WHEN: Today, Friday, August 26, 2022
WHERE: CNBC's "Squawk on the Street"
Following is the unofficial transcript of a CNBC exclusive interview with SEC Chair Gary Gensler on CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET) today, Friday, August 26th. Following is a link to video on CNBC.com: https://www.cnbc.com/video/2022/08/26/sec-chair-gary-gensler-breaks-down-the-agreement-with-china-over-audit-inspections.html.
All references must be sourced to CNBC.
JIM CRAMER: Welcome back to "Squawk on the Street." News out involving the SEC and China. SEC Chair Gary Gensler joins us now exclusively. Mr. Chairman, welcome to "Squawk on the Street." What do we got?
GARY GENSLER: It's good to be with you, Jim and David. Well, this morning, the Chinese officials from the Ministry of Finance and the China Securities Regulatory Commission signed an unprecedented agreement with our colleagues over at the Public Company Accounting Oversight Board and what this means for investors is this is a step along the way to ensure for compliance for the about 200 China related companies here in the US. It's not the end of the road because still, the Chinese auditing firms and the Chinese officials need to comply and let American officials through the PCAOB look at the audit work papers, no redactions, but look at these work papers and ensure for compliance with our laws that protect investors. At the core of this, this is about investors having trust in financial statements, and it's also about a level playing field to ensure that the rules of the road for the US issuers and or 50 other jurisdictions are also complied with by Chinese issuers. So it's a step along the way. We hope that the Chinese will comply with the agreements that these agreements signed this morning but the next few months will tell us whether that's true or as my family used to say, the proof is in the pudding. We'll see what happens.
CRAMER: Alright so, Mr. Chairman, before this agreement, would there be situations where you had felt and the Commission had felt that the disclosure was improper, and that the disclosure rules in China were quite different from the disclosure rules in this country.
GENSLER: So there is an agreement by Congress 20 years ago embedded in law called Sarbanes-Oxley. It was after a lot of big accounting failures, like Enron and WorldCom and the like. Many of your viewers may not remember that. But after that Congress said, you know what, we need to have this new organization to check on the auditing and it's sort of in auditing the auditors and looking at this. Well 20 years later, 52 jurisdictions around the globe allow that to happen and two do not. So Congress once again, about a year and a half ago, said, gotta gotta comply, gotta comply completely. And I want to thank Congress. I want to thank Senators Van Hollen and Senator Kennedy, who led this charge but many others in the House, Brad Sherman and others that they said, no, this has got to happen and they put a clock on it. But yes, to answer your question, before this for 18 or so years, we have not been able to look at the work papers, look to see whether the various auditing firms, you know, the big four auditing firms are also in China. And to look at those work papers and see whether they've properly got the support for the financials and they've got the proper internal controls, and that the auditors are looking at those internal controls and documenting what's called an auditor opinion.
CRAMER: Alright so Mr. Chairman, let's use a specific example and it's past tense so we can do that. Luckin, a deal, an IPO where people lost millions in this country. Would Luckin be, I don't want to say anything to be, fraud is very difficult to detect, but would Luckin have been say exposed and they would have been more risk factors had they allowed the US in to look at the auditing.
GENSLER: It's hard to tell in any one company but our system is is that companies present their disclosure to you, the American investor, and they present it but they have financials looked at by auditors and the auditors attest to certain things through auditing standards. That might sound a little boring, but it's really important because you have to trust the numbers. But then we have a second group, somebody looking at the auditors and those people looking at the auditors are overseen by the SEC and that's called the Public Company Accounting Oversight Board. So in your example, Luckin Coffee was a investigation that we brought and the PCAOB helped us on that several years ago about a Chinese related company and the numbers weren't kept up to snuff. But this is a more general thing. Can you trust the numbers and is there a level playing field? Why would 200 Chinese companies be able to issue here in the US and not comply with our laws? It's a great privilege to be in the US. We have the deepest, most liquid capital markets and if you want to issue here in the US and tap into the investment in the US, comply with our laws and I think Congress spoke with a clear voice and and we were effectuating the will of Congress. We've got the great support of unanimous bipartisan support of Congress. But again, the proof will be in the pudding. We'll have to see over the next few months how compliance goes.
DAVID FABER: Yeah. Chairman Gensler, it's David. You said you said twice the proofs in the pudding. You're gonna have on the ground inspectors in Hong Kong or inspectors on the ground in Hong Kong as soon as mid-September. Are you going to get a sense even then as to whether the Chinese are going to follow through on the promises they've made?
GENSLER: Well, it's a great question. Sending those inspectors in a normal inspection period can take up to three months. But we'll we'll start to know in October and November and let me remind the public, Congress said that there has to be an annual determination, an annual determination whether there's compliance and the first year last December, it was a no. It was no, there was a negative determination for Hong Kong and China. This annual determination needs to be made by this December, and that's why it was so important to get people on the ground by mid-September, really looking at those work papers and in addition, taking doing interviews with the people that actually did the audits. And and, thirdly, that the PCAOB can select whichever firms they want to look at, whatever firms, whichever engagements based on risk management, the PCAOB can select any company and take a look. But yes David, we'll probably know by certainly by early December because we have to the PCAOB has to make their next annual determination. And if it's if it's thumbs down, again, a negative determination, it may well be that these companies would have to delist. If it's a thumbs up, that would be real progress and I think, look, our US capital markets have been the destination of choice, the competitive destination of choice for decades for large companies around the globe. So, if there's compliance, this would keep some other companies in our markets, but it's really important to have the compliance so investors can trust the numbers and we have a level playing field.
