On March 24, 2021, the U.S. Securities and Exchange Commission (“SEC”) issued rule amendments to implement submission and disclosure requirements mandated by the Holding Foreign Companies Accountable Act (“HFCAA” or “Act”). The HFCAA is not yet operational—the March 24 action merely sets out new submission and disclosure requirements that apply only to issuers yet to be identified by the SEC to fall within the scope of the Act. The SEC is still assessing how best to (i) identify issuers that fall within the scope of the Act and (ii) implement the trading prohibitions mandated by the HFCAA. However, the March 24 action suggests that the HFCAA will likely be implemented in full in the coming months, at which point impacted issuers will have three years to comply with certain audit inspection requirements or face potential delisting.
Shortly after our report was published in December 2020, the HFCAA was signed into law on December 18, 2020. We explained in our report that the SEC would be charged with enforcing the Act, which requires the SEC to implement three functionally related components of the HFCAA:
1. First, the SEC must identify issuers (“SEC-Identified Issuers”) whose audit reports are prepared by an accounting firm that (i) is located in a foreign jurisdiction and (ii) the Public Company Accounting Oversight Board (“PCAOB”) has determined it is unable to inspect due to legal restrictions of that foreign jurisdiction.
2. Second, the SEC is required to issue rules requiring any SEC-Identified Issuer to (i) submit documentation to the SEC establishing that the issuer is not owned or controlled by a foreign government and (ii) disclose in its annual report its audit arrangements as well as any government influence.
3. Third, the SEC must impose a trading prohibition on any SEC-Identified Issuer whose audit reports have not been duly inspected by the PCAOB for three consecutive years.
Our previous report mentioned that within 90 days of the HFCAA’s enactment, the SEC would be required to issue rules concerning the second component described above. Consistent with this timeframe, the SEC announced on March 24, 2021, that it had adopted rule amendments to Forms 20-F, 40-F, 10-K, and N-CSR to implement the submission and disclosure requirements under the HFCAA regarding foreign government ownership and control. These rule amendments will go into effect 30 days after being published in the Federal Register, and they will apply to SEC-Identified Issuers only.
Submission Requirements. First, the rule amendments to implement Section 2 of the HFCAA require any SEC-Identified Issuer to submit documentation to the SEC to establish that the issuer is not owned or controlled by a governmental entity in the foreign jurisdiction of the registered public accounting firm that the PCAOB is unable to inspect or investigate completely. This mandatory supplemental submission will be due on or before the due date of the relevant annual report form.
Disclosure Requirements. Second, the rule amendments to implement Section 3 of the HFCAA require any foreign SEC-Identified Issuers to make the following specific disclosures in SEC Forms 20-F, 40-F, 10-K, and N-CSR under the caption “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections”:
HFCAA Not Yet Operational. Importantly, the SEC has not established an identification process for determining whether a registrant is an SEC-Identified Issuer. Indeed, the SEC’s March 24 announcement stressed that it is still “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.” Therefore, even with the newly issued disclosure rules, the HFCAA is still not operational.
In the rule amendments, the SEC urged the PCAOB to “act quickly to identify the best manner” for “determining that it is unable to inspect or investigate completely a registered public accounting firm because of a position taken by an authority in a foreign jurisdiction.” The PCAOB publishes its own list of issuers whose audit reports it cannot duly inspect. As of January 1, 2021, the PCAOB list consists of 197 issuers located in Mainland China, 72 in Hong Kong, 21 in France, and 8 in Belgium. The SEC noted that it would compile a list of SEC-Identified Issuers “[o]nce the PCAOB process has been established,” based on both the PCAOB’s determination and “information in a registrant’s annual reports.” It is likely that the eventual list of SEC-Identified Issuers will be very similar or identical to the PCAOB’s list.
The HFCAA did not mandate any deadlines for implementing rules on the identification process and the trading prohibition, and the SEC has not given any indication on timing. We are actively monitoring developments in this area.