Fintech Security

Holding Foreign Companies Accountable Act: U.S.-China deal

Hello, and welcome to Protocol Policy! Today we’re looking at how the deal between the U.S. and China over audits of public companies may nudge the two back into frenemy territory at a moment of fraught relations. Plus, the Twitter whistleblower is set to testify before a Senate committee in September, and Pinterest faces a civil rights investigation in California over workplace discrimination allegations.

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Earlier this morning, SEC Chair Gary Gensler confirmed that the U.S. and China had struck a deal that will allow Chinese companies to remain on U.S. stock exchanges beyond the effective 2024 deadline set by a law Congress passed during the Trump administration. That news is a big deal for U.S. investors and China’s tech sector. But zoom out and it also has significant diplomatic implications: The U.S. and China finally agreed on something. And, let’s face it, U.S.-China relations have only moved in one direction recently, and the resultant deterioration is steering us dangerously close to a broader conflict.

The U.S. is set to finally access the audits of U.S.-listed Chinese companies. Under the agreement, U.S. inspectors from the Public Company Accounting Oversight Board will travel to Hong Kong to conduct on-site audit reviews.

  • The U.S. government has long held concerns over the rigor and transparency of China’s financial disclosures. In late 2020, then-President Donald Trump signed into law the Holding Foreign Companies Accountable Act, which required any foreign security issuer to submit to a PCAOB audit review.
  • China and Hong Kong were the only two jurisdictions that didn’t allow audits, so the law effectively set a 2024 deadline for China to agree to audit reviews or risk its companies being delisted.
  • For a while, it seemed China wasn’t interested in concessions. Last year, China passed a Data Security Law that prevented companies from sharing data with overseas regulators without explicit permission from Beijing. Chinese regulators also called the U.S. delisting threat “obviously discriminatory.”

A deal was ultimately in the mutual interest of the U.S. and China. The U.S. stock exchange is a major source of capital for Chinese companies, and America’s financial sector and investors benefit from the listings.

  • Since entering U.S. exchanges in 1999, Chinese companies have been able to raise more than $100 billion in capital. In recent years, China’s tech sector has particularly benefited from this access, allowing the likes of Alibaba, Baidu and JD.com to see valuations soar on U.S. exchanges.
  • Wall Street also didn’t want to lose access to Chinese markets. Even with lockdowns slowing economic growth, China’s economy is still attractive to U.S. investors. Wall Street also cashed in on Chinese IPOs on U.S. exchanges by underwriting the deals.
  • U.S. investors are still betting big on Chinese startups. Earlier this year, Sequoia Capital China raised $9 billion. Even as government relations seem to cool between the U.S. and China, our largest investors are still betting on China’s startup scene, and those bets are partially predicated on those startups growing big enough to list on U.S. exchanges.

Gensler, at least, seems happy with how things worked out. He called the deal “the first time we have received such detailed and specific commitments from China that they would allow PCAOB inspections and investigations meeting U.S. standards.”

  • But he’s worried about China holding up its end of the bargain. Gensler warned “the proof will be in the pudding” and said the agreement “will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China.”
  • There’s cause for concern: Chinese regulators said the PCAOB would only be able to conduct inspections with their assistance, while the PCAOB seems to think it will have the ability to conduct investigations “without consultation with, [or] input from, Chinese authorities.”
  • Still, the mutual benefit I mentioned earlier is good enough reason to think both sides will work through their differences. It could be less of a misunderstanding of the terms of the deal and more a matter of messaging to domestic audiences.

Economic entanglement should ultimately reduce the threat of conflict. We’re far from Francis Fukuyama’s end of history, where globalization would result in the end of outright conflicts between great powers. But all things being equal, economic entanglement seems to reduce the chance of conflict by making the potential costs higher. This agreement is one small factor that contributes to further alignment between the U.S and China. It’s a step in the right direction. But it comes as the two countries pull apart on matters like the race to onshore semiconductor production.

— Hirsh Chitkara (email | twitter)

In Washington

Like Frances Haugen before him, Twitter whistleblower Peiter “Mudge” Zatko will testify before a Senate committee in September. The hearing will focus on the former head of security’s “allegations of widespread security failures and foreign state actor interference at Twitter.” The committee’s leaders, Sens. Dick Durbin and Chuck Grassley, said Mudge was appearing pursuant to a subpoena.

Meanwhile, the SEC asked Twitter in June for more clarity on the company’s estimates of bots as a percentage of its customized “monetizable daily active users” measure. Of course, that’s the calculation Elon Musk is trying to undermine as he seeks to get out of buying the company, and the one that Mudge sort of suggested he had doubts about as well. Twitter reportedly responded to the agency that it does an extensive, but manual, spot-checking of accounts.

