June 21, 2011 / 5:14 PM / 7 years ago

SEC weighs new policies on foreign reverse mergers

WASHINGTON (Reuters) - Securities regulators are developing policy changes to address the recent rash of accounting scandals at U.S.-listed companies based in China and other countries, Securities and Exchange Commission Chairman Mary Schapiro said on Tuesday.

U.S. Securities and Exchange Commission Chairman Mary Schapiro testifies before the Senate Banking Committee hearing on oversight of Dodd-Frank Wall Street reform and consumer protection implementation, on Capitol Hill in Washington May 12, 2011. REUTERS/Jonathan Ernst

“We have a menu of ideas we are looking at,” Schapiro told reporters on the sidelines of The Wall Street Journal’s CFO Network event held in Washington, D.C. “It’s not quite ready for prime time yet.”

The “menu” of ideas being explored by the SEC would be an additional step by regulators to address growing concerns about accounting and auditing of foreign-based companies that list in the United States.

The SEC has already taken enforcement action, often in the form of trading suspensions, against companies whose auditors have resigned over concerns about accounting fraud. Some of these companies have gained access to the U.S. markets by merging with shell companies here, even though most of their operations are overseas.

One of the largest companies to be caught up in the SEC’s probe so far is Longtop Financial Technologies Ltd, whose auditing firm Deloitte Touche Tohmatsu CPA Ltd quit after allegedly discovering falsified financial records.

During a question and answer session at the CFO Network event, Schapiro told the audience the SEC is trying to strike a balance between investor protection and ensuring companies have access to the U.S. capital markets.

“We want... foreign private issuers to list in the United States,” she said. “But we also want to make sure that U.S. investors have access to the information that they need to make the right kinds of investing decisions.”

Since March, more than two dozen China-based companies have disclosed auditor resignations or accounting problems. Most of the companies so far have generally been small in size. Earlier this month, the SEC issued an investor advisory bulletin warning about the risks involved with reverse mergers.

Concern about accounting at these companies has also led some brokerages to prevent investors from borrowing on margin to buy stocks of China-based companies.

The SEC formed a task force last year dedicated to rooting out accounting problems, and it has been probing companies and their auditors.

The SEC is working with Chinese regulators to try to help the U.S. Public Company Accounting Oversight Board, which polices auditors, to be able to do inspections abroad.

It is also reviewing a proposal by the Nasdaq exchange that would tighten listing standards.

Until now, the SEC has remained largely silent on what policy changes it might take to address the problem.

When asked when her menu of ideas will be ready to be released publicly, Schapiro said: “very soon.”

Meanwhile, the U.S. securities industry is studying ways to avoid lengthy trading halts of U.S.-listed Chinese securities that have been suspected of accounting problems, the Securities Industry and Financial Markets Association (SIFMA) said.

Reporting by Sarah N. Lynch; Editing by Tim Dobbyn

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