The Securities and Exchange Commission has adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the Holding Foreign Companies Accountable Act (HFCA Act).
The interim final amendments will apply to registrants that the Commission identifies as having filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the Public Company Accounting Oversight Board (PCAOB) has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. Before any registrant will have to comply with the interim final amendments, the Commission must implement a process for identifying such a registrant. Thus, the Commission is seeking public comment on this identification process.
Consistent with the HFCA Act, the amendments will require any such identified registrant to submit documentation to the Commission establishing that the registrant is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant. The Commission is seeking public comment on these submission and disclosure requirements. The HFCA Act requires the Commission to issue rules within 90 days of the date of enactment to establish the manner and form in which registrants must comply with the documentation submission requirement. The Commission is issuing the interim final amendments to comply with this 90-day deadline.
The Commission staff is actively assessing how best to implement other requirements of the HFCA Act not subject to the 90-day deadline, including the identification process and the trading prohibition requirements.
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March 24, 2021
The HFCA Act became law on December 18, 2020. Among other things, Section 2 of the HFCA Act amended Section 104 of the Sarbanes-Oxley Act of 2002 to require the Commission to identify each “covered issuer” that has retained a registered public accounting firm to issue an audit report where that firm has a branch or office located in a foreign jurisdiction, and the PCAOB has determined that it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction. The interim final amendments adopting release seeks comment on this requirement.
These registrants, identified as “Commission-Identified Issuers,” will be required to submit documentation to the Commission on or before the annual report due date that establishes that they are not owned or controlled by a governmental entity in that foreign jurisdiction. The interim final amendments implement a process for this documentation requirement, consistent with the HFCA Act’s 90-day deadline. In addition, if the registrant is determined to be a Commission-Identified Issuer for three consecutive years, Section 2 of the HFCA Act directs the Commission to prohibit trading of the registrant’s securities. The Commission staff is assessing how best to implement this requirement, which is not subject to the 90-day deadline.
Section 3 of the HFCA Act provides that Commission-Identified Issuers that are foreign issuers, as defined in Exchange Act Rule 3b-4, are subject to these additional specified disclosure requirements:
- During the period covered by the form, the above-referenced registered public accounting firm has prepared an audit report for the issuer;
- The percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which the issuer is incorporated or otherwise organized;
- Whether governmental entities in the applicable foreign jurisdiction with respect to that registered public accounting firm have a controlling financial interest with respect to the issuer;
- The name of each official of the Chinese Communist Party who is a member of the board of directors of the issuer or the operating entity with respect to the issuer; and
- Whether the articles of incorporation of the issuer (or equivalent organizing document) contains any charter of the Chinese Communist Party, including the text of any such charter.
The interim final amendments update relevant forms to provide for these disclosure requirements.
The interim final amendments become effective 30 days after publication in the Federal Register and comments on the amendments are due by the same date. The Commission is requesting public comment regarding implementation of the HFCA submission and disclosure requirements, as well as the appropriate mechanics for determining Commission-Identified Issuers. A registrant will not be required to comply with the amendments until the Commission has identified it as having a non-inspection year under a process to be subsequently established by the Commission with appropriate notice. Once identified, a registrant will be required to comply with the amendments in its annual report for each fiscal year in which it is identified. The Commission plans to separately address implementation of the trading prohibitions in Section 2 of the HFCA Act in a future notice and comment process.