Weinberg & Company

Best Practice Newsletter – August 2022

By August 23, 2022 No Comments

Exit Stage Left

US-Listed Chinese Companies Voluntarily Delist-

Five of China’s largest state-owned enterprises are starting the delisting process from US exchanges. This is on the heels of last month’s statement by SEC Chair Gary Gensler in which he doubted that an agreement can ever be reached between US and China that would allow US regulators to inspect audits of US-listed Chinese companies. 

The August 12 announcement includes: China Life Insurance Company, Petro China Co, China Petroleum & Chemical Corp, Aluminum Corp of China, and Sinopec Shanghai Petrochemical Co. All currently are listed on the New York Stock Exchange (NYSE). Prior to the delisting announcement, the five had a combined market cap of $348.5 billion.

China’s move to delist rather than disclose continues mainland China’s and Hong Kong’s status as the only two jurisdictions worldwide that don’t allow the Public Company Accounting Oversight Board (PCAOB) to inspect audits of US exchange-listed companies. 

For two decades Chinese authorities have resisted allowing the PCAOB to review the audit reports of its companies that trade on US exchanges, citing national security concerns.

After frustration over non-compliance, Congress in 2020 passed the Holding Foreign Companies Accountable Act which bans the trading of securities on US exchanges of companies whose auditors can’t be inspected by the PCAOB for three consecutive years. Under that law, which was signed in 2021, Chinese companies have until Spring 2024 to comply, or be delisted.

As frustration over non-compliance continued to grow among US lawmakers, a legislative bill that will shorten that deadline has made its way through committees in both the House and Senate. If it passes later this year, Chinese companies could face delisting as early as March 2023.

The voluntary exiting of US-listed Chinese companies over audit inspection issues doesn’t necessarily mean they’re off the hook, according to PCAOB Chair Erica Williams who took over the PCAOB last January. In an August 1 interview with Bloomberg, Williams said that the PCAOB’s authority to inspect audits was retrospective and that it could demand work papers from companies even after they leave voluntarily.

“If a firm or issuer decides to delist this year, it really doesn’t matter to me because I need to know if you engaged in fraud last year,” Williams told Bloomberg, while not citing any specific company.

Williams declined to say how far back the PCAOB inspectors would want to look, saying that the 2020 law doesn’t have a time limit on its authority.

 Covering the Privates

SEC Proposes More Private Fund Disclosures

As part of its increasing effort to regulate the private funds industry, particularly hedge funds, the SEC in conjunction with the Commodities Futures Trading Commission (CFTC) have proposed new rules requiring more disclosures, particularly as it relates to private funds’ investment strategies, leverage, and exposure to cryptocurrency.

In its August announcement the SEC proposed amendments to Form PF, which is the primary form private funds use to disclose purchases and sales of securities in a confidential manner.

 If adopted, the new rules would apply to advisors and large hedge funds with net asset value of $500 million and greater. Large hedge funds would be required to report their exposure to cryptocurrency. Since Form PF was created following the 2007-2009 financial crisis when cryto assets didn’t exist, the updated Form PF would add and define “digital assets” as a new asset class.

 In addition to providing extensive details about its investment strategy and exposure, hedge funds would be required to report on borrowing, any financial arrangements, market factor effects, currency exposure, country and industry exposure, risk metrics, investment performance by strategy, portfolio liquidity, and much more.

 The proposal seeks enhanced reporting from advisers and the private funds they advise. There would be enhanced reporting on assets under management (AUM), withdrawal and redemption rights, gross and net asset value, inflows and outflows, borrowings and types of creditors, beneficial ownership, identification of system risk, to name a few.

Dissent for the proposal came from SEC Commissioner Hester Peirce who said “Private fund investors—typically, institutional investors, such as insurance companies, university endowments, pension funds, and high income and net worth individuals are capable of making their own risk assessments.”

This latest proposal targeting private funds follows amendments proposed in February 2022 which changed how funds are audited, how books and records are maintained, and how fund advisors are required to report advisory-led secondary transactions. 

The SEC is seeking public input on its new rules pertaining to Form PF and is expected to make its decision following a 60-day comment period.


SPACs on Life Support

Investor frenzy for Special Purpose Acquisition Companies (SPACs) ground to an absolute halt in July, with only four IPO SPACs listing by mid-August. July’s distinction of zero SPAC IPOs marks the first month in five years that no new SPACs raised money. 

The second quarter of 2022 saw a total of 15 SPAC IPOs, down from 55 in Q1, according to Dealogic.

By mid-August, a total of only 73 SPAC transactions occurred this year, and according to SpacInsider those deals saw a marked decline in dollars raised: an average of $167.5 million per transaction, for a total of $12.2 billion raised to date.

For all of 2021, there were 609 deals that raised an average of $265 million per deal for a total of $161.4 billion raised. In 2020, there were 247 deals that raised $336.8 million per deal for a total of $83.2 billion.

Lack of investor appetite for SPACs has been attributed to additional SPAC scrutiny by US regulators and a declining stock market.

 Who’s the Boss?

Lead Auditors to Take Oversight Role

The SEC has just approved new rules which increase the accountability and oversight requirements of the lead auditor in audit engagements that involve multiple audit firms. 

In a recent statement SEC Chairman Gary Gensler noted that 26% of audits involve more than one firm. Multiple auditors typically are engaged in the audits of international companies, or highly complex and multi-national operations. 

Proposed by the PCAOB in June, the lead auditors in a multi-auditor engagement are now required to get statements from the other auditors that they are skilled in performing the audit and that they follow specific rules and audit procedures.

The lead auditor also is required to ensure the independence of the other auditors and to prioritize the supervision of the other auditors. Additionally, it applies a risk-based supervisory approach to the lead auditor’s oversight of other auditors for whose work the lead auditor assumes responsibility. 

The amendments apply to all audits conducted under PCAOB standards and will take effect for audits of financial statements for fiscal years ending on or after December 15, 2024.