The SEC’s Office of Investor Education and Advocacy, along with the Office of International Affairs, the Office of the Chief Accountant, the Division of Corporation Finance, and the Division of Trading and Markets, is issuing this Investor Bulletin to highlight for investors of affected companies the consequences under the HFCAA.
Under federal securities laws, the financial statements of public companies must be audited by a registered public accounting firm. In turn, the Public Company Accounting Oversight Board (PCAOB) is charged with regularly inspecting and investigating these auditors. The PCAOB has had difficulty inspecting and investigating auditors in certain foreign jurisdictions because of positions taken by a foreign authority, such as a governmental or regulatory agency. Recognizing these ongoing obstacles, Congress enacted the Holding Foreign Companies Accountable Act, or HFCAA.
The HFCAA requires the SEC to identify, every year, any public companies that file annual reports, such as on Forms 10-K and 20-F, with an auditor that the PCAOB has determined it is unable to inspect or investigate completely because of positions taken by a foreign authority. As a result, these companies, designated as Commission-identified issuers, must provide certain disclosures when they have been identified. After three consecutive years of being identified, trading in the securities of that company in the United States will be prohibited.
How do I know what companies are affected?
The SEC uses the PCAOB’s determination of auditors it is unable to inspect or investigate completely, along with information in a company’s annual reports, to determine Commission-identified issuers. The SEC’s role is solely to identify issuers that have used such PCAOB-identified public accounting firms to audit their financial statements. The SEC staff maintains a list of Commission-identified issuers and updates it on a rolling basis. You can subscribe to updates by providing your email address. The list also notes when the company was first identified.
Investors are strongly encouraged to consult the SEC’s list to understand which companies are affected and how many consecutive years an issuer has been identified. There are significant risks if you invest in a Commission-identified issuer, including possible illiquidity and significant loss of value in any shares owned.
What happens to my shares if there is a trading prohibition?
After a company has been a Commission-identified issuer for three consecutive years, the SEC will issue an order prohibiting the trading of the company’s securities on any national securities exchange or in the over-the-counter market in the United States. Trading in the company’s securities will cease once the trading prohibition in the order becomes effective. Investors holding these securities will have severely limited opportunities to sell the securities, potentially affecting the value of the securities significantly.
Trading can only resume when the company has filed financial statements with an audit report by an auditor that the PCAOB is able to inspect and investigate completely, has certified that it has retained such an auditor, and the SEC has issued an order ending the trading prohibition.
Any company that has a prior trading prohibition under the HFCAA will have to continue to use an auditor that the PCAOB is able to inspect and investigate completely going forward or risk a minimum five-year trading prohibition for any subsequent identification under the HFCAA.
In addition to the trading prohibition, the company’s securities may be subject to delisting due to the rules of the national securities exchange where securities are listed. Delisting rules differ between each exchange and the rules are available for review on each exchange’s website.
What must an affected company disclose?
A Commission-identified issuer must file on EDGAR documentation that establishes it is not owned or controlled by a foreign governmental entity. Additionally, certain Commission-identified issuers that are also foreign issuers will have to provide additional disclosure in their annual reports detailing any foreign governmental ownership or control, among other things.
What should I do if I own securities of an affected company?
You should understand the risks of holding the securities of a Commission-identified issuer. First, the ability to inspect and investigate auditors is important in maintaining the integrity of disclosures by public companies. As a result, when investing in a Commission-identified issuer, you may be missing this key component of regulatory oversight for your investment.
You should also be aware that the securities of a Commission-identified issuer will be subject to a trading prohibition in the United States if the company is so identified for three consecutive years. This could result in the securities becoming illiquid and potentially losing value significantly.
Investors who hold securities of Commission-identified issuers are encouraged to seek additional advice regarding their alternatives.
For additional investor education information, see the SEC’s website for individual investors, Investor.gov.