SEC mandates Chinese companies disclose ownership or risk delisting

china, regulation, securities and exchange commission, stock market

The new rules by the SEC, led by Chairman Gary Gensler, implement a law passed by Congress in December 2020 that aims to ensure foreign companies listed in the United States, in particular Chinese companies, comply with US rules. POOL/AFP via Getty Images

Chinese companies that list on US stock exchanges must disclose whether they are owned or controlled by a government entity, and provide evidence of their auditing inspections, the Securities and Exchange Commission said on Thursday.

The rule advances a process that could lead to more than 200 companies being kicked off US exchanges and could make some Chinese companies less attractive to investors.

The new rules implement a law passed by Congress in December 2020 that aims to ensure foreign companies listed in the United States, in particular Chinese companies, comply with US rules.

Unlike many countries, China has not allowed the SEC’s accounting body, the Public Company Accounting Oversight Board, to inspect its auditors, which in turn certify the accounts of Chinese companies listed in the United States.

Chinese authorities are reluctant to let overseas regulators inspect local accounting firms due to national security concerns.

US regulators worry the lack of US oversight is putting investors at risk.

china, regulation, securities and exchange commission, stock market

Alibaba is among hundreds of Chinese firms listed on stock exchanges in the US. Chinese firms’ failure to comply with SEC disclosure rules could lead to their being delisted.

Getty Images

At its core, “the finalized rule will allow investors to easily identify registrants whose auditing firms are located in a foreign jurisdiction that the PCAOB cannot completely inspect. Moreover, foreign issuers will be required to disclose the level of foreign government ownership in those entities,” said an SEC official.

The rule will also require enhanced disclosures from Chinese entities listing in the United States via a vehicle known as a variable interest entity (VIE).

While that structure allows Chinese companies in some sectors to circumvent domestic rules on listing overseas, US regulators worry the structure creates risks for investors and may obscure information on their ultimate ownership.

china, regulation, securities and exchange commission, stock market

US regulators worry that a lack of transparency by Chinese companies creates risks for investors.

AFP via Getty Images

Companies will have 15 days to dispute an SEC designation that they require enhanced disclosure .

The SEC has up to three years to order delisting of companies that do not comply with the rules.

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