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- **Document type:** Agency decision

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Conformed to Federal Register version
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 232, and 249
[Release No. 34-93701; IC-34431; File No. S7-03-21]
RIN 3235-AM84
Holding Foreign Companies Accountable Act Disclosure
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: We are adopting amendments to finalize interim final rules that revised Forms 20F, 40-F, 10-K, and N-CSR to implement the disclosure and submission requirements of the
Holding Foreign Companies Accountable Act (“HFCA Act”). The final amendments apply to
registrants that the Securities and Exchange Commission (“Commission”) identifies as having
filed an annual report with an audit report issued by a registered public accounting firm that is
located in a foreign jurisdiction and that the Public Company Accounting Oversight Board
(“PCAOB”) is unable to inspect or investigate completely because of a position taken by an
authority in that jurisdiction. Consistent with the HFCA Act, the amendments require the
submission of documentation to the Commission establishing that such a registrant is not owned
or controlled by a governmental entity in that foreign jurisdiction and also require disclosure in a
foreign issuer’s annual report regarding the audit arrangements of, and governmental influence
on, such registrants.
DATES: The amendments are effective on January 10, 2022, except for the addition of
§232.405(c)(1)(iii)(C), which is effective from January 10, 2022, until July 1, 2023.
FOR FURTHER INFORMATION CONTACT: Luna Bloom, Office Chief, at (202) 551-

3430, in the Office of Rulemaking, Division of Corporation Finance; Theodore Venuti, Assistant
Director, at (202) 551-5658, in the Office of Market Supervision, Division of Trading and
Markets; or Blair Burnett, Senior Counsel, at (202) 551-6792, in the Investment Company
Regulation Office, Division of Investment Management; U.S. Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are adopting amendments to the following rules
and forms.
Commission Reference
Regulation S-T
Securities Exchange Act of 1934
(Exchange Act) 1
Exchange Act and Investment
Company Act of 1940
(Investment Company Act) 2

CFR Citation
(17 CFR)

Rule 405
Form 20-F

§ 232.405
§ 249.220f

Form 40-F
Form 10-K
Form N-CSR

§ 249.240f
§ 249.310
§§ 249.331 and 274.128

Table of Contents
I. Introduction ............................................................................................................................. 3
II. Discussion of Amendments ..................................................................................................... 6
A. Documentation Submission Requirements ....................................................................... 6
1. Interim Final Amendments ........................................................................................ 6
2. Comments .................................................................................................................. 7
3. Final Amendments ..................................................................................................... 9
B. Disclosure Requirements ................................................................................................. 10
1. Interim Final Amendments ...................................................................................... 10
2. Comments ................................................................................................................ 12
3. Final Amendments ................................................................................................... 14
C. Inline XBRL Tagging ...................................................................................................... 15
D. Timing Issues .................................................................................................................. 17
E. Determination of Commission-Identified Issuer ............................................................. 18
F. Process for Trading Prohibition ...................................................................................... 23
1. HFCA Act Trading Prohibitions .............................................................................. 23
2. Process for Imposing a HFCA Act Trading Prohibition.......................................... 26
1

15 U.S.C. 78a et seq.

2

15 U.S.C. 80a-1 et seq.

2

3. Process for Terminating Trading Prohibitions; Required Certification ................... 29
G. Amendment to the Delegations of Authority of the Commission ................................... 32
III. Procedural and Other Matters................................................................................................ 33
IV. Economic Analysis ................................................................................................................ 34
A. Introduction and Broad Economic Considerations ......................................................... 34
B. Baseline ........................................................................................................................... 38
1. Regulatory Baseline ................................................................................................. 38
2. Affected Parties ........................................................................................................ 42
C. Economic Effects ............................................................................................................ 44
1. Benefits and Costs of HFCA Act Disclosure Requirements ................................... 44
2. Benefits and Costs of HFCA Act Submission Requirement ................................... 50
3. Impact on Efficiency, Competition, and Capital Formation .................................... 52
V. Paperwork Reduction Act ..................................................................................................... 53
A. Background ..................................................................................................................... 53
B. Summary of the Amendments ......................................................................................... 54
C. Burden and Cost Estimates Related to the Amendments ................................................ 54
VI. Statutory Authority ................................................................................................................ 57
TEXT OF RULE AMENDMENTS.............................................................................................. 57
I.

Introduction
On March 18, 2021, 3 the Commission adopted interim final amendments to Form 10-K,

Form 20-F, Form 40-F, and Form N-CSR to implement the disclosure and submission
requirements of Sections 2 and 3 of the HFCA Act, 4 which became law on December 18, 2020.
Section 2 of the HFCA Act amended Section 104 of the Sarbanes-Oxley Act of 2002 (“SarbanesOxley Act”) 5 by adding Section 104(i) to the Sarbanes-Oxley Act. Section 104(i)(2) of the
Sarbanes-Oxley Act requires the Commission to identify each “covered issuer” 6 that has retained

3

See Holding Foreign Companies Accountable Act Disclosure, Release No. 34-91364 (Mar. 18, 2021) [86 FR
17528 (Apr. 5, 2021)] (“Interim Final Release”).

4

Pub. L. 116-222, 134 Stat. 1063 (Dec. 18, 2020).

5

15 U.S.C. 7214 (as amended by Pub. L. 116-222).

6

See Section 104(i)(1)(A) of the Sarbanes-Oxley Act (defining a “covered issuer” as an issuer that is required to
file reports under Section 13 (15 U.S.C. 78m) or Section 15(d) (15 U.S.C. 78o(d)) of the Exchange Act). In this
release, we refer to issuers filing Exchange Act reports as “registrants.” We use the term “issuers” when
referring to the HFCA Act, but refer to “registrants” when discussing the forms and form requirements.

3

a registered public accounting firm 7 to issue an audit report 8 where that registered public
accounting firm has a branch or office 9 that:
•

Is located in a foreign jurisdiction; and

•

The PCAOB has determined that it is unable to inspect or investigate completely
because of a position taken by an authority in the foreign jurisdiction. 10

Once identified, Section 104(i)(2)(B) of the Sarbanes-Oxley Act requires these covered
issuers, which we refer to as “Commission-Identified Issuers” in this release, to submit
documentation to the Commission establishing that they are not owned or controlled by a
governmental entity in that foreign jurisdiction. 11 Additionally, Section 3 of the HFCA Act lists

7

We use the terms “registered public accounting firm” and “auditor” interchangeably to mean public accounting
firms that, among other things, prepare accountant’s reports on U.S. public companies and are required to
register with the PCAOB. The term “accountant’s report” is defined in 17 CFR 210.1-02(a)(1) (Rule 1-02(a)(1)
of Regulation S-X), with regard to financial statements, as a document in which an independent public or
certified public accountant indicates the scope of the audit (or examination) that the accountant has made and
sets forth that accountant’s opinion regarding the financial statements taken as a whole, or an assertion to the
effect that an overall opinion cannot be expressed.

8

The HFCA Act uses the term “audit report.” As noted above, see supra note 7, for the purposes of this release
and the final amendments, the term “audit report” has the same meaning as “accountants’ report” in Rule 102(a)(1) of Regulation S-X.

9

Where a branch or office of an international firm network is a separate legal entity from the U.S.-based or
international firm network, and that branch or office signs the audit report in its own name, the Commission will
look to the PCAOB determination for that branch or office and not apply that determination to the U.S.-based or
other branches or offices of that firm network that are not based in the PCAOB-identified foreign jurisdiction.

10

On September 22, 2021, the PCAOB adopted PCAOB Rule 6100, Board Determinations Under the Holding
Foreign Companies Accountable Act, which was approved by the Commission on November 4, 2021. See
Public Company Accounting Oversight Board; Order Granting Approval of Proposed Rule Governing Board
Determinations Under the Holding Foreign Companies Accountable Act, Release No. 34-93527 (Nov. 4, 2021)
[86 FR 62581 (Nov. 10, 2021]. The PCAOB Rule 6100 establishes a framework for the PCAOB to make its
determinations required by the HFCA Act. Specifically, PCAOB Rule 6100 establishes the manner of the
PCAOB’s determinations; the factors the PCAOB will evaluate and the documents and information it will
consider when assessing whether a determination is warranted; the form, public availability, effective date, and
duration of such determinations; and the process by which the PCAOB will reaffirm, modify, or vacate any
such determinations. In this release, we refer to a registered public accounting firm that the PCAOB has
determined that it is unable to inspect or investigate completely because of a position taken by an authority in
the foreign jurisdiction as a “PCAOB-Identified Firm.”

11

In addition to this submission requirement, pursuant to Section 104(i)(3) of the Sarbanes-Oxley Act, as added
by Section 2 of the HFCA Act, if an issuer is a Commission-Identified Issuer for three consecutive years, the
Commission must prohibit the securities of the issuer from being traded on a national securities exchange or

4

additional disclosure requirements for Commission-Identified Issuers that are “foreign issuers” 12
(“Commission-Identified Foreign Issuers”).
We received a number of comment letters in response to the interim final amendments.
While several commenters generally supported them, 13 some provided specific suggestions on
how to improve them or otherwise implement the HFCA Act, 14 and others opposed 15 the interim
final amendments. Generally, commenters supporting the interim final amendments stated that
the amendments effectively provided for timely implementation of the HFCA Act 16 and also
informed investors about the level of ownership and control the Chinese Government has in
listed companies. 17 Additionally, commenters supporting the interim final amendments asserted
that they agreed with the objective of the HFCA Act and were concerned about the lack of
transparency into Chinese companies. 18

through any other method that is within the jurisdiction of the Commission to regulate, including through “overthe-counter” trading. 15 U.S.C. 7214(i)(3).
12

See 17 CFR 240.3b-4 (“Exchange Act Rule 3b-4”). Under Exchange Act Rule 3b-4, the term “foreign issuer”
means any issuer that is a foreign government, a national of any foreign country, or a corporation or other
organization incorporated or organized under the laws of any foreign country.

13

See letters from American Securities Association (May 5, 2021) (“ASA”), Council of Institutional Investors
(May 5, 2021) (“CII”), U.S. Chamber of Commerce (May 21, 2021) (“Chamber”), United States Senator Dan
Sullivan et al. (Aug. 9, 2021) (“Sen. Sullivan et al.”), and United States Senator John Kennedy (Apr. 28, 2021)
(“Sen. Kennedy”).

14

See letters from ICI Global (May 5, 2021) (“ICI”), Jessica Kelly (Apr. 30, 2021) (“Kelly”), Professor Curtis J.
Milhaupt and Professor Lauren Yu-Hsin Lin (Apr. 5, 2021) (“Profs. Milhaupt and Lin”), New York Stock
Exchange LLC (May 12, 2021) (“NYSE”), and Professor Emmanuel T. De George et al. (May 4, 2021) (“U.S.
Acctg. Academics”).

15

See letters from Blank Rome LLP (May 5, 2021) (“Blank Rome”); China Petroleum & Chemical Corporation
(Apr. 30, 2021) (“China Petroleum”); China Southern Airlines Company Limited (Apr. 30, 2021) (“China
Southern”); Professor Jie et al. (May 3, 2021) (“Chinese Legal Academics”); Shanshan Xu (May 2, 2021)
(“Xu”); and Yum China Holdings, Inc. (May 4, 2021) (“Yum”).

16

See, e.g., letter from ICI.

17

See, e.g., letter from ASA.

18

See, e.g., letter from Chamber.

5

On the other hand, commenters opposing the amendments stated that the amendments
were repetitive of disclosure that is already provided and would result in unnecessary compliance
costs, 19 were unfair to Chinese registrants, 20 may bring adverse effects to the interests of global
investors in Commission-Identified Issuers, 21 and did not account for regulations in other
jurisdictions. 22 Some of these commenters also argued that any conflicts of relevant laws in
different jurisdictions that inhibit PCAOB inspection should be resolved through the cooperation
of regulators from the different jurisdictions. 23 Many of these comments reflect general
opposition to the design and operation of the HFCA Act itself. Where commenters addressed
aspects of the statute that Congress left to the Commission to implement, we have responded to
those comments below, in our discussion of the final amendments.
II.

