Capital Markets Alert
On December 18, 2020, the Holding Foreign Companies Accountable Act (the “Act”) was signed into law by President Trump after it was passed unanimously by the U.S. House of Representatives on December 2, 2020. The Act is identical to the bill the U.S. Senate passed in May 2020. Most significantly, the Act would amend the Sarbanes-Oxley Act of 2002 to require the U.S. Securities and Exchange Commission (the “SEC”) to prohibit the securities of foreign companies from being traded on U.S. securities markets, if the company retains a foreign accounting firm that cannot be inspected or investigated completely by the Public Company Accounting Oversight Board (the “PCAOB”) for three consecutive years, beginning in 2021. The Act would also require foreign companies to make certain disclosures about their ownership by governmental entities.
The enactment of the Act was the latest development of U.S. policy makers’ efforts to address the long-lasting concern with PCAOB’s inability to conduct inspections on foreign companies, especially Chinese companies, whose securities are listed in the U.S. Amid the U.S.-China tensions from the trade war and U.S. national security concerns, the Act was unanimously passed by House and Senate in a campaign that has featured these earlier steps in 2020:
If the SEC determines that a public company has three consecutive “non-inspection years,” beginning in 2021, the SEC would prohibit the company’s securities from being traded on a U.S. national securities exchange or an “over-the-counter” market subject to SEC regulations.
If, following the delisting of a company for noncompliance, the company certifies to the SEC that it has retained a registered public accounting firm that the PCAOB has inspected to the satisfaction of the SEC, the Act directs the SEC to end the prohibition on trading on U.S. securities markets.
If non-inspection recurs after the SEC ends a prohibition, the SEC will prohibit the company’s securities from being traded on a U.S. national securities exchange for at least five years. Such prohibition could only be removed if, after the end of the five-year period, the company certifies that it will retain an accounting firm that the PCAOB is able to inspect.
If the PCAOB can’t inspect the foreign accounting firm’s work, then the company will be required to submit to the SEC documentation certifying that the company is not owned or controlled by a governmental entity in the foreign jurisdiction in which its registered public accounting firm is located.
In addition, for each year that the PCAOB is unable to inspect a company’s accounting firm, the company will be required to disclose in a form filed with the SEC, among other things, the percentage of the company’s shares owned by governmental entities and its relationship with the Chinese Communist Party.
Among the five recommendations made in the PWG Report, the first recommendation is similar to the trading prohibition provision under the Act, except for the following differences:
While primarily aimed at China-based companies, the Act would apply to any other non-U.S. companies located in NCJs. A press release from Senator Van Hollen indicates that there are 224 U.S.-listed companies, with a combined market capitalization of more than $1.8 trillion, located in NCJs.
The Act requires the SEC to issue new rules within 90 days of the enactment to implement the Act. In his statement issued on December 18, 2020, the SEC then-Chairman, Clayton observed that the SEC staff’s proposal in response to the PWG Report’s recommendations would substantially overlap with the Act. As a result, Clayton indicated that he had “directed the staff to consider providing a single consolidated proposal for the Commission’s consideration on issues related to the PCAOB’s access to audit work papers, exchange listing standards, and trading prohibitions.”
How the SEC will harmonize the Act mandate with PWG Report’s recommendations in one set of rules, particularly on the following two issues, is worthy of special attention:
It remains to be seen whether the new SEC Chairperson, to be appointed by President Biden, will comply with the priorities set by the PWG Report when promulgating the implementation rules of the Act, or take a more reconciliatory approach with the regulatory counterparts in NCJs.