June 12, 2024

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US regulator under fire for delays to delisting Chinese stocks

3 min read

Pressure is building on the US Securities and Exchange Commission to finalise regulations to de-list Chinese companies that fail to comply with American auditing rules, after lawmakers discovered the agency might not begin enforcement until 2025 at the earliest.

Legislation signed by Donald Trump in December gave US-listed Chinese groups three years to comply with US accounting oversight.

But the clock has not begun ticking because so far the SEC has only issued interim rules that do not include a delisting process.

The issue threatens to come to a head following the US initial public offering of Chinese ride-sharing group Didi, whose shares plunged within a week of the listing when Beijing ordered its mobile application to be removed from app stores on data security concerns.

Mike Pence, Trump’s vice-president, on Wednesday urged the SEC to respond urgently, saying it needed to “rediscover its mission to protect American investors” after the Didi “fiasco”.

“The SEC must obey the law enacted by our administration and delist Chinese companies that flout the rules of accounting and transparency that American public companies must follow,” Pence said at the Heritage Foundation.

The Holding Foreign Companies Accountable Act, passed with rare bipartisan support in the US Congress, requires Chinese companies to give American regulators access to audited accounts — something currently prohibited by Beijing.

The SEC “hasn’t yet publicly proposed” a rulemaking “and therefore the three-year clock for delistings hasn’t started”, said Paul Leder, a former director of the SEC’s Office of International Affairs.

And the agency was unlikely to start counting the first year of non-compliance until 2022, “meaning that no company would be potentially delisted until 2025”, said Shaswat Das, a lawyer at King & Spalding who previously worked at the Public Company Accounting Oversight Board, or PCAOB, the US accounting watchdog overseen by the SEC.

The SEC declined to comment on its timetable.

In China, the new US law angered government agencies and prompted domestic companies to push the SEC to soften the looming crack down.

Yum China Holdings, a spin-off of the US parent company for Pizza Hut, KFC and other fast-food chains, has said its auditor, KPMG Huazhen LLP, cannot comply with the law and urged the SEC “to consider the negative impact of a literal implementation of the trading prohibition”.

China’s government has become increasingly worried about the potential national security risks associated with citizens’ data leaving its territory and particularly getting into the hands of the US government. On Saturday the country’s internet regulator said Chinese companies that held the data of more than 1m users would need to pass a security review before issuing shares on overseas stock exchanges.

As of May 5, there were 248 Chinese companies listed on US exchanges, according to the US-China Economic and Security Review Commission. 

Turmoil at the PCAOB has added a further question mark over the timing for enforcing the US audit law. To fill in a piece of the legislation, the board is writing specific rules to determine when it is unable to investigate Chinese public accounting firms. Though that rulemaking is under way — a public comment period ended on Monday — the PCAOB is currently run by an acting head after SEC chair Gary Gensler removed the previous board chair in June.

Republican senators last month asked Gensler if the absence of a PCAOB head would delay its Chinese auditing rule. The SEC has not responded yet.

Concern about delays prompted the US Senate in June to unanimously approve a new version of the law that would delist companies after only two years of non-compliance, but the legislation has not been taken up yet in the House of Representatives.

Some investor organisations are also pushing the SEC to act sooner. The Council of Institutional Investors, which represents big pension funds, has said “any deferral of the commencement of the trading prohibition beyond 2024” was inconsistent with the December law.

Additional reporting by Yuan Yang in Beijing