[Federal Register Volume 86, Number 234 (Thursday, December 9, 2021)]
[Rules and Regulations]
[Pages 70027-70044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-26528]


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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

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: 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 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.

DATES: The amendments are effective on January 10, 2022, except for the 
addition of Sec.  232.405(c)(1)(iii)(C), which is effective from 
January 10, 2022, until July 1, 2023.

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.

SUPPLEMENTARY INFORMATION: We are adopting amendments to the following 
rules and forms.

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                    Commission reference                                    CFR citation (17 CFR)
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Regulation S-T:
    Rule 405...............................................  Sec.   232.405.
Securities Exchange Act of 1934 (Exchange Act):\1\
    Form 20-F..............................................  Sec.   249.220f.
    Form 40-F..............................................  Sec.   249.240f.
    Form 10-K..............................................  Sec.   249.310.
Exchange Act and Investment Company Act of 1940 (Investment
 Company Act):\2\
    Form N-CSR.............................................  Sec.  Sec.   249.331 and 274.128.
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Table of Contents
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    \1\ 15 U.S.C. 78a et seq.
    \2\ 15 U.S.C. 80a-1 et seq.
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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
     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

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 Sarbanes-Oxley Act of 2002 
(``Sarbanes-Oxley Act'') \5\ by adding Section 104(i) to the Sarbanes-
Oxley Act. Section 104(i)(2) of

[[Page 70028]]

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:
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    \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).
    \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.
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     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\
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    \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.''
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    Once identified, Section 104(i)(2)(B) of the Sarbanes-Oxley Act 
requires these 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'').
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    \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 ``over-the-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.
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    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\
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    \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.
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    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.
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    \19\ See letter from China Petroleum.
    \20\ See 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.
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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

[[Page 70029]]

before the due date of the relevant annual report form.
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    \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.
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    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.
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    \26\ See letter from Yum.
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    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 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.
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    \27\ See letter from U.S. Acctg. Academics.
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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\
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    \28\ The 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'').
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    Additionally, the final amendments continue to permit Commission-
Identified 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 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\
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    \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.
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     That, during the period covered by the form, the PCAOB-
Identified Firm that has prepared an audit report for the issuer; \31\
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    \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 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.

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[[Page 70030]]

     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.
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    \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.
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    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 
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 (``non-PCAOB 
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\
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    \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.
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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 state-owned 
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.
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    \35\ See letter from U.S. Acctg. Academics.
    \36\ See letter from Profs. Milhaupt and Lin.
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    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 party-state 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.
    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 dual-class stock structures for investors to more 
fully understand the ownership or control of those registrants subject 
to the HFCA Act.
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    \37\ See letter from Kelly.
    \38\ See letter from CII.
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    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\
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    \39\ See letter from Kelly (citing Interim Final Release, supra 
note 3, at 17538, n. 54).
    \40\ See letter from U.S. Acctg. Academics.
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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

[[Page 70031]]

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\
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    \41\ See supra Section II.B.1.
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    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 Commission-Identified 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.
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    \42\ See letters from CII, Kelly, and Profs. Milhaupt and Lin.
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    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 Commission-Identified 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 
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 
Commission-Identified 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\
---------------------------------------------------------------------------

    \43\ See letters from U.S. Acctg. Academics and CII.
    \44\ See letter from U.S. Acctg. Academics.
---------------------------------------------------------------------------

    Consistent with these commenters' suggestions, the final amendments 
include a new tagging requirement to facilitate the Commission's 
accurate and efficient identification of Commission-Identified 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 issued, and the PCAOB ID Number(s) of the audit firm(s) or 
branch(es) providing the opinion(s).
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    \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-announcement-081621-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.
---------------------------------------------------------------------------

    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\
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    \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.
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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 non-inspection 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.
---------------------------------------------------------------------------

    \47\ See letters from ASA, Chamber, and NYSE.
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    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

[[Page 70032]]

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.

E. Determination of Commission-Identified 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 non-inspection 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 
Commission-Identified 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 registrant's filing of its annual report.\49\ Some 
commenters recommended publishing the list of Commission-Identified 
Issuers on the Commission's website,\50\ while one commenter 
recommended providing the information on EDGAR for efficient and rapid 
identification.\51\
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    \48\ See letters from Chamber (recommending 30 or 45 days after 
the filing deadline for the annual report), U.S. Acctg. Academics, 
and Yum.
    \49\ See letter from Yum.
    \50\ See letters from ASA, Chamber, and U.S. Acctg. Academics.
    \51\ See letter from CII.
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    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\
---------------------------------------------------------------------------

    \52\ See letter from Yum.
    \53\ See letters from Chamber and Yum.
    \54\ See letter from Yum.
---------------------------------------------------------------------------

    One commenter noted potential discrepancies between the three 
primary sources of public data that could be used to determine 
Commission-Identified 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.''
---------------------------------------------------------------------------

    \55\ See letter from U.S. Acctg. Academics.
---------------------------------------------------------------------------

    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 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 PCAOB-Identified Firm.\57\
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    \56\ See supra note 49.
    \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.
---------------------------------------------------------------------------

