On December 8, 2020, the Holding Foreign Companies Accountable Act was sent to President Trump's desk for his signature. The legislation requires certain issuers of securities to disclose to the Securities and Exchange Commission (SEC) information regarding foreign jurisdictions that prevent the Public Company Accounting Oversight Board (PCAOB) from performing inspections under the Sarbanes-Oxley Act of 2002 (the Act).1 Failure to comply with the Act bars securities from being listed on U.S. exchanges. It is intended to target Chinese companies. The bill dovetails with the work of the President's Working Group on Financial Markets (the PWG), which issued policy proposals at the end of July requiring Chinese companies to comply with U.S. auditing requirements.2 As expected, the president signed the bill into law on December 18, 2020. The same day, SEC Chair Jay Clayton issued a statement regarding harmonizing the Act and the PWG's work.3
Certain jurisdictions, such as China, do not provide the PCAOB with sufficient access to work papers of the principal audit firm for the audit of the listed company.4 The PCAOB serves as the U.S. government's audit watchdog.
The new law requires that certain issuers of securities show that they are not owned or controlled by a foreign government. Specifically, an issuer must make this certification if it:
- retains a registered public accounting firm that has a branch or office located in a foreign jurisdiction; and
- the PCAOB is unable to inspect or investigate completely the audit report because of prohibitions by the foreign government.
In other words, if the audit report on the financial statement of the issuer must be included in a report that the issuer files with the SEC, and if the foreign jurisdiction prohibits the PCAOB's review of the underlying materials, then the certification is required.
If the PCAOB is unable to inspect the issuer's public accounting firm for three consecutive years, then the SEC must prohibit the securities of the covered issuer from being traded on a U.S. exchange. Foreign issuers of securities that use such a foreign accounting firm to prepare an audit report must make certain disclosures for each non-inspection year, such as:
- the percentage of shares owned by government entities where the issuer is incorporated,
- whether these government entities have a controlling financial interest,
- information related to any board members who are officials of the Chinese Communist Party, and
- whether the articles of incorporation of the issuer contain any charter of the Chinese Communist Party.
The Holding Foreign Companies Accountable Act is in addition to a few other initiatives targeted at foreign (read: Chinese) companies. For instance, on January 6, 2021, the New York Stock Exchange (NYSE) announced that it is moving forward with delisting three Chinese telecommunications companies targeted by an executive order issued by President Trump.5 Similarly, in the waning days of the last Congress, the Senate passed unanimously the Protecting American Intellectual Property Act of 2020 (S. 3952), which requires the president to impose sanctions on foreign persons who steal U.S. trade secrets—watch for a reintroduction of this legislation in the current Congress.
Finally, note that Congress included the Corporate Transparency Act as part of the National Defense Authorization Act, ultimately passing it over President Trump's veto. The Corporate Transparency Act creates an expansive beneficial ownership registry within the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN).6 The Act institutes broad anti-money laundering reforms and requires millions of "reporting companies" to report information on their "beneficial owners" to FinCEN.
If you have any questions about how the Holding Foreign Companies Accountable Act or any of the other initiatives mentioned here might impact you, please feel free to reach out to the authors at Venable for guidance.
[1] See S.945 – Holding Foreign Companies Accountable Act available at https://www.congress.gov/bill/116th-congress/senate-bill/945/text?q=%7B%22search%22%3A%5B%22s.945%22%5D%7D&r=1&s=1.
[2] See President's Working Group on Financial Markets: Report on Protecting United States Investors from Significant Risks from Chinese Companies, July 24, 2020, available at https://home.treasury.gov/system/files/136/PWG-Report-on-Protecting-United-States-Investors-from-Significant-Risks-from-Chinese-Companies.pdf.
[3] See Chairman Jay Clayton, Statement after the Enactment of the Holding Foreign Companies Accountable Act, December 18, 2020, available at https://www.sec.gov/news/public-statement/clayton-hfcaa-2020-12.
[4] President's Working Group on Financial Markets Releases Report and Recommendations on Protecting Investors from Significant Risks from Chinese Companies, Press Release, U.S. Department of the Treasury, August 6, 2020, available at https://home.treasury.gov/news/press-releases/sm1086.
[5] Alexander Osipovich, NYSE Reverse Course Again, Will Delist Three Chinese Telecom Stocks, Wall Street Journal (Jan. 6, 2021), available at https://www.wsj.com/articles/nyse-reverses-course-again-will-delist-three-chinese-telecom-stocks-11609945817.
[6] See Biddle, et al., Congress Passes Corporate Transparency Act Creating Expansive Beneficial Ownership Registry with Significant Implications for U.S. and Foreign Business, Venable Client Alert available at https://www.venable.com/insights/publications/2020/12/congress-passes-corporate-transparency-act.