On April 21, 2020, SEC Chairman Jay Clayton, PCAOB Chairman William D. Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of Corporation Finance Director William Hinman and SEC Division of Investment Management Director Dalia Blass issued a Public Statement titled “Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited.”

The Statement begins with the observation that over the last several decades U.S. investors have increased their investments in companies based in or with operations in emerging markets.

For companies with emerging markets risks the Statement makes clear that robust disclosure of the specific risks for individual companies is necessary and boilerplate is not adequate:

“In light of both the significance and company-specific nature of the risks discussed in this statement, we expect issuers to present these risks prominently, in plain English and discuss them with specificity.  Issuers based in emerging markets should consider providing a U.S. domestic investor-oriented comparative discussion of matters such as (1) how the company has met the applicable financial reporting and disclosure obligations, including those related to DCP and ICFR and (2) regulatory enforcement and investor-oriented remedies, including as a practical matter, in the event of a material disclosure violation or fraud or other financial misconduct more generally.”

For investors the Statement addresses the very different risks presented by these investments, focusing on issues including:

  • Emerging Market Risk Disclosures are Important
  • Quality of Financial Information, Requirements and Standards Vary Greatly
  • The PCAOB’s Inability to Inspect Audit Work Papers in China Continues
  • The Ability of U.S. Authorities to Bring Actions in Emerging Markets May Be Limited
  • Shareholders Have Limited Rights and Few Practical Remedies in Emerging Markets
  • Passive Investing Strategies Do Not Take Account of These Risks
  • Investment Advisers, Broker-Dealers and Other Market Participants Should Consider Emerging Market Risks

As always, your thoughts and comments are welcome.