In Depth: Chinese Companies’ Route to Wall Street Faces SEC Scrutiny

The U.S. stock regulator wants to change the criteria for foreign private issuer status, which has given overseas companies exemptions from stricter disclosure requirements

Chinese companies trading on U.S. stock exchanges may face tighter scrutiny as the Securities and Exchange Commission (SEC) seeks to update decades-old rules on foreign private issuers (FPIs), a move that could further test deteriorating China-U.S. relations.

The surge in foreign companies, particularly from China, leveraging offshore tax havens to list on U.S. exchanges has made it more difficult for American regulators to oversee them, as their FPI status gives them exemptions from the same disclosure requirements as their domestic counterparts.

The SEC is now soliciting public input on proposals to impose stricter criteria on whether listed foreign companies qualify as FPIs. In a concept release published on June 4, the watchdog said the landscape had “shifted dramatically in recent decades” and that the regulations may need to be updated to reflect those changes and to ensure U.S. investors have adequate protection against potential risks stemming from the different rules.

“Maintaining reasonable accommodations in the federal securities laws to attract foreign companies to U.S. markets and to provide U.S. investors with the opportunity to trade in those companies under U.S. laws and regulations remains an objective,” SEC Chairman Paul S. Atkins said at a June 4 meeting in Washington, D.C. “That objective must be balanced with other considerations, including providing investors with material information about these foreign companies, including their unique corporate structures, and ensuring that domestic companies are not competitively disadvantaged with respect to regulatory requirements.”

The proposals were published amid deepening tensions between the U.S. and China on a number of fronts, including trade, export controls, and access to financial markets.

In May,