The Securities and Exchange Commission’s (“SEC”) power to obtain documents from U.S. companies and their auditors is a key component of its mandate to protect the marketplace from fraud. But what happens when the exercise of that power conflicts with the civil and criminal laws of another country? In the case of the SEC seeking documents of Chinese companies listed on U.S. exchanges, the result has been a long standoff between regulators in the two countries, with foreign accounting firms caught in the middle.

To date, nothing has resolved the standoff. Despite a series of diplomatic agreements between the two nations over the years, and despite the more recent administrative action that the SEC initiated against Chinese accounting firms, U.S. regulators still have no access to accounting workpapers and other information located in China. See earlier article.

Enter the Public Company Accounting Oversight Board (“PCAOB” or “Board”). Recently, the PCAOB and the China Securities Regulatory Commission (“CSRC”) signed a new Memorandum of Understanding (the “2013 MOU”), found here, reviving some optimism that the current standoff can be resolved through diplomatic channels. The 2013 MOU is similar to earlier agreements between the United States and China in that – while providing a mechanism for the exchange of documents – it allows assistance to be denied if a request would violate domestic law. The 2013 MOU is unique, however, in its inclusion of confidentiality provisions setting forth how and under what circumstances the PCAOB can share the information it receives. Specifically, the 2013 MOU requires the PCAOB to obtain prior written consent before sharing non-public information generally, but allows the Board to share information with the SEC simply by giving the CSRC advance notice.

Only time will tell whether the 2013 MOU will result in the release of information from China. While the new MOU has been celebrated in some quarters as a possible breakthrough in the standoff between regulators, the agreement on its face does not address the issue at the root of the impasse: auditors in China cannot surrender their work papers to U.S. authorities without potentially violating Chinese law. Until this fundamental problem is addressed, the stalemate is likely to continue.

Research and drafting assistance for this post was provided by Reed Smith Summer Associate Steven Peretz.