Market Trends 2024/25: Disclosure on the Holding Foreign Companies Accountable Act

This practice note discusses the impact of the Holding Foreign Companies Accountable Act (the HFCAA) on securities of foreign companies listed on U.S. exchanges and over-the-counter markets. It provides background on the HFCAA, enacted on December 18, 2020, which reinforces U.S. regulatory authority over SEC-reporting companies relying on auditors in non-U.S. jurisdictions where local authorities restrict Public Company Accounting Oversight Board (PCAOB) inspections. This note highlights the specific regulatory challenges posed by Chinese law, which prohibits auditing firms in China and Hong Kong from providing U.S. authorities access to audit records. It also details the PCAOB’s efforts to secure access to inspect and investigate audit firms in China and Hong Kong, including the signing of a Statement of Protocol with Chinese authorities in August 2022. This note also outlines the HFCAA-related disclosures required in public filings, such as the percentage of shares owned by government entities and the presence of Chinese Communist Party officials on the board of directors. Additionally, it discusses the enforcement mechanisms provided by the HFCAA, including the prohibition of trading on SEC-regulated markets if PCAOB inspections are prevented for two consecutive years. This practice note concludes with recommendations on enhancing HFCAA-related disclosures in public filings.

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