Following the U.S. Senate’s passage (by unanimous consent) in May of the Holding Foreign Companies Accountable Act, a special panel of top government financial regulators issued a report last week that also called for tougher rules in order for “non-cooperative” foreign companies to be allowed to be listed in the United States. The goal is to provide greater protection for investors in those companies, to meet minimal audit and transparency standards so that potential risks are better understood.
The President’s Working Group on Financial Markets specifically scrutinized the risks to investors posed by the Chinese government’s failure to allow access to the books of companies listed in the U.S. The group urged the Securities and Exchange Commission take steps to strengthen the listing standards.
“The recommendations outlined in the report will increase investor protection and level the playing field for all companies listed on U.S. exchanges,” said Treasury Secretary Steve Mnuchin, who chairs the PWG. “The United States is the premier jurisdiction in the world for raising capital, and we will not compromise on the core principles that underpin investor confidence in our capital markets.”
Besides Mnuchin, the PWG consists of representatives chosen by the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission.
The recommendations include a requirement for the Chinese companies’ auditors to provide information to the Public Company Accounting Oversight Board, which oversees audits of public companies in the U.S. Since the communist Chinese government doesn’t allow such transparency, the companies could meet the standard by providing audit documentation from their own firm, or from a “co-audit” from an outside firm, if the PCAOB determines they have sufficient access to work papers and practices. Those failing to comply by 2022 would need to de-list from American exchanges.
The recommendations also require “enhanced and prominent issuer disclosures of the risks of investing” in “non-cooperative jurisdictions” – namely China, but also other communist countries. Related or affected funds and indexes would have the same disclosure requirements.
The report’s recommendations resemble those in the Holding Foreign Companies Accountable Act passed by the Senate in May.
“The SEC works hard to protect American investors from being swindled by American companies,” said Republican Sen. John Kennedy of Louisiana, a co-sponsor of the bill. “It’s asinine that we’re giving Chinese companies the opportunity to exploit hardworking Americans—people who put their retirement and college savings in our exchanges—because we don’t insist on examining their books.”
Also last week a group of almost 250 prominent conservatives and former government and military officials – including National Legal and Policy Center President Peter Flaherty – signed a letter to Labor Secretary Eugene Scalia asking him to strengthen a proposed rule for retirement and pension managers to ensure all funds are fully transparent under U.S. laws.
“The investment of private retirement funds into Chinese companies that do not comply with basic transparency standards, and in many cases rely upon child- and slave-labor, is incompatible with fundamental American values and must be discontinued,” the signers wrote.
The rule that the letter addresses does not only speak to transparency regarding foreign entities, but also so-called “environmental, social (justice), and governance” (ESG) priorities that are employed by retirement and pension fund managers, which elevate political considerations (like climate change and immigration) over maximizing returns. The signers say greater transparency in fund management with regard to ESG is needed as well.
“Proponents of ESG causes have chosen to ignore the financial consequences of their actions and weaponized financial tools to pressure corporations to support their priorities…,” the letter states. “In crafting its final rule, Labor must, therefore, also ensure that fund managers further increase the transparency of their investment choices.”
National Legal and Policy Center has specifically focused on calling to account the world’s largest fund manager: BlackRock. In May Flaherty wrote to CEO Larry Fink, requesting that the firm divest its funds from 137 Chinese companies that are listed on American stock exchanges, noting his inconsistencies in pursuit of investments in the communist nation while at the same time prioritizing ESG goals.
“You recently wrote a letter to BlackRock shareholders about the pandemic and the future of BlackRock. Not one of your 5,000-plus words was critical of China for its role in the worldwide coronavirus nightmare…,” Flaherty wrote. “Your letter contains the word “transparency” nine times, yet the Chinese companies in which you invest your customer’s money are opaque… Would not your customers — and our nation — be better served by investing in non-Chinese companies in regulated and transparent markets?”
Following NLPC’s lead, Republican Sens. Martha McSally (Arizona) and Kevin Cramer (North Dakota) wrote Fink asking him to explain BlackRock’s investment priorities.
“We are interested in discussing what appears to be a double standard in the way your company treats investments in Chinese companies versus American,” the Senators wrote.
With pressure from grassroots activists, Congress, the President’s top financial regulators, and likely soon the Department of Labor…will Fink finally recognize his ESG hypocrisy?