Discussion of Amendments
A. Documentation Submission Requirements
1. Interim Final Amendments
As discussed above, Section 2 of the HFCA Act amended Section 104(i)(2) of the

Sarbanes-Oxley Act to require any Commission-Identified Issuer to submit to the Commission
documentation establishing that the issuer is not owned or controlled by a governmental entity in
the relevant foreign jurisdiction. 24 The Commission amended Form 10-K, Form 20-F, Form 40-

19

See letter from China Petroleum.

20

See letters from Chinese Legal Academics and China Petroleum.

21

See letters from Blank Rome, Chinese Legal Academics, China Southern, and Yum.

22

See letters from China Southern and Xu.

23

See letters from Blank Rome, Chinese Legal Academics, China Southern, China Petroleum, and Xu.

24

See Section 104(i)(2)(A) of the Sarbanes-Oxley Act. The interim final amendments met the Section 104(i)(4)
of the Sarbanes-Oxley Act mandate that the Commission adopt rules establishing the manner and form in which
such submissions will be made no later than 90 days after enactment.

6

F, and Form N-CSR to implement this provision. The submission requirement applies to all
Commission-Identified Issuers. The interim final amendments required this documentation to be
submitted electronically to the Commission on a supplemental basis 25 through the Electronic
Data Gathering, Analysis, and Retrieval (“EDGAR”) system on or before the due date of the
relevant annual report form.
Although the interim final amendments prescribed the timing and means by which such
submissions were made, neither they nor the HFCA Act specified the particular types of
documentation that could or should be submitted for this purpose. Moreover, in the Interim
Final Release, the Commission recognized that available documentation could vary depending
upon the organizational structure and other factors specific to the registrant. Thus, registrants
had flexibility under the interim final amendments to determine how best to satisfy this
requirement.

2. Comments
One commenter recommended that registrants make the submission of documentation
establishing that the issuer is not owned or controlled by a governmental entity in the foreign
jurisdiction of the PCAOB-Identified Firm in the form of a certification, but did not support
requiring the submission to be filed in a Form 8-K because it should not be classified as a
“material event” and did not support requiring disclosure that a registrant is a Commission
Identified issuer under Form 8-K. 26 This commenter suggested that making the submission
publicly available or filed as an exhibit would exceed the actions authorized by the HFCA Act

25

For purposes of the interim final amendments, use of the term “supplemental” did not have the meaning of
“supplemental information” in 17 CFR 240.12b-4. This is true for the final amendments we are adopting in this
release as well.

26

See letter from Yum.

7

and indicated that registrants may wish to seek confidential treatment for some or all of the
submission. The commenter also suggested that we establish a universal due date for the
submission requirement that is later than the due date for the annual report to provide registrants
additional time to prepare the submission and reduce the costs of compliance, and that we should
not make the determinations of Commission-Identified Issuers more often than annually.
Additionally, the commenter recommended that a registrant retain flexibility over the
type of documentation a Commission-Identified Issuer must submit to establish that it is not
owned or controlled by a governmental entity in the foreign jurisdiction based on its facts and
circumstances, but indicated that publication of non-exclusive methods to satisfy the requirement
would be valuable. This commenter suggested potential non-exclusive methods to show there is
no ownership or control, such as there has been no Schedule 13D or 13G filing by a government
related entity in the foreign jurisdiction, there are no material contracts with a foreign
governmental party, or there is no foreign government representative on the board.
Another commenter recommended additional guidance on the meaning of “owned or
controlled.” 27 The commenter suggested that the amendments use the term “significant
influence” under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and
incorporate specific examples including: (1) where a government entity or affiliate has 20
percent or greater ownership or voting interest; (2) existence and effect of potential voting rights
that are currently exercisable or convertible; (3) when an entity is represented on the board of
directors or equivalent governing body of the investee entity; and (4) an entity’s participation in
policy-making processes, including participation in decisions about dividends or other
distributions.

27

See letter from U.S. Acctg. Academics.

8

3. Final Amendments
We are finalizing the interim final amendments with respect to the submission
requirements without modification. The amendments require any Commission-Identified Issuer
to submit to the Commission through EDGAR, 28 on or before the due date of the relevant annual
report form, documentation establishing that the issuer is not owned or controlled by a
governmental entity in the foreign jurisdiction of the PCAOB-Identified Firm. This submission
will be made publicly available on EDGAR, which we believe is consistent with the HFCA Act
given its focus on transparency. 29
Additionally, the final amendments continue to permit Commission-Identified Issuers to
determine the appropriate documentation to submit in response to the requirement, based on their
organizational structure and other registrant-specific factors. We decline to provide an exclusive
or non-exclusive list of what documentation may demonstrate that the registrant is not owned or
controlled by the relevant governmental entity. We believe that such a list may be too limiting or
become the de facto means of satisfying the requirement. We believe that CommissionIdentified Issuers should instead make a determination of what documentation meets the
requirement for their particular company. We also believe that not prescribing the specific
documentation Commission-Identified Issuers must submit will limit compliance costs and could
result in more relevant information being provided to investors.
Moreover, although the terms are not defined in the statute, we believe that the meaning
of the terms “owned or controlled,” “owned,” and “controlling financial interest” in the HFCA

28

The final amendments do not specify the manner in which a registrant must submit the required documentation
on EDGAR. A registrant could submit the documentation with its annual report; on Forms 8-K or 6-K, as
applicable; or using another appropriate method.

29

See letter from Sen. Kennedy (stating that the purpose of the legislation “is to make relevant information about
publicly traded firms explicit and easily accessible to investors”).

9

Act reference a person’s or governmental entity’s ability to “control” the registrant as that term is
used in the Exchange Act and the Exchange Act rules.
One commenter suggested that the amendments use the term “significant influence”
under U.S. GAAP and incorporate a specified list of examples. We note, however, that the
HFCA Act refers to the Exchange Act and the Commission’s Exchange Act rules. Therefore, we
believe the terms “owned or controlled,” “owned,” and “controlling financial interest” used in
the HFCA Act are reasonably read to have the same meaning as the term “control” as used in the
Exchange Act and the Exchange Act rules. Moreover, registrants should generally understand
the concept of “control” and so incorporating the same meaning will result in consistent
application of the concept across different regulatory contexts.
B. Disclosure Requirements
1. Interim Final Amendments
Section 3 of the HFCA Act requires a Commission-Identified Foreign Issuer to provide
the following additional disclosures in its annual report for the year that the Commission so
identifies the issuer: 30
•

That, during the period covered by the form, the PCAOB-Identified Firm that has
prepared an audit report for the issuer; 31

30

The HFCA Act requires these disclosures in the issuer’s Form 10-K, Form 20-F, or a form that is the equivalent
of, or substantially similar to, these forms. The disclosures required by Section 3 of the HFCA Act are also
required in transition reports filed on Forms 10-K and in transition reports on Form 20-F that include audited
financial statements. The disclosures should address the transition period as if it were a fiscal year.

31

The registered public accounting firm referenced in the statute means a PCAOB-Identified Firm. See supra
notes 7 through 10. The interim final amendments included slightly different terms than those in the statutory
language to clarify this and other points. Specifically, the interim final amendments required a CommissionIdentified Foreign Issuer to disclose that, for the immediately preceding annual financial statement period, a
registered public accounting firm that the PCAOB was unable to inspect or investigate completely, because of a
position taken by an authority in the foreign jurisdiction, issued an audit report for the registrant. For the same
reasons, the final amendments include the same terms used in the interim final amendments for clarification as
well.

10

•

The percentage of the shares of the issuer owned by governmental entities in the
foreign jurisdiction in which the issuer is incorporated or otherwise organized;

•

Whether governmental entities in the applicable foreign jurisdiction with respect to
that registered public accounting firm have a controlling financial interest with
respect to the issuer;

•

The name of each official of the Chinese Communist Party (“CCP”) who is a member
of the board of directors of the issuer or the operating entity with respect to the issuer;
and

•

Whether the articles of incorporation of the issuer (or equivalent organizing
document) contains any charter of the CCP, including the text of any such charter.

Although Section 3 of the HFCA Act does not mandate specific rule or form changes, the
Commission stated its belief in the Interim Final Release that amending Commission forms to
include the new disclosure requirements will help registrants comply with the HFCA Act. The
Commission therefore amended Form 10-K, Form 20-F, Form 40-F, 32 and Form N-CSR 33 to
reflect the disclosure requirements in Section 3 of the HFCA Act.
The interim final amendments required a registrant to provide the disclosure for each year
in which the registrant is a Commission-Identified Foreign Issuer. Because the period covered

32

As we noted in the Interim Final Release, in reviewing the Commission’s forms, we determined that Form 40-F
is an equivalent or substantially similar form filed by foreign issuers. The Form 40-F is a form that may be used
by Canadian issuers that seek to offer their securities in the United States and is used by those issuers for annual
reports filed under Section 13(a) or Section 15(d) of the Exchange Act. As such, even though the form is not
expressly named in the HFCA Act, its use by issuers for annual reports filed under Section 13(a) and Section
15(d) establishes the form as equivalent or substantially similar to the Form 10-K and Form 20-F.

33

Form N-CSR is an annual reporting form used by registered investment companies that are affected by the
HFCA Act to file their audited financial statements with the Commission. Although Form N-CSR is not
specifically identified in the HFCA Act, as we indicated in the Interim Final Release, its use by these registered
investment companies for annual reports filed under Section 13(a) and Section 15(d) establishes the form as
equivalent or substantially similar to the Form 10-K and Form 20-F.

11

by the forms looks back at the prior year, a Commission-Identified Foreign Issuer that was
identified in the prior year would have been required to provide the HFCA Act Section 3
disclosure in its annual report for the year in which it was identified, even if the registrant’s
subsequent filing includes an audit report issued by a registered public accounting firm that is a
not a PCAOB Identified Firm (“non-PCAOB Identified Firm”).
In addition, the interim final amendments added an instruction in each of Form 20-F and
Form 40-F to specify that the disclosure applies to annual reports, and not to registration
statements. 34
2. Comments
Commenters in one letter stated that registrants typically are not providing the detailed
disclosures required by the HFCA Act and that current risk factor disclosure tends to be
insufficient for investors to understand the consequences of non-inspection. 35 Other commenters
in a separate letter recommended that the disclosure requirement relating to identification of
officials of the CCP that are members of the board of directors is vague and may be unhelpful
because the concept of “official of the CCP” is susceptible to variation. 36 The commenter stated
that virtually all executives of Chinese state-owned enterprises are members of the CCP as are
many executives of private firms. This commenter further stated that very little information
about the degree of control exercised by the Chinese Government and CCP over a registrant can
be gleaned solely from disclosure of a reference to the CCP charter in the company’s articles of

34

While Form 20-F and Form 40-F may be used as an initial registration form, the Commission noted its belief in
the Interim Final Release that, in the context of Section 3 of the HFCA Act, which linked the Form 20-F
requirement to the Form 10-K requirement, the disclosure was intended to be required when the form is used as
an annual report.

35

See letter from U.S. Acctg. Academics.

36

See letter from Profs. Milhaupt and Lin.

12

incorporation.
The commenter recommended requiring disclosure of each board member’s current and
past positions and ranks within the Chinese Government or CCP and whether the board member
serves on the registrant’s internal Communist Party Committee (suggesting such disclosure
would provide material information about an individual’s links to the Chinese party-state and, by
extension, the degree of influence the party-state exerts over the company). Additionally, the
commenter recommended disclosure of all provisions in a registrant’s articles of incorporation
that reference the CCP or the company’s internal Communist Party Committee.
This commenter stated that since many companies with Chinese operations are listed in
the United States using variable interest entity (“VIE”) structures incorporated in jurisdictions
outside of China, the disclosure requirements could be read as not requiring disclosure of
Chinese Government ownership of shares of the registrant. The commenter recommended that
the amendments clarify that “Commission-Identified Foreign Issuers are required to disclose the
percentage of shares of the registrant owned by governmental entities in the foreign jurisdiction
in which the registrant is incorporated or otherwise organized, or in which the registrant’s
operating entity is incorporated.”
Another commenter recommended that the Commission consider whether risks are
heightened for registrants using a VIE structure, given that the structure could block meaningful
disclosure of financial and political information. 37 A different commenter also noted concerns
with VIE and dual-class structures, which are complex and involve risks that the commenter
believes are not fully understood by many market participants. 38 This commenter recommended

37

See letter from Kelly.

