Defining Issues | December 2021

 

Insight

SEC adopts amendments to finalize HFCA Act-related rules

Final amendments establish requirements for entities with audit firms in countries restricting PCAOB inspections.

In December 2020, Congress enacted the Holding Foreign Companies Accountable (HFCA) Act, and the SEC released interim final amendments that begin to address the components of this Act.

In November 2021, the SEC approved PCAOB Rule 6100 which establishes a process for determining which registered public accounting firms the board is unable to inspect or investigate completely.

In December 2021, the SEC adopted amendments to finalize its rules under the HFCA Act that set forth submission and disclosure requirements for commission-identified issuers identified under the Act, specify the processes by which the SEC will identify and notify Commission-Identified Issuers, and implement trading prohibitions after three consecutive years of identification.

Applicability

  • Public companies that file an annual report on Form 10-K, 20-F, 40-F or N-CSR; and for which an audit report is issued by a registered public accounting firm located in a foreign jurisdiction that the PCAOB has determined it is unable to inspect, as determined under PCAOB Rule 6100.

Relevant dates

  • Final amendments will become effective 30 days after publication in the federal register.
  • Registrants are required to apply XBRL-tagging to information identifying the audit firm in annual reports for fiscal years beginning after December 18, 2020.
  • Registrants are not required to comply with the submission and disclosure requirements until the Commission has identified them as having a non-inspection year. 

Key impacts

1.    The SEC has issued a Fact Sheet summarizing the key provisions of the rules.

2.   Among other things, the final rules under the HFCA Act require the SEC to:

  • Identify registrants that have retained a registered public accounting firm to issue an audit report, and that firm has a branch or office located in a foreign jurisdiction that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. These are ‘Commission-Identified Issuers.’
  • Implement a process for Commission-Identified Issuers to submit documentation and disclose certain information.
  • Establish the form and manner of these requirements.

3.    Commission-Identified Issuers are determined on the following basis:

  • First, the PCAOB will identify registered public accounting firms that it is unable to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction based on the determination framework established in PCAOB Rule 6100.
  • Then, the SEC will identify registrants that retain such registered public accounting firms.  The SEC’s determinations will be made annually following the filing of the registrant’s annual report.
  • Registrants will be required to use XBRL-tagging of three data elements for the SEC’s use in the identification process – 1) the audit firm; 2) the location where the auditor’s report has been issued; and 3) the audit firm’s PCAOB ID Number(s)
  • The SEC will provisionally identify issuers and post to its website, allowing 15 business days for the registrant to contact the SEC if it believes it has been incorrectly identified. After this time frame, the identification will be considered conclusive.
  • After the commission’s conclusive identification of a registrant, the Commission-Identified Issuer will be required to comply with the submission and disclosure requirements (see below) in its annual report following each non-inspection year. 
  • For example, a registrant is determined to be a Commission-Identified Issuer based on the audit report in its Form 10-K filed in 2022 for the year ended December 31, 2021. The identified issuer would be required to comply with the adopted rules in its Form 10-K covering the year ended December 31, 2022, to be filed in 2023.

4.    For each non-inspection year, Commission-Identified Issuers will be required to comply with the following submission and/or disclosure requirements in the final rule:

  • Submit documentation to the SEC establishing that the company is not owned or controlled by a governmental entity in the foreign jurisdiction of the audit firm that the PCAOB is unable to inspect.
  • The documentation must be submitted electronically through EDGAR on or before the due date of the relevant annual report form.
  • The types of documentation to be submitted are not specified, providing flexibility in the form of the requirements. 
  • Commission-Identified Issuers that are owned or controlled by a governmental entity in the jurisdiction of the audit firm that the PCAOB is unable to inspect are not required to submit affirmative documentation.  

  • Disclose the following in the foreign issuer’s annual report covering the non-inspection year identified by the SEC:
  • That during the year covered in the annual report the registered public accounting firm has prepared an audit report.
  • The percentage of shares of the issuer that are owned by governmental entities in the foreign jurisdiction where the issuer is incorporated or organized.
  • Whether governmental entities in the applicable foreign jurisdiction of the audit firm have a controlling financial interest in the issuer.
  • The name of each official of the Chinese Communist Party (CCP) who is a member of the board of directors of the issuer (or the operating entity of the issuer).
  • Whether the issuer’s articles of incorporation (or similar document) contain any charter of the CCP, including the text of any such charter.

5.    Additionally, if an issuer is determined to be a Commission-Identified Issuer for three consecutive years, the HFCA Act includes a directive for the SEC to prohibit trading in its securities. 

6.   In June 2021, the US Senate passed S. 2184, the Accelerating Holding Foreign Companies Accountable Act which, if enacted, would reduce the time period for delisting under the HFCA Act to two years instead of three years. This pending legislation has not yet been taken up for consideration and vote in the US House of Representatives.

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