TheCorporateCounsel.net

When we last checked in on the drama of the Holding Foreign Companies Accountable Act, the PCAOB was striking an optimistic tone on its ability to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong that are auditing China-based companies listed on US exchanges. Last week, the Staff in the SEC’s Division of Corporation Finance and Division of Trading & Markets issued a statement that acknowledged the SEC isn’t currently identifying any more issuers under the HFCAA in light of this accord, and the risk of delisting is paused.

However, the Staff wants to remind everyone that the 174 companies previously conclusively identified under the HFCAA are still subject to additional disclosure requirements. Here are two disclosure-related excerpts from the Staff statement:

All CIIs are listed on the SEC website at www.sec.gov/HFCAA, and each CII must provide certain disclosures to investors and the Commission for each year it is identified as a CII. For foreign issuers that are CIIs, the required disclosures include the percentage of shares owned by foreign government entities, whether government entities in the foreign jurisdiction control the issuer, identification of all Chinese Communist Party (“CCP”) officials who are on the board of the issuer or the operating entity for the issuer, and whether the issuer’s articles of incorporation contain any “charter” of the CCP.

Other Disclosure Obligations for China-based Issuers

In July 2021, Chair Gensler issued a Statement on Investor Protection Related to Recent Developments in China. In that regard, we highlight that China-based issuers should consider their disclosure obligations as a whole, in addition to those disclosures required by the HFCAA and related Commission rules. To that end, we remind issuers that the Division of Corporation Finance has issued a Sample Letter to China-Based Companies, as well as earlier disclosure guidance to China-based issuers. The Division of Corporation Finance will monitor disclosures by China-based issuers and may provide additional guidance to assist these issuers in meeting their disclosure obligations under the federal securities laws.

In addition, the statement reminds companies that they would still be at risk of delisting if the PCAOB issues a new determination about its inspection abilities in a foreign jurisdiction. Moreover, under a Congressional amendment to the HFCAA last December, that delisting timeframe is now shortened to two consecutive years of being considered a “Commission-Identified Issuer” (rather than three). Here’s more detail on that aspect:

We note that the PCAOB could, in the future, make a new determination that it is unable to inspect or investigate completely registered public accounting firms in one or more jurisdictions because of positions taken by a foreign authority. At that time, Commission staff would continue to follow the procedures described in the December 2021 adopting release to identify issuers as CIIs. As noted above, should any issuers be identified as CIIs for two consecutive years in the future, an initial trading prohibition on the issuer’s securities would be imposed. Staff will continue to monitor developments related to the HFCAA, including any changes in PCAOB determinations related to inspections and investigations.

– Liz Dunshee