38

See letter from CII.

13

additional disclosure guidance for VIE and dual-class stock structures for investors to more fully
understand the ownership or control of those registrants subject to the HFCA Act.
Moreover, one commenter suggested that we consider distinguishing registrants that list
exclusively on a U.S. exchange from those that have a secondary listing overseas, noting the
Commission’s assessment in the Interim Final Release that 79 percent of registrants covered by
the HFCA Act disclose listing only on a U.S. national exchange. 39 Another commenter
suggested vigilance relating to firms that switch between U.S. and foreign jurisdictions to reset
the clock or switch to auditors operating only nominally in the United States. 40
3. Final Amendments
We are finalizing the disclosure requirements for Commission-Identified Foreign Issuers
with a minor modification to the interim final amendments. As with the interim final
amendments, we are adopting amendments to Form 10-K to revise Part II, Item 9C, Form 20-F
to revise Part II, Item 16I, Form 40-F to revise paragraph B.18, and Form N-CSR to revise
paragraph (j) of Item 4. The amended language in these forms is the same as the language in the
interim final amendments, with the exception of the modification pertaining to VIE structures
described below, and requires a Commission-Identified Foreign Issuer to provide the disclosures
discussed above that are required by the HFCA Act. 41
We do not believe it is necessary to explain further what is meant by “official of the
CCP” or require additional disclosures relating to this matter at this time. We believe the term is
clear from the HFCA Act and our amendments. Moreover, we are not adopting additional
disclosure requirements suggested by some commenters, as they would exceed the HFCA Act’s
39

See letter from Kelly (citing Interim Final Release, supra note 3, at 17538, n. 54).

40

See letter from U.S. Acctg. Academics.

41

See supra Section II.B.1.

14

requirements and are outside the scope of this rulemaking.
We note commenters’ concerns that the interim final amendments could be interpreted to
mean that a Commission-Identified Foreign Issuer listed in the United States using VIE or
similar corporate structures that is incorporated or otherwise organized in one jurisdiction, but
that has a consolidated operating company incorporated or otherwise organized in another
jurisdiction, may not be required to disclose government ownership of shares of the operating
company. 42 That was not the intent of the interim final amendments, and we do not believe this
is consistent with the intent of the HFCA Act. Therefore, we believe that a registrant should
provide the required disclosure associated with a consolidated operating company through a VIE
structure or other similar structures. Also, we do not believe that a registrant should be able to
avoid the HFCA Act’s requirements by using a VIE structure or other similar structures.
Therefore, the final amendments modify the interim final amendments to make clear that
the registrant must, in addition to providing the required disclosures for the CommissionIdentified Foreign Issuer, look through a VIE or any structure that results in additional foreign
entities being consolidated in the financial statements of the registrant and provide the required
disclosures about any consolidated operating company or companies in the relevant jurisdiction.
Thus, the amended forms state that any Commission-Identified Foreign Issuer that uses a VIE or
any structure that results in additional foreign entities being consolidated in the financial
statements of the registrant must provide the required disclosures for itself and its consolidated
foreign operating entities.
C. Inline XBRL Tagging
In the Interim Final Release, we sought comment on whether to introduce structured data
42

See letters from CII, Kelly, and Profs. Milhaupt and Lin.

15

tagging requirements pertaining to the auditor name and jurisdiction on the audit report signed by
the registered public accounting firm in the registrant’s Form 10-K, Form 20-F, and Form 40-F.
We suggested that such tagging would provide machine-readable data directly from the registrant
identifying the audit firm retained by it, and may therefore facilitate the Commission’s
determination of the registrants it should designate as Commission-Identified Issuers. Two
commenters recommended an eXtensible Business Reporting Language (“XBRL”) structured
tagging requirement. 43 One of these commenters recommended tagging the auditor name,
branch office, and PCAOB jurisdiction as listed on the Form AP, and the other commenter
suggested tagging the auditor’s name and jurisdiction as set forth on the audit report. 44
Consistent with these commenters’ suggestions, the final amendments include a new
tagging requirement to facilitate the Commission’s accurate and efficient identification of
Commission-Identified Issuers. To implement this requirement, in December 2021, the
Document Entity and Information (“DEI”) taxonomy will be updated to include three additional
data elements, applicable to annual report filings on Forms 10-K, 20-F, and 40-F that are
submitted with XBRL presentations. 45 Those three data elements will identify the auditor (or
auditors) who have provided opinions related to the financial statements presented in the
registrant’s annual report, the location where the auditor’s report has been issued, and the
PCAOB ID Number(s) of the audit firm(s) or branch(es) providing the opinion(s).

43

See letters from U.S. Acctg. Academics and CII.

44

See letter from U.S. Acctg. Academics.

45

We expect that the revised DEI Taxonomy will be published as “dei-2021q4.” A draft of the taxonomies was
published for comment on September 1, 2021 at https://xbrl.sec.gov/dei/2021q4/. See DRAFT 20201Q4 and
Draft 2022 SEC Taxonomies, available at https://www.sec.gov/structureddata/announcement/osdannouncement-081621-draft-cef-and-vip-taxonomies-update. See Also Release Notes for CEF and DEI
Taxonomies 2021Q4 DRAFT, U.S. SEC. EXCH. & COMM’N (Sept. 1, 2021), available at
https://xbrl.sec.gov/doc/releasenotes-2021q4-draft.pdf. We are not making similar updates to the DEI
taxonomy for Form N-CSR because the Commission currently collects on Form N-CEN (referenced in 17 CFR
249.330) information regarding a fund’s auditor in a structured data format.

16

When the updated DEI taxonomy is published, deployed to EDGAR, and announced as
part of the newly-adopted EDGAR Filer Manual for the relevant release in December 2021, all
registrants will be required to use the updated taxonomy, or a subsequently adopted version of
the taxonomy, for any annual report filed for a period ended after December 15, 2021.
We are adding a new paragraph to Rule 405 of Regulation S-T to clarify that registrants
must use the new data elements. The paragraph will remain part of Regulation S-T until the
2021 DEI taxonomy has been removed from EDGAR in 2023. Because we are not adopting a
change to the underlying forms, for registrants that are filing their financial statements using
Inline XBRL, the final amendments leave placement of the underlying tags within the annual
report up to the registrant. 46
D. Timing Issues
The HFCA Act was enacted on December 18, 2020 and provides for identification of the
issuers required to file reports under Section 13 or 15(d) of the Exchange Act during a year that
begins “after the date of enactment” of the HFCA Act. Given this statutory language, and in
response to some commenters, 47 we reiterate that a registrant will not be subject to a noninspection year determination for any fiscal year ending on or prior to December 18, 2020.
Accordingly, the Commission will identify registrants pursuant to the HFCA Act based on the
PCAOB’s determination and on registrants’ annual reports for fiscal years beginning after
December 18, 2020. The earliest that the Commission could identify a Commission-Identified
Issuer would be after registrants file their annual reports for 2021 and identify the accounting
46

The new DEI tagged data elements, particularly the PCAOB ID Number, are not new disclosure requirement
themselves (e.g., not changing the current form and content of the independent auditor’s report), but are
necessary for EDGAR and the staff to process the forms, akin to an EDGAR header data element. The data
elements will to assist the Commission and its staff in performing the required identification activity required by
the Act.

47

See letters from ASA, Chamber, and NYSE.

17

firm that audited their financial statements.
A registrant will be required to comply with the submission and disclosure requirements
in the annual report for each year in which it was so identified. This means that if a registrant is
identified as being a Commission-Identified Issuer based on its annual report filing made in 2022
for the fiscal year ended December 31, 2021, the registrant will be required to comply with the
submission and, if applicable, the disclosure requirements in its annual report filing covering the
fiscal year ended December 31, 2022, that the registrant is required to file in 2023.
E. Determination of Commission-Identified Issuer
In the Interim Final Release, the Commission stated that it will provide appropriate notice
once it has established the process by which it will begin to identify registrants pursuant to the
HFCA Act. In this regard, the Commission acknowledged that a registrant will not be required
to comply with the submission or disclosure requirements until the Commission identifies a
registrant as having a non-inspection year. The Commission also indicated that it was
considering making the determination of Commission-Identified Issuers on an annual basis based
on the audit report contained in a registrant’s annual report filed with the Commission for the
most recently completed fiscal year preceding the date of the Commission determination.
Additionally, the Commission stated that a registered public accounting firm is “retained” by a
registrant, as that term is used in Section 104(i) of the Sarbanes-Oxley Act, when the registered
public accounting firm signs the accountant’s report on the registrant’s consolidated financial
statements that is included in a registrant’s Exchange Act report. The Commission requested
comment on whether it should publish a list of Commission-Identified Issuers on its website or
whether Commission-Identified Issuers should be identified on EDGAR. Finally, the
Commission asked how it should address any potential errors in identification relating to a

18

registrant’s status if the list is made public and whether it should issue guidance or prescribe
rules relating to disclosure or procedures for identification of errors relating to a registrant’s
status.
A few commenters suggested that the Commission should make the CommissionIdentified Issuer determination based on the registrant’s fiscal year end. 48 One commenter stated
that the Commission should make determinations and provide notice to registrants as early as
possible after a registrant’s filing of its annual report. 49 Some commenters recommended
publishing the list of Commission-Identified Issuers on the Commission’s website, 50 while one
commenter recommended providing the information on EDGAR for efficient and rapid
identification. 51
One commenter suggested that providing a list or identifying Commission-Identified
Issuers on EDGAR is unnecessary and doing so would go beyond the statutory mandate. 52 Some
commenters indicated that the Commission should notify directly any registrants that it has
determined to be Commission-Identified Issuers prior to publishing the list, in light of the
potential market impact on these issuers and to ensure accuracy of such a list. 53 Yet another
commenter recommended that the Commission provide guidance rather than prescribe rules
relating to disclosure or procedures to correct errors relating to the Commission’s inclusion of a
registrant on its Commission-Identified Issuer list to provide flexibility to the Commission and

48

See letters from Chamber (recommending 30 or 45 days after the filing deadline for the annual report), U.S.
Acctg. Academics, and Yum.

49

See letter from Yum.

50

See letters from ASA, Chamber, and U.S. Acctg. Academics.

51

See letter from CII.

52

See letter from Yum.

53

See letters from Chamber and Yum.

19

registrants. 54
One commenter noted potential discrepancies between the three primary sources of
public data that could be used to determine Commission-Identified Issuers: (1) the PCAOB’s
published list of audit reports in jurisdictions where authorities deny access, (2) the PCAOB’s
Form AP database, and (3) registrants’ annual reports filed on EDGAR. 55 According to the
commenter, these potential discrepancies raise a concern regarding the information on which the
Commission would base its determination. The commenter also argued that, in situations with
multiple audit reports in an annual report filing, the “retained” auditor should be “the auditor
who signs off on the current (or more recent) fiscal-year financial statements.”
Based on our further consideration and the input of commenters, we have determined to
institute the following procedures for preparing and publishing the Commission-Identified Issuer
list. We agree with the commenter who suggested that registrants should be identified as early as
possible after the filing of an annual report and on a rolling basis. 56 Accordingly, promptly after
the filing of an annual report, the Commission will evaluate, using Inline XBRL tagging or other
structured data, whether the annual report contains an audit report signed by a PCAOB-Identified
Firm. 57
We continue to believe that a registered public accounting firm is “retained” by a
registrant, as that term is used in Section 104(i) of the Sarbanes-Oxley Act, when the registered

54

See letter from Yum.

