Updated: In December 2021, the SEC’s Division of Corporation Finance posted an illustrative letter (‘Dear Issuer letter’) with examples of comments issued to China-based companies requesting more specific and prominent disclosure of the risks – along with other information highlighted in the statements and guidance outlined below.
The SEC and PCAOB have been constrained from providing regulatory oversight and enforcement of non-US companies and their management in emerging markets, including China.
As a result, and because these constraints remain, the SEC and PCAOB continue to stress the importance of providing high quality, reliable audited financial information and risk disclosures for companies based in, or with significant exposure to, emerging markets. In an April 2020 joint statement, leaders of both agencies summarized the risks and related considerations to issuers, auditors, index providers and investors that are associated with these emerging markets.
In November 2020, the SEC’s Division of Corporation Finance issued Disclosure Guidance (DG) Topic No. 10, outlining the staff’s views regarding certain disclosure considerations for companies based in China.
The joint statement and DG Topic No. 10 follow other statements made by the SEC and PCAOB, expressing their expectations that companies consider and make these disclosures.
The Dear Issuer Letter posted by the SEC staff in December 2021 reflects the continued focus on the disclosure considerations highlighted in DG Topic No. 10 and the joint statement. It seeks clearer and more prominent disclosure of the specific risks associated with China-based companies.
April 2020 joint statement of SEC and PCAOB
Companies are expected to make prominent, plain-English and tailored disclosures over the following:
Disclosure Guidance Topic No. 10 – China-based companies
China-based issuers must fully disclose material risks related to their operations in China. This disclosure guidance provides the SEC staff view regarding important disclosure considerations relating to risks associated with China-based companies as well as the differences in shareholder rights, governance and reporting that may be relevant to investors.
The guidance also provides a list of questions for these companies to consider as they assess their risks and disclosure obligations.
The SEC staff views include considerations such as the following:
Dear Issuer Letter, December 2021 – China-based companies
The sample comments included in the Dear Issuer Letter are not an exhaustive list of the issues that companies should consider, but include requests to provide more specific and more prominent disclosures, including in areas such as the following:
Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally—Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China