Adopting Release 34-93701 Federal Register Notice

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
enforcement agencies (including the
Consumer Financial Protection Bureau,
a federal functional regulator, the
Secretary of the Treasury, with respect
to 31 U.S.C. Chapter 53, Subchapter II
(Records and Reports on Monetary
Instruments and Transactions) and 12
U.S.C. Chapter 21 (Financial
Recordkeeping), a State insurance
authority, with respect to any person
domiciled in that insurance authority’s
State that is engaged in providing
insurance, and the Federal Trade
Commission), self-regulatory
organizations, or for an investigation on
a matter related to public safety;
*
*
*
*
*
§ 313.18
■

[Removed]

7. Remove § 313.18.

By direction of the Commission.
April J. Tabor,
Acting Secretary.
[FR Doc. 2021–25735 Filed 12–8–21; 8:45 am]
BILLING CODE 6750–01–P

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
Securities and Exchange
Commission.
ACTION: Final rule.
AGENCY:

We are adopting amendments
to finalize interim final rules that
revised Forms 20–F, 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

SUMMARY:

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.
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.

DATES:

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.
We are
adopting amendments to the following
rules and forms.

SUPPLEMENTARY INFORMATION:

CFR citation
(17 CFR)

Commission reference
Regulation S–T:
Rule 405 ..................................................................................................................................................................
Securities Exchange Act of 1934 (Exchange Act):1
Form 20–F ...............................................................................................................................................................
Form 40–F ...............................................................................................................................................................
Form 10–K ...............................................................................................................................................................
Exchange Act and Investment Company Act of 1940 (Investment Company Act):2
Form N–CSR ...........................................................................................................................................................

khammond on DSKJM1Z7X2PROD with RULES

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

U.S.C. 78a et seq.
U.S.C. 80a–1 et seq.

VerDate Sep<11>2014

20:19 Dec 08, 2021

Jkt 256001

3. Process for Terminating Trading
Prohibitions; Required Certification
G. Amendment to the Delegations of
Authority of the Commission
III. Procedural and Other Matters
IV. Economic Analysis
A. Introduction and Broad Economic
Considerations
B. Baseline
1. Regulatory Baseline
2. Affected Parties
C. Economic Effects
1. Benefits and Costs of HFCA Act
Disclosure Requirements
2. Benefits and Costs of HFCA Act
Submission Requirement
3. Impact on Efficiency, Competition,
and Capital Formation
V. Paperwork Reduction Act
A. Background
B. Summary of the Amendments
C. Burden and Cost Estimates Related to
the Amendments
VI. Statutory Authority

PO 00000

Frm 00051

Fmt 4700

70027

Sfmt 4700

§ 232.405.
§ 249.220f.
§ 249.240f.
§ 249.310.
§§ 249.331 and 274.128.

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 SarbanesOxley Act of 2002 (‘‘Sarbanes-Oxley
Act’’) 5 by adding Section 104(i) to the
Sarbanes-Oxley Act. Section 104(i)(2) of
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 Public Law 116–222, 134 Stat. 1063 (Dec. 18,
2020).
5 15 U.S.C. 7214 (as amended by Pub. L. 116–
222).

E:\FR\FM\09DER1.SGM

09DER1

70028

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES

the Sarbanes-Oxley Act requires the
Commission to identify each ‘‘covered
issuer’’ 6 that has retained 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
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.
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 1–02(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.’’

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

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 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
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 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.

PO 00000

Frm 00052

Fmt 4700

Sfmt 4700

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–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
19 See

letter from China Petroleum.
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.
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.
20 See

E:\FR\FM\09DER1.SGM

09DER1

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES

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 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
26 See

letter from Yum.

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

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.
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 CommissionIdentified 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
Commission-Identified Issuers should
27 See

letter from U.S. Acctg. Academics.
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’’).
28 The

PO 00000

Frm 00053

Fmt 4700

Sfmt 4700

70029

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 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 Commission-Identified
Foreign Issuer to disclose that, for the immediately
preceding annual financial statement period, a

E:\FR\FM\09DER1.SGM

Continued

09DER1

70030

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES

• 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 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
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.
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.

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

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 (‘‘nonPCAOB 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 stateowned 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
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 partystate 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.
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.