55

See letter from U.S. Acctg. Academics.

56

See supra note 49.

57

In response to the commenter that raised concerns regarding the potential discrepancies between primary
sources of data from which the Commission may generate its list, we note that we intend to base a
determination on whether a registrant is a Commission Identified Issuer based on the audit report included in
their annual report filing. We do not believe that the determination should be made based on Form AP filings
because these are not filings made by the registrant.

20

public accounting firm signs the accountant’s report on the registrant’s consolidated financial
statements that is included in a registrant’s Exchange Act report. However, we are taking a
different approach than the one suggested by a commenter regarding instances where an annual
report may contain multiple audit reports. In situations where an annual report for an issuer
other than a registered investment company registrant organized as a series company contains
multiple accountant’s reports or involves more than one registered public accounting firm, only
the registered public accounting firm or firms that serve as “principal accountant” within the
meaning of 17 CFR 210.2-05 (Rule 2-05 of Regulation S-X) and AS 1205: Part of the Audit
Performed by Other Independent Auditors will, upon signing the accountant’s report on the
registrant’s consolidated financial statements, be deemed “retained” for purposes of Section
104(i) of the Sarbanes-Oxley Act and the Commission’s determination of whether the registrant
should be a Commission Identified Issuer. For a registered investment company registrant
organized as a series company, each series will be deemed to “retain” the public accounting firm
that signs the audit report for the series.
Once a registrant has been identified as described above, 58 the Commission59 will
“provisionally identify” such issuer as a Commission-Identified Issuer on the Commission’s
website at www.sec.gov/HFCAA. The Commission website will clearly delineate between
provisional identifications and “conclusive identifications,” and registrants will not be a
Commission-Identified Issuer until a conclusive determination has been made. For a period of

58

See supra Section II.D.

59

As discussed below, see infra Section II.G, the Commission is adopting 17 CFR 200.30-1(m) (new Rule 301(m)) that delegates Commission authority to the Director of the Division of Corporation Finance to identify a
registrant as a Commission-Identified Issuer.

21

15 business days 60 after the provisional identification, a registrant may contact the Commission
by email 61 if it believes it has been incorrectly identified and may provide evidence supporting
such claims. The Commission will respond to the registrant by email with respect to its analysis
of such evidence and its determination. If the Commission agrees with the registrant’s analysis,
the Commission will notify the registrant and will remove the registrant from the provisional
identification list. On the other hand, if the Commission does not agree that the registrant has
been incorrectly identified, the determination that the registrant is a Commission-Identified
Issuer will be conclusive. If the registrant does not contact the Commission to dispute the
provisional identification, the determination that the registrant is a Commission-Identified Issuer
will be conclusive 15 business days after the provisional identification. 62
We did not accept the suggestion of one commenter that the staff contact each individual
registrant that has been identified for inclusion in the list because we believe website posting will
provide sufficient notice and we are concerned that such procedures could further delay issuer
identification, which would be to the detriment of investors. Additionally, under the PCAOB
Rule 6100, the PCAOB will notify each PCAOB-Identified Firm of its determination and will
also publish the list on its website. As such, we do not believe provisional identification of
issuers on the Commission website will have a significant additional market impact. Finally, we
considered but determined not to publish the list of Commission-Identified Issuers on EDGAR.
The EDGAR system is designed to retain filings by and about individual registrants, rather than
present collated information. Consequently, the EDGAR system will not provide a mechanism

60

The term “business day” means any day, other than Saturday, Sunday, or a Federal holiday.

61

The email address will be provided on the www.sec.gov/HFCAA website when or before the provisional
Commission-Identified Issuer list is first populated.

62

In no event would the conclusive determination be made before expiration of the 15-business-day period.

22

to publish a list on EDGAR that includes a number of registrants grouped together.
In addition to identifying Commission-Identified Issuers, the list published on the
Commission website will indicate the number of consecutive years a Commission-Identified
Issuer has been published on the list and whether it has been subject to any prior trading
prohibitions under the HFCA Act. We believe it is appropriate to include this information on the
list because of the significance of the trading prohibition requirements set forth in Section
104(i)(3) of the Sarbanes-Oxley Act, as discussed in greater detail below. 63
F. Process for Trading Prohibition
1. HFCA Act Trading Prohibitions
Section 104(i)(3) of the Sarbanes-Oxley Act requires the Commission to prohibit the
trading on a national securities exchange or through any other method which is within the
jurisdiction of the Commission to regulate, including through over-the-counter trading, of the
securities of certain Commission-Identified Issuers (“trading prohibition”). Section 104(i)(3)(A)
of the Sarbanes-Oxley Act requires the Commission to impose a trading prohibition on a
registrant that is determined to be a Commission-Identified Issuer for three consecutive years
(“initial trading prohibition”). Section 104(i)(3)(B) of the Sarbanes-Oxley Act provides that the
Commission shall end an initial trading prohibition if the issuer certifies to the Commission that
it “has retained a registered public accounting firm that the [PCAOB] has inspected” to the
satisfaction of the Commission. 64 Furthermore, if the Commission ends a trading prohibition
under Section 104(i)(3)(B) of the Sarbanes-Oxley Act and, thereafter, the registrant is again
determined to be a Commission-Identified Issuer, Section 104(i)(3)(C) of the Sarbanes-Oxley

63

See infra Section II.F.

64

For purposes of terminating an initial trading prohibition or subsequent trading prohibition, the Commission
will terminate the prohibition if the retained firm is a non-PCAOB-Identified Firm.

23

Act requires the Commission to impose on such issuer a trading prohibition for a minimum of
five years (“subsequent trading prohibition”). Section 104(i)(3)(D) of the Sarbanes-Oxley Act
provides that the Commission shall end a subsequent trading prohibition if, after the end of the
five-year period, the issuer certifies to the Commission that it “will retain” a non-PCAOBIdentified Firm. 65
In the Interim Final Release, the Commission specifically requested comment on any
considerations it should take into account while determining how to best implement the trading
prohibition requirements set forth in Section 104(i)(3) of the Sarbanes-Oxley Act. 66 A few
commenters supported the prompt implementation of the trading prohibition. 67 One of these
commenters suggested that any deferral of the commencement beyond 2024 would be
inconsistent with the HFCA Act. 68
Other commenters noted the importance of clear rules relating to the trading
prohibition. 69 One of these commenters highlighted the importance of the Commission
establishing a “transparent and well communicated” process with clear information and adequate
notice of delisting to minimize disruption to investors in such entities. 70 This commenter
indicated that a “transparent process that provides clear information and adequate notice” is
necessary to provide market participants with the information they need to make investment
decisions in a timely manner.

65

The five-year period begins on the date on which the Commission imposes a subsequent trading prohibition.
See Section 104(i)(3)(D) of the Sarbanes-Oxley Act.

66

See Interim Final Release supra note 3, at 17533.

67

See letters from CII and Sen. Sullivan et al.

68

See letter from CII.

69

See letters from ICI and NYSE.

70

See letter from ICI.

24

Another commenter recommended that the precise date on which any trading prohibition
applies to an issuer’s securities be made public by the Commission as soon as possible and that
we allow no flexibility or ambiguity regarding the date on which the trading prohibition
applies. 71 This commenter further recommended clarifying whether a trading prohibition would
include derivatives, such as options and swaps based on the Commission-Identified Issuer’s
securities, and that the Commission should clearly establish the impact of a trading prohibition
on any other securities market activities, such as clearance and settlement and options exercise
and assignment. Another commenter stated that the Commission should take steps to prohibit
the trading of Commission-Identified Issuer’s securities on margin to avoid creating unnecessary
risks that will disrupt markets and needlessly harm small investors and prohibit the inclusion of
Chinese companies in passive index funds. 72 On the other hand, some commenters generally
opposed the trading prohibition required by the HFCA Act, arguing that the trading prohibition
would damage U.S. capital markets and harm U.S. investors. 73
We agree with those commenters 74 who stated that the prompt implementation of the
trading prohibition requirements of Section 104(i)(3) of the Sarbanes-Oxley Act is consistent

71

See letter from NYSE. This commenter recommended clarifying whether a trading prohibition would
commence: (i) on January 1 of the third year following the Commission’s determination that a registrant is a
Commission-Identified Issuer; or (ii) three years after the date on which the Commission makes its
determination that a registrant is a Commission-Identified Issuer. See also infra note 82 and accompanying
text.

72

See letter from ASA.

73

See letters from Blank Rome, China Southern, Chinese Legal Academics, Kelly, and Yum.

74

See supra notes 67 to 68. As noted above, the earliest that Commission could identify Commission-Identified
Issuers would be after companies file their annual reports for 2021 and identify the accounting firm that audited
their financial statements that, for calendar year issuers, would be spring of 2022. As a result, the earliest any
trading prohibitions required by Section 104(i)(3) of the Sarbanes-Oxley Act would apply would be in 2024,
once any issuer has been a Commission-Identified Issuer for three consecutive years (2022, 2023, and 2024).

25

with the HFCA Act. 75 In response to commenters opposed to implementing the trading
prohibitions, 76 we point to the statutory mandate to impose trading prohibitions under the HFCA
Act. 77 We agree with commenters 78 that a clear and transparent process for implementing and
terminating a trading prohibition, and advance notice of such process, will assist market
participants, minimize disruptions to the investors, and help to maintain fair and orderly markets.
Accordingly, we have determined that it is appropriate to notify issuers, investors, and other
market participants of the procedures by which the Commission will impose an initial or
subsequent trading prohibition and terminate an initial or subsequent trading prohibition,
including how issuers may certify that they have or will retain a non-PCAOB-Identified Firm
pursuant to Section 104(i)(3)(B) or (D) of the Sarbanes-Oxley Act. 79
2. Process for Imposing a HFCA Act Trading Prohibition
As an initial matter, we have set forth above a clear and transparent process for
identifying Commission-Identified Issuers that provides issuers with an opportunity to dispute
their status as a Commission-Identified Issuer. 80 In addition, the Commission has stated that it
will publicly disclose on its website the list of Commission-Identified Issuers, the number of

75

See, e.g., Sarbanes-Oxley Act, Sections 104(i)(1)(B) (defining the term “non-inspection year” to mean a year
“(i) during which the Commission identifies the covered issuer under paragraph (2)(A) with respect to every
report described in subparagraph (A) filed by the covered issuer during that year; and (ii) that begins after the
date of enactment of this subsection”) and 104(i)(3)(A) (requiring the Commission to impose a trading
prohibition if the Commission determines a covered issuer has three consecutive non-inspection years).

76

See supra note 73.

77

See supra note 65.

78

See supra note 69.

79

We note that unlike other provisions of the HFCA Act, the Commission is not required to undertake rulemaking
to implement the trading prohibitions of Section 104(i)(3) of the Sarbanes-Oxley Act. See, e.g., Section
104(i)(4) of the Sarbanes-Oxley Act (requiring the Commission to issue rules establishing the manner and form
for an issuer to submit documentation that it is not owned or controlled by a government entity in a foreign
jurisdiction).

80

See supra Section II.E.

26

consecutive years that an issuer has been identified as a Commission-Identified Issuer, and the
application of any prior trading prohibition to an issuer. 81 As a result, investors and market
participants should have sufficient notice regarding whether a security that they hold or plan to
hold is issued by a Commission-Identified Issuer and of the risk that such security may be
subject to a trading prohibition in the future, including the timeline for implementation of such
trading prohibition if the issuer remains a Commission-Identified Issuer. Furthermore, an initial
trading prohibition would not be imposed until an issuer has been a Commission-Identified
Issuer for three consecutive years. Thus, issuers will have a period of three years to retain a nonPCAOB-Identified Firm before an initial trading prohibition would be imposed, and investors
would have the same period of time in which to determine what action, if any, to take regarding
their investments in any Commission-Identified Issuer.
Given the procedural protections afforded to issuers pursuant to the Commission’s
approach provided herein and the fact that issuers and the investing public will have had
sufficient notice of an issuer’s status as a Commission-Identified Issuer over a period of three
years, we believe that it is appropriate and consistent with the protection of investors for the
Commission to impose an initial trading prohibition and issue an order prohibiting the trading of
an issuer’s securities 82 on a national securities exchange and in the over-the-counter market as

81

See id.

