On December 2, 2021, the SEC adopted rules finalizing implementation of the Holding Foreign Companies Accountable Act (HFCAA). The HFCAA requires a company to make certain submissions and disclosures if the auditor’s report on the financial statements in its annual report is issued by an auditor located in a foreign jurisdiction where the PCAOB is unable to inspect the auditor’s work.
The Final Rule specifies the SEC’s process to identify affected companies, which are referred to as “Commission-Identified Issuers.” This process is based on an identification of auditors whose work is not subject to inspection in a related PCAOB Rule. Identified companies are required to “provide information documenting that they are not owned or controlled by a governmental entity in its public accounting firm’s foreign jurisdiction on or before the due date of their annual report.”
According to the related Fact Sheet, “Commission-Identified Issuers,” that also meet the definition of “foreign issuer” in Rule 3b-4, will be required to make disclosures for itself and other related entities, that include:
- 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 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 Chinese Communist Party, including the text of any such charter.
The definition of “foreign issuer” is in Exchange Act Rule 3b-4:
3b-4 Definition of “foreign government,” “foreign issuer” and “foreign private issuer”.
The term foreign issuer means any issuer which is a foreign government, a national of any foreign country or a corporation or other organization incorporated or organized under the laws of any foreign country.
You can read more in this Fact Sheet and the Final Rule.
As always, your thoughts and comments are welcome!