The SEC’s VIE Problem: Why the Agency’s Approach Contradicts Its Rhetoric

Abstract

In July 2021, the SEC temporarily banned securities issuances by Chinese companies listing in the United States with a stated rationale of protecting average investors from the complicated and opaque corporate structure known as a variable interest entity (“VIE”), often employed by Chinese operating companies listed in the United States. The subsequent rule changes for VIE disclosure illustrate the disconnect between the agency’s rhetoric and its actions. The SEC’s continued invocation of retail investors rings hollow when they are unlikely to be affected by tweaks to disclosure rules. The SEC should make an effort to be more transparent about whom its disclosure rules serve: institutional investors, who are most likely to read disclosure documents and most able to use the information contained within them to price the securities efficiently. Academic literature suggests professional investors should be the agency’s main priority, and the current regime, as seen in the case of VIE disclosure rules, can only make sense when viewed through that lens. Investor confidence, internal rulemaking, and market efficiency would all be improved if the SEC were more transparent about its goals and methods.