6 April 2021
2021 Nian 3 Yue 24- day US Securities and Exchange Commission ( " SEC" ) issued revised rules to implement the "foreign companies Accountability Act" ( " HFCAA" or Act ) and submitted in the prescribed disclosure requirements. But HFCAA not yet officially launched -SEC in 3 Yue 24- action day is limited to establishing a new submission and disclosure requirements, SEC Act is applicable securities issuers has not been determined. Currently SEC is still assessing how best to ( i ) determine which securities issuers belonging HFCAA jurisdiction, and ( ii ) specific implementation HFCAA in trade ban provisions. But the SEC in 3 Yue 24- day of action suggests HFCAA may be fully implemented in the coming months, at which time the affected securities issuers will have a three-year period to meet the audit requirements related to, or face the consequences of a potential delisting.
Shortly after the release of our December 2020 report , HFCAA was officially signed into a U.S. federal law on December 18, 2020. We explained in the previous report that the SEC will be responsible for implementing three functionally related components of HFCAA:
1. First, the SEC must designate a securities issuer ("SEC Designated Issuer") that meets two conditions: (i) The issuer’s audit report is prepared by a certified public accountant firm located in a jurisdiction outside the United States, and (Ii) The Accounting Oversight Board of Listed Companies ("PCAOB") is unable to inspect the audit report due to legal restrictions in the jurisdiction.
2. Second, the SEC needs to issue implementation rules stipulating that SEC designated issuers (i) must submit relevant documents to the SEC to prove that they are not owned or controlled by foreign governments, and (ii) must disclose their audit plans and any issues in their annual reports. The influence of foreign governments on it.
3. Third, the SEC must impose a trading ban on any SEC-designated issuer that has not allowed PCAOB to inspect its audit report for three consecutive years.
Our previous report mentioned that within 90 days after HFCAA is promulgated, the SEC must promulgate and implement the above-mentioned second part of the rules. According to this timetable, the SEC announced on March 24, 2021 that it had revised the 20-F, 40-F, 10-K, and N-CSR annual reports to implement HFCAA filing and disclosure requirements related to government ownership and control. . These revised rules will take effect 30 days after being published in the Federal Register and will apply to SEC-designated issuers.
Submit request. First, the revised rules implement the requirements of HFCAA Chapter 2: Any SEC-designated issuer must submit documents to the SEC to prove that it is not owned or controlled by a foreign government in a jurisdiction where an accounting firm cannot be fully inspected by PCAOB. Such mandatory documents must be submitted on or before the due date of the relevant annual report.
Disclosure requirements. Second, the revised rules implement the requirements of Chapter 3 of the HFCAA: Any overseas SEC designated issuer must make the following specific "Regarding prohibition of inspections" in the 20-F, 40-F, 10-K or N-CSR forms Disclosures in foreign jurisdictions":
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"During the previous annual financial statement period, due to the requirements of the relevant competent authority of the foreign jurisdiction, a certified public accountant firm that PCAOB could not fully inspect has issued an audit report for the registrant";
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"The percentage of the registrant's equity owned by the government department of the foreign jurisdiction in which the registrant is registered or established";
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"(PCAOB cannot fully inspect) whether the government department of the foreign jurisdiction where the CPA firm is located has a controlling interest in the registrant";
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"The name of the CCP member on the board of directors of the registered person or its business unit"; and
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"Does the registrant's company charter (or similar organizational document) contain any charter required by the Communist Party of China, and the specific content of any such charter?"
HFCAA has not yet officially started. It should be pointed out that the SEC has not established specific procedures for how to designate relevant issuers. Indeed, the SEC emphasized in its March 24 announcement that it “is still actively evaluating how to best implement other requirements of HFCAA that are not subject to the 90-day period, including the process of designating relevant issuers and the specific requirements for implementing transaction bans. "Therefore, even if the new disclosure rules have been promulgated, HFCAA has not yet officially launched.
In the revised rules issued , the SEC urged PCAOB to “act quickly to determine the best way” to “identify CPA firms that it cannot fully inspect due to the requirements of the competent authority of the foreign jurisdiction”. PCAOB has a self-published list of issuers whose audit reports cannot be checked . As of January 1, 2021, 197 securities issuers on the PCAOB list are located in mainland China, 72 are located in Hong Kong, 21 are located in France, and 8 are located in Belgium. The SEC stated that it will complete a list of designated issuers based on the PCAOB's decision and "information in the registrant's annual report." The SEC's final list may be very similar or even identical to PCAOB's list.
HFCAA has not set any time limit for the implementation of the relevant issuer's designated process and transaction ban, and the SEC has not released any relevant time signals. We are paying close attention to developments in this field.
For further information, please contact:
B. Chen Zhu, Partner, Morrison Foerster