PO 00000

Frm 00054

Fmt 4700

Sfmt 4700

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 additional
disclosure guidance for VIE and dualclass 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
37 See

letter from Kelly.
letter from CII.
39 See letter from Kelly (citing Interim Final
Release, supra note 3, at 17538, n. 54).
40 See letter from U.S. Acctg. Academics.
38 See

E:\FR\FM\09DER1.SGM

09DER1

khammond on DSKJM1Z7X2PROD with RULES

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
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 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 CommissionIdentified 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
41 See
42 See

supra Section II.B.1.
letters from CII, Kelly, and Profs. Milhaupt

and Lin.

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

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 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 CommissionIdentified 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 CommissionIdentified 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
43 See

letters from U.S. Acctg. Academics and CII.
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/osd-announcement081621-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.
44 See

PO 00000

Frm 00055

Fmt 4700

Sfmt 4700

70031

issued, and the PCAOB ID Number(s) of
the audit firm(s) or branch(es) providing
the opinion(s).
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 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
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.

E:\FR\FM\09DER1.SGM

09DER1

70032

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

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.

khammond on DSKJM1Z7X2PROD with RULES

E. Determination of CommissionIdentified 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 noninspection 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 CommissionIdentified Issuers should be identified
on EDGAR. Finally, the Commission
asked how it should address any
potential errors in identification relating
to a 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
Commission-Identified 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
48 See letters from Chamber (recommending 30 or
45 days after the filing deadline for the annual
report), U.S. Acctg. Academics, and Yum.

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

registrant’s filing of its annual report.49
Some commenters recommended
publishing the list of CommissionIdentified 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 registrants.54
One commenter noted potential
discrepancies between the three primary
sources of public data that could be
used to determine CommissionIdentified 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
49 See

letter from Yum.
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.
54 See letter from Yum.
55 See letter from U.S. Acctg. Academics.
56 See supra note 49.
50 See

PO 00000

Frm 00056

Fmt 4700

Sfmt 4700

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 PCAOBIdentified 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
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 Commission 59
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
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.
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 30–1(m)) that delegates Commission authority
to the Director of the Division of Corporation
Finance to identify a registrant as a CommissionIdentified Issuer.

E:\FR\FM\09DER1.SGM

09DER1

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES

registrants will not be a CommissionIdentified Issuer until a conclusive
determination has been made. For a
period of 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 CommissionIdentified Issuer will be conclusive. If
the registrant does not contact the
Commission to dispute the provisional
identification, the determination that
the registrant is a CommissionIdentified 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 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
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 15business-day period.

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

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 SarbanesOxley 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 CommissionIdentified Issuer for three consecutive
years (‘‘initial trading prohibition’’).
Section 104(i)(3)(B) of the SarbanesOxley 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 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-PCAOB-Identified
Firm.65
In the Interim Final Release, the
Commission specifically requested
comment on any considerations it
should take into account while
63 See

infra Section II.F.
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.
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.
64 For

PO 00000

Frm 00057

Fmt 4700

Sfmt 4700

70033

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.
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 CommissionIdentified 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 CommissionIdentified 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
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.
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 CommissionIdentified 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.

E:\FR\FM\09DER1.SGM

09DER1

70034

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES

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 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
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).
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 SarbanesOxley 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).

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

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 CommissionIdentified Issuers, the number of
consecutive years that an issuer has
been identified as a CommissionIdentified 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 CommissionIdentified Issuer for three consecutive
years. Thus, issuers will have a period
of three years to retain a non-PCAOBIdentified 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 CommissionIdentified 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
80 See

supra Section II.E.
id.
82 A commenter asked for clarification of the
impact of a trading prohibition on derivative
securities. See letter from NYSE. The SarbanesOxley 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 Sarbanes-Oxley Act (emphasis
added). Accordingly, to the extent the derivative
security is issued by the Commission-Identified
Issuer subject to the trading prohibition, that
derivative security would also be subject to the
trading prohibition. For example, if a CommissionIdentified Issuer that is subject to a trading
prohibition has issued equity securities and
81 See

PO 00000

Frm 00058

Fmt 4700

Sfmt 4700

exchange and in the over-the-counter
market as 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
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 securitybased swaps are generally entered into bilaterally
between security-based swap 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 Sarbanes-Oxley 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 a.m. (Washington DC 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.

