The U.S Securities and Exchange Commission (SEC) has finalized a rule that would allow it to remove companies from stock exchanges if they fail to submit to an audit.

On Thursday, the SEC adopted amendments to finalize rules to implement the Holding Foreign Companies Accountable Act (HFCAA) that was passed by Congress last year. Now the agency has the power to forbid companies from trading or being listed on a U.S stock exchange if they prevent audits by the Public Company Accounting Oversight Board (PCAOB) for three consecutive years.

“We have a basic bargain in our securities regime, which came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002," said SEC Chairman Gary Gensler in a statement announcing the rule change. "If you want to issue public securities in the U.S. the firms that audit your books have to be subject to inspection by the PCAOB."

The HFCAA passed in 2020 with an obvious target in mind; China. In his statement, Gensler noted that more than 50 foreign jurisdictions already comply with U.S audit regulations, but “two historically have not: China and Hong Kong.”

In the last year, Chinese regulators have taken aim at companies looking to list overseas, arguing that their scrutiny was aimed at protecting Chinese investors as well as their data security.

Under Gensler’s leadership, the SEC has sharpened its focus on Chinese investments and companies. In July, he urged U.S businesses to be more mindful of the risks of investing in these structures and issued fresh guidance, particularly for Variable Interest Entities (VIEs) that are often favored by Chinese entities.

According to the SEC, the finalized rules will allow investors to easily identify registrants whose auditing firms are located in a foreign jurisdiction that the PCAOB cannot completely inspect. Foreigner issuers, meanwhile, will be required to disclose the level of foreign government ownership in those entities.

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