U.S. Regulator Takes Another Step Towards Delisting Chinese Companies

The President's Working Group has issued some recommendations to stock exchanges to protect U.S. investors from Chinese fraud.

Anna Vodopyanova
    Aug 07, 2020 6:00 AM  PT
U.S. Regulator Takes Another Step Towards Delisting Chinese Companies
author: Anna Vodopyanova   

Friday promises to be sour for Chinese stocks in the United States as regulators have taken another step in the crackdown on Chinese listings that some say could lead to their delisting.

The President's Working Group on Financial Markets released a "Report and Recommendations on Protecting Investors from Significant Risks from Chinese Companies" Thursday that explicitly blames China for the risks investors faced due to Beijing's unwillingness to share audits.

Chairman of the PWG, Secretary Steven T. Mnuchin, said in the report, "The PWG unanimously recommends that the Securities and Exchange Commission take steps to enhance the listing standards on U.S. exchanges for access to audit work papers, among other recommendations."

Specifically, the PWG proposed five actions. These are: (1) requiring access of the Public Company Accounting Oversight Board (PCAOB) to the work papers of the audit firm of a listed company or a co-audit from an audit firm with comparable resources and experience; (2) requiring enhanced and prominent issuer disclosures of the risks of investing; (3) enhancing registered fund disclosures for funds exposed to issuers; (4) encouraging or requiring registered funds that track indexes to perform greater due diligence on an index and its index provider; and (5) issuing guidance to investment advisers with respect to fiduciary obligations when considering investments in non-cooperating jurisdictions.

The PWG gave until January 1, 2022, to comply with the new listing standards "to reduce market disruption," according to the document.

The report followed a June 4 directive by President Trump to protect U.S. investors from risks posed by Chinese companies. The House is also reviewing a bill passed by the Senate that would require Chinese firms to comply with U.S. listing standards and disclose ties to the government. At the time the bill was unveiled, China Securities Regulatory Commission's Chairman Huiman Yi told Caixin Global that China and the U.S. "can definitely find a way to cooperate on audit regulation."

Earlier this week, China passed a historic reform to allow class-action shareholder lawsuits in a liberalization step of its capital markets. The move was reportedly spurred by this year's big scandal involving fraud at Luckin Coffee (OTC: LKNCY).