SEC Should Bar Stock Index Providers From Including Sanctioned Chinese Companies, Domestic Industry Group Says
The SEC should ban sanctioned Chinese companies from being included in indices, exchange-traded funds (ETFs) and other index funds in U.S. capital markets, the Coalition for a Prosperous America said. The nonprofit group said index providers fail to “consider material risks posed by U.S. national security threats” when they evaluate companies, including whether they are listed under a U.S. sanctions regime or designated on the Commerce Department’s Entity List. “These gaps in oversight and due diligence are afflicting index funds held by scores of millions of unwitting American retail investors -- often through their pension funds -- and elevating the material risks in a manner inconsistent with their proper fiduciary duty," CPA wrote to the SEC in a letter released Jan. 5.
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The coalition said U.S. retail and institutional investors are being exposed to a “wide range” of publicly traded Chinese companies that are involved in human rights violations, including the detention of Muslim minority groups in the Xinjiang region. CPA said “four of the largest iShares ETFs with exposure to Chinese securities” are holding securities of eight companies named on the Entity List and three companies on the Treasury Department’s Chinese military company list. The coalition specifically named Inspur Group, China State Shipbuilding, Zhejiang Dahua Technology and iFlytek.
The SEC should bar these companies and strictly enforce the Holding Foreign Companies Accountable Act, which requires foreign companies to report to the SEC whether they are owned or controlled by a foreign government (see 2112030005). “We strongly urge the SEC to prohibit index providers from including the securities of Chinese companies (particularly non-regulated ‘A-share’ enterprises) in their benchmarks that are not fully compliant with U.S. securities laws and which have been identified by any U.S. government agency as contributing to China’s military modernization or egregious human rights abuses,” CPA said. The SEC didn’t comment.