    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

[[Page 70033]]

registrants will not be a Commission-Identified 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 Commission-Identified Issuer 
will be conclusive. If the registrant does not contact the Commission 
to dispute the provisional identification, the determination that the 
registrant is a Commission-Identified Issuer will be conclusive 15 
business days after the provisional identification.\62\
---------------------------------------------------------------------------

    \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 Commission-Identified Issuer.
    \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 15-business-day period.
---------------------------------------------------------------------------

    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 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\
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    \63\ See infra Section II.F.
---------------------------------------------------------------------------

F. Process for Trading Prohibition

1. HFCA Act Trading Prohibitions
    Section 104(i)(3) of the Sarbanes-Oxley 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 Commission-Identified Issuer for three consecutive years 
(``initial trading prohibition''). Section 104(i)(3)(B) of the 
Sarbanes-Oxley 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\
---------------------------------------------------------------------------

    \64\ For 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.
---------------------------------------------------------------------------

    In the Interim Final Release, the Commission specifically requested 
comment on any considerations it should take into account while 
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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \69\ See letters from ICI and NYSE.
    \70\ See letter from ICI.
---------------------------------------------------------------------------

    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 Commission-Identified 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 Commission-Identified 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

[[Page 70034]]

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\
---------------------------------------------------------------------------

    \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 Commission-Identified 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.
    \73\ See letters from Blank Rome, China Southern, Chinese Legal 
Academics, Kelly, and Yum.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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 Sarbanes-Oxley 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).
---------------------------------------------------------------------------

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

    \80\ See supra Section II.E.
    \81\ See id.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \82\ A commenter asked for clarification of the impact of a 
trading prohibition on derivative securities. See letter from NYSE. 
The Sarbanes-Oxley 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 
Commission-Identified Issuer that is subject to a trading 
prohibition has issued equity securities and 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 security-based 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.
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    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\
---------------------------------------------------------------------------

    \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.

---------------------------------------------------------------------------

[[Page 70035]]

    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-the-counter 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 Commission-Identified Issuer, the public 
availability of the provisional list of Commission-Identified 
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\
---------------------------------------------------------------------------

    \86\ See supra note 84.
    \87\ We 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.
---------------------------------------------------------------------------

3. Process for Terminating Trading Prohibitions; Required Certification
    Section 104(i)(3)(B) of the Sarbanes-Oxley 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 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\
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    \89\ See Section 104(i)(3)(B) of the Sarbanes-Oxley Act.
    \90\ See Section 104(i)(3)(D) of the Sarbanes-Oxley Act.
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    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 non-PCAOB-Identified Firm with a PCAOB-
Identified Firm. Thus, in order to achieve the result that the retained 
non-PCAOB-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 Commission-Identified 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 non-PCAOB-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 PCAOB-Identified 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 non-PCAOB-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 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 Commission-Identified 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-PCAOB-Identified 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 
Commission-Identified 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.
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    \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.
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    As described above, a Commission-Identified Issuer subject to an 
initial or subsequent trading prohibition must certify that it has or 
will retain a non-PCAOB-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

[[Page 70036]]

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.
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    \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.
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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 Commission-Identified 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 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 90-day 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.
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    \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).
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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 analyze these effects against a baseline that consists of the 
current regulatory framework and current market practices.
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    \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.
---------------------------------------------------------------------------

    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 well-functioning 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\
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    \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 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).

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[[Page 70037]]

    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.
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    \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'').
---------------------------------------------------------------------------

    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 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\
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    \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).
    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \103\ See infra Section IV.B.1.
---------------------------------------------------------------------------

    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 
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\
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    \104\ See supra note 10.
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    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 
Commission-Identified 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

[[Page 70038]]

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\
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    \105\ For 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).
    \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).
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    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 PCAOB-Registered Firms from Non-U.S. Jurisdictions where the 
PCAOB is Denied Access to Conduct Inspections'' web page.\110\
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    \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/.
    \110\ Available at https://pcaobus.org/oversight/international/denied-access-to-inspections.
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    Under the amendments, Commission-Identified 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 class of a Commission-Identified Issuer's securities.
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    \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.
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    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.
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    \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.

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[[Page 70039]]

2. Affected Parties 116
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    \116\ 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.
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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 
state-owned 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 Commission-
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\
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    \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 only one foreign exchange, while approximately 79 percent 
only disclosed listing on a U.S. national exchange. Of these 
registrants, 13 (equal to six percent) self-identified in their 2020 
disclosures as state-owned enterprises.
    \119\ Executive Order 14032, titled ``Addressing the Threat From 
Securities Investments That Finance Certain Companies of the 
People's Republic of China,'' was signed by United States President 
Joe Biden on June 3, 2021, and came into effect on August 2, 2021 
[86 FR 30145, (June 7, 2021)]. It generally prohibits U.S. persons 
from purchasing or selling securities of issuers identified as 
Communist Chinese Military-Industrial Companies. The annex to the 
Executive order includes a list of such companies as determined by 
the US Treasury.
    \120\ 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.
---------------------------------------------------------------------------

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.

