A Commission-Identified Issuer is a registrant identified by the SEC 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 (PCAOB-Identified Firm). The SEC will identify such issuers promptly after the filing of their annual reports by evaluating whether the annual report contains an audit report signed by a PCAOB-Identified Firm.
The SEC will “provisionally identify” such issuer as a Commission-Identified Issuer on a rolling basis on the SEC’s website at www.sec.gov/HFCAA, which will clearly delineate between provisional identifications and “conclusive identifications,” and registrants will not be Commission-Identified Issuers until a conclusive determination has been made. Provisionally identified issuers will have 15 business days to email the SEC to dispute such identification with supporting evidence, after which the identification will become conclusive.
Registrants will be responsible for monitoring the list on their own, as the SEC will NOT be contacting registrants individually to notify them that they have been deemed a Commission-Identified Issuer.
Submission of Documentation Regarding Ownership
The final amendments require a Commission-Identified Issuer to submit documentation to the SEC through the EDGAR database on or before its annual report due date that establishes that it is NOT “owned” or “controlled” by a governmental entity in its PCAOB-Identified Firm’s foreign jurisdiction.
The SEC declined to provide an exclusive or nonexclusive list of what documentation may demonstrate that a Commission-Identified Issuer is not owned or controlled by the relevant governmental entity, noting that a Commission-Identified Issuer should instead determine what documentation meets the requirement for that particular issuer and that this would limit compliance costs and could result in more relevant information being provided to investors.
The SEC is of the view that although the terms “owned or controlled,” “owned,” and “controlling financial interest” are not defined in the HFCA Act, they should be understood to have the same meaning as the term “control” used in the Exchange Act and the Exchange Act rules.
Commission-Identified Issuers that are owned or controlled by a foreign governmental entity will not be required to submit documentation to the SEC.
A Commission-Identified Foreign Issuer is required to provide the following additional disclosures in its annual report for the year that the SEC so identifies the issuer:
- that, during the period covered by the form, the PCAOB-Identified Firm that has prepared an audit report for the issuer
- 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 where that registered public accounting firm is located have a controlling financial interest in 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
- 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
The SEC has amended Form 10-K, Form 20-F, Form 40-F, and Form N-CSR to reflect the disclosure requirements under the HFCA Act.
In addition, the SEC does not want a registrant to avoid the HFCA Act’s requirements by using a variable interest entity (VIE) structure or similar structures. Thus, the SEC has modified the interim final amendments to make clear 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 both itself and its consolidated foreign operating entities.
When to Comply With the Submission of Documentation and Disclosure Requirements
The SEC clarified that if an issuer is identified as a Commission-Identified Issuer based on its annual report filing made in 2022 for the fiscal year ended December 31, 2021, such issuer will be required to comply with the submission and, if applicable, disclosure requirements in its annual report filing covering the fiscal year ended December 31, 2022, that the issuer is required to file in early 2023. Absent any further guidance from the SEC, we expect issuers will need to provide the submission on EDGAR concurrently with the filing in early 2023 of its Form 20-F, Form 40-F, or Form 10-K for the fiscal year ended December 31, 2022. The SEC indicated that a registrant could submit the documentation with its annual report, on Form 8-K or Form 6-K, or using another appropriate method.
The final amendments have established the process implementing the trading prohibition under the HFCA Act. No further rulemaking is expected for this to be effective.
The SEC will impose an initial trading prohibition on a registrant as soon as practicable after it is conclusively identified as a Commission-Identified Issuer for three consecutive years. The prohibition will apply to trading on a U.S. securities exchange and in the over-the-counter market. The earliest trading prohibition would apply to an affected issuer in 2024, after the filing of its annual report for the year ended December 31, 2023. If the SEC ends the initial trading prohibition and, thereafter, the registrant is again determined to be a Commission-Identified Issuer, the SEC will impose a subsequent trading prohibition on the registrant for a minimum of five years. In both instances, the SEC’s order will be effective on the fourth business day after it is published.
To end an initial or subsequent trading prohibition, a Commission-Identified Issuer must certify that it has retained or will retain a registered public accounting firm that the PCAOB has inspected to the satisfaction of the SEC (non-PCAOB-Identified Firm). The certification must be submitted at the same time as, or after, the Commission-Identified Issuer files an annual or amended annual report on the consolidated financial statements that include an audit report signed by such non-PCAOB-Identified Firm. 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 SEC publishes the order.
The finalized rules will allow investors to easily identify registrants whose auditing firms are located in a foreign jurisdiction that the PCAOB cannot completely inspect. Moreover, foreign issuers will be required to disclose the level of foreign government ownership in those entities. The new rules also provide clarity on the timing of the submission and disclosure requirements and the trading prohibitions.