SEC, FINRA Cross-Border Crackdown Typifies Trump 2.0 Priorities

Wall Street cops are zeroing in on foreign issuers and fraud involving overseas companies listing on US exchanges, hewing closely to the Trump administration’s broader posture toward Chinese businesses and other competitors abroad.

“Starting with the administration’s America-first trade policy, there’s been a wave of guidance and initiatives targeting conduct that purportedly harms American business interests, particularly when perpetrated by foreign actors,” said Geoffrey Atkins, a partner at Ropes & Gray LLP who advises companies on regulatory enforcement across the US and Asia.

The Securities and Exchange Commission in September and October forced at least nine companies based in Asian jurisdictions with US market listings to temporarily halt trading, citing atypical price moves and potential social media manipulation.

The agency under Chairman Paul Atkins has also formed a cross-border task force, focusing on companies, auditors, and underwriters from foreign jurisdictions “where governmental control and other factors pose unique investor risks.” (Paul Atkins and Geoffrey Atkins aren’t related.)

The SEC continues to monitor for “behavior that indicates hanky-panky going on in the marketplace,” Paul Atkins told CNBC on Oct. 22, referencing “ramp-and-dump” schemes involving foreign issuers that could occur during the government shutdown.

“This area lines up nicely with the types of activity that this SEC has said it plans to pursue, in terms of potential harm to retail investors, bread-and-butter traditional anti-fraud measures,” said Amy Jane Longo, a partner at Ropes & Gray and former trial counsel for the SEC’s enforcement division. “I think that’s where we’ll see the focus in the task force.”

The SEC under Atkins has charted a course away from enforcing disclosure errors, off-channel communications, and cryptocurrency registration to focus more on insider trading, offering fraud, and Ponzi-like schemes.

The SEC’s public affairs office has said it is unable to respond to press inquiries during a government shutdown.

Multi-Pronged Crackdown

The SEC isn’t alone targeting foreign issuers.

The Financial Industry Regulatory Authority last month announced it’s probing broker-dealers involved in taking small foreign companies public.

The SEC-overseen self-regulatory group took aim at underwriters, bookrunners, and placement agents in small-cap offerings in a bid to crack down on pump-and-dump schemes, often fueled by social media campaigns or spam text messages.

“Within that sweep and past FINRA actions, there’s been a focus on broker-dealers who either have some portion of ownership through China, or they do a significant amount of work for Chinese investors,” said Tiffany Rowe, counsel at Parker Poe Adams & Bernstein LLP specializing in SEC and FINRA enforcement.

A FINRA spokesperson declined to comment.

Nasdaq Inc. said in September it plans to tighten its listing requirements and expedite suspending or removing companies from its exchange. The proposal also calls for additional requirements for new listings from companies with China-based operations.

Nearly 70% of cases that Nasdaq has referred to the SEC or FINRA since August 2022 have related to trading in companies based in China or its special administrative regions, which make up just 10% of all listings, according to the exchange’s rule proposal.

The more than 280 Chinese companies listed on major US stock exchanges have a total market capitalization of $1.1 trillion, according to a March report from the US-China Economic and Security Review Commission.

Small-cap issuers are the majority of offshore listing activity, with the average IPO from a China-based company raising just $50 million in 2024, down from more than $300 million in 2021, the report said.

Nasdaq declined to comment.

China, Caymans, and Beyond

US regulatory focus on foreign issuers goes back decades, following a wave of reverse mergers involving Chinese companies marked by a perceived lack of scrutiny from local underwriters and government officials, compared to domestic initial public offerings.

Securities enforcers in recent months have focused on companies such as Regencell Bioscience Holdings Ltd., a Hong Kong-based traditional Chinese medicine biotech whose stock surged by more than 46,000% earlier this year even though the company has no sales.

“There were parties basically hijacking IPOs and using them as vehicles for a pump-and-dump,” said David Danovitch, a managing partner at Sullivan & Worcester who represents issuers and broker-dealers.

Under Nasdaq’s proposal, Chinese firms would require at least $25 million in public offering proceeds for new listings, under the rationale that a larger IPO would be harder to manipulate.

“These are small firms, so our concern is that this could bankrupt a few firms or inhibit their ability to comply properly,” Danovitch said. “You want your regulators to root out the crime and make sure investors here aren’t getting hurt.”

Issuers in Russia and the Cayman Islands, along with jurisdictions across the Middle East or Central and South America, may also face more scrutiny as the SEC task force ramps up operations, informed by the Trump administration’s broader focus on protecting US citizens from “bad actors,” according to securities lawyers.

But it remains to be seen whether the administration’s moves will ultimately create a chilling effect on prospective foreign issuers.

“Atkins saying, ‘we’re going after these bad actors, but we still want innovation and want to welcome foreign issuers into our capital markets,’ is the best way to draw the distinction between who we are going to go after and who we are going to welcome,” Rowe said. “I don’t think he has said that yet. There’s a very deliberate effort by the SEC and they’re being very deferential to the goals of the Trump administration.”