FABER: Yeah, well, you've mentioned those roughly 200 companies, you know, obviously, market caps vary but as much as a trillion to 2 trillion. Nonetheless, they're still under separate pressures from the Chinese government to perhaps come back home or delist. You know, what's your sense if this is successful, in terms of this tie that some of US investors have seen of an unwillingness of Chinese companies to list here and even those who are listed here to still choose to have another listing in Hong Kong or make it their sole listing?
GENSLER: Look, I still think we've got the deepest most liquid capital markets. They're not perfect. We're we're looking at other reforms to to enhance our capital markets, enhance our stock markets. But I think that we're the competitive destination of choice for companies from Europe, Asia, from Africa, from South America, from Australia, around the globe, and I want to continue to focus on that ensure that we're the gold standard. If the Chinese authorities allow for compliance, then that will continue and company by company to make a choice. If there's not compliance, then of course, then we'll protect the investing public, and these companies will have to leave.
CRAMER: Mr. Chairman, we are indeed the gold standard. I want to bring three companies to your attention. Magic Empire Global, symbol MEGL, based in Hong Kong, August 5th, 5 million shares come public at $4. Bank shares open at 50, close at 97. 2,325% from IPO first day, peaks at $249 stock is now back to seven. Starbox which is based in Malaysia, 5 million shares, $4. Opens at 27, reaches at 46 that first day and then goes back to seven instantly and then the most egregious one, AMT Global, AMTD Global based in Hong Kong, 16 million shares, 16. IPO price at $7.80 July 15th. Stock rallies to $2,555 on August 2. These do not seem to me to be situations that are warranted to be able to say that we're the gold standard and I urge you to look into how these things can happen because to me, they are violative of the kind of standards that you want in our country.
GENSLER: Look Jim, we do want those standards and we have standards, support of Congress, excellent remarkable staff at the SEC. We're the cop on the beat and we've got disclosure standards and porous anti-fraud and anti-manipulation, we oversee the markets. This auditing and accounting is one piece of that. Again, choice will be of the Chinese authorities but if there is compliance over these next few months, companies could remain here. If not, they they would need to leave. I'd be remiss if I didn't just do a little shout out to Chair Erica Williams, who runs PCAOB, terrific work with her staff and just a remarkable group of folks at the SEC and also our US ambassador in China Nick Burns who has been a really good advisor here but we'll continue on and we'll be looking out for US investors and US issuers because US issuers want a level playing field in our market. They don't want somebody to be able to come here and not comply with the same standards.
CRAMER: Excellent. I do hope you looked into disclosure of those three companies. Now, Mr. Chairman, if this weekend David Faber and I wanted to get together and create a new coin and we wanted to say, I don't know how may have, let's call it dollar base. And we had a coin and we suggested, you know what, let's leak this coin to some of our friends and then we'll release it and then we'll open it 40% higher. I would regard that as not unlike the security that was created in the in the Sopranos and yet this goes on every day, 200 at a time. How are we going to continue to let this kind of activity occur where there's blatant front running and people are getting hurt and it just seems like they won't even let you interfere because Congress may actually not want you to be the cop on the beat.
GENSLER: Look, if you and David wanted to create a coin, I would suggest to you get good lawyers who understand the securities laws and I hope those lawyers would advise you that because the public would be investing based on your and David's entrepreneurial efforts. You probably have a website, you'll probably be marketing it in some way that needs to test what's called an investment contract or security and yes, you would need, you and David would need to register. And if there was a platform, trading platform or an exchange that listed your token, the David Cramer token, then that that platform that platform listing your token needs to register as an exchange. That's the plain and simple truth of it. Congress passed these laws to protect the public. It's about raising money from the public. It is also about the trading venues, the exchanges and we've benefited for 88 years by this regime. I think it's helped economic growth to protect the investing public. It's also helped issuers tap into the best capital markets. So I do ask you if you and David start that token to get good legal advice and follow the securities laws.
CRAMER: I'm calling Paul Weiss at the end of this.
FABER: Yeah, we're not doing, I'm gonna call it the Cramer coin anyway. His visage is a lot more recognizable than mine. Chair Gensler, I want to end on something I brought up a couple times. It's Friday in August. Clearly you seem to be home. Are you guys working, you know, I'm one of these I think people are better in the office people I guess I agree with Jamie Dimon. I don't know where you stand on that but is the SEC back to the office?
GENSLER: Look, I, I think it's remarkable how well society writ large but let me do a shout out and compliment to the SEC staff of 4,500 people have been able to be a cop on the beat, effective oversight of the markets in these times were largely remote when I came on board in April of last year. We were still actually mandatory remote, we've worked with our bargaining unit with the union representatives, we moved to voluntary remote. That's that's where we are. I think there is a benefit to being in the office. I do think that there's a, there's a benefit but just a big shout out to the SEC staff that worked so well even remotely.
FABER: Really? I mean, I don't know I just read "Black Edge," I just read that book. Everybody's wandering in everybody's office talking about enforcement actions. It's years ago, but I mean sharing ideas, sharing where they are in investigations. Seems more effective to me than being via Zoom.
CRAMER: Where's the, where's the fireplace Are you talking about the fireplace?
FABER: The fireplace is behind him.
CRAMER: No, it's not. He's moved.
FABER: Take the wide shot, it is. Final thoughts, final thoughts before we get to the opening bell Chairman Gensler.
GENSLER: Well just I just think that it's important in this agreement that we reached today with the Chinese to be, we're going to keep our eye on the ball is to investor protection. I want to, I want to thank again my colleagues at the PCAOB but I think that this is an unprecedented agreement. It's tough, it's very specific, it will hold them accountable, it effectuates the will of Congress, but now really the decisions will be on the authorities there whether these work papers and inspections and investigations continue and we'll see where it comes out in a few months.
FABER: Chair Gensler, always great to have you with us. Thank you and enjoy your weekend.
CRAMER: Thank you so much.