Recommendation from PWG May Result in Chinese Companies Delisted

September 4, 2020

On August 6, 2020, the President’s Working Group on Financial Markets (“PWG”) released its report in response to President Trump’s June 4 Memorandum on Protecting United States Investors from Significant Risks from Chinese Companies. 
The PWG report made five recommendations that are intended to address “certain risks to investors in U.S. financial markets posted by the Chinese government’s failure to allow audit firms that are registered with the Public Company Accounting Oversight Board (PCAOB) to comply with U.S. securities laws and investor protection requirements.”[1]  
PCAOB was an agency created under the Sarbanes-Oxley Act of 2002 to oversee the accounting profession[2] by establishing auditing standards for public accounting firms and inspecting registered accounting firms to assess their compliance with those standards and undertaking enforcement actions for failure to comply with those standards.[3]  
These recommendations are intended to enforce the requirement that, any accounting firm, whether based in the U.S. or abroad, that prepares or issues an audit opinion with respect to any issuer of securities in the U.S. is required to produce underlying audit work papers related to that audit work at the request of PCAOB or the U.S. Securities and Exchange Commission (SEC).[4]  
While the recommendations are not limited to accounting firms based in China or that audits companies raising capital in the U.S. markets, however, it is clearly intended to address Chinese authorities’ continuing unwillingness to agree to a joint inspection program with PCAOB. 
The recommendations in the PWG report include:[5]
1. Enhanced Listing Standards for Access to Audit Work Paper.
The PWG recommended that, as a condition to initial and continued exchange listing, PCAOB shall have access to the working paper of the principal auditor for the audit of the listed company.  
Companies that are unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in certain jurisdictions that do not cooperate with U.S. regulators (“Non-Cooperating Jurisdictions” or “NCJs”) may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm.  
The new listing standards are applicable immediately to new company listings but for currently listed companies, they will have until January 1, 2022, to come into compliance. 
2.     Enhanced Issuer Disclosures.
Recommend requiring enhanced and prominent issuer disclosures of the risks of investing in NCJs.
3.     Enhanced Fund Disclosures.
Recommend enhanced risk disclosures by registered funds that have exposures to issuers from NCJs. 
4.     Greater Due Diligence of Indexes and Index Providers.
Recommend encouraging or requiring registered funds that track indexes to perform greater due diligence on an idex or its index provider. 
5.     Guidance for Investment Advisers.
Recommend issuing guidance to investment advisers with respect to fiduciary obligations when considering investments in NCJs, including China.   
The PWG report follows other legislative proposals or actions by the U.S. government in recent months.  
In May 2020, the U.S. Senate unanimously passed the Holding Foreign Companies Accountable Act (“HFCA”), which, among other things, would require the SEC to prohibit the trading of the securities of listed companies on a U.S. exchange, that retained an auditor whose report cannot be inspected or investigated by PCAOB for three (3) consecutive years.  
The HFCA, however, has not been enacted into law.  
In the same spirit, the SEC published Nasdaq rule proposals in June 2020 that would apply additional, more stringent criteria to listing companies whose principal businesses are in “a jurisdiction that Nasdaq determined to have secrecy laws, blocking statutes, national security laws or other law or regulations restricting access to information by regulators of U.S.-listed companies in such jurisdiction,” including those based on whether the company’s auditor has been subject to a PCAOB inspection and if the auditor has failed to respond to PCAOB’s request for inspection.
In light of these recommendations and if the other legislations become law or are adopted, China-based companies listed on a U.S. exchange may be forced to delist from the U.S. exchange if Chinese authorities continue to block auditors in China from giving PCAOB access to its working papers.  
For China-based companies seeking a listing on a U.S. exchange, the path to successfully raising capital from the U.S. markets is now a more challenging one.    

[1] Mnuchin, Steven T., Secretary of the Treasury and Chairman, President’s Working Group on Financial Markets, Letter to The Honorable Donald J. Trump, The White House, July 24, 2020.
[2] 15 U.S.C. § 7201 et seq.
[3] 15 U.S.C. § 7214.
[4] 17 U.S.C. § 7216(b)
[5] See President’s Working Group on Financial Markets: Report on Protecting United States Investors from Significant Risks from Chinese Companies (July 24, 2020), available at

Ian Liao, partner with YK Law LLP and heads up its Corporate/M&A Practice. Ian is a corporate lawyer with substantial experience in M&A, venture capital, private equity, technology and other corporate transactions. Ian has advised clients on cross-border transactions involving the Greater China region since 1998 and continues to do so today.

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