SEC eyes majors’ activity in China

Bizzers surprised by report of inquiry into dealings with state officials

The Securities and Exchange Commission has sent a letter of inquiry to several of the majors regarding their dealings with Chinese government officials, according to published reports.

Reuters reported on Wednesday that the SEC was probing the possibility of some of the majors making “inappropriate payments” to government officials in connection with securing approval for pics to play in the second-most populuous movie market.

Report named 20th Century Fox, DreamWorks Animation and Disney as among the studios which received the letter. All three declined to comment, and the SEC would not comment on whether it was conducting such an investigation.

The Obama administration has recently stepped up its enforcement of the Foreign Corrupt Practices Act, which bars U.S. businesses from bribing foreign government officials in connection with business opportunities. Some observers speculated that the letters of inquiry could be a “fishing-expedition” on the part of the feds.

While China is seen as the single biggest opportunity for the majors to boost pic profits, there are formidable barriers to entry for Hollywood. China allows only 34 non-native films into the country annually, and getting those pics past the country’s regulators can be extraordinarily difficult. Knowing the right people, both in the Chinese government and its state-governed film industry, is critical.

In a sign of the growing importance of the film biz within China, the pic quota was recently expanded from 20 to 34. That expansion was part of the U.S. government and the MPAA’s ongoing efforts to loosen China’s film quota. A spokesperson for the MPAA declined to comment on how an SEC investigation might effect those efforts moving forward. A rep for Joe Biden’s office, which has led the charge on China’s entertainment industry, did not respond to a request for comment.

Observers say that an SEC inquiry would highlight the challenges of doing business in China. While censorship and regulatory matters can be difficult for U.S.-based companies to navigate, they’re not the only issues. In recent months, Hollywood has been besieged by Chinese groups claiming to want to invest in the film business, but few deals have been assembled that fund U.S.-based productions.

Instead, much of the coin is flowing overseas, with deals like Shanghai-based Oriental DreamWorks and “Iron Man 3” benefitting a growing Chinese film industry and local entrepreneurship and expertise. That fits into the Chinese government’s mandate of building its entertainment industry with help from overseas partners with moviemaking expertise.

While the SEC declined to confirm reports of its letter to Hollywood studios, observers say that any investigation is likely to be in its very early stages. Letters of inquiry are often “innocuous,” according to one attorney who has received such letters on behalf of his clients but declined to comment publicly on the reports of the probe.

“I think it’s important to underscore that, while it is one thing for the SEC to send a letter to a studio, it is quite another were the SEC to issue subpoenas,” he said. “It’s important not to draw too many conclusions at this point even if letters were sent — the SEC may just be on a large-scale fishing expedition.”

According to guidelines detailed on the SEC’s website, the probe is likely still in the informal stage. Many studio execs in a position to know about the existence of such an inquiry were caught off guard Wednesday afternoon by the Reuters report.

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