Financial services subcommittee questions experts on China-based issuers – Finance and Banking

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Worldwide: Financial services subcommittee questions experts on China-based issuers

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The Subcommittee on Investor Protection, Entrepreneurship and Capital Markets of the United States Financial Services Commission has reviewed the oversight and disclosure legislation for issuers of China-based companies.

In the majority memorandum, staff described the use of variable interest entity structures by companies based in China. Staff explained that the VIE structure involves the creation of an offshore shell company that enters into contractual arrangements with a China-based operating company with which it shares a name. This gives the impression that the China-based company and the shell company are the same company. The shell company issues shares to public shareholders. However, the shell company is only linked to the China-based operating company through contractual arrangements. Subcommittee staff estimated that two-thirds of Chinese companies listed in the United States use a VIE structure, which may mislead American investors thinking of investing in the operating company.

The subcommittee considered:

  • HR ____, the “Accelerating Holding Foreign Companies Accountable Act”, which would prohibit transactions with issuers who retain an accounting firm not subject to inspection by the Public Company Accounting Oversight Board (“PCAOB”) for two consecutive years ; and
  • HR 2072, the “Uyghur Forced Labor Disclosure Law,” which would require the SEC to require issuers to disclose activities related to the Xinjiang Uyghur Autonomous Region.

The following experts testified:

  • Karen M. Sutter, Asian Trade and Finance Specialist at the Congressional Research Service, who recommended disclosure requirements such as (i) an equivalent of 10K regarding ownership, shareholding and corporate ties, (ii) quarterly reports and (iii) separate financial statements for LIFE contracts;
  • Samantha Ross, founder of AssuranceMark, who praised the SEC and PCAOB’s implementation of the Holding Foreign Companies Accountable Act, and called for vigilance to prevent China-based companies banned from trading in the United States from ” access public markets;
  • Claire Chu, senior analyst at RWR Advisory Group, who recommended (i) cross-exclusion authorities for US economic and financial sanctions, (ii) the extension of US sanctions to Chinese companies related to the military, intelligence and securities, (iii) a regulatory framework a framework for index providers, and (iv) public reporting on activities related to human rights violations; and
  • Eric B. Lorber, senior director at the Foundation for the Defense of Democracies, who testified that the United States must strike a balance between banning Chinese issuers that do not conform to American standards and increasing reporting requirements to the point that ‘they “cool the attractiveness of these financial markets that we aim to protect and promote.”

Primary sources

  1. S. House Financial Services Subcommittee Hearing on Investor Protection, Entrepreneurship and Capital Markets: Considering China, Inc. – Examining the Risks to Investors and the United States Posed by foreign issuers in US markets
  1. United States House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets Majority Staff Memorandum: Taking the Time from China, Inc. – Investor and Business Risk Review United States posed by foreign issuers in American markets
  2. HR 2072, “Uyghur Forced Labor Disclosure Law”
  3. U.S. House Financial Services Committee Press Release: Protecting U.S. Investors and Capital Markets: Our Markets Work Because Participants Must Play By The Rules
  4. CRS Testimonial, Karen M. Sutter: Taking Stock of China, Inc. – Examining the Risks to Investors and the United States Posed by Foreign Issuers in U.S. Markets
  5. Testimonial from Congress, Samantha Ross: Taking Stock of China, Inc. – Examining the Risks to Investors and the United States Posed by Foreign Issuers in U.S. Markets
  6. Testimonial from Congress, Claire Chu: Taking Stock of China, Inc. – Examining the Risks to Investors and the United States Posed by Foreign Issuers in U.S. Markets
  1. Testimonial from Congress, Eric Lorber: Taking Stock of China, Inc. – Examining the Risks to Investors and the United States Posed by Foreign Issuers in U.S. Markets

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