On March 24, 2021, the U.S. Securities and Exchange Commission adopted interim final amendments to implement the congressionally mandated submission and disclosure requirements of the Holding Foreign Companies Accountable Act (HFCA Act).
On December 18, 2020, the Holding Foreign Companies Accountable Act became public law. Most significantly, the Act requires the U.S. Securities and Exchange Commission (SEC) to prohibit the securities of foreign companies from being listed or traded on U.S. securities markets if the company retains a foreign accounting firm where the books cannot be inspected by the Public Company Accounting Oversight Board (PCAOB) for three consecutive years, beginning in 2021, because the accounting firm is located in a foreign jurisdiction that does not permit PCAOB inspection.
As required by the Sarbanes-Oxley Act of 2002, the auditor of financial statements of companies whose securities are listed on a U.S. securities exchange— whether a U.S. auditor or a non-U.S. auditor — must be registered with, and therefore subject to the jurisdiction of, the PCAOB.
China’s state security laws, including governing the protection of state secrets and national security, have been invoked in recent years to limit the ability of the PCAOB to oversee PCAOB-registered audit firms in mainland China and Hong Kong. As a result, for certain China-based companies listed on U.S. stock exchanges, the SEC and PCAOB have not had access to the books and records and audit work papers of PCAOB-registered firms in China and, to the extent their audit clients have operations in China, Hong Kong. Due to these obstacles, investors or potential investors in U.S. capital markets who rely on the audit reports of PCAOB-registered firms in China and Hong Kong are deprived of the potential benefits of PCAOB inspections of these auditors.
The Act directs the SEC to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges if the auditor of the registrant’s financial statements was not subject to PCAOB inspection for three consecutive years, beginning in 2021. As an example, a registrant whose financial statements are not subject to PCAOB inspection would be prohibited from being listed on any U.S. securities exchange starting with the registrant’s filing of its 2023 annual report filed in early 2024. The Act further directs the SEC to prohibit the trading in such securities in the U.S. over-the-counter market.
The Act requires additional disclosures. Specifically, each foreign registrant that files an audit report not subject to PCAOB inspection should disclose:
The percentage of shares of the registrant owned by governmental entities in the foreign jurisdiction where the registrant is incorporated or organized;
Whether governmental entities in the applicable foreign jurisdiction have a controlling financial interest with respect to the registrant;
The name of each official of the Chinese Communist Party who is a member of the board of directors of (i) the registrant or (ii) the operating entity with respect to the registrant; and
Whether the articles of incorporation of the registrant (or equivalent organizing document) contains any charter of the Chinese Communist Party, including the text of any such charter.
The HFCA Act requires the SEC 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. SEC is issuing the interim final amendments to comply with this 90-day deadline.
Source: Securities and Exchange Commission, March 24, 2021
https://www.sec.gov/news/press-release/2021-53