SEC Chair Gary Gensler on September 14, 2021, testified in support of a stalled Senate bill that would speed up a congressionally-imposed delisting deadline for companies whose audits the PCAOB is unable to inspect. S. 2184, the Accelerating Holding Foreign Companies Accountable Act, seeks to ratchet up pressure on U.S.-traded Chinese companies already facing the prospect of delisting.
The measure, introduced by Sen. John Kennedy, a Louisiana Republican, passed the Senate in June. But Kennedy, during a Senate Banking Committee hearing, acknowledged that “we’re having a little trouble getting the House to take it up.”
S. 2184 builds on the Holding Foreign Companies Accountable Act (HFCA), legislation signed into law late last year that threatens to delist U.S.-traded Chinese issuers after three consecutive non-inspection years. The HFCA, which Gensler also supports, would carry out what had long been considered a “nuclear option” in addressing the Chinese government’s refusal to grant U.S. regulators access to audit work papers for companies traded on U.S. exchanges, resulting in ongoing Sarbanes-Oxley violations for those companies.
Both the SEC and PCAOB have begun implementation of the law, with the latter in May issuing a proposal in PCAOB Release No. 2021-001, Proposed Rule Governing Board Determinations Under the Holding Foreign Companies Accountable Act. The board is proposing to add new Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act, which would establish a framework for the board to determine it is unable to inspect a public accounting firm in a foreign jurisdiction due to a position taken by that country’s government. (See PCAOB Seeks Comment on Proposed Framework to Determine Audit Firms it Cannot Fully Inspect or Investigate in the May 14, 2021, edition of Accounting & Compliance Alert.
In addition to the delisting threat, the HFCA Act also requires the companies to establish they are not owned or controlled by a foreign government, among other disclosure requirements. The SEC in late March issued interim final rules and request for comment in Release No. 34-91364, Holding Foreign Companies Accountable Act Disclosure that address the disclosure portions of the law. (See SEC Starts to Implement Rules to Address Chinese Company Audit Inspections in the March 25, 2021, edition of ACA.)
The House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets is slated later this month to hold a hearing on the risks that Chinese investments pose to retail investors. (See House Panel Plans Hearing on Retail Investor Risk Posed by Chinese Companies in the September 2, 2021, edition of ACA.)