New SEC rules could lead to delisting of hundreds of Chinese firms from US exchanges

The earliest companies might be delisted would be 2024. The shares of delisted firms could continue to trade in the U.S., over the counter.

Promulgated in compliance with the Holding Foreign Companies Accountable Act (HFCAA), the rules are meant to counter Chinese companies listed on U.S. exchanges that refuse to have their audits verified.

The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies, providing external and independent oversight of auditors. The Chinese side claims that Chinese firms are in compliance, as they are audited by the big four accounting firms. The problem is that the Chinese regulators do not allow the audits to be sent to the PCAOB.

Chinese law requires companies to obtain the permission of the government before allowing foreign securities regulators to inspect their activities. The companies must also obtain government permission before providing foreign parties with documents or materials relating to capital markets activities. While Chinese authorities could, theoretically provide this permission. Chinese regulators have frequently refused to allow Chinese companies to be audited.

SEC Chairman Gary Gensler reported in December, 2021 that, although more than 50 foreign jurisdictions have cooperated with the PCAOB, neither Hong Kong nor the PRC has.

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