Chinese companies listed on U.S. stock exchanges should have to follow tougher auditing rules and other listing standards, according to a report by the White House financial markets task force.
The report from the President's Working Group on Financial Markets includes five recommendations aimed at addressing the risks to investors in U.S. financial markets caused by what it said was the Chinese government's failure to allow U.S.-registered audit firms to ensure that Chinese companies comply with American securities laws and investor protections.
The report, released Thursday, calls for Chinese audit firms to share information with the Public Company Accounting Oversight Board, a U.S. regulator that oversees audits of public companies, broker-dealers and others. Chinese firms restricted by their government from sharing audit information could provide a co-audit from a comparable audit firm if the PCAOB determines that the auditor had insufficient access.
Chinese companies already listed would have until 2022 to comply or be forced to delist. Non-public firms planning an initial public offering on U.S. exchanges would have to comply first.
The working group also called for the SEC to require more prominent investor disclosure of the risks of investing in China and other uncooperative countries, and enhanced registered fund disclosures for funds exposed to such issuers. Registered funds that track indexes would have to perform "greater due diligence" on those indexes and index providers. It also calls for guidance to remind investment advisers of their fiduciary obligations when considering such investments.
The recommendations cover all countries that limit access to PCOAB, referred to as non-cooperating jurisdictions, but the report focuses on China. Working group chairman Steven Mnuchin said in a statement that the group unanimously recommended that the Securities and Exchange Commission take steps to enhance the listing standards on U.S. exchanges. "The recommendations outlined in the report will increase investor protection and level the playing field for all companies listed on U.S. exchanges," he said.
The group's recommendations are similar to bipartisan legislation passed unanimously in May by both the Senate and House as part of a defense spending bill, the Holding Foreign Companies Accountable Act.
Senate co-sponsor Chris Van Hollen, D-Md. said in a statement Friday that the report "is an important first step," but that changing the status quo and holding Chinese companies to uniform standards requires passing the legislation. "Without the added teeth of our bill, this report alone does not implement the requirements necessary to protect everyday American investors," Mr. Van Hollen said.
The proposed Holding Foreign Companies Accountable Act prohibits listing of securities of a company failing to comply with PCOAB audits for three years in a row and would require public companies to disclose whether they are owned or controlled by a foreign government.