82

A commenter asked for clarification of the impact of a trading prohibition on derivative securities. See letter
from NYSE. The Sarbanes-Oxley Act, as amended by the HFCA Act, states that the Commission “shall
prohibit the securities of the covered issuer from being traded . . . .” Section 104(i)(3)(A) of the SarbanesOxley Act (emphasis added). Accordingly, to the extent the derivative security is issued by the CommissionIdentified Issuer subject to the trading prohibition, that derivative security would also be subject to the trading
prohibition. For example, if a Commission-Identified Issuer that is subject to a trading prohibition has issued
equity securities and warrants on such equity securities, both the equity securities and the warrants would be
prohibited from trading. However, we understand that most exchange-traded standardized equity options are
issued by the Options Clearing Corporation, rather than the issuer of the underlying equity. See, e.g., Financial
Industry Regulatory Authority Rule 2360(a)(32) (defining “standardized equity option”). As another example,
we understand that security-based swaps are generally entered into bilaterally between security-based swap

27

soon as practicable after the issuer has been determined to be a Commission-Identified Issuer for
three consecutive years. 83
An order issuing an initial trading prohibition would provide that such trading prohibition
will be effective on the fourth business day after the order is published by the Commission. 84
We believe that providing a short delay in effectiveness of an initial trading prohibition
appropriately addresses concerns regarding the risk to investors in U.S. markets of continued
trading of Commission-Identified Issuers while also providing appropriate notice to investors
and other market participants in order to make investment decisions. Moreover, the Commission
believes this procedure will inform investors when a trading prohibition will be imposed and
when it will become effective. 85
Similarly, with respect to the imposition of a subsequent trading prohibition, the
Commission would issue an order prohibiting the trading of an issuer’s securities on a national
securities exchange and in the over-the-counter market as soon as practicable after the issuer is

dealers and/or eligible contract participants and are not issued by the issuer of the underlying equity securities.
See Treatment of Certain Communications Involving Security-Based Swaps That May Be Purchased Only by
Eligible Contract Participants, Release No. 33-10450 (Jan. 5, 2018) [83 FR 2046, 2051 n.60 (Jan. 16, 2018)]
However, we further note that the imposition of a trading prohibition with respect to the underlying security of a
derivative may itself have an impact on the derivative security, apart from the requirements of the SarbanesOxley Act. And while this commenter requested the Commission to establish the impact of the trading
prohibitions on any other securities market activities, such as clearance and settlement and options exercise and
assignment, we note that there are already rules and processes in place in the securities markets to address when
an equity security is subject to a trading halt, and those processes would generally apply with respect to a
trading prohibition the same as they would with respect to any other trading halt. See, e.g., Chicago Board
Options Exchange Rules 4.4 (Withdrawal of Approval of Underlying Securities) and 502 (Trading Halts);
Options Clearing Corporation Information Memo #30049 (Review of Trading Halt Processing).
83

Those interested in providing feedback or discussing issues that may arise as a result of an initial trading
prohibition or a subsequent trading prohibition may contact the Commission at the email address that will be
provided on the www.sec.gov/HFCAA website.

84

For example, if an order issuing a trading prohibition is published by the Commission on a Monday, the trading
prohibition would be effective starting at 12:00 am (Washington D.C. time) the Friday of that week.

85

While the HFCA Act does not address the delisting of securities from a national securities exchange, the
existing rules of national securities exchanges that list issuers that are subject to an initial trading prohibition are
applicable to delisting of such issuers’ securities, as appropriate.

28

again identified as a Commission-Identified Issuer. An order issuing a subsequent trading
prohibition would provide that the trading prohibition will be effective on the fourth business day
after the order is published by the Commission. 86 As with the process for issuing an initial
trading prohibition, we believe that this procedure appropriately addresses concerns regarding
the risk to investors in U.S. markets of continued trading of Commission-Identified Issuers that
have previously been subject to an initial trading prohibition while also providing appropriate
notice to investors and other market participants in order to make investment decisions. We
believe that the application of a prior trading prohibition, the ability of an issuer to dispute its
status as a Commission-Identified Issuer, the public availability of the provisional list of
Commission-Identified Issuers, 87 and an issuer’s repeat use of a registered public accounting
firm that the PCAOB is unable to inspect or investigate completely warrant the same short delay
in the effectiveness of a subsequent trading prohibition as in an initial trading prohibition. In
addition, we believe this procedure will inform investors when a subsequent trading prohibition
will be imposed and become effective. 88
3. Process for Terminating Trading Prohibitions; Required Certification
Section 104(i)(3)(B) of the Sarbanes-Oxley Act provides that the Commission shall
terminate an initial trading prohibition if a Commission-Identified Issuer certifies to the
Commission that the issuer has retained a registered public accounting firm that the PCAOB has

86

See supra note 84.

87

We note that a provisional list of issuers that may be identified as Commission-Identified Issuers will be made
publicly available before it is finalized. Accordingly, investors and other market participants would have access
to the provisional list and would therefore have notice that a subsequent trading prohibition may be
forthcoming. See supra Section II.E.

88

While the HFCA Act does not address the delisting of securities from a national securities exchange, the
existing rules of national securities exchanges that list issuers that are subject to a subsequent trading
prohibition are applicable to delisting of such issuers’ securities, as appropriate.

29

inspected to the satisfaction of the Commission.89 Section 104(i)(3)(D) of the Sarbanes-Oxley
Act also provides that the Commission shall terminate a subsequent trading prohibition if the
Commission-Identified Issuer certifies to the Commission that the issuer will retain a registered
public accounting firm that the PCAOB is able to inspect under this section. 90
As a general matter, the retention of a registered public accounting firm does not
guarantee that the newly engaged accounting firm will be the firm that issues an audit report on
the financial statements of the issuer. Specifically, an issuer could retain more than one audit
firm or retain a non-PCAOB-Identified Firm and subsequently replace the non-PCAOBIdentified Firm with a PCAOB-Identified Firm. Thus, in order to achieve the result that the
retained non-PCAOB-Identified Firm is actually performing the audit, we believe it appropriate
and consistent with the protection of investors that, for a Commission-Identified Issuer to certify
consistent with Section 104(i)(3)(B) of the Sarbanes-Oxley Act, a Commission-Identified Issuer
must file financial statements that include an audit report signed by a non-PCAOB-Identified
Firm. Such a certification made by a Commission-Identified Issuer subject to an initial trading
prohibition will terminate an initial trading prohibition.
Accordingly, a Commission-Identified Issuer subject to an initial trading prohibition can
make the required certification that it “has retained” a non-PCAOB-Identified Firm to the
satisfaction of the Commission only if such certification is preceded or accompanied by the filing
of an annual report or an amended annual report with financial statements that include an audit
report on the consolidated financial statements signed by a non-PCAOB-Identified Firm. We
believe that lifting the trading prohibition prior to the Commission-Identified Issuer filing
89

See Section 104(i)(3)(B) of the Sarbanes-Oxley Act.

90

See Section 104(i)(3)(D) of the Sarbanes-Oxley Act.

30

financial statements that include such an audit report would place investors at risk by
commencing trading in a security for which the latest three annual reports filed with the
Commission are audited by a PCAOB-Identified Firm. In addition, lifting the trading prohibition
prior to the issuer filing financial statements that include an audit report on the consolidated
financial statements signed by a non-PCAOB-Identified Firm could place investors at risk by
commencing trading in a security that could potentially become subject to a subsequent trading
prohibition lasting a minimum of five years if the issuer does in fact use a PCAOB-Identified
Firm to perform its audit for its next annual report. Therefore, we believe it would be
appropriate to terminate an initial trading prohibition only after investors and regulators have
access to financial statements that include an audit report on the consolidated financial
statements signed by a non-PCAOB-Identified Firm.
Similarly, we believe that a Commission-Identified Issuer that is subject to a subsequent
trading prohibition should make at least the same showing to end trading prohibition as a
Commission-Identified Issuer that is subject to an initial trading prohibition. Accordingly, for a
Commission-Identified Issuer to certify consistent with Section 104(i)(3)(D) of the SarbanesOxley Act, a Commission-Identified Issuer must file, either with or prior to its certification, an
annual report or amended annual report with financial statements that include an audit report
signed by a non-PCAOB-Identified Firm. Such a certification made by a Commission-Identified
Issuer subject to a subsequent trading prohibition will terminate a subsequent trading
prohibition. 91 We believe that the concerns described above with respect to an initial trading
prohibition are even greater with Commission-Identified Issuers subject to a subsequent trading

91

The certification could be signed by any individual that is duly authorized to execute and deliver such a
certification on behalf of the Commission-Identified Issuer.

31

prohibition as a result of a repeated reliance on a PCAOB-Identified Firm. Further, an issuer
subject to a subsequent trading prohibition would have at least five years to retain a nonPCAOB-Identified Firm to audit its financials before a subsequent trading prohibition could be
terminated by the Commission.
As described above, a Commission-Identified Issuer subject to an initial or subsequent
trading prohibition must certify that it has or will retain a non-PCAOB-Identified Firm for the
Commission to end a trading prohibition, 92 and such certification would be submitted at the same
time as, or after, the issuer files an annual or amended annual report with financial statements
that include an audit report signed by a non-PCAOB-Identified Firm. 93 Once the Commission
receives the certification and has verified that the issuer has in fact filed an annual or amended
annual report with financial statements that include an audit report signed by a non-PCAOBIdentified Firm, the Commission shall as soon as practicable issue an order ending the initial or
subsequent trading prohibition, as the case may be. An order ending an initial or subsequent
trading prohibition will provide that the termination of the trading prohibition will be effective
the next business day after the order is published by the Commission. We believe that once an
issuer has certified to the satisfaction of the Commission that it has retained a non-PCAOBIdentified Firm, termination of the trading prohibition should not be delayed.
G. Amendment to the Delegations of Authority of the Commission
The Commission is adopting new Rule 30-1(m) that delegates Commission authority to
the Director of the Division of Corporation Finance to identify a registrant as a Commission-

92

See Sections 104(i)(3)(B) and (D) of the Sarbanes-Oxley Act. Section 104(i)(3)(D) of the Sarbanes-Oxley Act
further provides that, with respect to a subsequent trading prohibition, the issuer may not submit such
certification until after the end of the five-year period.

93

Any certification should be submitted in accordance with the EDGAR Filer Manual.

32

Identified Issuer. This delegated authority is designed to conserve Commission resources by
permitting Commission staff to carry out the procedures described herein in connection with the
identification of Commission-Identified Issuers. The Commission staff may nevertheless submit
matters to the Commission for consideration, as it deems appropriate.
III. Procedural and Other Matters
If any of the provisions of these rules, or the application thereof to any person or
circumstance, is held to be invalid, such invalidity shall not affect other provisions or application
of such provisions to other persons or circumstances that can be given effect without the invalid
provision or application.
Pursuant to the Congressional Review Act, the Office of Information and Regulatory
Affairs has designated these rules as not a “major rule,” as defined by 5 U.S.C. 804(2).
The Administrative Procedure Act (“APA”) generally requires an agency to publish
notice of a rulemaking in the Federal Register and provide an opportunity for public comment.
This requirement does not apply, however, if the agency “for good cause finds . . . that notice
and public procedure are impracticable, unnecessary, or contrary to the public interest.” Section
2 of the HFCA Act requires Commission rulemaking within 90 days of the date of enactment in
order to “establish the manner and form in which a covered issuer shall make a submission
required under paragraph (2)(B).” Furthermore, Section 3 of the HFCA Act requires certain
disclosure from issuers, and the amendments to Form 10-K, Form 20-F, Form 40-F, and Form NCSR clarify issuers’ obligations under the HFCA Act. Because the interim final amendments
conformed the specified forms to the requirements of a newly enacted statute and in light of the
90- day rulemaking directive in Section 2 of the HFCA Act, the Commission found in the

33

Interim Final Release that notice and public comment were impracticable and unnecessary. 94
The revisions to the interim final amendments being adopted in this release are in response to
feedback received on requests for comment in the Interim Final Release.
IV. Economic Analysis
A. Introduction and Broad Economic Considerations
As discussed above, we are finalizing amendments to Form 10-K, Form 20-F, Form 40-F,
and Form N-CSR that implemented the disclosure and submission requirements of the HFCA
Act. We are mindful of the costs imposed by, and the benefits obtained from, our rules. In this
section, we analyze potential economic effects stemming from the amendments. 95 We analyze
these effects against a baseline that consists of the current regulatory framework and current
market practices.
We are finalizing the interim final amendments with a modification to clarify that a
Commission-Identified Foreign Issuer listed in the United States using VIE or any structure that
results in additional foreign entities being consolidated in the financial statements of the

94

Accordingly, the interim final amendments did not require a final regulatory flexibility analysis under the
Regulatory Flexibility Act. See 5 U.S.C. 604(a) (requiring a final regulatory flexibility analysis only for rules
required by the APA or other law to publish a general notice of proposed rulemaking). For the same reason,
these amendments do not require a final regulatory flexibility analysis).

