U.S. securities regulators approved strict new listing standards for reverse merger companies on Wednesday after a rash of accounting scandals.

Under the new listing standards approved by the U.S. Securities and Exchange Commission, any company that becomes public through a reverse merger will have to meet stricter new requirements before they can list on NASDAQ OMX, NYSE Euronext and NYSE AMEX.

A reverse merger is a method of entering the market where U.S. shell companies merge with foreign companies. Many of the companies that have been targeted by regulators for accounting issues have been based in China.

The SEC and the U.S. Justice Department are investigating accounting irregularities at U.S.-listed companies based in China. The SEC sharpened its focus on the issue beginning last year as dozens of China-based companies began disclosing auditor resignations or bookkeeping irregularities.

In addition to taking enforcement actions to suspend or halt trading in more than 35 companies in recent months, the exchanges and the SEC have also been working together to tackle the problem by crafting more stringent listing rules.

The US exchanges have been doing brisk business with Chinese companies raising capital in the US. The US Public Company Accounting Oversight Board found that 215 companies with operations in China had listed in the US, a majority through reverse mergers.  But following inquiries into several companies by the SEC, the US Department of Justice and the accounting board, the exchanges moved to tightened their listing standards. Already, Nasdaq OMX and NYSE Euronext, which operate the two largest US listings markets, have delisted five Chinese companies and halted trading in the shares of more than 35 other small and micro-cap Chinese companies.  Separately, the PCAOB sanctioned a US auditing firm for relying on poorly trained Chinese assistants and blocked a Hong Kong firm’s registration to practice in the US.

The SEC has taken aim at companies based in China which merged with US listed shell companies as a result of recent reports by Muddy Waters Research claiming corporate malfeasance and poor corporate governance.

Source: Reuters and Financial Times