US SEC details ownership structure and audits of Chinese companies by Reuters

Author: Katanga Johnson

WASHINGTON (Reuters) – Chinese companies listed on U.S. stock exchanges must report whether they are owned or controlled by a government entity and provide evidence of their audits, the Securities and Exchange Commission (SEC) said on Thursday.

The rules anticipate a process that could trigger more than 200 U.S. exchanges, and some Chinese companies have been unattractive to investors.

The new rules set out a law passed by Congress in December 2020 that aims to ensure that foreign companies listed in the U.S., especially Chinese companies, comply with U.S. rules.

Unlike in many countries, China has not allowed the SEC’s accounting body, the Public Works Accounting Commission, to audit its auditors, and at the same time certify the accounts of Chinese companies listed in the United States.

Chinese authorities are reluctant to allow foreign regulators to inspect local accounting firms because of concerns about national security.

U.S. regulators are concerned that a lack of US oversight would put investors at risk.

Essentially, “the finalized rules will make it easier for investors to identify their audit firms that cannot be fully inspected by PCAOBs located in a foreign jurisdiction.

The rules will also require enhanced disclosures by listed Chinese entities in the United States through a vehicle known as a variable interest entity (VIE).

While this structure allows Chinese companies in some sectors to avoid internal listing rules abroad, U.S. regulators are concerned that the structure poses risks to investors and may obscure information about their recent ownership.

Companies will have 15 days to discuss an SEC designation requiring enhanced disclosure.

The SEC has three years to remove the list of companies that do not comply with the rules.