Following passage of a law that prevents foreign companies from being listed on U.S. exchanges if they fail to meet certain Public Company Accounting Oversight Board standards, the Securities and Exchange Commission approved a rule establishing a framework for the law's implementation.
In late 2020, President Donald Trump signed the Holding Foreign Companies Accountable Act into law. That law prohibits foreign companies from having their securities listed on U.S. exchanges if they refuse or are unavailable for PCAOB inspections or investigations for three consecutive years.
The law requires that the PCAOB determine whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by an authority in that jurisdiction. Currently, China's government refuses to allow the PCAOB to inspect audits of companies registered in China and Hong Kong, noted Sen. John Kennedy, R-La., who introduced the bill in 2019 along with Sen. Chris Van Hollen, D-Md., in a June news release.
In September, the PCAOB adopted a final rule implementing the Holding Foreign Companies Accountable Act. The final rule creates a framework for the PCAOB to use when determining whether it can audit foreign companies; the factors the PCAOB will evaluate and the documents and information the PCAOB 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.
The SEC oversees the PCAOB and approved the rule Nov. 5. The rule is effective immediately.
"This is an important step to protect U.S. investors," SEC Chairman Gary Gensler said in a news release. "I believe it is critical that the commission and the PCAOB work together to ensure that the auditors of foreign companies accessing U.S. capital markets play by the same rules."
In May, the SEC adopted interim final rules that would amend several forms in order to implement the disclosure and submission requirements under the Holding Foreign Companies Accountable Act. Mr. Gensler said the SEC remains on track to finalize those rules before the end of the year.
The Senate in June passed via unanimous consent the Accelerating Holding Foreign Companies Accountable Act. That bill, introduced by Mr. Kennedy the same month, would reduce the number of years a foreign company can refuse PCAOB inspection to two years from three years before having their securities delisted. A companion version of the bill hasn't been introduced in the House.
