Foreign companies registered with the Securities and Exchange Commission would be required to meet Public Company Accounting Oversight Board standards, under legislation passed by unanimous consent Wednesday in the Senate.
Under the Holding Foreign Companies Accountable Act, which was introduced last year by Sens. Chris Van Hollen, D-Md., and John Kennedy, R-La., companies refusing the requirement for three years in a row would no longer be listed in U.S. markets.
Also, the bill would require public companies to disclose whether they are owned or controlled by a foreign government, specifically, those based in China.
"The SEC works hard to protect American investors from being swindled by American companies," Mr. Kennedy said in a news release. "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."
Congress established the PCAOB to inspect audits of public companies, ensuring the information companies provide to the public is accurate, independent and trustworthy, the news release noted. Currently, China's government refuses to allow the PCAOB to inspect audits of companies registered in China and Hong Kong, the senators said.
According to the SEC, 224 U.S.-listed companies are located in countries where there are obstacles to PCAOB inspections. These companies have a combined market capitalization of more than $1.8 trillion, according to the senators.
"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," Mr. Van Hollen said in the news release. "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."
Carson Block, founder of Muddy Waters Capital, an activist short-seller and staunch proponent of the legislation, said, "After a decade of pounding the tables on the issue of China companies defrauding U.S. investors, we are encouraged to see this bill pass the Senate and we hope it becomes law. By listing in the U.S., these companies have ready access to U.S. retail investors' money, and so long as China effectively remains a rogue country for U.S. securities regulation, its companies should not have access to our markets."
Mr. Kennedy and Mr. Van Hollen urged the House to take up the legislation quickly.
The bill's Senate passage comes on the heels of the Federal Retirement Thrift Investment Board, Washington, halting its implementation of plans to shift billions of dollars in retirement assets to an index fund that includes Chinese companies. The board, which oversees $593.7 billion Thrift Savings Plan, the retirement system for 5.9 million federal employees and members of the uniformed services, made its decision May 13.
Two days prior, two letters were sent from administration officials regarding the planned shift — one from Larry Kudlow, director of the National Economic Council, and Robert O'Brien, national security adviser, to Labor Secretary Eugene Scalia. Another letter was sent from Mr. Scalia to Michael D. Kennedy, chairman of the FRTIB directing the board to reverse its decision, citing humanitarian and national security concerns.