On December 2, 2021, the US Securities and Exchange Commission issued interim final rules implementing the Holding Foreign Companies Accountable Act. The HFCAA was passed in late 2020; it amended the section of the Sarbanes-Oxley Act of 2002 that requires the SEC to identify issuers that have retained registered public accounting firms with offices outside of the United States, where the Public Company Accounting Board is unable to inspect or investigate fully. The Sarbanes-Oxley Act requires such “Commission-Identified Issuers” to provide documentation proving that they are not owned or controlled by a foreign governmental entity.
In order to implement these provisions, the SEC amended Form 10-K, Form 20-F, Form 40-F, and Form N-CSR, which must be submitted electronically through the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system on or before the due date for the corresponding annual report. The final amendments do not prescribe the probative documentation required, relying instead on the definition of the term “control” in the Exchange Act and the rules thereunder to guide Commission-Identified Issuers’ understanding of the words “owned or controlled” and “controlling financial interest” as they appear in the HFCAA. For foreign issuers, the additional disclosures involve identification of the audit firm that prepared the report; the percentage of the issuer’s shares that are owned by governmental entities in foreign jurisdictions; whether governmental entities have a controlling financial interest in the issuer; the name of every Chinese Communist Party official on the issuer’s board of directors or that of the issuer’s operating entity, and; whether the issuer’s organizing document contains any charter of the Chinese Communist Party.
Pursuant to section 104(i)(3) of the Sarbanes-Oxley Act, the SEC must impose a three-year trading prohibition on certain Commission-Identified Issuers (five years for second-time Commission-Identified Issuer registrants). The final rules set forth a clear process for identifying and publishing the names of Commission-Identified Issuers, allowing such issuers to dispute their status, and giving investors and market participants notice of this status. The final rules also establish procedures for ending trading prohibitions imposed pursuant to the Act. Under the rules, the SEC may identify issuers based on the annual reports and determinations by the PCAOB for fiscal years beginning after Dec. 18, 2020.