E:\FR\FM\09DER1.SGM

09DER1

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
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-thecounter market as soon as practicable
after the issuer is 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 CommissionIdentified Issuer, the public availability
of the provisional list of CommissionIdentified 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 SarbanesOxley 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 inspected to the satisfaction of the
Commission.89 Section 104(i)(3)(D) of
86 See

supra note 84.
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.
89 See Section 104(i)(3)(B) of the Sarbanes-Oxley
Act.

khammond on DSKJM1Z7X2PROD with RULES

87 We

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

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 nonPCAOB-Identified Firm with a PCAOBIdentified Firm. Thus, in order to
achieve the result that the retained nonPCAOB-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 CommissionIdentified 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 nonPCAOB-Identified Firm. We believe that
lifting the trading prohibition prior to
the Commission-Identified Issuer filing
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 PCAOBIdentified 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 nonPCAOB-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
90 See

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

Act.

PO 00000

Frm 00059

Fmt 4700

Sfmt 4700

70035

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 Sarbanes-Oxley Act, a CommissionIdentified 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-PCAOBIdentified 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 CommissionIdentified Issuers subject to a
subsequent trading 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 non-PCAOB-Identified
Firm to audit its financials before a
subsequent trading prohibition could be
terminated by the Commission.
As described above, a CommissionIdentified Issuer subject to an initial or
subsequent trading prohibition must
certify that it has or will retain a nonPCAOB-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
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.
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.

E:\FR\FM\09DER1.SGM

09DER1

70036

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

amended annual report with financial
statements that include an audit report
signed by a non-PCAOB-Identified 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-PCAOB-Identified Firm,
termination of the trading prohibition
should not be delayed.

khammond on DSKJM1Z7X2PROD with RULES

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 CommissionIdentified 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

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

certain disclosure from issuers, and the
amendments to Form 10–K, Form 20–F,
Form 40–F, and Form N–CSR 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 90day rulemaking directive in Section 2 of
the HFCA Act, the Commission found in
the 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
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.

PO 00000

Frm 00060

Fmt 4700

Sfmt 4700

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 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 wellfunctioning 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

E:\FR\FM\09DER1.SGM

09DER1

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES

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
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 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).

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

financing.101 Effects from government
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
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? 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.

PO 00000

Frm 00061

Fmt 4700

Sfmt 4700

70037

the comparatively limited benefits and
costs associated with the interim 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 CommissionIdentified 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 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
104 See

supra note 10.
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).
105 For

E:\FR\FM\09DER1.SGM

09DER1

70038

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES

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 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 PCAOBRegistered Firms from Non-U.S.
Jurisdictions where the PCAOB is
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 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/.

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

Denied Access to Conduct Inspections’’
web page.110
Under the amendments, CommissionIdentified 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 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
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.

PO 00000

Frm 00062

Fmt 4700

Sfmt 4700

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
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.
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).
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.

E:\FR\FM\09DER1.SGM

09DER1

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
2. Affected Parties 116

khammond on DSKJM1Z7X2PROD with RULES

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 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 stateowned 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 Commission116 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 110),
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 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

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

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 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.

70039

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 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
C. Economic Effects
PCAOB’s oversight has led to
1. Benefits and Costs of HFCA Act
improvements in audit quality and
Disclosure Requirements
financial reporting quality, for both
domestic and foreign issuers. The
For Commission-Identified Foreign
inability of the PCAOB to inspect the
Issuers, the amendments will require
auditors of these registrants could
specific disclosures to be made in these
registrants’ annual reports.121 In general, generate uncertainty regarding their
financial reporting quality. Thus, to the
as discussed above, the required
disclosures elicit information that some extent this information is new to
investors,122 we expect the specific
academic literature has found is valuerequired disclosure to potentially
only one foreign exchange, while approximately 79
facilitate investors’ capital allocation
percent only disclosed listing on a U.S. national
decisions. We further expect that the
exchange. Of these registrants, 13 (equal to six
presentation of such information in a
percent) self-identified in their 2020 disclosures as
standardized form in the annual report
state-owned enterprises.
119 Executive Order 14032, titled ‘‘Addressing the
is likely to be helpful to investors by
Threat From Securities Investments That Finance
reducing their search costs.
Certain Companies of the People’s Republic of
The amendments will require
China,’’ was signed by United States President Joe
disclosure
of the percentage of the
Biden on June 3, 2021, and came into effect on
shares of the registrant owned by a
August 2, 2021 [86 FR 30145, (June 7, 2021)]. It
generally prohibits U.S. persons from purchasing or
government entity in the foreign
selling securities of issuers identified as Communist jurisdiction. As discussed above,
Chinese Military-Industrial Companies. The annex
government ownership is information
to the Executive order includes a list of such
that is likely relevant to investors’
companies as determined by the US Treasury.
120 Justin Hopkins, Mark H. Lang & Jianxin
capital allocation decisions. For
(Donny) Zhao, The Rise of US-Listed VIEs from
example, disclosure of government
China: Balancing State Control and Access to
ownership may allow investors to better
Foreign Capital, Darden Business School Working
assess potential political risks/effects
Paper No. 3119912, Kenan Institute of Private
Enterprise Research Paper No. 19–17 (2018),
available at http://dx.doi.org/10.2139/ssrn.3119912.
121 See supra Section II.B for a detailed
description of the disclosure requirements
mandated by Section 3 of the HFCA Act.

