SEC issues form amendments related to disclosure and submissions under the Holding Foreign Companies Accountable Act

In December 2020, the Holding Foreign Companies Accountable Act was signed into law. As you may recall, the HFCAA amends SOX to impose certain requirements on a public company identified by the SEC as a company that files in its periodic reports financial statements audited by a registered public accounting firm with a branch or office located in a foreign jurisdiction and that the PCAOB is “unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.” The HFCAA imposes requirements on SEC-identified issuers, under SEC rules that the HFCAA requires the SEC to adopt within 90 days after enactment, to submit certain documentation to the SEC establishing that the company is not owned or controlled by a governmental entity in the foreign jurisdiction. In addition, the law imposes certain disclosure requirements on foreign issuers that have been “identified” by the SEC. (See this PubCo post.) Yesterday, the SEC announced that it has adopted interim final amendments to Forms 20-F, 40-F, 10-K, and N-CSR to implement the submission and disclosure requirements of the HFCAA.  The interim final amendments will become effective 30 days after publication in the Federal Register, and comments are due by the same date.

The interim amendments will apply to registrants that the SEC has identified as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction (“Identified Issuers”). Accordingly, a necessary predicate to implementation of these amendments is that the SEC has put into effect a process for identifying these registrants; however, the SEC has not yet devised or implemented a process for these identifications, and the PCAOB is still considering the process for determining whether it is unable to inspect because of a position taken by an authority in a foreign jurisdiction. As a result, no registrant will be required to comply with the amendments until the SEC “has identified it as having a non-inspection year under a process to be subsequently established by the Commission with appropriate notice.” Once a registrant has been identified by the SEC, it “will be required to comply with the amendments in its annual report for each fiscal year in which it is so identified.”  In addition, if an issuer is an Identified Issuer for three consecutive years, the SEC is required under the HFCAA “to prohibit the securities of the issuer from being traded” on a national securities exchange, over the counter or through any other method within the jurisdiction of the SEC.    

Notably, only the disclosure and submission requirements of the HFCAA are subject to the 90-day mandate; the identification process and trading prohibition are not, which likely accounts for the timing and limited scope of these amendments. The SEC is seeking public comment on the identification process, as well as the trading prohibition in the HFCAA. The SEC plans to separately address implementation of the trading prohibition in a future notice and comment process.

Submission requirement. Under the amendments, Identified Issuers (that are not owned or controlled by a governmental entity in the described foreign jurisdiction) will be required to submit documentation to the SEC, through EDGAR on or before the date that the annual report is due, establishing that these issuers are not owned or controlled by a governmental entity in that foreign jurisdiction. Neither the HFCAA nor the amendments specify the particular types of documentation that should be submitted for this purpose, allowing flexibility, but the SEC is requesting comment on whether it should require specific types of documentation.

Disclosure requirement. Foreign Identified Issuers are required to make these additional specified disclosures:

These requirements have been added under the caption “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections” in Forms 10-K, 20-F, and 40-F (as well as in Form N-CSR), but are not required to be included in a registrant’s proxy or information statement. The disclosure will be required for each year that the company is an Identified Issuer, even if the audit report in the company’s subsequent filing can be inspected.

The SEC interprets the terms “owned or controlled” in the submission requirements and “owned” and “controlling financial interest” in the disclosure requirements as “intended to reference a person’s or governmental entity’s ability to ‘control’ the registrant as that term is used in the Exchange Act and the Exchange Act rules.”

Under the amendments, any year in which the SEC “has identified a registrant as having retained a registered public accounting firm meeting the criteria described above for the audit report on its financial statements in its most recent annual report made under the Exchange Act will be deemed a non-inspection year.” The submission and disclosure requirements would then be required for the annual report covering that non-inspection year. For example, the SEC states, “if a registrant is identified based on its Form 10-K filing made in 2022 for the fiscal year ended December 31, 2021 as being a Commission-Identified Issuer, then 2022 would be deemed a non-inspection year. Such registrant would be required to comply with the submission and, if applicable, the disclosure requirements in its Form 10-K filing covering the fiscal year ended December 31, 2022, which is required to be filed in 2023.” Under the HFCAA, a registrant will not be subject to a non-inspection year determination for any fiscal year ending on or prior to December 31, 2020.