EmergingMarketRiskDisclosuresareImportant.Companiesthathaveoperationsinemergingmarkets,andinvestorsinthosecompanies,oftenfacegreaterrisksanduncertaintiesthaninmoreestablishedmarkets.IssuersreportingwiththeSECshouldclearlydisclosethesematterstoinvestors.Similarly,fundsinvestinginemergingmarketsshouldensurethattheirmaterialriskdisclosuresareadequateandincompliancewithfederalsecuritieslaws.Manyrisksanduncertaintiesareindustry-andjurisdiction-specific.Boilerplatedisclosuresgenerallyarenotusefulorsufficientinthesecircumstances.
QualityofFinancialInformation,RequirementsandStandardsVaryGreatly.Investorsandfinancialprofessionalsshouldcarefullyconsiderthenatureandqualityoffinancialinformation,includingfinancialreportingandauditrequirements,whenmakingorrecommendinginvestments.Issuersshouldensurethatrelevantfinancialreportingmattersarediscussedwiththeirindependentauditorsand,whereapplicable,auditcommittees.
ThePCAOB’sInabilitytoInspectAuditWorkPapersinChinaContinues.InvestorsandfinancialprofessionalsshouldconsiderthepotentialrisksrelatedtothePCAOB’slackofaccesstoinspectPCAOB-registeredaccountingfirmsinChina.Issuersshouldclearlydisclosetheresultingmaterialrisks.Auditorsshouldhaveappropriatequalitycontrolsinplacerelatedtoexecutingqualityaudits.
TheAbilityofU.S.AuthoritiestoBringActionsinEmergingMarketsMayBeLimited.Accountability,forissuersandgatekeepers,includingindividualaccountability,isakeyaspectofU.S.securitieslaw.TheSEC,U.S.DepartmentofJustice(“DOJ”)andotherauthoritiesoftenhavesubstantialdifficultiesinbringingandenforcingactionsagainstnon-U.S.companiesandnon-U.S.persons,includingcompanydirectorsandofficers,incertainemergingmarkets,includingChina.Issuersshouldclearlydisclosetherelatedmaterialrisks.
ShareholdersHaveLimitedRightsandFewPracticalRemediesinEmergingMarkets.ShareholderclaimsthatarecommonintheUnitedStates,includingclassactionsecuritieslawandfraudclaims,generallyaredifficultorimpossibletopursueasamatteroflaworpracticalityinmanyemergingmarkets.Issuersshouldclearlydiscloseanymateriallimitationsonshareholderrights.
PassiveInvestingStrategiesDoNotTakeAccountofTheseRisks.Investorsshouldunderstandthatanindexfundtrackingaspecificemergingmarketindexgenerallydoesnotdirectlyweightsecuritiesonthebasisofinvestorprotectionlimitationsordifferencesinthequalityoffinancialreportingandavailableoversightmechanisms.
InvestmentAdvisers,Broker-DealersandOtherMarketParticipantsShouldConsiderEmergingMarketRisks.Financialprofessionalsgenerallyshouldconsiderthelimitationsandotherrisksdescribedabove,whenrecommendinginvestmentsinemergingmarkets.
Investorsshouldrecognizethattheseconsiderations(1)oftenaresignificant,(2)varyfromjurisdictiontojurisdictionandcompanytocompany,and(3)arejustsomeofthefactorsthatmaycontributetoeffectiveinvestmentdecisionmaking,includingportfolioandindexconstruction.
Thisstatementshouldnotbeviewedasanefforttorestrictaccesstoemergingmarketinvestments.Investorchoicehaslongbeenacorecomponentofourcapitalmarketsregulatoryframework,andemergingmarketinvestments,includingasacomponentofadiversifiedportfolio,haveproventobebeneficialtomanyinvestors.Thecombinationof(1)fullandfairdisclosure,(2)meaningful,principledoversightandenforcementand(3)broadinvestorchoice,hasmadetheU.S.capitalmarketstheworld’sdeepestandmostvibrant,benefitinginvestors,issuersandeconomicwelfaredomesticallyandglobally.Thisstatementreflectsourcommitmenttopreservingandpromotingeachcomponentofthatimportantandpowerfulcombination.
DisclosureRequirementsofCompaniesReportingwiththeSEC—ImportanceofHigh-Quality,ReliableAuditedFinancialStatements—EmergingMarketDisclosuresOftenareDifferentinScopeandQualityDespiteAppearingSimilarinForm
Companiesthathavesignificantoperationsinemergingmarketsoftenfacegreaterrisksanduncertainties,includingidiosyncraticrisks,thaninmoreestablishedmarkets.IssuersreportingwiththeSECshouldclearlydisclosethesematterstoinvestors.Boilerplatedisclosuresgenerallyarenotusefulorsufficientinthesecircumstances.Forexample,issuersshouldcarefullyconsidertheenvironmentinwhichthecompanyoperatesinassessingwhetherthecompanyhassufficientcontrols,processesandpersonneltoaddressitsaccountingorfinancialreportingissues.Thesepotentiallyuniqueoperatingconsiderationsalsoshouldbeconsideredandreflectedinfinancialandoperationaldisclosuresmoregenerally,includingdisclosuresofmaterialrisks,trends,uncertainties,accountingjudgmentsandotheritemsthatarematerialtoaninvestor.

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