Recent positive signals from Chinese regulators could mean the delisting crisis facing concept stocks in the US due to years of restricted audit working paper access is approaching detente, but their future in America’s markets is still uncertain, writes Iris Shi

D uring the past decade of Chinese enterprises flocking to list in the US, whether China concept stocks were booming or in crisis, the longstanding clash of wills between China and the US revolving around audit working papers has loomed in the background of these ups and downs in share prices. However, in April this year, China concept stocks – which have been buffeted by regulatory pressures from both the US and China and faced the risk of collective delisting – finally saw some positive signals.

On 2 April, the China Securities Regulatory Commission (CSRC), the Ministry of Finance, the National Administration of State Secrets Protection and the State Bureau of Archives published the Regulations for Enhancing Confidentiality and File Management Relating to the Offshore Offering and Listing of Securities by Domestic Enterprises (Draft for Comment) which, compared with the regulations originally issued in 2009, made a number of revisions that have garnered widespread attention.

The draft expressly: includes domestic joint stock limited companies that directly offer and list abroad within the scope of “domestic enterprises”; increases the responsibilities of enterprises for the protection and management of confidential and sensitive information; and, in respect of the offshore securities offering and listing activities of domestic enterprises, provides clearer and more explicit guidelines on confidentiality and file management for domestic enterprises, relevant securities companies and securities service firms.

The draft also improves the arrangements for cross-border regulatory co-operation and provides system safeguards for secure and efficient cross-border regulatory co-operation. It revises the provisions on foreign inspections in light of international practice, and strikes the phrase: “onsite inspections shall be conducted with China’s regulators taking the lead, or rely on the inspection results of China’s regulators”, which appears in the 2009 version of the regulations.

The focus is no longer on “onsite inspections”, but rather that the “cross-border regulatory co-operation mechanism” will be employed in respect of the investigation of and collection of evidence from domestic enterprises (and intermediary firms that provide services) by foreign regulators, with the CSRC and relevant authorities providing necessary assistance based on the bilateral/multilateral co-operation mechanism.

The draft has been interpreted by the market as a positive move to liberalise cross-border audit regulatory co-operation; that is to say, China may permit US regulators to access the audit working papers of China concept stocks that have been the subject of dispute for many years. A senior lawyer well-versed in capital markets revealed that the CSRC has held consultations with the “Big Four” accounting firms, is encouraging domestic companies to seek listings in the US, and will co-operate in such matters as the inspection of audit working papers by the US Public Company Accounting Oversight Board (PCAOB) during the second half of the year.

Darren Liang, a Shanghai-based partner at Shihui Partners, also points out that: “Notwithstanding the fact that the draft has not yet officially entered into effect, listed China concept stock companies and pertinent securities service firms are already paying closer attention to compliance risks and formulating corresponding compliance response plans.”towards the light

A number of Liang’s clients were recently required to illustrate whether they had sufficiently complied with the provisions on sensitive information under the draft. “We immediately assisted them in verifying the information provided to auditors,” he says.

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