A coalition of nearly 50 consumer and civil rights groups is pushing House Speaker Nancy Pelosi for a vote on the privacy bill advancing through the chamber. The letter broadens the praise that the measure has gotten in the advocacy community, and increases pressure on Pelosi to buck concerns from California that the bill would remove some of her home state’s power in favor of nationwide protections.

Would Messenger, WhatsApp, Google, Apple, Verizon or AT&T protect users’ metadata from prosecutors aiming to punish people who get abortions? That’s what a group of more than a dozen House Democrats asked the companies. While it’s unlikely any of them will volunteer to defy valid court demands anytime soon, the letter puts pressure on the firms to be transparent or make other tweaks in their data-handling policies. Many of the companies have tried to keep mum since the Supreme Court cleared the way for states to criminalize abortion.

Democratic FTC Commissioner Alvaro Bedoya discussed his interest in how social media design choices affect kids and keep them engaged in an interview with the Washington Post. Bedoya, who was born in Peru and is the commission’s newest member, also talked about the responsibility he feels to dig into frauds occurring in languages other than English.

The White House brought in TikTok influencers to spread the word about Biden’s student debt cancellation plan. Uses of “literally” per minute: two.

In the states

Amazon is shutting down the telehealth service it had operated for employees and planned to roll out to non-Amazonians in several cities next year. Amazon Care, as it was known, apparently wasn’t “complete enough” as a health care offering, but the company insisted it would be looking for other opportunities in the space. Maybe like that chain of primary care providers it just agreed to buy?

Snap will pay $35 million to settle a lawsuit alleging its lenses and filters violate Illinois’ landmark biometric privacy law, which has reined in the practices of several major tech companies.

And Sephora will pay $1.2 million to settle California claims that it exchanged consumer data for valuable ad analytics without its customers’ permission, in violation of CCPA. According to the state’s attorney general, Rob Bonta, the makeup retailer also failed to honor steps that browser users can take to opt out of the sale of their information from all sites at once, instead of one by one. Bonta said his office would be doing a sweep of other companies that might not be honoring the global opt-out signals.

Blake Masters, the Peter Thiel acolyte who won the Republican nomination for an Arizona Senate seat, has done a dramatic flip-flop on abortion as he heads into the general election. He’s running in a purple state at a moment when reproductive rights have proven a winning issue for Democrats.

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On Protocol

Pinterest is facing a California civil rights investigation. Earlier this week, the state reached out to potential witnesses, all of them women, including whistleblower Ifeoma Ozoma, who famously alleged discrimination and retalliation at the company. Pinterest said the state is looking into multiple companies.

YouTube will blanket Poland, Slovakia and Czechia with videos designed to ready viewers to recognize misinformation online. The idea is that alerting people to manipulation attempts and techniques before they see them will do more to “inoculate” users than trying to correct an unending stream of falsehoods one by one. The effort will focus on manipulation likely to come that’s centered on the flow of Ukrainian migrants fleeing Russia’s war in their country.

A federal initiative to get a better look at the “ingredients” in software could be a boon for cybersecurity. It’s a good start, but not a cure-all.

Biden’s student loan plan could boost fintech lenders as borrowers who took out private debt to pay for their education look to refinance when they have to restart their payments.

In the media, culture and metaverse

Researchers concluded that a long-running, inauthentic social media influence network was promoting the interests of the U.S. — a country that hasn’t been publicly tied to such efforts before. After takedown of the network by Twitter and Meta, the sleuths at the Stanford Internet Observatory and Graphika apparently found, somewhat to their amusement, that the campaign used the same techniques we’ve come to associate with Russia — like fake profiles sharing memes — but it was criticizing Russia, China and Iran in those countries.

Google bowed to Democratic lawmakers who urged it to distinguish between genuine abortion care facilities and “crisis” centers run by anti-abortion groups trying to steer people away from terminating their pregnancies. “When someone in the U.S. searches for health care providers that provide abortions … the Local Search results box will display facilities that have been verified to provide abortions,” the company wrote in a letter. A group of Republican state attorneys general had told Sundar Pichai they’d come down on the company for limiting the centers’ reach.

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‘This is no “America’s Funniest Home Videos”’

Democratic Sen. Ed Markey, a longtime critic of Amazon’s Ring, slammed the forthcoming show from Amazon’s MGM that is supposed to include footage from the smart doorbell maker. Markey called “Ring Nation” an ad disguised as entertainment and said it was a very unfunny normalization of “over-policing and over-surveillance.”

Thanks for reading — see you Monday!

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