Editor’s note: SEC’s Clayton may need to find a new job. SEC refuses to go after China-owned publicly listed corps that won’t allow financial disclosures to be made public. Instead Clayton’s agency says “oh, just be careful”. Ridiculous.
The commission’s ‘buyer beware’ announcement looks tough but actually is irresponsible.
[Michael D. Mann and Arthur Levitt Jr. | May 6, 2020 | WSJ]
Securities markets in the U.S. have long been the center of the universe for mobilizing and allocating capital. Registration with the Securities and Exchange Commission is the gold standard for a system that allows investors and issuers to choose among investment opportunities. But in April the SEC and the Public Company Accounting Oversight Board appeared to declare that era is over.
In an unprecedented public statement, the chairmen of the SEC and the PCAOB, along with SEC senior staff, warned investors that disclosures by SEC-registered companies from emerging markets may be incomplete and misleading. The commission’s cross-border regulation, oversight and enforcement—especially for activity from China—can’t be relied upon, the regulators said.
We don’t question the need for skepticism in evaluating companies’ financial disclosures. But the statement might have laid out a plan to address this concern. Instead, the agencies put investors and companies operating in emerging markets, including U.S. companies with foreign subsidiaries, in disclosure limbo by broadly doubting the integrity of the practices in these markets.
Instead of announcing a renewed effort to fix the problem, the regulators washed their hands of it. One wonders what they hope to achieve other than looking tough on China.
No one disputes that China shows little enthusiasm for U.S. listings by its companies. Nor does Beijing cooperate with the SEC on enforcement, especially regarding the quality of audits and auditors of Chinese companies. But simply saying “buyer beware” isn’t a credible response.
The SEC has long acknowledged that securities-market rules vary in quality around the world. But it has never abandoned its role in promoting better international auditing and listing standards and welcoming all who choose to comply with U.S. regulation. For example, despite wide-ranging European secrecy laws and privacy statutes, the SEC created a regime for international cooperation, which isn’t perfect but plays an important role.
Similarly, German companies for decades rejected U.S. accounting principles in favor of rules that allow for hidden reserves. The SEC’s response was clear and direct: If you want to play in our markets, you must first play by our rules. Companies seeking legitimacy and access to capital relented. When the Soviet Union collapsed, the SEC helped countries from Poland to Vietnam build markets that embrace principles of fairness and transparency. These forays have enhanced the attractiveness of U.S. capital markets while encouraging other markets to raise their standards, to the benefit of the global economy.
Advancing effective regulatory policies internationally is never easy, particularly in economies with enormous systemic differences, such as China’s. But announcing that public companies operating in emerging markets are unsafe, and leaving it to investors to protect themselves, fails to carry out the SEC’s statutory mandate. It can only diminish U.S. markets.
It also sells short the recourse the SEC has in this situation: Failure to comply with its rules, or to cooperate with its investigations, can be the basis for stopping a listing, suspending trading or barring a person or company from participating in U.S. markets. The SEC could also work with the PCAOB to write more-stringent requirements for foreign audits and auditors.
And while regulators are focused on China, they are tarring the audits of U.S. companies with operations abroad. Investors who purchased or are considering the purchase of those companies’ securities, believing that disclosures and audits were compliant with SEC and PCAOB requirements, are now being told their confidence may not have been warranted.
Perhaps the SEC and PCOAB leadership intended to do investors a service by venting frustration with an issue that has been festering for years. But a shift to a buyer-beware philosophy looks like a rejection of the foundation of the U.S. regulatory framework, which would be a loss for investors, companies and the world economy.
Mr. Mann was founding director of the International Affairs, 1989-96. Mr. Levitt was SEC chairman, 1993-2001.
Read the original article here.
The Securities and Exchange Commission in Washington
Jim Bourg | Reuters