The SEC extended the time for briefings to be filed in the appeal of the Chinese affiliates of the Big Four firms against the January 2014 decision by an Admin-istrative Trial Judge to ban them for six months. The final brief is now due on May 29, 2015, meaning that a final decision is unlikely before late summer.
Both the SEC and the Big Four indicate that substantial progress has been made towards a settlement, “however, the multi-party nature of the negotiations, the importance, complexity and sensitivity of the matters under discussion, and the legal and cross-border regulatory issues presented have continued to require significant time and care to discuss.” The negotiations, of course, are not be-tween the SEC and the Big Four, they are between the SEC and China, since the Big Four have no means to negotiate a settlement. It is all up to China to deter-mine the extent to which it is willing to cooperate with U.S. securities regulators on Chinese companies listed in the U.S.
In a closely related matter, U.S. Public Company Accounting Oversight Board (PCAOB) negotiations for regulatory access to China have been going on for a decade. PCAOB Chairman James Doty recently said that those negotiations were in a “difficult and frustrating place”. Shaswat Das, Associate Director of the PCAOB’s office of International Affairs and Alan Lo Re, Assistant Director Attorn-ey of the PCAOB’s Division of Enforcement and Investigations are scheduled to speak at a conference in Beijing on Thursday, and perhaps have meetings scheduled with Chinese regulators.
The issues remain straightforward. The PCAOB wants to do joint inspections side by side with Chinese regulators, while China wants the PCAOB to accept their work. The SEC wants unfettered access to documents related to U.S. listed Chinese companies while China wants to prevent disclosure of information that could be harmful to China’s interests. The positions of all parties are reasonable, and there is little scope for anyone to compromise.
If this were easy it would have been settled years ago.
It seemed for a time that U.S. regulators would have the upper hand. The SEC ban on the Big Four would likely have led to the delisting of Chinese stocks from U.S. markets because these companies would find it impossible to find required auditors. The six-month ban would likely become permanent when the auditors refused again to supply documents. Likewise, the PCAOB could deregister ac-counting firms it cannot inspect, leading to the same delisting consequences. But these measures are extreme, and after the Alibaba IPO, seem impossible.
I expect that Chinese and US regulators will ultimately reach agreement. I be-lieve that Chinese regulators will have the upper hand in these negotiations. Knowing that U.S. regulators are unlikely to delist Chinese stocks, they will seek a deal that gives up no meaningful turf while allowing U.S. regulators to save face. Since the PCAOB and SEC appear to be negotiating separately, Chinese regulators are likely to play them off each other, as they did earlier with an earlier investigation deal with the PCAOB.
The result will be bad for U.S. investors. There has been resurgence in short seller activity. Insider trading is rampant, fueled by the exemption of Chinese companies from Reg FD requirements to fairly disclose material information. Chinese companies are often inscrutable; meaning effective regulation of these companies is all the more important.