The SEC has adopted interim final amendments to Form 10-K, Form 20-F, Form 40-F, and Form N-CSR to implement the disclosure and submission requirements of the Holding Foreign Companies Accountable Act, or the HFCA Act. The HFCA Act became law on December 18, 2020. Among other things the HFCA Act requires the SEC to identify each “covered issuer” that has retained a registered public accounting firm to issue an audit report where that registered public accounting firm has a branch or office that:
- Is located in a foreign jurisdiction; and
- The PCAOB has determined that it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.
The SEC refers to registrants so identified as Commission-Identified Issuers. Commission-Identified Issuers are required to submit documentation to the Commission that establishes that they are not owned or controlled by a governmental entity in that foreign jurisdiction. In addition, if the registrant is determined to be a Commission-Identified Issuer for three consecutive years, Section 2 of the HFCA Act directs the Commission to prohibit trading of the registrant’s securities. Section 3 of the HFCA Act provides that Commission-Identified Issuers that are foreign issuers, referred to as Commission-Identified Foreign Issuers, are subject to additional specified disclosure requirements, as discussed in more detail below.
Scope of Amendments
The scope of the interim final amendments is limited to:
- the statutory mandate to issue rules that establish the manner and form in which a Commission-Identified Issuer must make the required submissions; and
- the disclosure obligations set forth in Section 3 of the HFCA Act that have been added to the relevant Commission forms.
Role of the PCAOB
Under Section 104(i)(2) of the Sarbanes-Oxley Act, as added by the HFCA Act, the PCAOB is responsible for determining that it is unable to inspect or investigate completely a registered public accounting firm because of a position taken by an authority in a foreign jurisdiction. The SEC understands that the PCAOB is considering its obligations under the HFCA Act, including the process for making these determinations. The SEC believes it is important that the PCAOB act quickly to identify the best manner in which to make these determinations. Any PCAOB rulemaking in response to the HFCA Act will be subject to Commission review and approval prior to taking effect. Once the PCAOB process has been established, the Commission will use the PCAOB’s determination about which firms it is unable to inspect or investigate completely, along with information in a registrant’s annual reports, to compile a list of registrants that are Commission-Identified Issuers.
Section 3 of the HFCA Act requires a Commission-Identified Foreign Issuer to provide certain additional disclosure in its annual report for the year that the Commission so identifies the issuer. The HFCA Act requires this disclosure in the issuer’s Form 10-K, Form 20-F, or a form that is the equivalent of, or substantially similar to, these forms. Specifically, a Commission-Identified Issuer is required to disclose:
- That, during the period covered by the form, the registered public accounting firm has prepared an audit report for the issuer;
- The percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which the issuer is incorporated or otherwise organized;
- Whether governmental entities in the applicable foreign jurisdiction with respect to that registered public accounting firm have a controlling financial interest with respect to 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 with respect to the issuer; and
- Whether the articles of incorporation of the issuer (or equivalent organizing document) contains any charter of the CCP, including the text of any such charter.
While Section 3 of the HFCA Act does not mandate specific rule or form changes, the SEC believes that amending its forms to include the new disclosure requirements will help registrants comply with the HFCA Act. The Commission therefore amended Form 10-K, Form 20-F, Form 40-F, and Form N-CSR to reflect the disclosure requirements in Section 3 of the HFCA Act.
In addition to the Section 3 disclosure requirement, Section 2 of the HFCA Act amended Sarbanes-Oxley Act Section 104 to, in part, require any Commission-Identified Issuer to submit to the Commission documentation establishing that the issuer is not owned or controlled by a governmental entity in the foreign jurisdiction of the registered public accounting firm that the PCAOB is unable to inspect or investigate completely, and mandates that the Commission adopt rules establishing the manner and form in which such submissions will be made no later than 90 days after enactment. Because the submission requirement is triggered by the preparation of an audit report on a registrant’s financial statements, the Commission is amending Form 10-K, Form 20-F, Form 40-F, and Form N-CSR to implement this provision. In contrast to the disclosure requirement in Section 3 of the HFCA Act that applies only to Commission-Identified Foreign Issuers, the submission requirement in Section 2 of the HFCA Act applies to all Commission-Identified Issuers. The amendments require a registrant that is a Commission-Identified Issuer that is not owned or controlled by a governmental entity in the described foreign jurisdiction to electronically submit documentation to the Commission on a supplemental basis that establishes that the registrant is not so owned or controlled. Under the interim final amendments, such submissions will be made through the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system on or before the due date of the relevant annual report form.
While the interim final amendments prescribe the timing and means by which such submissions shall be made, neither they nor the HFCA Act specify the particular types of documentation that can or should be submitted for this purpose. Moreover, the SEC recognizes that available documentation could vary depending upon the organizational structure and other factors specific to the registrant. Thus, as an initial matter, registrants will have flexibility under the interim final amendments to determine how best to satisfy this requirement. At the same time, the SEC is requesting comment as to whether the Commission should require specific types of documentation or whether additional guidance would be necessary or useful to registrants as they seek to comply with the submission requirement.