PO 00000

Frm 00063

Fmt 4700

Sfmt 4700

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.

E:\FR\FM\09DER1.SGM

09DER1

70040

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

khammond on DSKJM1Z7X2PROD with RULES

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 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-connected
board members may facilitate the
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 through 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 stateowned enterprises (‘‘SOEs’’). The study also finds
an increase in related-party transactions for Chinese
listed firms with politically connected independent
directors).

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

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 CommissionIdentified 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 CommissionIdentified 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
Commission-Identified Foreign Issuers.
One commenter asserted that the
proposed disclosures were repetitive of
126 See

PO 00000

letter from Kelly.

Frm 00064

Fmt 4700

Sfmt 4700

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 reevaluate 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
127 See

letter from China Petroleum.
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.
130 See id.
131 See supra Section IV.B.1.
128 For

E:\FR\FM\09DER1.SGM

09DER1

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
by a government in non-cooperating
foreign jurisdictions and the degree of
control a government in the noncooperating 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’ 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.

khammond on DSKJM1Z7X2PROD with RULES

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 Commission-Identified
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
Commission-Identified 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.

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

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 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 non-inspection.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 inspect or investigate
132 See

letter from U.S. Acctg. Academics.
supra Section IV.B.1 for a description of
current regulatory requirements regarding
disclosure of ownership and control more generally.
133 See

PO 00000

Frm 00065

Fmt 4700

Sfmt 4700

70041

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 above, the required
disclosures may provide new or more
easily accessible information about
whether registrants have retained noninspected registered auditors and
whether such registrants are owned or
controlled by governmental entities of
the foreign jurisdictions that prevent
PCAOB inspections. To the extent this
disclosed information is new or reduces
search costs, we expect it could
potentially reduce information
asymmetries in securities markets,
thereby improving price efficiency and
helping investors achieve more efficient
portfolio allocations. Overall, we believe
that any efficiency gains will be modest
since the potential increase in
informational content and reduction in
search costs to investors is likely to be
limited given existing disclosures.
To the extent the amendments will
reduce information asymmetries,
affected registrants may experience a
change in cost of capital (either a
reduction or an increase is possible,
depending on circumstances), which
may in turn affect capital formation.
However, similar to any effects on
efficiency, we expect such capital
formation effects to be small in
aggregate. Likewise, we do not expect
134 See

E:\FR\FM\09DER1.SGM

supra note 128.

09DER1

70042

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

the amendments to significantly impact
overall competition, based on the
expected low compliance costs for
registrants and the expected limited
incremental impact on investors’
information environment. However, we
do not rule out that there could be
instances where the required
disclosures provide new information
about some registrants that could
potentially impact (either positively or
negatively) their individual competitive
situation due to investors’ reassessment
of such registrants’ risk and prospects.
V. Paperwork Reduction Act

khammond on DSKJM1Z7X2PROD with RULES

A. Background
Certain provisions of Form 10–K and
Form 20–F that will be affected by the
amendments contain ‘‘collection of
information’’ requirements within the
meaning of the PRA.135 The
Commission is submitting the final
amendments to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with the PRA.136
The titles for the collections of
information are:
• ‘‘Form 10–K’’ (OMB Control No.
3235–0063); and
• ‘‘Form 20–F’’ (OMB Control No.
3235–0288).
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
requirement unless it displays a
currently valid OMB control number.
Compliance with the information
collections is mandatory. Responses to
the information collections are not kept
confidential and there is no mandatory
retention period for the information
disclosed. The affected forms were
adopted under the Exchange Act and set
forth the disclosure requirements for
annual reports filed by registrants to
help investors make informed
investment decisions. The hours and
costs associated with preparing and
135 See supra note 128. As noted in the Economic
Analysis section, see supra Section IV, based on
recent Form 40–F filings, no Form 40–F registrants
reported having retained a registered public
accounting firm located in a foreign jurisdiction
that we believe the PCAOB may determine it is
unable to inspect or investigate completely because
of a position taken by an authority in that foreign
jurisdiction, and therefore we estimate that no Form
40–F registrants will be subject to the requirements
of the final amendments upon their adoption.
Accordingly, we are not making any revisions to the
PRA burden estimates for Form 40–F at this time.
Additionally, based on recent Form N–CEN filings,
no registered investment company reported having
retained a registered public accounting firm located
in a foreign jurisdiction, and therefore we estimate
that no registered investment companies will be
subject to the requirements of the final amendments
upon their adoption. Accordingly, we are not
making any revisions to the PRA burden estimates
for Form N–CSR at this time. See supra note 33.
136 44 U.S.C. 3507(d) and 5 CFR 1320.11.

