The Securities and Exchange Commission (SEC) on Thursday approved 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 rule, administered by the Public Company Accounting Oversight Board (PCAOB), was drafted to comply with the “Holding Foreign Companies Accountable Act (HFCAA),” which was signed into law by President Donald Trump with bipartisan support in December 2020.
The approved framework takes effect immediately, the SEC announced in a press release.
“This is an important step to protect U.S. investors,” said SEC Chair Gary Gensler in a statement. “I believe it is critical that the Commission and the PCAOB work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by the same rules.”
The law and the accompanying rule take aim at policies like that of the Chinese government that block U.S. auditors from examining the finances of companies based in China and Hong Kong, claiming such examinations of company finances would reveal state secrets.
Under the rule, the PCAOB would determine whether it is “unable to inspect or investigate completely registered public accounting firms that have a branch or office that is located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction.” The Board will use three factors to determine whether this is the case:
- Can it “select the audits and audit areas it will review during inspections and the potential violations it will investigate”;
- Does it have “timely access to firm personnel, audit work papers, and other documents and information relevant to its inspections and investigations, and the ability to retain and use such documents and information”; and
- Can it “otherwise conduct its inspections and investigations in a manner consistent with the [HFCAA] and the Board’s rules.”
The PCAOB said it could make determinations by jurisdiction or firm, but will likely make determinations only by jurisdiction. The organization 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.
Once the PCAOB makes a determination, it will submit a report to the SEC. The report will “describe its assessment of whether the position taken by the foreign authority (or authorities) impairs the Board’s ability to execute its mandate with respect to inspections or investigations. The report will analyze the relevant factor(s) … and describe the basis for the Board’s conclusions.”
The report will be made public on the PCAOB’s website, and the Board will provide notice to the affected company.
A company can be delisted if it fails to comply with the PCAOB’s rule for three consecutive years. The determination could be reevaluated annually if “changes in facts and circumstances warrant a reassessment of a determination that is in effect.” A reevaluation could also be triggered by the PCAOB or the SEC at any time, the rule said.
Implementation of the rule is likely to be delayed, as the SEC on Monday announced four new additions to the PCAOB board. Erica Williams will assume the role of chairperson and will be joined by Kara Stein, Christina Ho, and Anthony Thompson as fresh faces. Duane DesParte, currently the acting chair and sole member of the organization, will resume his tenure as a board member once Williams is sworn in.