The SEC could prohibit trading of 270 Chinese companies by 2024 unless they open their books for auditing, Gensler says

• The SEC could restrict trading of hundreds of Chinese companies by 2024, Gary Gensler wrote in an op-ed.
• Legislation requires foreign companies to allow their auditors to be inspected if they want to list in the US.
• Gensler echoed previous comments about risks related to ownership structures of US-listed Chinese stock.
  
  

The US Securities and Exchange Commission could crack down on trading in shares of about 270 China-linked companies by 2024 unless they allow their auditors to be inspected by US regulators, Gary Gensler warned in an op-ed in the Wall Street Journal this week.

The SEC chief - who is taking on a growing list of market issues, from stock market structure to crypto banking - cited legislation addressing gaps in the 2002 Sarbanes-Oxley Act that prohibits a company from trading its shares if a foreign entity restricts its auditor from being inspected for three consecutive years.

In June, however, the Senate passed legislation to speed this period forward, whittling the time companies have to comply down to two years, a move Gensler has said he would support if the House takes it up next.

"I don't believe China-related companies currently are providing adequate information about the risks they face-and thus the risks that American investors in these businesses face," Gensler said, pointing to this summer's wave of regulation from Beijing that has forced a range of new rules onto Chinese companies.

He also repeated concerns relating to the opaque ownership structure of Chinese firms listing shares in the US. Because the Chinese government does not allow foreign ownership of domestic firms, Chinese companies looking to list shares overseas must establish shell companies domiciled in places like the Cayman Islands. These entities list shares in the US, but they do not carry any real ownership stake in the operating company.

"I worry that some investors don't realize they're putting their money into a Cayman shell rather than a company operating in China."

Gensler's move to tackle risks related to China is just one item on a long to-do list he has crafted for the country's top financial regulator. In his address before Congress on Tuesday, he pointed to five markets in his crosshairs - Treasuries, non-Treasury fixed-income, stocks, swaps, and cryptocurrencies. These are on top of issues like corporate disclosures, ESG, and retail investor protections.

"Whether in California, the Cayman Islands or China, all companies that seek to raise money in the deep and liquid U.S. capital markets should play by America's rules," the SEC chief wrote.