Kennedy, Banking Committee colleagues to SEC: China-linked companies exploit our rules, create risks for American investors

WASHINGTON - Sen. John Kennedy (R-La.), a member of the Senate Banking Committee, today joined Sens. Tim Scott (R-S.C.), Elizabeth Warren (D-Mass.) and 15 bipartisan Banking Committee colleagues in pointing out the dangers posed by China-linked firms that hide their corporate structures using variable interest entities (VIEs).

In a letter to Securities and Exchange Commission (SEC) Chairman Paul Atkins, the Banking Committee members called for the SEC's Cross-Border Task Force to Combat Fraud to address concerns about how Chinese corporations can exploit VIE structures to conceal violations of American investors' privacy and Chinese Communist Party influence.

"We welcome the SEC's new Cross-Border Task Force to Combat Fraud. As part of that work, the SEC should examine how [VIE] structures are being used, as they may advance Chinese government objectives in ways that undermine investor protection and fair, orderly, and efficient markets," the senators wrote.

"A VIE is a legal structure where a company is controlled through contractual agreements or arrangements other than a direct equity stake with voting rights associated with equity ownership. American investors in these structures will - sometimes unknowingly - purchase shares in an offshore shell company contractually tied to a PRC-based operating entity," the lawmakers explained.

"Ultimately, the VIE structure leaves investors without insight into the operating entity's true ownership structure, with weak contractual claims, no right as shareholders to meaningfully participate in the operating entity's corporate decision-making, and with little or no meaningful legal protection, including recourse in the event of bankruptcy, and exposure to changes in Chinese law or interpretations of law that harm investors' rights or value of their investments," the Banking Committee members cautioned.

"It is critical for the United States to address the threats posed by China and its use of opaque corporate structures, including the risks to U.S. investors and the U.S. financial system," Kennedy and his colleagues concluded.

Sens. Jim Banks (R-Ind.), Chris Van Hollen (D-Md.), Kevin Cramer (R-N.D.), Raphael Warnock (D-Ga.), Pete Ricketts (R-Neb.), Andy Kim (D-N.J.), Cynthia Lummis (R-Wyo.), Lisa Blunt Rochester (D-Del.), Dave McCormick (R-Pa.), Thom Tillis (R-N.C.), Bill Hagerty (R-Tenn.), Katie Britt (R-Ala.), Mike Rounds (R-S.D.), Mike Crapo (R-Idaho) and Bernie Moreno (R-Ohio) joined Kennedy, Scott and Warren in signing the letter.

View the full letter here.