The U.S. Senate approved the Holding Foreign Companies Accountable Act (HFCAA), sweeping legislation that could result in non-U.S. companies that fail to meet a number of strict criteria being barred from trading on U.S. stock exchanges.
One of the key provisions of the legislation is that companies would be required to certify that "they are not owned or controlled by a foreign government." Lawmakers would also require that these statements be backed up by an audit conducted by the Public Company Accounting Oversight Board (PCAOB).
The legislation would still need to pass the House of Representatives before being sent to President Trump for final approval. If passed, though, the law could have far-reaching effects on foreign companies already listed on U.S. exchanges, especially those from China.
These include Chinese search engine leader Baidu (NASDAQ:BIDU), which has frequently been called the "Google of China" after its search counterpart owned by Alphabet; e-commerce and cloud computing titan Alibaba (NYSE:BABA); and e-commerce platform JD.com (NASDAQ:JD). Other companies that could potentially be affected by the legislation include video game and social media giant Tencent (OTC:TCEH.Y); New Oriental Educational & Technology Group (NYSE:EDU), which specializes in tutoring and test-prep services; and of course Luckin Coffee (OTC:LKNC.Y).
The PCAOB, which falls under the purview of the Securities and Exchange Commission (SEC), is a nonprofit organization charged with overseeing audits of all U.S. companies that aspire to raise capital and be listed on the U.S. stock market. It was established by Congress in 2002 in the wake of several high-profile accounting scandals, including Enron and WorldCom. Foreign companies would be forced to submit to oversight by the PCAOB, which also reviews the audits of U.S. companies.
While the requirements would apply equally to any foreign company listed in the U.S., the new regulations appear to be focused on China, which has refused to submit the work of its auditors for outside review, arguing that Chinese law forbids the necessary documents from leaving the country.
The law passage in the Senate reflects the anger among U.S. lawmakers toward China and what many regulators say is a disregard of American financial disclosure standards.
The Motely Fool