95

Exchange Act Section 3(f) requires the Commission, when engaging in rulemaking where it is required to consider
or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency, competition, and capital formation. Further,
Exchange Act Section 23(a)(2) requires the Commission, when making rules under the Exchange Act, to consider
the impact that the rules would have on competition and prohibits the Commission from adopting any rule that
would impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the
Exchange Act. Additionally, Section 2(c) of the Investment Company Act requires us, when engaging in
rulemaking that requires us to consider or determine whether an action is consistent with the public interest, to
also consider, in addition to the protection of investors, whether the action will promote efficiency, competition,
and capital formation. Although we are adopting amendments to Form N-CSR to implement the HFCA Act as
applied to registered investment companies, based on recent Form N-CEN filings, no registered investment
company reported having retained a registered public accounting firm located in a foreign jurisdiction for the
preparation of the company’s financial statements. Based on this data, and Commission staff experience, we
estimate that no registered investment companies will be subject to the requirements of the interim final
amendments upon the rule’s adoption. Accordingly, we do not expect any economic effects associated with the
amendment to Form N-CSR.

34

registrant, must provide the HFCA Act’s required disclosures regarding government ownership
of shares of the operating company. We also are adding a requirement for registrants to tag the
name, jurisdiction, and the PCAOB ID Number(s) of the audit firm(s) that sign the audit report
accompanying a registrant’s Form 10-K, Form 20-F, and Form 40-F. In this economic analysis,
we discuss the economic effects arising from the interim final amendments as finalized,
including the modifications discussion above. Where possible, we have attempted to quantify
the expected economic effects of the amendments. Some of the potential economic effects are
inherently difficult to quantify. In some instances, we lack the information or data necessary to
provide reasonable estimates for the economic effects of the amendments. Where we cannot
quantify the relevant economic effects, we discuss them in qualitative terms.
The new disclosure requirements will increase transparency about the reliability of
affected issuers’ financial statements as well as the characteristics of their ownership and control
structures. High-quality disclosures, including high-quality financial statements, are a
cornerstone of well-functioning capital markets. 96 Such disclosures reduce information
asymmetries between investors and issuers, with positive effects on price efficiency and capital
allocation. 97 Broadly speaking, academic research shows that increasing the quality of financial
reporting improves price efficiency and reduces an issuer’s cost of capital. 98
96

See, e.g., Christian Leuz & Peter Wysocki, The Economics of Disclosure and Financial Reporting Regulation,
54 J. ACCT. RESEARCH 525 (2016); and Anne Beyer, Daniel Cohen, Thomas Lys & Beverly Walther, The
Financial Reporting Environment: Review of the Recent Literature, 50 J. ACCT. ECON 296 (2010).

97

See, e.g., Douglas W. Diamond & Robert E. Verrecchia, Disclosure, Liquidity, and the Cost of Capital, 46 J.
FIN. 1325 (1991).

98

See, e.g., Stephen Brown & Stephen A. Hillegeist, How Disclosure Quality Affects the Level of Information
Asymmetry, 12 REV. ACCOUNT. STUD. 443 (2007) (showing how better disclosure quality reduces information
asymmetry); Nilabhra Bhattacharya, Hemang Desai, & Kumar Venkataraman, Does Earnings Quality Affect
Information Asymmetry? Evidence from Trading Costs, 30 CONT. ACCOUNT. RES. 482 (2013) (showing that
earnings quality reduces information asymmetry); Partha Sengupta, Corporate Disclosure Quality and the Cost
of Debt, 73 ACCOUNT. REV. 459 (1998) (showing that high disclosure quality reduces the cost of debt);
Christine Botosan, Disclosure Level and the Cost of Equity Capital, 72 ACC. REV. 323 (1997) (finding that

35

Financial reporting quality is in part determined by audit quality. According to some
academic studies, PCAOB oversight has led to improvements in audit quality and to increased
investor confidence in the quality of the audited financial statements. 99 However, when the
PCAOB is unable to inspect some auditors there is a lack of transparency with respect to the
audit quality provided by such firms. As a result, there may be uncertainty regarding the
reliability of the financial information of issuers audited by firms that are not inspected, which
can potentially lead to suboptimal investment decisions by investors.
In addition, academic literature provides evidence of varying types of impact of
ownership and control structures on firm value. 100 Government ownership, in particular, can be
related to both risks and benefits for investors. Evidence in the literature highlights
inefficiencies and expropriation risks as a result of government ownership or control, whereas
other studies provide evidence of easier access to financing. 101 Effects from government

disclosure quality reduces the cost of equity for firms with low analyst coverage); Mark E. Evans, Commitment
and Cost of Equity Capital: An Examination of Timely Balance Sheet Disclosure in Earnings Announcements,
33 CONT. ACCOUNT. RES. 1136 (2016) (finding that “firms which consistently disclose balance sheet detail in
relatively timely earnings announcements have lower costs of capital compared to other firms”); For a survey of
financial reporting research, see Anne Beyer, Daniel A. Cohen, Thomas Z. Lys, & Beverly R. Walther, The
Financial Reporting Environment: Review of the Recent Literature, 50 J. ACCOUNT. ECON. 296 (2010).
99

See, e.g., Daniel Aobdia, The Impact of the PCAOB Individual Engagement Inspection Process—Preliminary
Evidence, 93 ACCOUNT. REV. 53 (2018) (concluding that “both audit firms and clients care about the PCAOB
individual engagement inspection process and, in several instances, gravitate toward the level set by the Part I
Finding bar”); Mark L. DeFond & Clive S. Lennox, Do PCAOB Inspections Improve the Quality of Internal
Control Audits?, 55 J. ACCOUNT. RES. 591 (2017) (finding evidence consistent with “PCAOB inspections
improving the quality of internal control audits by prompting auditors to remediate deficiencies in their audits of
internal controls”); Brandon Gipper, Christian Leuz, & Mark Maffett, Public Oversight and Reporting
Credibility: Evidence from the PCAOB Audit Inspection Regime, 33 REV. FINANC. STUD. 4532 (concluding that
“consistent with an increase in reporting credibility after the introduction of public audit oversight, we find that
capital market responses to earnings surprises increase significantly”).

100

See, e.g., Andrei Shleifer & Robert Vishny, A Survey of Corporate Governance, 52 J. FIN. 737 (1997)
(discussing both the theory and empirical evidence on the effect of large shareholders on firm value).

101

See, e.g., Ginka Borisova, Veljko Fotak, Kateryna Holland & William Megginson, Government Ownership and
the Cost of Debt: Evidence from Government Investments in Publicly Traded Firms, 118 J. FIN. ECON. 168
(2015) (showing that during times of firm-specific or economy-wide distress, the dominant effect of state equity
ownership is a reduction in the cost of debt, consistent with an implicit debt guarantee of government
ownership); Gongmen Chen, Michael Firth & Liping Xu, Does the Type of Ownership Control Matter?

36

ownership or control on firm value may be further amplified when the regulatory environment in
the foreign jurisdiction is weak, and when there is heightened political risk. 102
The required disclosures and submissions will reduce uncertainty about characteristics
that may affect firm value and risk and therefore could facilitate investors’ capital allocation
decisions. Some of the information required to be disclosed under the amendments may be
otherwise available to investors through other sources or overlap with existing mandated
disclosures. 103 In such cases, we expect the required disclosures could nevertheless reduce search
costs for investors and potentially enhance investor protection. In addition, the submission
requirement will provide some reassurance to investors that Commission-Identified Issuers that
do not disclose any ownership or control by governmental entities (in foreign jurisdictions that
prevent PCAOB inspections) are not, in fact, owned or controlled by such entities.
The amendments will impose compliance costs on issuers that may vary based on
characteristics of their audit arrangements and ownership structure. Although these compliance
costs, in and of themselves, may not be significant for most firms, the costs may nonetheless
cause certain issuers to accelerate their response to other aspects of the HFCA Act, such as
switching audit firms or exiting the U.S. markets altogether. Those effects are likely to be much
more significant than the comparatively limited benefits and costs associated with the interim

Evidence from China’s Listed Companies, 33 J. BANK. FINANCE 171 (2009) (finding evidence that the type of
government ownership affects value and performance).
102

See, e.g., Laura Liu, Haibing Shu & John Wei, The Impacts of Political Uncertainty on Asset Prices: Evidence
from the Bo Scandal in China, 125 J. FIN. ECON. 286 (2017) (concluding that political uncertainty is a priced
risk as evidenced by stock price reactions following the 2012 Bo Xilai political scandal in China; the study
shows amplified effects on prices for state-owned enterprises and politically connected companies); Bryan
Kelly, Lubos Pastor & Pietro Veronesi, The Price of Political Uncertainty: Theory and Evidence from the
Option Market, 71 J. FIN. 2417 (2016) (finding that options whose lives span political events tend to be more
expensive, and that such protection is more valuable in a weaker economy and amid higher political
uncertainty).

103

See infra Section IV.B.1.

37

final amendments.
B. Baseline
1. Regulatory Baseline
The regulatory baseline for these amendments includes the interim final amendments
adopted on March 18, 2021, and the PCAOB Rule 6100, Board Determinations Under the
Holding Foreign Companies Accountable Act, adopted the PCAOB on September 22, 2021 and
approved by the Commission on November 4, 2021. 104
The disclosures and submissions required by the amendments will provide the
Commission, as well as market participants, with more readily accessible and comparable
information regarding a number of Commission-Identified Issuers’ characteristics, namely: (1)
the extent of ownership or control by a governmental entity in a jurisdiction where the PCAOB is
unable to inspect or investigate completely because of a position taken by an authority in that
jurisdiction, (2) the use of a registered public accounting firm in preparation of an audit report
that the PCAOB is unable to fully inspect, (3) the presence and identity of any official of the
CCP who is a member of the board of directors, and (4) the presence and specific text of any
charter of the CCP contained in the registrant’s articles of incorporation (or equivalent
organizing document). We therefore analyze the extent to which such requirements will change
existing regulatory requirements or the current practices of potentially affected registrants.
Compliance with the HFCA Act will require disclosures and submissions pertaining to
the ownership or control of a registrant by a governmental entity in the foreign jurisdiction of the
registered public accounting firm that the PCAOB is unable to inspect or investigate completely.
In practice, many registrants already include disclosures similar to the information required by

104

See supra note 10.

