The Securities and Exchange Commission held a roundtable on July 9, 2020 on investing in emerging markets. Participants with a very wide range of perspectives addressed three concentric circles of topics:

  • At the core is the regulatory impasse between the United States and China over the ability of the Public Company Accounting Oversight Board (PCAOB) to conduct inspections and investigations of Chinese auditing firms.
  • More broadly, many participants discussed whether there are specific risks involved in investing in Chinese businesses with equity securities trading on U.S. exchanges.
  • At the most general level, the discussion addressed risks of "investing in emerging markets," a term that participants used in different ways.

This memorandum summarizes some themes from the discussion and identifies questions about possible future regulatory developments.1

Context

The roundtable was the latest development in a campaign that has featured these earlier steps:

  • June 4, 2020 – A presidential memorandum directs federal agencies to develop regulatory measures to protect U.S. investors from "risks from Chinese companies".3
  • May 29, 2020 – Nasdaq proposes amendments to its listing rules for "Restrictive Market Companies" – defined to include a company operating or incorporated in a jurisdiction that restricts access by U.S. regulators.3
  • May 20, 2020 – The Senate passes Senate Bill S. 945, the Holding Foreign Companies Accountable Act, sponsored by Sen. Kennedy of Louisiana.4 S. 945 would impose specified consequences on a reporting company if the PCAOB is unable to inspect or investigate its auditor because of a position taken by an authority in the auditor's jurisdiction. The consequences could include delisting if the circumstances continue for three reporting years, and disclosure of (1) the percentage of the shares of the issuer owned by governmental entities, (2) whether any governmental entities have a controlling financial interest in the issuer, (3) the name of each official of the Chinese Communist Party who is a member of the board of directors and (4) whether the articles of incorporation of the issuer contains any charter of the Chinese Communist Party.

April 21, 2020 – A public statement by senior officials of the SEC and the PCAOB calls attention to "disclosure, financial reporting and other risks" of emerging markets investments.5

December 7, 2018 – A public statement by senior officials of the SEC and the PCAOB calls attention specifically to information access challenges with respect to U.S.-listed companies with operations in China.6

The background to all this activity includes the growth in U.S. listings of equity of China-centered businesses over the past two decades. Today more than 200 U.S.- listed companies are either Chinese-incorporated or doing business principally in China. In 2019 there were 25 IPOs of U.S.-listed Chinese companies, accounting for over 18% of all U.S.-listed IPOs that year.7 The issuers in question range widely, including big state-controlled entities, some of the world's largest tech firms, as well as startups and other smaller businesses. In many cases, the U.S.-listed company is incorporated outside China – usually in the Cayman Islands – and is listed only in the United States, but in recent months some of these businesses are seeking a second listing outside the United States.8

Footnotes

1 A webcast of the SEC Emerging Markets Virtual Roundtable is available in two parts, here and here. Jason Benitez and Shelbi Vaughn provided invaluable assistance in the preparation of this memorandum.

2 Presidential Memorandum on Protecting United States Investors from Significant Risks from Chinese Companies (June 4, 2020), available here.

3 Proposed Amendments to Nasdaq Rule 5005(a)(37), SR-NASDAQ-2020-027 (May 29, 2020).

4 The Holding Foreign Companies Accountable Act, S.945, 116th Cong. (2020), available here.

5 SEC Chairman Jay Clayton, PCAOB Chairman William D. Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of Corporation Finance Director William Hinman, SEC Division of Investment Management Director Dalia Blass, Public Statement on Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited (April 21, 2020), available here.

6 SEC Chairman Jay Clayton, SEC Chief Accountant Wes Bricker and PCAOB Chairman William D. Duhnke III, Public Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally— Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China (Dec. 7, 2018), available here.

7 See data compiled by University of Florida Professor Jay Ritter, available here.

8 See Scott Murdoch and Julie Zhu, Chinese Companies Take Record 50% of Global Equity Raising in First Half of 2020, REUTERS (June 28, 2020); Joanne Chiu, Chinese Tech Firms Get Trading Boost From Hong Kong Listings, THE WALL STREET JOURNAL (July 8, 2020).

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Originally published 20 July, 2020

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