U.S. SEC and PCAOB issued statement warning investment risks in emerging markets

23 Apr, 2020 23:09
source: Singularity Financial

Singularity Financial Hong Kong April 23, 2020 – by David Lee

The head of the U.S. securities regulator on Wednesday warned investors against putting money into Chinese companies as they rebalance their portfolios following market turmoil due to ongoing problems with those companies’ disclosures.

In an interview on Fox Business Network on Wednesday, Securities and Exchange Commission chair Jay Clayton said, “This is a time when institutional investors are going through, rebalancing and assessing their portfolios. We are reminding people that when you see disclosures from an emerging market, it may look like a report from a U.S. domestic issuer, but it is not the same kind of investing. “The risks are different and hard to discern.”

The comments from Clayton come after the U.S. Securities and Exchange Commission Chair, Chief Accountant and Divisions of Corporation Finance and Investment Management Directors, together with the Public Company Accounting Oversight Board Chair, issued a public statement on April 21, 2020, to companies based in or with significant operations in emerging markets.

Foreign jurisdictions aren’t maintaining adequate standards of investor protection, and the U.S. has little control over that, Clayton (pictured) and other officials said in a strongly worded statement. The group also underlined a longstanding point of conflict: that the main U.S. accounting watchdog can’t inspect the work that Chinese auditors do for companies that sell stock in American markets.

The SEC has been locked in a decade-long struggle with the Chinese government to inspect audits of U.S.-listed Chinese companies. The regulator’s accounting oversight arm, the Public Company Accounting Oversight Board, is still unable to access those critical records, it has said.

The PCAOB, which was set up by the 2002 Sarbanes-Oxley Act and is overseen by the SEC, is tasked with policing the accounting firms that sign off on the books of the nation’s listed companies. Its problems with Chinese audit quality have been festering since 2011, when scores of Chinese companies trading on U.S. exchanges were accused of accounting irregularities.

The Statement advised the issuers, their respective audit committees and auditors to (1) prepare and provide high-quality, reliable financial information and other disclosures and (2) provide accurate and complete risk disclosures peculiar to their businesses and operations in emerging markets, including:

– the issuers’ greater industry- and jurisdiction-specific risks and uncertainties compared to those based or operating in established markets;

– the difference in scope and quality of disclosure requirements in emerging markets despite appearing similar in form;

– the PCAOB’s lack of access to the work of PCAOB-registered accounting firms in China, the largest emerging market economy;

– the limited ability and substantial difficulty of SEC, U.S. Department of Justice and other authorities to pursue non-U.S. bad actors in certain emerging markets;

– the difficulty or impossibility for shareholders to enforce their rights or pursue shareholder claims as a matter of law or practicality in many emerging markets; and

– the absence of regard to the investor’s exposure to emerging market risks by index funds tracking a specific emerging market index.

The Statement urged investment advisers that are recommending investments in emerging markets to consider, as part of their due diligence, the sufficiency of an issuer’s emerging market risk disclosures, whether there are limitations on the quality or availability of financial information with respect to these investments, possible limitations on investors’ legal remedies, the effect of market closures on investments and ability to gain access to investors’ assets.