Tag: Holding Foreign Companies Accountable Act

Is the stand-off with Chinese regulators regarding inspection of auditors over?

For well 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 December 2020, the Holding Foreign Companies Accountable Act, was signed into law. The HFCAA amended SOX to prohibit trading on U.S. exchanges of public reporting companies audited by audit firms located in foreign jurisdictions that the PCAOB has been unable to inspect for three sequential years. (See this PubCo post.) The U.S.-China Economic and Security Review Commission reported that, as of March 31, 2022, Chinese companies listed on the three largest U.S. exchanges had a total market capitalization of $1.4 trillion. As a result, the trading prohibitions of the HFCAA could have a substantial impact.   Years of negotiation to resolve the deadlock over audit inspections notwithstanding, China and Hong Kong have still not permitted PCAOB inspections, largely because of purported security concerns. (Interestingly, the WSJ reported that, in a “departure from what officials have said previously, the Chinese stock regulator said on Friday that audit working papers generally do not contain state secrets, individual privacy, companies’ vast user data or other sensitive information.”) In May, in remarks to the International Council of Securities Associations, YJ Fischer, Director of the SEC’s Office of International Affairs, indicated that, although there had been progress, “significant issues remain[ed],” and reaching an agreement would be only “a first step.”  In other words, there was still “a long way to go.” On Friday, however, the PCAOB took that first step by signing a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China governing inspections and investigations of audit firms based in China and Hong Kong.  According to a statement from SEC Chair Gary Gensler, the “agreement marks the first time we have received such detailed and specific commitments from China that they would allow PCAOB inspections and investigations meeting U.S. standards.”

SOX at 20! Happy birthday SOX!

SEC Chair Gary Gensler may just have some paternal affection for SOX, especially on the week of its 20th birthday.   In these remarks to the Center for Audit Quality,  he recalls having “a front-row seat” for the negotiations and signing of the bill, working as Senior Advisor to the late Senator Paul Sarbanes on this legislation. The bill passed the House almost unanimously and the Senate by a vote of 99 to 0—hard to imagine that ever happened, let alone only 20 years ago.  In giving SOX its 20-year review, he discusses the significant role SOX played in restoring public trust in the financial system after the Enron and WorldCom scandals, but also offers some, let’s say, opportunities for improvement. (He also drops the hint that the SEC may be taking a “fresh look at the SEC’s auditor independence rules.”)

Is time running out under the HFCAA?

In December 2020, the Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland, was signed into law. The HFCAA amended SOX to prohibit trading on U.S. exchanges of public reporting companies audited by audit firms located in foreign jurisdictions that the PCAOB has been unable to inspect for three sequential years. (See this PubCo post.) The U.S.-China Economic and Security Review Commission reports that, as of March 31, 2022, Chinese companies listed on the three largest U.S. exchanges had a total market capitalization of $1.4 trillion. As a result, the trading prohibitions of the HFCAA, which could kick in in just a couple of years—or perhaps even sooner, if Congress speeds up the timeline—could have a substantial impact. According to SEC Chair Gary Gensler, “[w]e have a basic bargain in our securities regime, which came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002. If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the [PCAOB]….The Commission and the PCAOB will continue to work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by our rules. We hope foreign governments will, working with the PCAOB, take action to make that possible.” But China and Hong Kong have not permitted PCAOB inspections, largely because of purported security concerns. Last week, in remarks to International Council of Securities Associations, YJ Fischer, Director of the SEC’s Office of International Affairs, addressed “recent regulatory developments related to the lack of US inspections of audits and investigations in China and Hong Kong, and the implications for continued trading of China-based issuers on US exchanges.” The main message: although there has been progress, “significant issues remain,” and reaching an agreement would be only “a first step.”  In other words, there is still “a long way to go.”

SEC adopts final amendments under the Holding Foreign Companies Accountable Act

In December 2020, the Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland, was signed into law. The HFCAA amended SOX to prohibit trading on U.S. exchanges of public reporting companies audited by audit firms located in foreign jurisdictions that the PCAOB has been unable to inspect for three sequential years. (See this PubCo post.) According to SEC Chair Gary Gensler, “[w]e have a basic bargain in our securities regime, which came out of Congress on a bipartisan basis under the Sarbanes-Oxley Act of 2002. If you want to issue public securities in the U.S., the firms that audit your books have to be subject to inspection by the [PCAOB]….This final rule furthers the mandate that Congress laid out and gets to the heart of the SEC’s mission to protect investors….The Commission and the PCAOB will continue to work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by our rules. We hope foreign governments will, working with the PCAOB, take action to make that possible.” Last week, the SEC adopted final amendments to implement the HFCAA. The amendments will be effective 30 days after publication in the Federal Register.

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.

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.

SEC Chair supports foreign companies delisting bill

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.

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.