SEC notifies five Chinese companies of HFCAA noncompliance

The SEC notified the companies Tuesday they are not in compliance with the Holding Foreign Companies Accountable Act (HFCAA), which was signed into law in December 2020. Under the terms of the law, publicly traded companies in countries that block audit inspections by U.S. regulators can be delisted after three years of noncompliance, beginning in 2021. The earliest a company could be delisted would be 2024.

The bill was seen by U.S. legislators and regulators as pushing back against allegations of financial fraud within Chinese companies listed on U.S. exchanges, most recently with Luckin Coffee. The law also targets alleged Chinese government control of such companies.

Yum China Holdings, which operates more than 11,000 restaurants in China including American brands KFC, Pizza Hut, and Taco Bell, was one of the five companies notified by the SEC as being in violation of the HFCAA. The company released a statement Thursday acknowledging its stock will be removed from the New York Stock Exchange in 2024 if the law is not amended to exclude it or the PCAOB is unable to inspect its audits over the next three years. Yum China stock trades on the Hong Kong Stock Exchange as well.

“The company will continue to monitor market developments and evaluate all strategic options,” Yum China said.

Approximately 273 Chinese companies whose stock is listed on U.S. exchanges might be similarly affected by the rule, according to Yum China’s press release.

Other companies notified of noncompliance with the HFCAA were Chinese biotech firms BeiGene and Zai Lab; ACM Research, a Chinese semiconductor process equipment manufacturer; and Chinese pharmaceutical company HUTCHMED.

In a statement released Thursday, Zai Lab said it was “evaluating, designing, and implementing additional business processes and control changes to meet the requirements of the HFCAA.”

ACM Research released a statement Friday that it is “implementing plans to identify and appoint an independent public accounting firm that is subject to inspection by the PCAOB, in order that in the future ACM will no longer appear on the SEC’s provisional lists and will no longer be subject to the related delisting guidelines.”

HUTCHMED’s statement, also issued Friday, noted its stock is listed on the Hong Kong Stock Exchange and said the company “will continue to monitor market developments and evaluate all strategic options.”

BeiGene did not respond to a request for comment.

In November, the PCAOB, which is overseen by the SEC, drafted a rule establishing the process for delisting foreign companies from U.S-based exchanges if they do not allow U.S. regulators to examine their finances.

The PCAOB has identified 20 audit firms, all based in either China or Hong Kong, that have denied it access to conduct inspections of China-based public companies’ financial records.

In addition to the potential delisting of China-based public companies, the SEC has placed more stringent disclosure requirements on such companies seeking to raise money in U.S. markets.

The SEC has indicated it is concerned Chinese companies regularly flout the agency’s rules about transparency and full disclosure of all risks related to a company’s financial performance. The result is an uneven playing field where most of the world’s publicly traded companies adhere to one set of rules while China-based companies adhere to another less stringent and less rigorously enforced regime.