New Item 9C in Form 10-K – Holding Foreign Companies Accountable Act Disclosures

By George Wilson

On March 18, 2021, the SEC Adopted Interim Final Rules implementing disclosure requirements in the “The Holding Foreign Companies Accountable Act” (HFCA Act).  The Act became law on December 18, 2020.  The SEC’s Interim Final Rules became effective on May 5, 2021.  These rules added new Item 9C to Form 10-K and made similar changes to Forms 20-F and 40-F.

The HFCA Act requires disclosures by companies that have retained a PCAOB 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 
  • 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.” 

These companies are referred to as “Commission-Identified Issuers.”  New Item 9C(a) in Form 10-K requires that these companies “must electronically submit to the Commission on a supplemental basis documentation that establishes that the registrant is not owned or controlled by a governmental entity in the foreign jurisdiction.”  They must submit this documentation before the due date of the form.  This requirement does not apply if the company is owned or controlled by a foreign governmental entity.

If the SEC determines that a company is a Commission-Identified Issuer for three consecutive years, Section 2 of the HFCA Act requires that the Commission prohibit trading of the company’s securities. 

A Commission-Identified Issuer that is a foreign issuer must make additional disclosures.  The term foreign issuer is defined in Exchange Act Rule 3b-4:

“The term foreign issuer means any issuer which 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.”  

The required disclosures are specified in Section 3 of the HFCA Act and are included in Item 9C(b) below.

The updated instructions to Form 10-K now include new Item 9C:

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 

(a) A registrant 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 must electronically submit to the Commission on a supplemental basis documentation that establishes that the registrant is not owned or controlled by a governmental entity in the foreign jurisdiction. The registrant must submit this documentation on or before the due date for this form. A registrant that is owned or controlled by a foreign governmental entity is not required to submit such documentation. 

(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 disclose: 

(1) 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; 

(2) The percentage of shares of the registrant owned by governmental entities in the foreign jurisdiction in which the registrant is incorporated or otherwise organized; 

(3) 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 registrant; 

(4) The name of each official of the Chinese Communist Party who is a member of the board of directors of the registrant or the operating entity with respect to the registrant; and 

(5) Whether the articles of incorporation of the registrant (or equivalent organizing document) contains any charter of the Chinese Communist Party, including the text of any such charter. 

Rule 12b-13 requires that all item numbers be included in Form 10-K.  That said, for most companies the response to this new item will likely be “Not applicable.”

As always, your thoughts and comments are welcome.

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