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As investors large and small adjust portfolios to minimize costs from the COVID-19 pandemic, the Securities and Exchange Commission is warning that emerging-market firms, particularly in China, may be riskier than they appear.
The agency, which enforces securities laws in the U.S., has limited ability to ensure firms based in emerging markets comply, particularly with requirements that they accurately disclose risk factors such as major lawsuits and the impact of operational challenges like disease epidemics on their businesses.
"Investors have long wanted access to emerging markets, and we don't want to deny them that access, but the risks are different," SEC Chairman Jay Clayton told FOX Business' Maria Bartiromo on Wednesday. "There are a number of risks in emerging markets that don't exist in U.S. markets, including your ability to have recourse."
With Chinese companies in particular, the Public Company Accounting Oversight Board -- which monitors the accuracy of U.S. earnings statements -- lacks access to the audit records of accounting work which make it easier to spot misstatements that might hurt stockholders financially.
The fallout from such misrepresentation may be exacerbated by the volatility in global markets during the COVID-19 outbreak, which has infected more than 2.5 million people worldwide and killed more than 178,000.
The blue-chip Dow Jones Industrial Average, for instance, lost about a third of its value before rallying from a bottom below 20,000.
With markets relatively calm for the moment, "this is a time when people, both retail investors -- who are on our minds every day -- and institutional investors are going through their portfolios looking at rebalancing," Clayton said.
They should exercise due caution while doing so, he said.
"When you see disclosures from emerging markets, they may look like disclosures from U.S. domestic issuers," he told Bartiromo, but "it's not the same kind of investing."
There are 156 Chinese companies listed on U.S. exchanges combined carrying a total market cap of $1.2 trillion as of February 2019, according to the U.S.-China Economic Security Review Commission.