SEC Adopts Latest Amendments Under Foreign Owned Company Liability Law | Cooley LLP

In December 2020, the Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland, was enacted. The HFCAA amended SOX to prohibit trading on U.S. stock exchanges in public information companies audited by audit firms in foreign jurisdictions that the PCAOB has been unable to inspect for three consecutive years. (See this article from PubCo.) According to SEC Chairman Gary Gensler, “[w]We have a core market in our securities regime, which came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002. If you want to issue government securities in the United States, the companies that audit your books must be subject to inspection by the [PCAOB]… .This final rule advances the mandate that Congress has defined and goes to the heart of the SEC’s mission to protect investors… .The Commission and the PCAOB will continue to work together to ensure that auditors of foreign companies acceding US capital markets play by our rules. We hope that foreign governments, in conjunction with the PCAOB, will take steps to make this possible. Last week, the SEC passed the latest changes to implement HFCAA. The changes will come into force 30 days after their publication in the Federal Register.

The HFCAA requires the SEC to “identify” each public information company that has retained the services of a registered public accounting firm to issue an audit report if that firm has a branch or office in a foreign jurisdiction and that the PCAOB was “unable to inspect or investigate.” [that firm] completely because of a position taken by an authority in the foreign jurisdiction. Additionally, once a public reporting company has been so “identified” by the SEC, the HFCAA requires the company to submit certain documents to the SEC establishing that it is not owned or controlled by any government entity in foreign jurisdiction and to provide certain information. The HFCAA prohibits trading on stock exchanges and other markets in the United States of companies that have been so “identified” for three consecutive years.

In March, the SEC passed draft final changes (see this PubCo article), and on Thursday of last week, the SEC passed final changes to Forms 20-F, 40-F, 10-K and N-CSR to implement the submission and disclosure requirements of the HFCAA. In addition, the SEC has established procedures to identify companies and prohibit trading in the securities of those companies identified after three consecutive years without inspection, as required by the HFCAA. Essentially, the final changes are in line with the draft final rules with a few changes: they make it clear that the disclosure requirements apply to variable interest entities and include requirements for data labeling (Inline XBRL). They also establish new procedures for the SEC to “identify” mandated companies and prohibit trading in appropriate cases in accordance with the HFCAA.

Documentation. According to the backgrounder and final amendments, each public reporting company that has been “identified” by the SEC will be required to submit to the SEC, on EDGAR, no later than the due date of the company’s annual report, the documentation that “establishes that it is not owned or controlled by any government entity in the foreign jurisdiction of its public accounting firm.” The SEC does not offer a list of documents that may be appropriate, but rather allows companies to “determine the appropriate documentation to submit in response to the requirement, based on their organizational structure and other filer-specific factors.” Further, the SEC considers that the terms “owned or controlled”, “owned” and “controlling financial interest” in the HFCAA “refer to the ability of a person or government entity to” control “the reporting such. as this term is used in the Stock Exchange Act and the Rules of the Exchange Act.

Disclosures. A company that is also a “foreign issuer”, as defined in rule 3b-4, will be required to provide information specified in its annual report for the year in which the SEC identified the company, as set out in changes to Form 10-K (which adds new element 9C to Part II), Form 20-F, Form 40-F and Form N-CSR. The information must be provided by the company “for itself and for its consolidated foreign operating entity (ies), including any entity with variable interest holders or similar structure which results in the consolidation of additional foreign entities in the [the company’s] Financial statements. “That is, the amendments require the company to” review a VIE or any structure that results in the consolidation of additional foreign entities in the financial statements of the registrant and provide the required information about any company of consolidated operations or companies in the relevant jurisdiction. ”Required disclosures include:

  • “During the period covered by the form, the [registered public accounting firm] who prepared an audit report for the issuer;
  • The percentage of the issuer’s shares held by government entities in the foreign jurisdiction in which the issuer is incorporated or otherwise organized;
  • Whether the government entities in the applicable foreign jurisdiction with respect to that registered public accounting firm have a controlling financial interest in the issuer;
  • The name of each official of the Communist Party of China… who is a member of the board of directors of the issuer or the operational entity with respect to the issuer; and
  • Whether the articles of association of the issuer (or an equivalent organizational document) contain a charter of the Communist Party of China, including the text of such a charter. “

To help the SEC with its identification process, the final changes also include a new online XBRL tagging requirement tied to three additional data elements: the audit firm’s PCAOB identification number. Once the updated taxonomy “published, deployed on EDGAR and announced” as part of the new EDGAR Filer manual published in December 2021, “”all registered must use the updated taxonomy,… for any annual report filed for a period ending after December 15, 2021.

Hourly. Companies will be required to comply with submission and disclosure requirements in their annual reports for each year they have been identified by the SEC. The SEC will identify companies under the HFCAA based on the PCAOB’s ruling on the audit firm and annual reports of the companies for fiscal years beginning after December 18, 2020, when the HFCAA was enacted. The earliest identification date would be after companies have filed their annual reports for 2021 and named the accounting firm. Accordingly, if a company is identified by the SEC on the basis of its 2021 annual report filed in 2022, the company will be required to comply with the submission and, if applicable, the disclosure requirements in its annual report for the year ending December 31. 2022, to be filed in 2023.

SEC ID. The SEC will “identify” a company as soon as possible after the company submits its annual report and on an ongoing basis using Inline XBRL, depending on whether the audit report is signed by an audit firm that the PCAOB is unable to inspect due to a position taken by an authority in the foreign jurisdiction. The SEC will “provisionally identify” the company on the SEC’s website at For 15 business days after this provisional identification, the company may send an email to the SEC if it believes it has been incorrectly identified, providing evidence to support its claim. The SEC will review and analyze the information and respond via email as to whether the SEC agrees (and will remove the name from the list) or disagrees, in which case the SEC will “conclusively identify” the company on a separate list. . If the company does not contact the SEC to dispute the provisional identification within 15 business days, the identification will become final. The SEC will publish a list on its website identifying these companies, showing the number of consecutive years the company has been on the list, and noting whether the company has been subject to prior trade bans. The list is intended to inform investors and other market participants as to whether a security has been issued by an “identified” company and the risk that the security will be subject to a trading ban in the future.

Prohibition of trade. HFCAA requires SEC to prohibit trading of a company’s securities on stock exchanges, over-the-counter, or by any other method within the purview of the SEC to regulate after the company has been definitively “identified” by the SEC for three consecutive years. To end a trade ban, an “identified” business must certify that it has retained or will retain a registered public accounting firm that the PCAOB has determined is able to inspect or investigate, including filing financial statements that include an audit report signed by the new business. As a result, the SEC observes, companies will have three years to retain the services of an audit firm that the PCAOB can inspect before a ban is imposed. If the SEC ends the original trading ban and the company is again conclusively identified by the SEC, the SEC will impose a trading ban of at least five years thereafter.

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