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Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
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related to government ownership in the foreign jurisdiction that may influence the value of their investment. These benefits would be limited to the extent that affected registrants already provide disclosure relevant to assessing such risks.
In addition to the disclosure of ownership through equity holdings, the amendments will require affected registrants to disclose whether a governmental entity has a controlling financial interest in the registrant. We expect such disclosure may benefit investors as it could provide information about other mechanisms, besides direct equity ownership, such as control through a pyramidal ownership structure that might allow a governmental entity to influence registrants operational and other decisions. This information would provide additional insight into potential risks to investors that might arise from such control/ownership structures.123
One commenter agreed that such disclosure will be informative for investors.124
The amendments also require disclosure of board members affiliations with the CCP and whether the articles of incorporation of the registrant or equivalent organizing document includes any charter of the CCP, including the text of any such charter. These disclosures will enhance existing information on the composition of the board and could increase insight into its quality and the related consequences for firm value. One study shows that the degree of a boards political affiliation in China is related to firm value, and this varies based on facts and circumstances.125 For example, political affiliation of board members may imply that their incentives may not align with shareholders interests. Under different circumstances, politically-connected board members may facilitate the 123 See, e.g., Jesse Fried & Ehud Kamar, Alibaba:
A Case Study of Synthetic Control, European Corporate Governance Institute Working Paper Series in Law, Paper No 533/2020 2020
concluding that control of a firm can be exerted not only through equity, but through a mixture of employment, contractual, and commercial arrangements.
124 See letter from ASA.
125 See Lihong Wang, Protection or Expropriation:
Politically Connected Independent Directors in China, 55 J. Bank. Fin. 92 2015 using a sample of Chinese listed firms over the 20032012 period, the study finds that while the presence of politically connected independent directors is related to increased firm value for private firms, the presence of politically connected independent directors is related to lower firm value for stateowned enterprises SOEs. The study also finds an increase in related-party transactions for Chinese listed firms with politically connected independent directors.

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execution of financing transactions for the registrant. To the extent that these disclosures may benefit investors by facilitating their efforts to evaluate characteristics of registrants that may have an impact on the value of their investments, these specific disclosures may facilitate investors capital allocation decisions and potentially increase investor protection.
In a modification to the interim final rule, the final rules will specify that the registrant must look through a VIE or any structure that results in additional foreign entities being consolidated in the financial statements of the registrant and provide disclosure about the operating company in the relevant jurisdiction. Thus, any CommissionIdentified Foreign Issuer that uses a VIE
or other similar corporate structure will be required to provide the required disclosures for itself and its foreign operating entity. This change will benefit investors by providing more accurate information regarding the true ownership structure of CommissionIdentified Foreign Issuers. One commenter suggested that a VIE
structure could block meaningful disclosure of financial and political information.126
In another change from the interim final rule, the final amendments will include a new Inline XBRL tagging requirement: Registrants will have to tag the auditor name, jurisdiction, and the PCAOB ID Numbers of the audit firms that appear on the audit report signed by the registered public accounting firm in the registrants Form 10K, Form 20F, and Form 40F. Such tagging requirement will likely benefit investors by providing them with machine-readable information on auditors directly from a registrants annual report, thus allowing them to identify registrants with auditors from jurisdictions that do not allow PCAOB
oversight. This change will also facilitate the Commissions accurate and efficient identification of CommissionIdentified Issuers. Since registrants already use Inline XBRL tagging in their annual reports and other filings with the commission, and the information on auditor name and jurisdiction is readily available to them, we do not believe this change will result in a significant cost increase for them.
b. Registrants The required disclosures are likely to impose some compliance costs on Commission-Identified Foreign Issuers.
One commenter asserted that the proposed disclosures were repetitive of 126 See
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disclosure that is already provided and would result in unnecessary compliance costs.127 We do not expect these compliance costs to be significant since these registrants likely already possess the information required by the amendments. However, to the extent that such information is not readily accessible or needs to be formatted to comply with the required disclosure, registrants would incur additional costs.128
The required disclosures may impact the cost of capital for some affected registrants. As discussed above, empirical evidence suggests that the information elicited by the required disclosures is, in general, related to potential risks and more broadly to firm value.129 We discuss the potential impact of the required disclosures on affected registrants cost of capital further below, but note that the magnitude of any such impact is likely to be moderated depending on the extent information is otherwise available to investors.
The required disclosure regarding the use of a non-inspected firm to audit the registrants annual report, which will now be required in a standardized manner, may lead investors to reevaluate potential risks related to financial reporting quality due to the inability of the PCAOB to inspect the auditors of these registrants. Some academic literature finds that PCAOB
oversight is broadly related to improvements of audit quality, and also investor perceptions of such audit quality.130 As described above, many registrants already disclose the risks or decreased benefits associated with using a non-inspected auditor.131 Given the extent to which information specifically required in the new disclosures overlaps with disclosures already observed in practice, in addition to the information being available from other sources such as the PCAOB, we expect the impact of these specific required disclosures on affected registrants cost of capital to be small.
Section 3 of the HFCA Act also requires registrants to disclose information in a standardized manner in annual reports about their ownership and control structures, including the magnitude of direct equity ownership 127 See
letter from China Petroleum.
the purpose of the Paperwork Reduction Act PRA, 44 U.S.C. 3501 et seq., we estimate that affected registrants will incur on average one burden hour to prepare and review the information needed for the HFCA Act Section 3 disclosure requirements. See infra Section V.C.
129 See supra Section IV.A.
130 See id.
131 See supra Section IV.B.1.
128 For
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