38

the HFCA Act in the portions of their respective periodic reports pertaining to registrant-specific
risks. 105 Others provide detailed diagrams to illustrate their ownership structure within their
descriptions of business or otherwise seek to inform readers of their VIE arrangements within the
financial statements included in periodic disclosures. 106 The levels of detail and specificity
associated with these disclosures vary, however, and the information often is not easily
comparable across filings given that similar disclosures may not occur within the same item or
section of the report. 107
One notable exception to this variation in disclosures, however, is the disclosure by
registrants of the PCAOB’s inability to conduct inspections of their respective independent audit
firms. We observe a highly similar type and pattern of disclosure regarding the PCAOB’s
inability to inspect those firms included in the majority of the potential Commission-Identified
Issuers’ Item 3 (for Form 20-F filers) and Item 1A (for Form 10-K filers) discussion of risk
factors. 108 Such disclosures are readily accessible using the keyword search functionality on the

105

For example, some registrants may provide these disclosures in response to 17 CFR 229.105 (Item 105 of
Regulation S-K) (requiring a registrant to disclose a discussion of the material factors that make an investment
in the registrant or offering speculative or risky).

106

See Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities.

107

See, e.g., Justin Hopkins, Mark H. Lang & Jianxin (Donny) Zhao, The Rise of US-Listed VIEs from China:
Balancing State Control and Access to Foreign Capital, Darden Business School (Working Paper No.
3119912), Kenan Institute of Private Enterprise Research Paper No. 19-17 (2018), available at
http://dx.doi.org/10.2139/ssrn.3119912 (finding that, Chinese firms disclose using a VIE structure in 42 percent
of reviewed year 2013 Forms 10-K, where “some firms simply mention the VIE structure in passing, while
others explicitly disclose the legal risks of the VIE, documenting which specific subsidiaries utilize the VIE and
provide pro forma balance sheets and income statements for these subsidiaries, as well as summarizing the
specific contracts including the parties and terms”). See also, Paul Gillis& Michelle R. Lowry, Son of Enron:
Investors Weigh the Risks of Chinese variable Interest Entities, 26 J. APPL. CORP. FIN. 61 (2014).

108

Staff conducted a review of annual report disclosures using a combination of Intelligize searches and a manual
review of select filings of Forms 10-K and 20-F. Highly similar language describing the potential risks
associated with the PCAOB’s inability to conduct inspections appeared across at least 65% of annual reports
filed within the same year, including reviewed periods that predate the initial introduction of the HFCA Act
legislation in 2019. As no single audit firm currently serves more than, at maximum, 20% of potential
Commission-Identified Issuers, the inclusion of standard disclosures across registrants does not appear to be

39

Commission’s EDGAR website. 109 In addition, similar identification of registrants whose
independent auditors were not fully inspected by the PCAOB due to limitations and restrictions
imposed by authorities in foreign jurisdictions has historically been available via the PCAOB’s
dedicated “Public Companies that are Audit Clients of PCAOB-Registered Firms from Non-U.S.
Jurisdictions where the PCAOB is Denied Access to Conduct Inspections” webpage. 110
Under the amendments, Commission-Identified Foreign Issuers will also be required to
disclose the presence and identity of any official of the CCP who is a member of its board of
directors in addition to the percentage of the shares of the issuer owned by governmental entities
in the foreign jurisdiction in which the issuer is incorporated or otherwise organized and whether
governmental entities in the applicable foreign jurisdiction with respect to that registered public
accounting firm have a controlling financial interest with respect to the issuer. At present, some
of this information may be elicited by Form 10-K disclosure requirements 111 or Form 20-F
disclosure requirements. 112 Because Form 10-K, Part III disclosures may be incorporated by
reference from the registrant’s definitive proxy statement if filed within 120 days of the related

attributable to the practices of any individual audit firm. See infra note 117 for a description of the sample
identification methodology.
109

Available at https://www.sec.gov/edgar/search/.

110

Available at https://pcaobus.org/oversight/international/denied-access-to-inspections.

111

See 17 CFR 229.401 (Item 401 of Regulation S-K), 17 CFR 229.403 (Item 403 of Regulation S-K), and 17 CFR
229.404 (Item 404 of Regulation S-K), required under Items 10, 12 and 13 of Form 10-K. Item 401 of
Regulation S-K requires disclosure relating to the identification of directors and a brief description of their
business experience. Item 403 of Regulation S-K requires disclosure with respect to any person or group that
beneficially owns more than five percent of any class of the registrant’s voting securities, as well as ownership
information of executive officers and directors of the registrant. Item 404 of Regulation S-K requires disclosure
of transactions between the registrant and related persons, such as officers, directors and significant
shareholders.

112

See Items 6 and 7 of Form 20-F. Item 6 of Form 20-F requires disclosure relating to the identification and share
ownership of directors and senior management. Item 7 of Form 20-F requires disclosure with respect to
beneficial owners of more than five percent of any class of the registrant’s voting securities, disclosure with
respect to related party transactions, as well as disclosure of whether the company is directly or indirectly
owned or controlled by another corporation or foreign government and the nature of that control.

40

Form 10-K fiscal year end, or alternatively filed as a Form 10-K amendment by the same 120
day deadline, such disclosures are not currently uniformly present in the annual report filings of
the potentially affected issuers. Moreover, there are currently no requirements that such
disclosures must include the political party affiliation or party posts of those responsible for
registrants’ management and oversight, including but not limited to members of the board. Nor
is there a requirement to systematically disclose the identity and ownership stake of any person
or group of persons – including government entities – who directly or indirectly acquire or have
beneficial ownership of less than five percent of a class of a Commission-Identified Issuer’s
securities.
Finally, under the amendments, Commission-Identified Foreign Issuers will be required
to state whether the articles of incorporation of the issuer (or equivalent organizing document)
contains any charter of the CCP, including the text of any such charter. While periodic reporting
requirements currently instruct registrants to include a complete copy of the articles of
incorporation and bylaws as an exhibit to the annual report, 113 there are no requirements to
identify the political or textual origins of any portion of a registrant’s articles of incorporation.
In practice, given that a registrant may simply indicate in its annual report exhibit index that such
articles are incorporated by reference, 114 few filers include the full text of such articles, bylaws,
or charters in annual report filings after initially doing so at the time of initial public offering
(“IPO”) registration. Similarly, amended or revised versions of the registrant’s articles of
incorporation and bylaws are generally not included in the annual report filing, but are
incorporated by reference as well. In these cases, locating the submission to which the

113

See Item 19, Instruction 1 of Form 20-F and 17 CFR 229.601(b)(3)(i).

114

See 17 CFR 240.12b-23(c).

41

registrant’s complete and most recent version of its articles of incorporation are attached in their
entirety requires a search and review of the registrant’s current reports (on Forms 8-K or 6-K). 115
Therefore, under current regulatory requirements and in practice, the majority of annual reports
filed by potential Commission-Identified Foreign Issuers do not include, either in part or in
complete form, the registrant’s articles of incorporation, from which the reader might assess the
presence or absence of text from the charter of the CCP.
2. Affected Parties 116
a. Registrants
Registrants subject to periodic reporting requirements under the Exchange Act will not be
affected by the amendments unless and until they are Commission-Identified Issuers.
Commission identification of such issuers is in turn contingent upon initial identification of
affected registered public accounting firms that are retained by registrants with periodic
disclosure obligations. Based upon a review of such registrants in calendar year 2020, we
identified 273 registrants for whom future identification as a Commission-Identified Issuer might
occur, based on current facts and circumstances. 117 Of these potential Commission-Identified

115

The requirement to submit a Form 6-K in such cases by registrants that use Form 20-F to file annual reports
depends upon the current reporting requirements of the relevant foreign jurisdiction. Because potential
Commission-Identified Issuers domiciled, incorporated, or organized in China are required by Chapter 5 Article
27 of the Regulations of the People’s Republic of China on Administration of Company Registration to file a
complete copy of the revised articles within 30 days of such changes, a similar requirement to promptly furnish
a Form 6-K including the complete revised articles of incorporation also applies. This document may then be
incorporated by reference in the registrant’s subsequent annual reports. Analogous requirements for registrants
using domestic forms are outlined in Form 8-K, Item 5.03.

116

As noted above, the amendments may accelerate responses to other aspects of the HFCA Act, such as switching
audit firms or exiting the U.S. markets altogether. These responses could impact parties beyond those identified
below (e.g., audit firms). For purposes of this economic analysis, we focus on those parties affected by the
interim final amendments.

117

Analysis is based on staff review of data obtained from the PCAOB (see supra note 110108), Audit Analytics,
manual review of all annual reports filed by foreign issuers using Forms 20-F, 40-F, or an amendment thereto in
calendar year 2020, and review of securities registered in calendar year 2020 by foreign issuers. This analysis

42

Issuers candidates, 18.2 percent filed annual disclosures using Form 10-K while 78.2 percent are
Form 20-F filers. No filings submitted by potential candidates were made using Forms 40-F or
N-CSR. Among filers, approximately 22 percent were incorporated in the United States while
78 percent were incorporated in foreign jurisdictions, including 4.8 percent who self-disclosed to
be state-owned enterprises. These registrants’ securities either are listed on a national exchange
(88.7 percent), OTC-listed (9.9 percent), or report no U.S. listing (1.5 percent). 118 Of the 273
Commission-Identified Issuers, five are listed in the Annex to Executive Order 14032 as issuers
that are affiliated with the Chinese military. 119 Additionally, a recent study found that 42 percent
of US-listed Chinese firms disclosed using a VIE structure in year 2013. 120
b. Investors
The amendments may impact both current investors in affected registrants as well as
potential investors that may consider investing in these registrants in the future. As mentioned

may potentially be viewed as an upper bound on the future number of registrants that may be affected by the
HFCA requirements as clients of those firms previously identified by the PCAOB.
118

Using a more conservative approach that looked only to registrants with at least one annual report filed after the
introduction of the HFCA Act, we further estimate that in calendar year 2020, 194 registrants submitted an
annual report (Form 10-K, 20-F, or an amendment) whose auditor was previously identified by the PCAOB (see
supra note 110) as a registered firm from a non-U.S. jurisdiction where necessary access to conduct oversight
was denied due to a position taken by local authorities. Based on our historical analysis of these registrants, 18
percent submitted annual reports using a domestic form, while 82 percent and zero percent submitted their
annual reports via foreign filings Form 20-F and Form 40-F, respectively. Based on the same population of
registrants, we estimate that approximately three percent of potentially affected registrants disclosed their
securities as listed on two or more foreign exchanges, approximately nine percent listed on only one foreign
exchange, while approximately 79 percent only disclosed listing on a U.S. national exchange. Of these
registrants, 13 (equal to six percent) self-identified in their 2020 disclosures as state-owned enterprises.

119

Executive Order 14032, titled “Addressing the Threat From Securities Investments That Finance Certain
Companies of the People's Republic of China,” was signed by United States President Joe Biden on June 3,
2021, and came into effect on August 2, 2021 [86 FR 30145 (June 7, 2021)]. It generally prohibits U.S. persons
from purchasing or selling securities of issuers identified as Communist Chinese Military-Industrial Companies.
The annex to the Executive order includes a list of such companies as determined by the US Treasury.

120

Justin Hopkins, Mark H. Lang & Jianxin (Donny) Zhao, The Rise of US-Listed VIEs from China: Balancing
State Control and Access to Foreign Capital, Darden Business School Working Paper No. 3119912, Kenan
Institute of Private Enterprise Research Paper No. 19-17 (2018), available at
http://dx.doi.org/10.2139/ssrn.3119912.

43

above, at least some of the information elicited by the required disclosures is likely to be
available already to investors through various existing channels, such as vendor databases or
various third-party reports, but at varying costs. As such, we expect that the required disclosures
are likely to affect mostly retail investors who directly invest or consider investing in affected
registrants since it may be more costly for these investors to obtain such information absent the
required disclosures. Institutional or other sophisticated investors may also be impacted by the
amendments; however, we expect that such impact might be limited given their resources to
obtain the required information from other sources (e.g., vendor databases), when such sources
are available.
C. Economic Effects
1. Benefits and Costs of HFCA Act Disclosure Requirements
For Commission-Identified Foreign Issuers, the amendments will require specific
disclosures to be made in these registrants’ annual reports. 121 In general, as discussed above, the
required disclosures elicit information that some academic literature has found is value-relevant
to investors. As such, we expect the required disclosures to be beneficial to investors because
they are likely to reduce search costs when the information in the required disclosure is
otherwise available through diverse sources or existing disclosures, and also potentially provide
investors with information about aspects of these registrants’ governance characteristics that
otherwise might not be available or relatively costly to obtain. We do not expect significant
compliance costs for Commission-Identified Foreign Issuers given that these registrants likely
already possess the information required by the amendment; however, registrants may incur

121

See supra Section II.B for a detailed description of the disclosure requirements mandated by Section 3 of the
HFCA Act.

