A group of the most heavyweight regulators in the U.S. have «unanimously» recommended tougher exchange rules that when broken could lead to delistings, specifically underlining companies from opaque nations like China.
In an effort to improve investor protection, the President’s Working Group on Financial Markets (PWG) – a group of senior regulators in the country – issued recommendations on how to tighten rules for listed companies. This is especially relevant given the recent series of scandals, most notably the disgraced Luckin Coffee which was found to have falsely inflated sales figures by over $300 million.
«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,” said Steven Mnuchin, Treasury Secretary and the PWG’s chairman, in a statement.
Open Up Books or Leave
Of the major qualms, the report outlined the lack of access by the Public Company Accounting Oversight Board (PCAOB) to audit papers as a key issue, underlining companies from countries like China as examples of «non-cooperating jurisdictions» (NCJs). The working group suggested to allow PCAOB access as a requirement for initial and continued listing.
Other recommendations include enhanced and prominent issuer disclosure on investment risks in NCJs; enhanced disclosures for funds exposed to issuers from NCJs; stricter due diligence on index tracking; and guidance to investment advisers with respect to fiduciary obligations when considering NCJ investments.
Alt Exchanges
Despite the commitment to investor protection, the report acknowledges that its reach is limited to U.S. exchanges and that it could very well be business as usual for Chinese companies that opt to list in other jurisdictions such as Hong Kong, Shanghai or London.
«U.S. investors could purchase such securities on foreign exchanges, and these purchases may be subject to fewer investor protections than in the United States,» the report said.
National Support
A noteworthy point on the PWG’s recommendations was the range of regulators nationwide which were consulted for the report. In addition to the Treasury Secretary, the PWG includes Jerome Powell, Federal Reserve's chairman of the board of governors; Jay Clayton, SEC chairman; and Heath Tarbert, chairman of the Commodity Futures Trading Commission. The Federal Reserve Bank of New York, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation were also consulted for their views.
«The recommendations outlined in the report will increase investor protection and level the playing field for all companies listed on U.S. exchanges,» Mnuchin added. «The United States is the premier jurisdiction in the world for raising capital, and we will not compromise on the core principles that underpin investor confidence in our capital markets.»
After concluding the new rules, existing listed Chinese firms will have until January 1 of 2022 to comply while new firms seeking to list will be required to comply immediately.
