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Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations
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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
We agree with those commenters 74
who stated that the prompt implementation of the trading prohibition requirements of Section 104i3 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 104i3B or D of the Sarbanes-Oxley Act.79
73 See letters from Blank Rome, China Southern, Chinese Legal Academics, Kelly, and Yum.
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 104i3 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 104i1B defining the term non-inspection year to mean a year i during which the Commission identifies the covered issuer under paragraph 2A 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 104i3A 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 104i3 of the SarbanesOxley Act. See, e.g., Section 104i4 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.

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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 CommissionIdentified Issuers, the number of consecutive years that an issuer has been identified as a CommissionIdentified 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 CommissionIdentified Issuer for three consecutive years. Thus, issuers will have a period of three years to retain a non-PCAOBIdentified 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 CommissionIdentified Issuer.
Given the procedural protections afforded to issuers pursuant to the Commissions approach provided herein and the fact that issuers and the investing public will have had sufficient notice of an issuers 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 issuers securities 82 on a national securities 80 See
supra Section II.E.
id.
82 A commenter asked for clarification of the impact of a trading prohibition on derivative securities. See letter from NYSE. The SarbanesOxley Act, as amended by the HFCA Act, states that the Commission shall prohibit the securities of the covered issuer from being traded . . . . Section 104i3A 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 CommissionIdentified Issuer that is subject to a trading prohibition has issued equity securities and 81 See
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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
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
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 2360a32 defining standardized equity option.
As another example, we understand that securitybased 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.
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.

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