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

filing the forms constitute reporting and
cost burdens imposed by each collection
of information.
B. Summary of the Amendments
As described in more detail above, we
are adopting final amendments to
implement the disclosure and
submission requirements of the HFCA
Act. The amendments will require
certain disclosure from foreign issuers
relating to foreign jurisdictions that
prevent PCAOB inspections and require
all applicable registrants to submit
documentation to the Commission
establishing that such a covered issuer
is not owned or controlled by a
governmental entity in that foreign
jurisdiction.
C. Burden and Cost Estimates Related to
the Amendments
We anticipate that new disclosure and
submission requirements will increase
the burdens and costs for these
registrants. We derived our burden hour
and cost estimates by estimating the
average amount of time it would take a
registrant to prepare and review the
required disclosure and submission, as
well as the average hourly rate for
outside professionals who assist with
such preparation. In addition, our
burden estimates are based on several
assumptions. For the HFCA Act Section
3 disclosure requirements we estimated
the number of affected registrants by
determining the number of foreign
issuer registrants that retained registered
public accounting firms that issued an
audit report and are located in a
jurisdiction where obstacles to PCAOB
inspections exist. For the Section
104(i)(1)(B) of the Sarbanes-Oxley Act
(as added by Section 2 of the HFCA Act)
submission requirements, we estimated
the number of affected registrants by
determining the number of registrants
that retained registered public
accounting firms that issued an audit
report and are located in a jurisdiction
where obstacles to PCAOB inspections
exist. Based on these estimates, for
purposes of the PRA, we estimate that
there will be:
• No affected Form 10–K filers for the
HFCA Act Section 3 disclosure
requirements and 55 affected filers for
the Section 104(i)(1)(B) of the SarbanesOxley Act submission requirement; and
• Two hundred and twenty affected
Form 20–F filers for the HFCA Act
Section 3 disclosure requirements and
206 affected filers for the Section
104(i)(1)(B) of the Sarbanes-Oxley Act
submission requirement.137
137 See supra Section IV.B.2.a. Based on the data
and analysis described in Section IV above, for

PO 00000

Frm 00066

Fmt 4700

Sfmt 4700

Commission-Identified Issuers will
generally have information readily
available about their audit
arrangements, ownership structures,
and controlling parties. Therefore, we
estimate that the average incremental
burden for an affected registrant to
prepare the submission would be one
hour and for an affected registrant that
is a foreign issuer to prepare the
disclosure would be one hour. These
estimates represent the average burdens
for all affected registrants, both large
and small.138 In deriving our estimates,
we recognize that the burdens will
likely vary among individual registrants
based on a number of factors, including
the size and complexity of their
operations. We believe that some
registrants will experience costs in
excess of this average and some
registrants may experience less than the
average costs.
The table below shows the total
annual compliance burden, in hours
and in costs, of the collection of
information resulting from the final
amendments.139 The burden estimates
were calculated by multiplying the
estimated number of responses by the
estimated average amount of time it
would take a registrant to prepare and
purposes of the PRA we estimate that
approximately 275 registrants may be affected by
the rules, of which we estimate 20 percent are U.S.
registrants that file on Form 10–K (55 registrants)
and 80 percent are foreign issuers that file on Form
20–F (220 registrants). For purposes of the HFCA
Act Section 3 disclosure requirement, we estimate
that only foreign filers filing on Form 20–F will be
required to provide the disclosure (220 registrants).
For purposes of the Section 104(i)(1)(B) of the
Sarbanes-Oxley Act submission requirement, we
estimate that approximately five percent of the
affected registrants are state-owned entities and will
not be required to prepare the submission. As a
result, we estimate that U.S. registrants that file on
Form 10–K (55 registrants) and foreign issuers that
file on Form 20–F but are not state-owned entities
(206) will be required to provide the submission.
138 As discussed above in Section II.C., the final
amendments also include structured data 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. However,
we believe that any associated burden resulting
from this requirement will be encompassed within
the overall PRA burden estimates for these forms
because the final amendments add only a few
discrete data points to an affected registrant’s
existing tagging obligations. Affected registrant are
currently required to tag specified information in
the relevant forms. See generally 17 CFR 232.405
(Rule 405 Regulation S–T) and 232.406 (Rule 406
of Regulation S–T), paragraphs 101 and 104 to
‘‘Instructions as to Exhibits’’ in Form 20–F,
paragraphs 15 and 17 to General Instruction B in
Form 40–F.
139 The table’s estimated number of responses
aggregates the responses for both the disclosure
requirement and the submission requirement. Some
registrants will be counted twice, once for each
response. For convenience, the estimated hour and
cost burdens in the table have been rounded to the
nearest whole number.

