SEC seeking comment on new foreign audit oversight rules

Signed into law in December by then-President Donald Trump, the Holding Foreign Companies Accountable Act (HFCA Act) requires all companies located in foreign jurisdictions to allow their financial statements to be reviewed by the Public Company Accounting Oversight Board (PCAOB). The law is primarily aimed at Chinese companies that are audited by a Chinese firm but do not open their books to the PCAOB, as required for all public companies under the Sarbanes-Oxley Act. The Chinese government has stepped in to prevent Chinese-based companies from fulfilling this requirement, citing national security concerns.

On Wednesday, the SEC issued interim final amendments that will identify foreign companies that have failed to meet the requirement. Before any company would be compelled to comply with the amendments, however, the SEC needs to finalize the rules. In the interim, the agency is seeking public comment.

The HFCA Act was seen by U.S. legislators and regulators as a way to push back against allegations of financial fraud within Chinese companies (e.g., Luckin Coffee) listed on U.S. exchanges. The law also requires companies to disclose whether they are controlled by a foreign government and whether any of their board members are members of the Chinese Communist Party.

The law allows the SEC to delist any companies that prevent the PCAOB from reviewing their financial statements for three consecutive years. Rules on the law’s process of identifying companies that violate the law, and for eventually delisting them, have not yet been released.

Among the issues the SEC is requesting comment on include timing considerations. Should the Commission set a single determination date of May 15 to announce which companies are not complying with the law? Should the date be earlier or later? Should it be done more on a rolling basis, say monthly, quarterly, or annually? Should the SEC wait until the PCAOB makes its determination?

The SEC also wants to know about how the disclosures should be conveyed to the public. Should a list of the companies be published on the agency’s Website or identified in the EDGAR system? Should the SEC create a data tagging requirement for such companies? Should the Commission establish guidance or rules on how companies can rectify errors on the list? What process should be established for companies on the list that switch from an uninspected audit firm to an audit firm that allows the PCAOB to inspect their books?

For submission requirements, the SEC is interested in hearing whether the law is clear enough on what it means by “government control” of a company, by “controlling financial interest,” and other related terms.

Should the requirement that companies submit documentation regarding governmental control or Chinese Communist Party board membership be made in conjunction with the company’s annual report? Should the submission be made publicly available, or are there portions that should be shielded from public view?

The interim final amendments will take effect 30 days from their publication in the Federal Register, and the public comments are due by the same date.