Senate Unanimously Passes Bill to Require Audits of Chinese Companies Trading on U.S. Stock Exchanges - Should the House Follow Suit?

What’s the story?

• The Senate on Wednesday passed the Holding Foreign Companies Accountable Act (S. 945) by unanimous consent in a bid to increase oversight of foreign companies that trade securities on U.S. stock exchanges. It aims to counter efforts by the Chinese Communist Party to shield Chinese companies that publicly trade their securities on U.S. exchanges from audits by American regulators. 
• Because of these companies’ refusal to submit to legitimate audits, there is heightened risk that they’re misrepresenting information to investors. Securities & Exchange Commission (SEC) data shows that 11% of all securities class action lawsuits in 2011 were brought against Chinese-owned companies accused of financial misrepresentation.
• According to the SEC, there are 224 companies listed on U.S. exchanges with a combined market capitalization of over $1.8 trillion that are located in countries where there are barriers to accounting inspections. If the bill becomes law, it would force major Chinese companies like Alibaba to comply with U.S. financial oversight rules or face “delisting” (e.g. getting kicked off the exchange).

What would the bill do?

• The Holding Foreign Companies Accountable Act would effectively require foreign companies trading on U.S. stock exchanges to submit to audits by U.S. financial regulators and punish those that refuse to comply by delisting them from the exchange.
• The bill would require companies that trade on U.S. stock exchanges to certify that they aren’t owned or controlled by a foreign government if the Public Company Accounting Oversight Board (PCAOB) is unable to audit a company’s financial reports because the company retained a foreign public accounting firm that isn’t subject to inspection by the PCAOB ― which audits all publicly-traded U.S. companies.
• If the PCAOB isn’t able to inspect the company’s foreign accounting firm for three consecutive years, the issuer’s securities would be prohibited from trading on a U.S. national stock exchange.

What are they saying?

• The bill’s sponsor, Sen. John Kennedy (R-LA), offered the following statement on the Senate’s passage of this legislation:

“The SEC works hard to protect American investors from being swindled by American companies. It’s asinine that we’re giving Chinese companies the opportunity to exploit hardworking Americans ― people who put their retirement and college savings in our exchanges ― because we don’t insist on examining their books. There are plenty of markets all over the world open to cheaters, but America can’t afford to be one of them. China is on a glidepath to dominance and is cheating at every turn. I hope my colleagues in the House will immediately send this bill to the president’s desk so we can protect Americans and their savings.”

• The bill’s lead cosponsor, Sen. Chris Van Hollen (D-MD), added:

“As we continue to experience the economic fallout and volatility caused by the COVID-19 pandemic, the need to protect main street investors is all the more important. For too long, Chinese companies have disregarded U.S. reporting standards, misleading our investors. Publicly listed companies should all be held to the same standards, and this bill makes commonsense changes to level the playing field and give investors the transparency they need to make informed decisions.”

What’s next for the bill?

• The Holding Foreign Companies Accountable Act now goes to the House, which could consider the legislation when it returns from recess although it hasn’t yet scheduled any votes.
• If the bill gets a vote in the House, it would likely receive bipartisan support similar to what it received in the Senate and easily pass.
• The Trump administration has expressed support for this legislation, making it likely to be signed into law if the House sends it to President Donald Trump’s desk. White House Economic Advisor Larry Kudlow told Fox Business:

“We have to [push for] investor protection, and we have to for national security. A lot of these companies, by the way, have already had scandals and cost investors a lot of money because of their failure to be transparent in their reporting. The Chinese government forbids that kind of transparency.”

— Eric Revell

(Photo Credit: iStock.com / Grindi)