The House of Representatives on July 14, 2022, agreed to a series of amendments to its fiscal 2023 defense authorization bill that include imposing new filing requirements on Chinese companies raising money through exempt offerings, setting out open data standards across financial regulators, and deterring Russian officials from participation in international financial bodies.
Before passing the National Defense Authorization Act (NDAA) by a vote of 329-101, the House also agreed to amendments that include expanding a cap on a fund used for the SEC’s whistleblower award program, mandating new corporate board diversity disclosures, and codifying insider trading prohibitions.
Under an amendment from Rep. Brad Sherman, a California Democrat, China-based issuers, including hedge funds and private equity funds, would be subject to the new filing requirements when using the exemptions from registration in Rule 506(b) in Regulation D under the Securities Act of 1933, as well as Rule 144A and Regulation S, to raise either $25 million or more in a single issuance or $50 million or more over a year period.
Sherman’s amendment, which does not dictate whether the information would be publicly disclosed or kept confidential, would require those companies to file with the commission information on the identity and place of incorporation of the issuer; the total amount and net proceeds; the principal beneficial owners; and the intended use of proceeds, including each country and industry in which the issuer plans to invest the proceeds.
The language of the NDAA amendment is similar – though more narrowly targeted – to an amendment Sherman included in the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength (America COMPETES) Act of 2022, which passed by the House in February and is now the subject of negotiations with the Senate.
Sherman’s defense bill amendment comes amid broader tensions over the presence of Chinese companies in U.S. capital markets, with the clock running down on an upcoming deadline under the 2020 Holding Foreign Companies Accountable (HFCA) Act that will ban U.S. trading in companies whose audits cannot be inspected by the PCAOB for three consecutive years, along with mandating new disclosures around foreign government control. Today, the Chinese government refuses to allow inspections of audits of U.S.-listed companies from China and Hong Kong, which has resulted in widespread ongoing violations of the Sarbanes-Oxley Act of 2002.
The COMPETES Act contains a Sherman-authored provision shortening that time-line to two non-inspection years instead of three.
Sherman, during a July 12 virtual fireside chat with the Center for Audit Quality (CAQ), said he expects China to “drag their feet ‘til a little after the last minute,” and noted the COMPETES Act acceleration provision. Ultimately, he expected China to pull some of their companies off the US exchanges that they regard as strategic and leave others on.
But whatever companies they pull, he said “Americans could still invest if you’re willing to invest on the Hong Kong exchange, the Shanghai exchange, but at least you know, if you’re deliberately going around the investor protection system in the United States, buyer beware.”
Also included in NDAA is the language of the Financial Transparency Act of 2022, which would direct the SEC and other financial regulators to implement new open data standards. The amendment was introduced by Reps. Carolyn Maloney, a New York Democrat, and Patrick McHenry of North Carolina, the ranking Republican on the House Financial Services Committee.
For the SEC, the measure would create a new data transparency mandate on top of what the commission already does through its existing Electronic Data Gathering, Analysis, and Retrieval (EDGAR) filing system and eXtensible Business Reporting Language (XBRL) machine-readable data format requirements. The measure sets out data standards for filings by investment advisers, funds, nationally recognized statistical rating organizations (NRSROs), asset-backed securities, and public companies, as well as registration statements, proxy materials, and security-based swap filings.
The SEC would be allowed under the bill to scale data reporting requirements for smaller companies. Also under the bill, the SEC would be required to make available all public information published under the Dodd-Frank Act and securities laws as an “open-government data asset,” that is “freely available for download in bulk and rendered in a human-readable format and accessible via application programming interface where appropriate.’’PL111-203
“The Financial Transparency Act will finally bring financial reporting and transparency into the 21st Century – making information more easily accessible to both regulators and the public,” Maloney said in a statement.
The NDAA also includes some measures responding to Russia’s invasion of Ukraine, including the Isolate Russian Government Officials Act of 2022, sponsored by Rep. Ann Wagner, a Missouri Republican.
Wagner’s amendment sets out that it is the policy of the United States to “exclude government officials of the Russian Federation, to the maximum extend practicable, from participation in meetings, proceedings, and other activities” of Financial Stability Board (FSB), International Organization of Securities Commissions (IOSCO), and other international financial bodies. The bill instructs the SEC, Secretary of the Treasury, and Board of Governors of the Federal Reserve to take all necessary steps to advance that policy, which would run for five years following enactment, or 30 days after the president deems that Russia “has ceased its destabilizing activities with respect to the sovereignty and territorial integrity of Ukraine.”
Also passed as amendments to the NDAA were:
- A measure increasing a cap related to the Investor Protection Fund the commission uses for whistleblower payouts under the Dodd-Frank Act from $300 million to $600 million. The program rewards whistleblowers whose information leads to SEC enforcement actions where monetary penalties top $1 million, with awards between 10 and 30 percent of those monetary sanctions, depending on several factors such as the significance of the information provided and the ‘programmatic interest’ of the commission in deterring other securities law violations.
- The Promoting Opportunities for Non-Traditional Capital Formation Act, which would expand the work of the SEC’s Advocate for Small Business Capital Formation toward helping underrepresented small businesses raise capital. The amendment would direct the advocate to “provide educational resources and host events to raise awareness of capital raising options” for underrepresented small businesses, including women-owned and minority-owned businesses, as well as rural businesses. The amendment also directs the advocate to meet with representatives of state securities commissions at least once a year “to discuss opportunities for collaboration and coordination with respect to efforts to assist small businesses and small business investors.”
- The Improving Corporate Governance Through Diversity Act, which would require public companies to disclose, in proxy statements and any information statement relating to the election of directors, data based on “voluntary self-identification” on the racial, ethnic, and gender, and sexual orientation composition of the board of directors, board nominees, and executive officers, among other information, including veteran status. The amendment would also establish a Diversity Advisory Group at the commission.
- The Insider Trading Prohibition Act, which would bar trading by a person based on material non-public information if that person is aware, or recklessly disregards, that the material has been wrongfully obtained and that transactions would constitute wrongful trading. Those in possession of material nonpublic information would also be barred from wrongfully passing along that information to be used for insider trading.
- The Empowering States to Protect Seniors from Bad Actors Act, which would establish a senior investor protection grant program at the SEC. The bill addresses Dodd-Frank Section 989A, which directed the Consumer Financial Protection Bureau (CFPB) to establish a grant program that would provide financial support to states to protect seniors from financial fraud. But uncertainty around the CFPB’s funding authority has sidelined the program for more than a decade. The amendment would shift oversight of the program to a newly established SEC interdivisional task force and give the commission authority to dole out $10 million per year in grants to state insurance and securities regulators through fiscal 2028.
- The Senior Security Act, which would set up a Senior Investor Task Force at the commission made up of staff from the Division of Enforcement, the Division of Examinations, and the Office of Investor Education and Advocacy.
- An amendment based off the Reveal Risky Business in Russia Act, which would require public companies to disclose business ties to Russia.
Additional reporting by Soyoung Ho,
This story was updated to include additional amendments passed in the NDAA.
This article originally appeared in the July 15, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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