For Immediate Release
May 17, 2020
CONTACT: Hamilton Strategies, [email protected], Patrick Benner, 610.584.1096, ext. 104, or Deborah Hamilton, ext. 102
Committee-Sponsored Joint Letter Calls on SEC, PCAOB to Ensure China Complies with US Securities Laws and Regulations
Need to Be Guided by President Trump’s Rationale for Blocking TSP Investments
WASHINGTON, D.C.— On the heels of President Donald Trump’s critical intervention to prevent the federal Thrift Savings Plan (TSP) from investing an estimated $4.5 billion in Chinese Communist Party (CCP) companies, 51 former senior U.S. government officials, influential financial sector figures, China experts, religious leaders and other patriots issued today an open letter urging that his logic be applied to the nation’s capital markets more broadly.
That logic was expressed at the president’s direction in a powerful letter sent on May 11 by National Economic Council Chair Lawrence Kudlow and National Security Advisor Robert O’Brien. It explained that President Trump’s order to the Federal Retirement Thrift Investment Board to stand down on investing TSP International Fund (I Fund) monies in Communist China, which was formally transmitted by Labor Secretary Eugene Scalia, was prompted by concern that:
This action would expose the retirement funds to significant and unnecessary economic risk. And it would channel federal employees’ money to companies that present significant national security and humanitarian concerns because they operate in violation of U.S. sanction laws and assist the Chinese Government’s efforts to build its military and oppress religious minorities.
The financial impact of this risk is significant: scandals involving Chinese companies in recent years have cost investors billions of dollars. In addition, the Chinese government currently prevents companies with Chinese operations listed on U.S. exchanges from complying with applicable U.S. securities law, leaving investors without the benefit of important protections. According to the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB), Chinese authorities have impeded the PCAOB’s ability to oversee PCAOB-registered audit firms in mainland China and Hong Kong who serve mainland Chinese companies.
This has prevented the PCAOB from conducting inspections of those firms’ audits of Chinese companies in violation of U.S. law. Recently, a Chinese law came into effect that prevents the PCAOB from directly conducting its oversight function inside Chinese territory. This is part of the significant legal and practical obstacles to the SEC and PCAOB obtaining information needed for investigations or enforcement actions.
The Chinese Government’s intentional thwarting of U.S. investor protections should raise serious concerns about the reliability of financial information from Chinese companies and demonstrate the significant risks to investors, especially retail investors such as TSP beneficiaries, of investing in the companies listed on the Chinese exchanges that would be represented in the new index.
Signatories of the open letter organized by the Committee on the Present Danger: China (CPDC) and sent today to Securities and Exchange Commission (SEC) Chairman Jay Clayton and Public Company Accounting Oversight Board (PCAOB) Chairman William Duhnke wrote:
We welcome the President’s decision and strongly second the concerns he has rightly expressed about the lack of transparency, PCAOB covered audits and material risk disclosure by Chinese companies in our capital markets. The Chinese Communist Party’s claims that corporate financials and other such data are “state secrets” only raise further questions about the advisability of giving its corporations a pass on conforming to the same statutory and regulatory standards that registered American companies are required to meet. Put simply, Chinese companies are today receiving preferential treatment over their American corporate counterparts on your watch.
The country needs strong leadership on this issue now. We believe President Trump has defined the requirements for Chinese companies to enjoy the benefits of having access to our capital markets. It is up to you both to enforce these requirements andgenuinely protect American investors, as well as our national security and fundamental values, by ensuring that the risks associated with investing in Chinese Communist Party-tied securities registered with the SEC and listed on U.S. capital markets are as transparent and disclosed as are those of the registered securities of American corporations. (Emphasis in the original throughout.)
The Committee on the Present Danger: China commends the signatories of this open letter and urges federal regulators to heed their call for ending the preferential treatment they have thus far accorded Chinese Communist Party companies. By so doing, Clayton and Duhnke and their respective institutions will make a signal contribution to playing their statutory role of protecting the integrity of our capital markets. The SEC and PCAOB can, thereby, prevent real reputational harm to U.S. exchanges that, as the open letter put it, “have long been and must remain the gold-standard for the financial world.”
To interview representatives of the Committee on the Present Danger: China, contact [email protected], Patrick Benner, 610.584.1096, ext. 104, or Deborah Hamilton, ext. 102.