C. Economic Effects

1. Benefits and Costs of HFCA Act Disclosure Requirements
    For Commission-Identified Foreign Issuers, the amendments will 
require specific disclosures to be made in these registrants' annual 
reports.\121\ In general, as discussed above, the required disclosures 
elicit information that some academic literature has found is value-
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.
---------------------------------------------------------------------------

    \121\ See supra Section II.B for a detailed description of the 
disclosure requirements mandated by Section 3 of the HFCA Act.
---------------------------------------------------------------------------

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 PCAOB's oversight has led to improvements in 
audit quality and financial reporting quality, for both domestic and 
foreign issuers. The inability of the PCAOB to inspect the auditors of 
these registrants could generate uncertainty regarding their financial 
reporting quality. Thus, to the extent this information is new to 
investors,\122\ we expect the specific required disclosure to 
potentially facilitate investors' capital allocation decisions. We 
further expect that the presentation of such information in a 
standardized form in the annual report is likely to be helpful to 
investors by reducing their search costs.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    The amendments will require disclosure of the percentage of the 
shares of the registrant owned by a government entity in the foreign 
jurisdiction. As discussed above, government ownership is information 
that is likely relevant to investors' capital allocation decisions. For 
example, disclosure of government ownership may allow investors to 
better assess potential political risks/effects

[[Page 70040]]

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \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 state-owned enterprises 
(``SOEs''). The study also finds an increase in related-party 
transactions for Chinese listed firms with politically connected 
independent directors).
---------------------------------------------------------------------------

    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 Commission-
Identified 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 Commission-Identified Foreign Issuers. One 
commenter suggested that a VIE structure could block meaningful 
disclosure of financial and political information.\126\
---------------------------------------------------------------------------

    \126\ See letter from Kelly.
---------------------------------------------------------------------------

    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 Commission-
Identified 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 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\
---------------------------------------------------------------------------

    \127\ See letter from China Petroleum.
    \128\ For 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \129\ See supra Section IV.A.
---------------------------------------------------------------------------

    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 re-evaluate 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.
---------------------------------------------------------------------------

    \130\ See id.
    \131\ See supra Section IV.B.1.
---------------------------------------------------------------------------

    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

[[Page 70041]]

by a government in non-cooperating foreign jurisdictions and the degree 
of control a government in the non-cooperating 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.
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.
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\
---------------------------------------------------------------------------

    \132\ See letter from U.S. Acctg. Academics.
    \133\ See supra Section IV.B.1 for a description of current 
regulatory requirements regarding disclosure of ownership and 
control more generally.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \134\ See supra note 128.
---------------------------------------------------------------------------

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 non-inspected 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

[[Page 70042]]

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

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:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     ``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 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 Sarbanes-Oxley 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 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

[[Page 70043]]

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

    \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.
    \140\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes 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, law firms and other 
persons who regularly assist registrants in preparing and filing 
periodic reports with the Commission.

                                            Table 1--Incremental Paperwork Burden Under the Final Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               Estimated
                                               number of     Incremental   Total incremental
                                                affected    burden hours/     burden hours        75% Company      25% Professional   Professional costs
                                               responses        form
                                                      (A)             (B)    (C) = (A) * (B)    (D) = (C) * 0.75    (E) = (C) * 0.25    (F) = (E) * $400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 10-K (submission)......................           55               1                 55                  41                  14              $5,600
Form 20-F (submission)......................          206               1                206                 155                  52              20,800
Form 20-F (disclosure)......................          220               1                220                 165                  55              22,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

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

Subpart A--Organization and Program Management

0
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.
* * * * *
    Section 200.30-1 is also issued under 15 U.S.C. 77f, 77g, 77h, 
77j, 78c(b) 78l, 78m, 78n, 78o(d).
* * * * *

0
2. Amend Sec.  200.30-1 by adding to paragraph (m) to read as follows:


Sec.  200.30-1   Delegation of authority to Director of Division of 
Corporation Finance.

* * * * *
    (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 Sarbanes-Oxley 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.

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

0
3. The general authority citation for part 232 continues to read as 
follows:

    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.
* * * * *

0
4. Effective January 10, 2022, through July 1, 2023, amend Sec.  
232.405 by adding paragraph (c)(1)(iii)(C) to read as follows:


Sec.  232.405  Interactive Data File submissions.

* * * * *
    (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 updated relevant standard 
taxonomy; and
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
5. The general authority citation for part 249 and sectional authority 
citations for Sec. Sec.  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.
* * * * *
    Section 249.331 is also issued under 15 U.S.C. 78j-1, 7202, 
7233, 7241, 7264, 7265; and 18 U.S.C. 1350.
* * * * *

0
6. Amend Form 20-F (referenced in Sec.  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.


[[Page 70044]]



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 Sarbanes-Oxley 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:
* * * * *

0
7. Amend Form 40-F (referenced in Sec.  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

* * * * *

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, identified by the Commission pursuant to Section 104(i)(2)(A) 
of the Sarbanes-Oxley 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:
* * * * *

0
8. Amend Form 10-K (referenced in Sec.  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 Sarbanes-Oxley 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. 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:
* * * * *

0
9. Amend Form N-CSR (referenced in Sec. Sec.  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 Sarbanes-Oxley 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