E:\FR\FM\09DER1.SGM

09DER1

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
review the required information. The
portion of the burden carried by outside
professionals is reflected as a cost, while
the portion of the burden carried by the
registrant internally is reflected in

hours. For purposes of the PRA, we
estimate that 75 percent of the burden
of preparation of Form 10–K and Form
20–F is carried by the registrant
internally and that 25 percent of the

70043

burden of preparation is carried by
outside professionals retained by the
registrant at an average cost of $400 per
hour.140

TABLE 1—INCREMENTAL PAPERWORK BURDEN UNDER THE FINAL AMENDMENTS
Estimated
number of
affected
responses

Incremental
burden
hours/form

Total
incremental
burden hours

75% Company

25% Professional

Professional costs

(A)

(B)

(C) = (A) * (B)

(D) = (C) * 0.75

(E) = (C) * 0.25

(F) = (E) * $400

Form 10–K (submission)
Form 20–F (submission)
Form 20–F (disclosure) ..

55
206
220

1
1
1

VI. Statutory Authority
The amendments contained in this
release are being adopted under the
authority set forth in Sections 2 and 3
of the HFCA Act, Section 104 of the
Sarbanes-Oxley Act, Sections 3, 12, 13,
15(d), and 23(a) of the Exchange Act,
and Sections 8(b), 24(a), 30(a), and 38(a)
of the Investment Company Act.
List of Subjects in 17 CFR Parts 200,
232, and 249
Reporting and recordkeeping
requirements, Securities.
Text of Rule Amendments
In accordance with the foregoing, the
Commission amends title 17, chapter II
of the Code of Federal Regulations as
follows:
PART 200—ORGANIZATION;
CONDUCT AND ETHICS; AND
INFORMATION AND REQUESTS

1. The authority citation for part 200,
subpart A, continues to read, in part, as
follows:

Authority: 15 U.S.C. 77c, 77o, 77s, 77z–
3, 77sss, 78d, 78d–1, 78d–2, 78o–4, 78w,
78ll(d), 78mm, 80a–37, 80b–11, 7202, and
7211 et seq., unless otherwise noted.

*

*

khammond on DSKJM1Z7X2PROD with RULES

*
*
*
*
■ 2. Amend § 200.30–1 by adding to
paragraph (m) to read as follows:
§ 200.30–1 Delegation of authority to
Director of Division of Corporation Finance.

*

*

*

140 We recognize that the costs of retaining
outside professionals may vary depending on the
nature of the professional services, but for purposes

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

Authority: 15 U.S.C. 77c, 77f, 77g, 77h,
77j, 77s(a), 77z-3, 77sss(a), 78c(b), 78l, 78m,
78n, 78o(d), 78w(a), 78ll, 80a–6(c), 80a–8,
80a–29, 80a–30, 80a–37, 7201 et seq.; and 18
U.S.C. 1350, unless otherwise noted.

