On July 9, 2020, SEC Division of Economic and Risk Analysis Chief Economist and Director S.P. Kothari and SEC Office of Compliance Inspections and Examinations Director Peter Driscoll moderated a panel discussion concerning investments by U.S. retail investors in emerging markets, particularly in China. This was Panel 1 of the SEC staff’s roundtable on emerging markets.

The panel began by discussing the risks faced by U.S. retail investors when investing in emerging markets in general, and particularly, in China.  Among other things, the panelists discussed:

  • The limited ability of U.S. investors to enforce a U.S. court judgment in an emerging market;
  • Institutional corruption; and
  • Risks including those arising from information asymmetry, currencies, and ownership structures.

A number of the panelists raised concerns regarding the lack of appropriate due diligence conducted in connection with investments in Chinese securities, including those included in broad indices or ETFs.  That said, the panelists agreed that emerging markets related investments are important to portfolio diversification.  To address these concerns, a number of proposals were advanced by the panelists, including to (1) consider disclosing additional risks of emerging market investments, particularly risks of currencies, ownership structures and investor protection; and (2) make U.S. parents of global audit firms provide financial guarantees for audit failures of their audit affiliates in China.

On the same date, another panel discussion focused on how to improve emerging market investing for U.S. retail investors with SEC Division of Investment Management Director Dalia Blass and SEC Division of Trading and Markets Deputy Director Christian Sabella moderating.

To raise awareness for retail investors, an NYSE representative proposed to introduce an indicator (i.e., a flag separate from the ticker) for issuers that retain auditors not subject to PCAOB auditor inspection and working paper access to warn the public that these issuers are not subject to the same governance, disclosure, or regulatory requirements of the other listed companies.  The Nasdaq representative noted that the exchange had recently advanced three proposed rule changes for emerging markets issuers (more information here) and noted that these are awaiting SEC approval.  Representatives from fund complexes emphasized that any regulatory action or rule change, such as the Senate bill now being considered in Congress, should be carefully evaluated so as to minimize the impact on U.S. markets. Many of the more established Chinese companies are contemplating dual listing and since there is currently no shortage of capital, delisting securities for non-compliance (as contemplated by the Senate bill) will just motivate those issuers to list their securities on other Asian markets, such as in Hong Kong or Singapore, and these securities will remain part of the emerging markets portfolio available to investors.

A webcast archive of the panel discussion will be available on the SEC website.