In a bipartisan, bicameral move, US Senators Marco Rubio (R-FL), Bob Menendez (D-NJ), Tom Cotton (R-AR) and Kirsten Gillibrand (D-NY) have introduced the ‘Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act’, which would increase oversight of Chinese and other foreign companies listed on US exchanges and delist firms that are out of compliance with US regulators for a period of three years.
The legislation aims to force the Chinese government, which currently blocks US regulators from viewing the full audit reports of publicly traded companies headquartered in Hong Kong and mainland China, to change behaviour.
According to its introducers, the EQUITABLE Act will better inform investors about their exposure to financial risks, delist non-compliant issuers of securities, and ban Chinese and other foreign firms that flaunt investor protections and regulatory norms from entering US capital markets.
US Representatives Mike Conaway (R-TX), Tim Ryan (D-OH), and Mike Gallagher (R-WI) introduced companion legislation in the House of Representatives.
“Beijing should no longer be allowed to shield US-listed Chinese companies from complying with American laws and regulations for financial transparency and accountability,” Rubio said. “If China-based companies want to list on stock exchanges or access capital markets in the US, we should make them comply with American laws. The EQUITABLE Act makes it clear that there is a price for the Chinese government and Communist Party’s disregard for the rules of responsible economic and financial engagement in international capital markets.”
“It’s time for China’s government and companies to play by the same rules as American companies in our financial markets,” Menendez said. “Our legislation would ensure that foreign companies comply with US accounting regulations. This will stop Chinese firms from hiding behind the Communist Party’s efforts to take advantage of our capital markets by withholding accounting information. US investors trust that both foreign and domestic publicly-listed firms are held to the same standard – and the EQUITABLE Act will make it so.”
“The Chinese Communist government consistently manipulates the law and our regulations to protect their companies from being held to basic global accounting standards, creating unfair advantages and further encouraging corrupt behavior,” Conaway said. “The EQUITABLE Act is simple: any Chinese company who wishes to be listed on US stock exchanges, or access US capital, should be required to comply with U.S. laws on financial transparency.”
In December 2018, the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) issued a joint warning to investors about the challenges American regulators face when attempting to conduct oversight of US-listed companies whose operations are based in China and Hong Kong. The statement said: “The business books and records related to transactions and events occurring within China are required by Chinese law to be kept and maintained there. China also restricts the auditor’s documentation of work performed in the country from being transferred out of China… China’s state security laws are invoked at times to limit US regulators’ ability to oversee the financial reporting of US-listed, China-based companies. In particular, Chinese laws governing the protection of state secrets and national security have been invoked to limit foreign access to China-based business books and records and audit work papers.”
The US-China Economic and Security Review Commission has identified 156 Chinese companies, including 11 state-owned-enterprises, that are listed on America’s three largest exchanges with a combined market capitalization of $1.2 trillion.
