SEC adopts amendments to finalize HFCA Act-related rules

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.

In December 2022, Congress passed the omnibus spending bill and the President signed it into law. This bill included the enactment of provisions to accelerate the timeline for implementation of trading prohibitions from three years to two years. Separately, on December 15, 2022 the PCAOB published its determination that in 2022 the Board was able to inspect and investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. This determination reset the now two-year clock for compliance with the trading prohibitions for identified issuers audited by these firms.

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 became effective on January 10, 2022.
  
• 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

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

• 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. 
• In December 2022, the enactment of the omnibus spending bill included a provision that accelerated the timeline for trading prohibitions under the HFCA Act from three years to two years. This amendment had originally been passed by the US Senate in June 2021, as Accelerating Holding Foreign Companies Accountable Act.

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