*

*
*
*
*
■ 4. Effective January 10, 2022, through
July 1, 2023, amend § 232.405 by adding
paragraph (c)(1)(iii)(C) to read as
follows:

*
*
*
*
(c) * * *
(1) * * *
(iii) * * *
(C) Additional elements. Annual
reports on forms 10–K, 20–F or 40–F
filed for periods after December 15,
2021, must contain all applicable data
elements from the most recently
of this PRA analysis, we estimate that such costs
will be an average of $400 per hour. This estimate
is based on consultations with several registrants,

PO 00000

Frm 00067

Fmt 4700

Sfmt 4700

14
52
55

$5,600
20,800
22,000

updated relevant standard taxonomy;
and
*
*
*
*
*
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
5. The general authority citation for
part 249 and sectional authority
citations for §§ 249.220f, 249.240f,
249.310, and 249.331 continue to read
as follows:

■

Authority: 15 U.S.C. 78a et seq. and 7201
et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350;
Sec. 953(b) Pub. L. 111–203, 124 Stat. 1904;
Sec. 102(a)(3) Pub. L. 112–106, 126 Stat. 309
(2012), Sec. 107 Pub. L. 112–106, 126 Stat.
313 (2012), Sec. 72001 Pub. L. 114–94, 129
Stat. 1312 (2015), and secs. 2 and 3 Pub. L.
116–222, 134 Stat. 1063 (2020), unless
otherwise noted.
Section 249.220f is also issued under secs.
3(a), 202, 208, 302, 306(a), 401(a), 401(b), 406
and 407, Pub. L. 107–204, 116 Stat. 745, and
secs. 2 and 3, Pub. L. 116–222, 134 Stat.
1063.
Section 249.240f is also issued under secs.
3(a), 202, 208, 302, 306(a), 401(a), 406 and
407, Pub. L. 107–204, 116 Stat. 745.

*

*

*

*

*

Section 249.310 is also issued under secs.
3(a), 202, 208, 302, 406 and 407, Pub. L. 107–
204, 116 Stat. 745.

*

*

*

*

PART 232—REGULATION S–T—
GENERAL RULES AND REGULATIONS
FOR ELECTRONIC FILINGS

§ 232.405 Interactive Data File
submissions.

*

Section 200.30–1 is also issued under 15
U.S.C. 77f, 77g, 77h, 77j, 78c(b) 78l, 78m,
78n, 78o(d).

*

(m) With respect to Section
104(i)(2)(A) of the Sarbanes-Oxley Act
of 2002 (15 U.S.C. 7214 (as amended by
Pub. L. 116–222)), to identify each
‘‘covered issuer,’’ as that term is defined
in Section 104(i)(1)(A) of the SarbanesOxley Act of 2002, that has retained a
registered public accounting firm to
issue an audit report where that
registered public accounting firm has a
branch or office that is located in a
foreign jurisdiction and Public
Company Accounting Oversight Board
has determined that it is unable to
inspect or investigate completely
because of a position taken by an
authority in the foreign jurisdiction.

3. The general authority citation for
part 232 continues to read as follows:

■

*

41
155
165

■

Subpart A—Organization and Program
Management

*

55
206
220

*

*

*

*

Section 249.331 is also issued under 15
U.S.C. 78j–1, 7202, 7233, 7241, 7264, 7265;
and 18 U.S.C. 1350.

*

*

*

*

*

6. Amend Form 20–F (referenced in
§ 249.220f) by revising Item 16I.(b) to
read as follows:

■

Note: The text of Form 20–F does not, and
this amendment will not, appear in the Code
of Federal Regulations.
law firms and other persons who regularly assist
registrants in preparing and filing periodic reports
with the Commission.

E:\FR\FM\09DER1.SGM

09DER1

70044

Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations

United States Securities and Exchange
Commission
Washington, DC 20549
Form 20–F
*

*

*

*

*

*

*

*

Part II
*

*

Item 16I. Disclosure Regarding Foreign
Jurisdictions That Prevent Inspections
*

*
*
*
*
(b) A registrant that is a foreign issuer,
as defined in 17 CFR 240.3b–4,
identified by the Commission pursuant
to Section 104(i)(2)(A) of the SarbanesOxley Act of 2002 (15 U.S.C.
7214(i)(2)(A)) as having retained, for the
preparation of the audit report on its
financial statements included in the
Form 20–F, a registered public
accounting firm that has a branch or
office that is located in a foreign
jurisdiction and that the Public
Company Accounting Oversight Board
has determined it is unable to inspect or
investigate completely because of a
position taken by an authority in the
foreign jurisdiction, for each year in
which the registrant is so identified,
must provide the below disclosures.
Also, any such identified foreign issuer
that uses a variable-interest entity or any
similar structure that results in
additional foreign entities being
consolidated in the financial statements
of the registrant is required to provide
the below disclosures for itself and its
consolidated foreign operating entity or
entities. A registrant must disclose:
*
*
*
*
*
■ 7. Amend Form 40–F (referenced in
§ 249.240f) by revising paragraph
B.18(b) to read as follows:
Note: The text of Form 40–F does not, and
this amendment will not, appear in the Code
of Federal Regulations.

