SEC Finalizes Rules Implementing Requirements under the HFCAA

SEC Finalizes Rules Implementing Requirements under the HFCAA

Blog Keeping Current: Disclosure and Governance Developments

Yesterday, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the Holding Foreign Companies Accountable Act (HFCAA). These amendments finalize the interim final rules adopted in March. 

At a high level, the amendments do four things, as required under the HFCAA—most notably, establishing procedures to identify companies whose audit reports are issued by public accounting firms located in foreign jurisdictions where the PCAOB is unable to audit such firms because of a position taken by an authority in that jurisdiction (currently China and Hong Kong) and to impose trading prohibitions on such companies (which are referred to as Commission-Identified Issuers):

  1. Require Commission-Identified Issuers to submit documentation to the SEC via EDGAR establishing that, if true, it is not owned or controlled by a governmental entity in the public accounting firm’s foreign jurisdiction.
    • This was adopted as proposed in the interim final amendments without modification. The SEC declined to provide an exclusive or non-exclusive list of what documentation may demonstrate that a Commission-Identified Issuer is not owned or controlled by the relevant governmental entity.
  2. Require that a Commission-Identified Issuer that is a "foreign issuer" provide certain additional disclosures in its annual report for itself and any of its consolidated foreign operating entities.
    • This was adopted with a minor modification to the interim final amendments. The amended language in Forms 10-K, 20-F, 40-F and N-CSR is the same as the language in the interim final amendments, with the exception of the modification pertaining to VIE structures described below, and the requirement that a Commission-Identified Foreign Issuer provide the disclosures discussed above that are required by the HFCAA. 
    • With respect to VIE structures, the final amendments “make clear that the registrant must, in addition to providing the required disclosures for the Commission-Identified Foreign Issuer, look through a VIE or any structure that results in additional foreign entities being consolidated in the financial statements of the registrant and provide the required disclosures about any consolidated operating company or companies in the relevant jurisdiction.”
  3. Add a new Inline XBRL tagging requirement.
    • In response to comments received on the interim final rules, the SEC will require Inline XBRL tagging of three additional data elements, applicable to annual report filings on Forms 10-K, 20-F, and 40-F that are submitted with XBRL presentations: (a) identity of the auditor (or auditors) who have provided opinions related to the financial statements presented in the issuer’s annual report, (b) the location where the auditor’s report has been issued, and (c) the PCAOB ID Number(s) of the audit firm(s) or branch(es) providing the opinion(s).
  4. Provide notice regarding the procedures the SEC has established to identify issuers and to impose trading prohibitions on the securities of certain Commission-Identified Issuers.
    • Timing. The SEC confirmed: “The earliest that the Commission could identify a Commission-Identified Issuer would be after registrants file their annual reports for 2021 and identify the accounting firm that audited their financial statements.” On that basis, for calendar-year companies, the submission and disclosure requirements discussed above would be due by the annual report filing covering FY2022 that will be filed in 2023. It also means that for delisting purposes, 2022 would be the first non-inspection year, so the earliest “third-consecutive non-inspection year” would be in 2024 after the Commission-Identified Issuer files its annual report.
    • Determination of Commission-Identified Issuers.
      • Promptly after the filing of an annual report, the Director of the Division of Corporation Finance (under delegated authority) will evaluate, using Inline XBRL tagging or other structured data, whether the annual report contains an audit report signed by a PCAOB-Identified Firm to identify Commission-Identified Issuers.
      • Once an issuer has been identified, the SEC will “provisionally identify” the issuer as a “Commission-Identified Issuer” on a website at The website will clearly delineate between provisional identifications and “conclusive identifications,” and companies will not be a Commission-Identified Issuer until a conclusive determination has been made.  Such issuers have 15 business days after provisional identification to dispute the characterization. The SEC will not contact each issuer individually to notify them that they are a Commission-Identified Issuer. The website will also track the number of consecutive years a Commission-Identified Issuer has been published on the list and whether it has been subject to any prior trading prohibitions under the HFCAA.
    • Process for Trading Prohibition.
      • The adopting release incorporates certain language from the HFCAA. The exact timeline for when the SEC will delist an issuer after three consecutive non-inspection years remains imprecise. Per the adopting release, the SEC will “impose an initial trading prohibition and issue an order prohibiting the trading of an issuer’s securities on a national securities exchange and in the over-the-counter market as soon as practicable after the issuer has been determined to be a Commission-Identified Issuer for three consecutive years.” The SEC will implement the trading prohibition via stop orders, which will be issued and then go effective on the fourth business day after the order is published. If a stop order is published on a Monday, the trading prohibition would be effective starting at 12:00 a.m. (Washington, DC time) the Friday of that week. 
      • The HFCAA contemplates that the “retention” of a registered public accounting firm that the PCAOB is able to inspect will enable the SEC to lift the trading restriction. Consistent with the designation of Commission-Identified Issuers on the basis that signing the audit report is when a registered public accounting firm is “retained,” the same goes for lifting the restriction. A Commission-Identified Issuer must retain a non-PCAOB-identified firm and file financial statements that have been audited by such firm before the SEC will lift a trading prohibition.
      • Addressing commenter concerns about transparency and advance notice of delistings, the SEC pointed to the website posting described above and concluded that with such website posting, “investors and market participants should have sufficient notice regarding whether a security that they hold or plan to hold is issued by a Commission-Identified Issuer and of the risk that such security may be subject to a trading prohibition in the future, including the timeline for implementation of such trading prohibition if the issuer remains a Commission-Identified Issuer.” The SEC further pointed to the four-day delay that will be reflected in its stop orders.


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