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U.S. Exchanges and New Chinese Government Regulations

U.S. Exchanges and New Chinese Government Regulations

The Chinese government decided to act through the Chinese Securities Regulatory Commission (CSRC) to add a number of requirements on offerings by Chinese Domestic Companies on U.S. exchanges. Their actions consist of many new regulations and filing requirements; however, I would like to talk about two, and how those requirements differ from any rules or requirements that our regulators have required from Chinese companies wanting to list on U.S. exchanges.

U.S. Exchanges and New Chinese Government Regulations

CSRC Scrutiny on U.S. Sponsors and Underwriters Before Participating in Chinese Offerings

The first is a requirement of U.S. sponsors or underwriters to file with the CSRC by supplying certain information on their background. In effect, the Chinese government wants to know which U.S. underwriter will participate in Chinese offerings and review their application. 

Compare that to our regulator’s stance on which Chinese sponsors or underwriters that are participating in issuers listing on our exchanges. Currently, there is no requirement by any exchange that I am aware of, that requires foreign underwriters or sponsors to first submit a written application to participate in U.S. listed offerings.

While the CSRC is reviewing which U.S. financial institutions are participating in the distribution of Chinese issuers on U.S. exchanges our regulators are not requiring Chinese or foreign financial institutions, participating in these offerings, to submit a formal application to participate. I believe such institutions participating in any U.S. Exchange should file an application and be reviewed by that exchange.

Shouldn’t Chinese underwriters and sponsors be required to file with the exchanges so that they can review their backgrounds and standings in their country? Shouldn’t one of the requirements for Chinese, or any foreign sponsors, that participate in U.S. offerings, be that they agree to supply these exchanges with any and all trading information in the immediate after market, should it be requested? Chinese sponsors that do not agree to this requirement would not be approved to participate in the U.S. offerings on those exchanges.

Also, currently, foreign underwriters that underwrite a portion of a U.S. offerings to foreign investors, sign paperwork with the U.S. underwriters stating that they have the financial means to undertake this commitment, but our regulators do not verify the fact. U.S. underwriters are audited to make sure they are meeting their financial requirements but as far as I know the exchanges cannot, and do not verify that foreign underwriters have the same capital reserves.

CSRC Requires Approval From Chinese Issuers Before Offering on U.S. Exchanges

The second requirement I would like to discuss is that the Chinese issuers must apply to the CSRC and get approval to do an offering on U.S. exchanges. The Chinese authorities have every right to approve which of their companies they will allow to list on a foreign exchange, but part of the requirement is that the U.S. sponsors must sign a statement that says that the issuers filings are true and accurate.

Again, this is an example of the Chinese government doing everything to control and approve what companies go public and what U.S. financial institutions are selling them. Our markets need more protection from those foreign issuers and the foreign financial institutions selling them. 

Why couldn’t our exchanges require the CSRC to give them a report on each issuer stating that they have reviewed the companies applying for listing and that they meet all requirements for doing business in China and are in good standing. Also, shouldn’t the CSRC assure our exchanges that these issuers are not controlled or owned by a governmental entity and if so that it is properly disclosed.

Protecting the Integrity of Exchanges and Markets

I am a very strong believer that countries that do business with each other and enjoy the blessings of capitalism will not only uplift the financial status of their citizens but will also result in a world that is less apt to resolve conflicts with military actions. They will try harder to resolve disputes in such a way that will keep the economic systems working and growing.

However, when a country takes actions to protect its system of government and companies that list on our exchanges it becomes imperative that we do the same. I want all companies in the world to want to trade on the U.S. exchanges but we need to make sure that those companies and countries are acting in a way that helps us protect the integrity of those exchanges and markets.

In China’s case, we should at least respond to their increase in control of what companies and underwriters they will allow to market these issuers, by making sure that these issuers are in good standing with the CSRC and that the Chinese underwriters are adhering to U.S. security regulations when participating in these offerings.

Damon D. Testaverde