United States Securities and Exchange
Commission
Washington, DC 20549
Form 40–F
*

*

*

*

*

General Instructions

khammond on DSKJM1Z7X2PROD with RULES

*

*

*

*

*

B. Information To Be Filed on This Form
(18) Disclosure Regarding Foreign
Jurisdictions That Prevent Inspections
*

*
*
*
*
(b) A registrant that is a foreign issuer,
as defined in 17 CFR 240.3b–4,

VerDate Sep<11>2014

16:33 Dec 08, 2021

Jkt 256001

identified by the Commission pursuant
to Section 104(i)(2)(A) of the SarbanesOxley Act of 2002 (15 U.S.C.
7214(i)(2)(A)) as having retained, for the
preparation of the audit report on its
financial statements included in the
Form 40–F, a registered public
accounting firm that has a branch or
office that is located in a foreign
jurisdiction and that the Public
Company Accounting Oversight Board
has determined it is unable to inspect or
investigate completely because of a
position taken by an authority in the
foreign jurisdiction, for each year in
which the registrant is so identified,
must provide the below disclosures.
Also, any such identified foreign issuer
that uses a variable-interest entity or any
similar structure that results in
additional foreign entities being
consolidated in the financial statements
of the registrant is required to provide
the below disclosures for itself and its
consolidated foreign operating entity or
entities. A registrant must disclose:
*
*
*
*
*
■ 8. Amend Form 10–K (referenced in
§ 249.310) by revising Item 9C(b) to Part
II to read as follows:
Note: The text of Form 10–K does not, and
this amendment will not, appear in the Code
of Federal Regulations.

United States Securities and Exchange
Commission
Washington, DC 20549
Form 10–K
*

*

*

*

*

*

*

*

Part II
*

*

Item 9C. Disclosure Regarding Foreign
Jurisdictions that Prevent Inspections
(b) A registrant that is a foreign issuer,
as defined in 17 CFR 240.3b–4,
identified by the Commission pursuant
to Section 104(i)(2)(A) of the SarbanesOxley Act of 2002 (15 U.S.C.
7214(i)(2)(A)) as having retained, for the
preparation of the audit report on its
financial statements included in the
Form 10–K, a registered public
accounting firm that has a branch or
office that is located in a foreign
jurisdiction and that the Public
Company Accounting Oversight Board
has determined it is unable to inspect or
investigate completely because of a
position taken by an authority in the
foreign jurisdiction, for each year in
which the registrant is so identified,
must provide the below disclosures.

PO 00000

Frm 00068

Fmt 4700

Sfmt 4700

Also, any such identified foreign issuer
that uses a variable-interest entity or any
similar structure that results in
additional foreign entities being
consolidated in the financial statements
of the registrant is required to provide
the below disclosures for itself and its
consolidated foreign operating entity or
entities. A registrant must disclose:
*
*
*
*
*
9. Amend Form N–CSR (referenced in
§§ 249.331 and 274.128) by revising
paragraph (j) to Item 4 to read as
follows:

■

Note: The text of Form N–CSR does not,
and this amendment will not, appear in the
Code of Federal Regulations.

United States Securities And Exchange
Commission
Washington, DC 20549
Form N–CSR
*

*

*

*

*

Item 4. Principal Accountant Fees and
Services
*

*

*

*

*

(j) A registrant that is a foreign issuer,
as defined in 17 CFR 240.3b–4,
identified by the Commission pursuant
to Section 104(i)(2)(A) of the SarbanesOxley Act of 2002 (15 U.S.C.
7214(i)(2)(A)), as having retained, for
the preparation of the audit report on its
financial statements included in the
Form N–CSR, a registered public
accounting firm that has a branch or
office that is located in a foreign
jurisdiction and that the Public
Company Accounting Oversight Board
has determined it is unable to inspect or
investigate completely because of a
position taken by an authority in the
foreign jurisdiction, for each year in
which the registrant is so identified,
must provide the below disclosures.
Also, any such identified foreign issuer
that uses a variable-interest entity or any
similar structure that results in
additional foreign entities being
consolidated in the financial statements
of the registrant is required to provide
the below disclosures for itself and its
consolidated foreign operating entity or
entities. A registrant must disclose:
*
*
*
*
*
By the Commission.
Dated: December 2, 2021.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021–26528 Filed 12–8–21; 8:45 am]
BILLING CODE 8011–01–P

E:\FR\FM\09DER1.SGM

09DER1