In May, the Senate passed the Holding Foreign Companies Accountable Act, which would amend SOX to impose certain requirements on a public company that is audited by a registered public accounting firm with a branch or office located in a foreign jurisdiction that the PCAOB is “unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.” And, as previously discussed, Nasdaq has also proposed rule changes aimed at addressing the same issue. (See this PubCo post.) A number of key players are speaking up to endorse these actions.
Under the proposed federal legislation, after three years of non-inspections, the company’s securities can be barred from being traded on a national securities exchange, over the counter or through any other method within the jurisdiction of the SEC. (See this PubCo post.) As reported by Bloomberg, SEC Chair Jay Clayton on Tuesday signaled that he supported the legislation, viewing it as “a very sensible way to approach a problem that’s been around for a while….This is a problem that I believe needs to be addressed and I hope it can be.”
In Clayton’s view, prohibitions on PCAOB audit inspections “creates an ‘unlevel playing field’ for investors. ‘I’m not a guy who wants to take precipitous, hit the nail on the head with a hammer tomorrow, but I like the way they’ve approached [the legislation.] There’s a period of time to come into compliance and if you don’t then it’s time to take measures beyond just disclosure.’” The SEC would be required to adopt implementing regulations if the bill were passed by the House and signed into law.
And Reuters reports that the CEO of Nasdaq advocated at a conference yesterday that regulators need to “address transparency and accounting issues at companies based in foreign jurisdictions that are looking to go public through the U.S. markets….‘The broader issue though is this issue of disclosure and PCAOB oversight of the audit firms and I think that’s an issue for the SEC to address.’”
The article notes that Nasdaq has recently proposed new rules, which “include greater scrutiny of the audit firms of overseas companies it lists, [which] will help Nasdaq ensure those firms meet its standards.” The SEC has now posted Nasdaq’s proposal to apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditor. (See this PubCo post. The other two related Nasdaq proposals discussed in the post appear to have been resubmitted to the SEC, presumably with some modifications, but are not yet posted on the SEC’s website. Update: these two proposals have just been filed on the SEC website.) The Administration appears to be viewing Nasdaq’s proposal favorably. Secretary of State Mike Pompeo commented that “American investors should not be subjected to hidden and undue risks associated with companies that do not abide by the same rules as U.S. firms….Nasdaq’s action should serve as a model for other exchanges in the United States, and around the world….I applaud Nasdaq for requiring auditing firms to ensure all listed companies comply with international reporting and inspection standards.”