SEC Chair directs staff to consolidate rulemaking in light of the Holding Foreign Companies Accountable Act
On December 18, the Holding Foreign Companies Accountable Act was signed into law. The HFCAA, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland, amends SOX to prohibit trading on U.S. exchanges of public reporting companies audited by registered public accounting firms that the PCAOB has been unable to inspect for three sequential years. The HFCAA also requires substantial action by the SEC to implement it. As I noted in my previous post about the bill (see this PubCo post), it was unclear how the bill would affect or interact with the proposal on this same topic that the SEC staff have been working on, which had been expected this month (see this PubCo post and this PubCo post). Now, SEC Chair Jay Clayton has issued a statement clarifying the situation.
Happy holidays everyone! Happy 2021!
House passes Holding Foreign Companies Accountable Act; bill now sent to President for signature (updated)
For over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” including China. To address this issue, in May, the Senate passed, by unanimous consent, the Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland. The bill would amend SOX to prohibit trading on U.S. exchanges of public reporting companies audited by registered public accounting firms that the PCAOB has been unable to inspect for three sequential years. Yesterday, the House also passed the bill, with the result that it is now headed to the President for signature. [Update: This bill was signed into law on December 18.] How this bill will affect or interact with the expected proposal on this topic from the SEC (see this PubCo post) remains to be seen.
Yesterday, Corp Fin posted CF Disclosure Guidance: Topic No. 10, Disclosure Considerations for China-Based Issuers, which provides guidance regarding disclosure considerations for companies based in or with the majority of their operations in the People’s Republic of China (China-based Issuers). You might recall that, in August, the President’s Working Group on Financial Markets, which includes Treasury Secretary Steven T. Mnuchin, Fed Chair Jerome H. Powell, SEC Chair Jay Clayton and CFTC Chair Heath P. Tarbert, issued a Report on Protecting United States Investors from Significant Risks from Chinese Companies, which made a number of recommendations, among them that regulators should require enhanced and prominent issuer disclosures of the risks of investing in China-based Issuers and should issue interpretive guidance to clarify these disclosure requirements and increase awareness of the risks of investing in these companies. (See this PubCo post.) This guidance appears designed to implement that recommendation. The clear implication of the guidance is that China-based Issuers need to consider beefing up their risk factor and related disclosures; in outlining risks and posing questions to consider, the guidance provides a great starting point.
Tuesday, at the CNBC Financial Advisor Summit, SEC Chair Jay Clayton was interviewed by CNBC’s Bob Pisani, touching on a variety of issues, including SPACs, proposed changes to Form 13F, ESG ratings and investing, emerging market listings and other topics of interest. No breaking news, but some insight into the SEC’s thinking on these subjects.
For over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” or “NCJs,” including China. To address this issue, in May, the Senate passed the Holding Foreign Companies Accountable Act, which would amend SOX to impose certain requirements on public companies that are audited by a registered public accounting firm that the PCAOB is unable to inspect, and a version was subsequently passed by the House as an amendment to a defense funding bill. Around the same time, Nasdaq also proposed rule changes aimed at addressing similar issues in restricted markets, including new initial and continued listing standards. (See this PubCo post.) Now, the President’s Working Group on Financial Markets, which includes Treasury Secretary Steven T. Mnuchin, Fed Chair Jerome H. Powell, SEC Chair Jay Clayton and CFTC Chair Heath P. Tarbert, has issued a Report on Protecting United States Investors from Significant Risks from Chinese Companies. The Report makes five recommendations “designed to address risks to investors in U.S. financial markets posed by the Chinese government’s failure to allow audit firms that are registered with the Public Company Accounting Oversight Board (PCAOB) to comply with U.S. securities laws and investor protection requirements.” In this Statement, the SEC Chair Jay Clayton, Chief Accountant Sagar Teotia and the Directors of various SEC Divisions responded to the Report, indicating that Clayton had already “directed the SEC staff to prepare proposals in response to the report’s recommendations for consideration by the Commission and to provide assistance and guidance to investors and other market participants as may be necessary or appropriate. The SEC staff also stands ready to assist Congress with technical assistance in connection with any potential legislation regarding these matters.”
Nasdaq proposes new rules to address emerging market listings; Holding Foreign Companies Accountable Act
Yesterday, the SEC formally announced its July 9 roundtable on emerging markets. In the announcement, the SEC observed that, “while the U.S. securities laws and regulations applicable to emerging market companies listed on U.S. exchanges are the same as (or comparable to) the laws and regulations applicable to U.S. public companies, the practical effects often are substantially different, based on the inability of U.S. regulators to inspect for compliance and enforce these rules and regulations.” In the meantime, Nasdaq appears to have taken the matter to the next level. Nasdaq’s three new proposals haven’t been posted by the SEC yet—so there may still be a lot of behind-the-scenes negotiation before they see the light of day on the SEC’s website—but they are clearly designed to address these concerns about emerging market issuers, especially lack of accounting controls and transparency. Not to be outdone, the Senate yesterday passed a bill that could bar from listing on U.S. exchanges companies audited by firms that the PCAOB is prohibited by foreign authorities from inspecting.