US report recommends tougher listing and disclosure rules for Chinese companies

In a development understood to be targeted at China-based companies, a new Trump administration report recommends more stringent US exchange listing rules and heightened disclosure requirements for companies based in jurisdictions that do not cooperate with US regulators, as well as enhanced disclosure and diligence requirements for investment funds. SEC Chairman Jay Clayton has directed the SEC staff to prepare proposals in response to the report’s recommendations.

Companies that are public in the United States are required to file audited financial statements with the US Securities and Exchange Commission (the “SEC”). Under the Sarbanes-Oxley Act of 2002 (“SOX”), the auditor of the financial statements filed with the SEC must be registered with the US Public Company Accounting Oversight Board (the “PCAOB”), which means that the audit firm is subject to regular PCAOB inspections to assess the auditor’s compliance with applicable US laws and professional standards in connection with its audits of public companies. China-based audit firms – including the Chinese branches of the “Big Four” accounting firms – have long refused to allow PCAOB inspections, arguing that the production of audit papers would violate Chinese law, because of the potential disclosure of state secrets discussed in the audits.

The new report, which was issued by the President’s Working Group on Financial Markets following discussions with the SEC, targets companies based in jurisdictions that do not currently provide the PCAOB with the ability to inspect public accounting firms or otherwise do not cooperate with US regulators (“Non-Cooperating Jurisdictions,” or “NCJs”) 

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