44

additional compliance costs if the required information is not readily accessible to them or needs
to be formatted for the required disclosure.
a. Investors
The amendments will require disclosure that a registered public accounting firm that the
PCAOB is unable to inspect or investigate completely because of a position taken by an
authority in the foreign jurisdiction has issued an audit report for the registrant. The disclosure
will provide transparency about the inspection status of the engaged audit firm. As discussed
above, the academic literature provides evidence that the PCAOB’s oversight has led to
improvements in audit quality and financial reporting quality, for both domestic and foreign
issuers. The inability of the PCAOB to inspect the auditors of these registrants could generate
uncertainty regarding their financial reporting quality. Thus, to the extent this information is
new to investors, 122 we expect the specific required disclosure to potentially facilitate investors’
capital allocation decisions. We further expect that the presentation of such information in a
standardized form in the annual report is likely to be helpful to investors by reducing their search
costs.
The amendments will require disclosure of the percentage of the shares of the registrant
owned by a government entity in the foreign jurisdiction. As discussed above, government
ownership is information that is likely relevant to investors’ capital allocation decisions. For
example, disclosure of government ownership may allow investors to better assess potential
political risks/effects related to government ownership in the foreign jurisdiction that may
influence the value of their investment. These benefits would be limited to the extent that

122

See supra Section IV.B.1 for a description of current practice and regulatory requirements regarding disclosure
of the registrant’s auditor inspection status.

45

affected registrants already provide disclosure relevant to assessing such risks.
In addition to the disclosure of ownership through equity holdings, the amendments will
require affected registrants to disclose whether a governmental entity has a controlling financial
interest in the registrant. We expect such disclosure may benefit investors as it could provide
information about other mechanisms, besides direct equity ownership, such as control through a
pyramidal ownership structure that might allow a governmental entity to influence registrants’
operational and other decisions. This information would provide additional insight into potential
risks to investors that might arise from such control/ownership structures. 123 One commenter
agreed that such disclosure will be informative for investors. 124
The amendments also require disclosure of board members’ affiliations with the CCP and
whether the articles of incorporation of the registrant (or equivalent organizing document)
includes any charter of the CCP, including the text of any such charter. These disclosures will
enhance existing information on the composition of the board and could increase insight into its
quality and the related consequences for firm value. One study shows that the degree of a
board’s political affiliation in China is related to firm value, and this varies based on facts and
circumstances. 125 For example, political affiliation of board members may imply that their
incentives may not align with shareholders’ interests. Under different circumstances, politically-

123

See, e.g., Jesse Fried & Ehud Kamar, Alibaba: A Case Study of Synthetic Control, European Corporate
Governance Institute Working Paper Series in Law, Paper No 533/2020 (2020) (concluding that control of a
firm can be exerted not only though equity, but through a mixture of employment, contractual, and commercial
arrangements).

124

See letter from ASA.

125

See Lihong Wang, Protection or Expropriation: Politically Connected Independent Directors in China, 55 J.
BANK. FIN. 92 (2015) (using a sample of Chinese listed firms over the 2003-2012 period, the study finds that
while the presence of politically connected independent directors is related to increased firm value for private
firms, the presence of politically connected independent directors is related to lower firm value for state-owned
enterprises (“SOEs”). The study also finds an increase in related-party transactions for Chinese listed firms
with politically connected independent directors).

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connected board members may facilitate the execution of financing transactions for the
registrant. To the extent that these disclosures may benefit investors by facilitating their efforts
to evaluate characteristics of registrants that may have an impact on the value of their
investments, these specific disclosures may facilitate investors’ capital allocation decisions and
potentially increase investor protection.
In a modification to the interim final rule, the final rules will specify that the registrant
must look through a VIE or any structure that results in additional foreign entities being
consolidated in the financial statements of the registrant and provide disclosure about the
operating company in the relevant jurisdiction. Thus, any Commission-Identified Foreign Issuer
that uses a VIE or other similar corporate structure will be required to provide the required
disclosures for itself and its foreign operating entity. This change will benefit investors by
providing more accurate information regarding the true ownership structure of CommissionIdentified Foreign Issuers. One commenter suggested that a VIE structure could block
meaningful disclosure of financial and political information. 126
In another change from the interim final rule, the final amendments will include a new
Inline XBRL tagging requirement: registrants will have to tag the auditor name, jurisdiction, and
the PCAOB ID Number(s) of the audit firm(s) that appear on the audit report signed by the
registered public accounting firm in the registrant’s Form 10-K, Form 20-F, and Form 40-F.
Such tagging requirement will likely benefit investors by providing them with machine-readable
information on auditors directly from a registrant’s annual report, thus allowing them to identify
registrants with auditors from jurisdictions that do not allow PCAOB oversight. This change
will also facilitate the Commission’s accurate and efficient identification of Commission-

126

See letter from Kelly.

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Identified Issuers. Since registrants already use Inline XBRL tagging in their annual reports and
other filings with the commission, and the information on auditor name and jurisdiction is
readily available to them, we do not believe this change will result in a significant cost increase
for them.
b. Registrants
The required disclosures are likely to impose some compliance costs on CommissionIdentified Foreign Issuers. One commenter asserted that the proposed disclosures were repetitive
of disclosure that is already provided and would result in unnecessary compliance costs. 127 We
do not expect these compliance costs to be significant since these registrants likely already
possess the information required by the amendments. However, to the extent that such
information is not readily accessible or needs to be formatted to comply with the required
disclosure, registrants would incur additional costs. 128
The required disclosures may impact the cost of capital for some affected registrants. As
discussed above, empirical evidence suggests that the information elicited by the required
disclosures is, in general, related to potential risks and more broadly to firm value. 129 We discuss
the potential impact of the required disclosures on affected registrants’ cost of capital further
below, but note that the magnitude of any such impact is likely to be moderated depending on the
extent information is otherwise available to investors.
The required disclosure regarding the use of a non-inspected firm to audit the registrant’s
annual report, which will now be required in a standardized manner, may lead investors to re-

127

See letter from China Petroleum.

128

For the purpose of the Paperwork Reduction Act (“PRA”), 44 U.S.C. 3501 et seq., we estimate that affected
registrants will incur on average one burden hour to prepare and review the information needed for the HFCA
Act Section 3 disclosure requirements. See infra Section V.C.

129

See supra Section IV.A.

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evaluate potential risks related to financial reporting quality due to the inability of the PCAOB to
inspect the auditors of these registrants. Some academic literature finds that PCAOB oversight is
broadly related to improvements of audit quality, and also investor perceptions of such audit
quality. 130 As described above, many registrants already disclose the risks or decreased benefits
associated with using a non-inspected auditor. 131 Given the extent to which information
specifically required in the new disclosures overlaps with disclosures already observed in
practice, in addition to the information being available from other sources such as the PCAOB,
we expect the impact of these specific required disclosures on affected registrants’ cost of capital
to be small.
Section 3 of the HFCA Act also requires registrants to disclose information in a
standardized manner in annual reports about their ownership and control structures, including the
magnitude of direct equity ownership by a government in non-cooperating foreign jurisdictions
and the degree of control a government in the non-cooperating jurisdiction may exert on the
registrant through channels other than ownership. Providing standardized disclosure could
facilitate more efficient comparisons of government ownership and control information across
Commission-Identified Foreign Issuers and thus reduce investor search costs.
The amendments also will require registrants to disclose information about potential
additional links to the CCP. Such disclosure is likely to be informative of the registrant’s
governance, and may also lead investors to re-assess potential political risks that may not have
been previously known through existing registrants’ disclosures. For example, such links
between the registrant and the CCP may indicate increased political influence on registrants’

130

See id.

131

See supra Section IV.B.1.

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decision-making processes and consequent impacts on registrants’ value. While some, but not
all, of the information in the required disclosures may already be publicly available through
disclosures in forms other than in annual reports, the content of such disclosures may not be
standardized across registrants. We expect these specific disclosures may potentially impact
registrants’ cost of capital, particularly for registrants about which such information is not
otherwise known by the market.
2. Benefits and Costs of HFCA Act Submission Requirement
The amendments implementing the submission requirement of Section 104(i)(1)(B) of
the Sarbanes-Oxley Act (as added by Section 2 of the HFCA Act) provide that a CommissionIdentified Issuer that is not owned or controlled by a foreign governmental entity in a foreign
jurisdiction that prevents PCAOB inspections must submit documentation to the Commission
that establishes that the registrant is not so owned or controlled. As discussed above, the
amendments specify that if an affected registrant is owned or controlled by a foreign
governmental entity, it will not be required to submit such documentation. We estimate in the
baseline that a large majority of current registrants that are potential future CommissionIdentified Issuers are also foreign issuers that will be subject to the disclosures required by
Section 3 of the HFCA Act. Therefore, we expect the submission requirement to serve as a
complement to these required disclosures.
a. Investors
We anticipate that requiring Commission-Identified Issuers to provide documentation to
support a lack of foreign control will provide further reassurance to investors that the registrants’
disclosures in this regard are materially accurate and complete. In particular, because the
submission requirement generally would apply to those Commission-Identified Issuers who

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otherwise do not disclose that they are owned or controlled by a foreign governmental entity, this
requirement will provide some reassurance to investors that such control does not exist. We
believe that greater certainty about which Commission-Identified Issuers lack governmental
ownership and control may improve investors’ assessments of the risks of investing in
Commission-Identified Issuers’ securities. One commenter suggested that registrants typically
are not providing the detailed disclosures required by the HFCA Act and that current risk factor
disclosure tends to be insufficient for investors to understand the consequences of noninspection. 132 Since the submitted documentation will be publicly available, we expect the
reassurance benefit to be larger than if the submission were available only to the Commission.
Because affected registrants will have flexibility to determine the specific types of
documentation to submit to the Commission, we expect the magnitude of the reassurance benefit
to depend on the nature of information issuers submit. We generally expect this reassurance
benefit to be limited given the HFCA Act’s required Section 3 disclosure and other information
about ownership and control required by existing Commission rules.133
Because we expect the submission requirement to impose (on average) only minor
compliance costs on affected registrants and no other significant costs, we also do not generally
expect any significant negative effects on investors from this requirement, such as a reduction in
the prices of affected registrants’ securities they currently own.
b. Registrants
Commission-Identified Issuers who lack ownership or control by a governmental entity
in the foreign jurisdiction of the registered public accounting firm that the PCAOB is unable to

132

See letter from U.S. Acctg. Academics.

133

See supra Section IV.B.1 for a description of current regulatory requirements regarding disclosure of ownership
and control more generally.

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inspect or investigate completely will incur some direct compliance costs related to producing
the documentation they will be required to submit to the Commission. The magnitude of these
compliance costs will depend on how easily the affected registrants can produce documentation
to satisfy the submission requirement. The amendments do not specify particular types of
documentation that can or must be submitted to satisfy this requirement. Affected registrants
will thus have flexibility to determine how best to establish that they are not owned or controlled
by a foreign governmental entity. This should help limit compliance costs, as registrants will be
able to produce documentation that is suited to their particular circumstances. At the same time,
at least as an initial matter, uncertainty about the scope of the requirement could lead some
registrants to seek additional advice from attorneys and other advisers, which could marginally
increase compliance costs. Overall, because we expect that affected registrants will have
information readily available about their ownership structures and controlling parties, we expect
the direct compliance costs associated with this requirement will be minor. 134
3. Impact on Efficiency, Competition, and Capital Formation
As discussed a

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Ac813993eeeae7232. Public record. Not legal advice.