Rules Issued to Identify Foreign Firms that Could Be Delisted from U.S. Stock Exchanges

Enacted into law on 18 December 2020, the Holding Foreign Companies Accountable Act bans trade on any U.S. securities exchange of shares of any firm if the firm’s audit reports cannot be audited by the Public Company Accounting Oversight Board for three consecutive years. It requires the U.S. Securities and Exchange Commission to develop regulations if the PCAOB cannot audit a firm’s financial reports because they are prepared by an accounting firm not subject to PCAOB inspection.

The SEC recently issued interim final amendments – which will become effective 30 days after publication in the Federal Register – detailing the process for identifying “Commission-Identified Issuers” within the context of the law. Firms based in mainland China and Hong Kong are most likely to be deemed as “Commission-Identified Issuers”, based on the legislative history of the HFCAA and the disclosure requirements. When audit reports for a publicly-traded company are prepared by an accounting firm not subject to PCAOB inspection, 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 PCAOB maintains that actions taken by mainland Chinese authorities “impede our ability to oversee PCAOB‑registered audit firms in mainland China and Hong Kong.”

According to an SEC fact sheet, Commission-Identified Issuers will be required to disclose in their annual reports:

• the percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which the issuer is incorporated or otherwise organised;

• 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 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 organising document) contains any charter of the Chinese Communist Party, including the text of any such charter.

The SEC’s interim final amendments update relevant forms to provide for these disclosure requirements. A firm will be required to comply with these requirements once the SEC has identified it as having a “non-inspection year” under a process to be subsequently established by the agency with appropriate notice. If a firm is determined to be a Commission-Identified Issuer for three consecutive years, the SEC will prohibit trading of the registrant’s securities. The SEC announcement said that implementation of the trading prohibitions of the HFCAA will be addressed through a future notice-and-comment process.