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Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations 2. Affected Parties 116

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a. Registrants Registrants subject to periodic reporting requirements under the Exchange Act will not be affected by the amendments unless and until they are Commission-Identified Issuers.
Commission identification of such issuers is in turn contingent upon initial identification of affected registered public accounting firms that are retained by registrants with periodic disclosure obligations. Based upon a review of such registrants in calendar year 2020, we identified 273 registrants for whom future identification as a Commission-Identified Issuer might occur, based on current facts and circumstances.117 Of these potential Commission-Identified Issuers candidates, 18.2 percent filed annual disclosures using Form 10K while 78.2
percent are Form 20F filers. No filings submitted by potential candidates were made using Forms 40F or NCSR.
Among filers, approximately 22 percent were incorporated in the United States while 78 percent were incorporated in foreign jurisdictions, including 4.8
percent who self-disclosed to be stateowned enterprises. These registrants securities either are listed on a national exchange 88.7 percent, OTC-listed 9.9
percent, or report no U.S. listing 1.5
percent.118 Of the 273 Commission116 As noted above, the amendments may accelerate responses to other aspects of the HFCA
Act, such as switching audit firms or exiting the U.S. markets altogether. These responses could impact parties beyond those identified below e.g., audit firms. For purposes of this economic analysis, we focus on those parties affected by the interim final amendments.
117 Analysis is based on staff review of data obtained from the PCAOB see supra note 110, Audit Analytics, manual review of all annual reports filed by foreign issuers using Forms 20F, 40F, or an amendment thereto in calendar year 2020, and review of securities registered in calendar year 2020 by foreign issuers. This analysis may potentially be viewed as an upper bound on the future number of registrants that may be affected by the HFCA requirements as clients of those firms previously identified by the PCAOB.
118 Using a more conservative approach that looked only to registrants with at least one annual report filed after the introduction of the HFCA Act, we further estimate that in calendar year 2020, 194
registrants submitted an annual report Form 10K, 20F, or an amendment whose auditor was previously identified by the PCAOB see supra note 110 as a registered firm from a non-U.S.
jurisdiction where necessary access to conduct oversight was denied due to a position taken by local authorities. Based on our historical analysis of these registrants, 18 percent submitted annual reports using a domestic form, while 82 percent and zero percent submitted their annual reports via foreign filings Form 20F and Form 40F, respectively. Based on the same population of registrants, we estimate that approximately three percent of potentially affected registrants disclosed their securities as listed on two or more foreign exchanges, approximately nine percent listed on
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Identified Issuers, five are listed in the Annex to Executive Order 14032 as issuers that are affiliated with the Chinese military.119 Additionally, a recent study found that 42 percent of US-listed Chinese firms disclosed using a VIE structure in year 2013.120
b. Investors The amendments may impact both current investors in affected registrants as well as potential investors that may consider investing in these registrants in the future. As mentioned above, at least some of the information elicited by the required disclosures is likely to be available already to investors through various existing channels, such as vendor databases or various third-party reports, but at varying costs. As such, we expect that the required disclosures are likely to affect mostly retail investors who directly invest or consider investing in affected registrants since it may be more costly for these investors to obtain such information absent the required disclosures.
Institutional or other sophisticated investors may also be impacted by the amendments; however, we expect that such impact might be limited given their resources to obtain the required information from other sources e.g., vendor databases, when such sources are available.

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relevant to investors. As such, we expect the required disclosures to be beneficial to investors because they are likely to reduce search costs when the information in the required disclosure is otherwise available through diverse sources or existing disclosures, and also potentially provide investors with information about aspects of these registrants governance characteristics that otherwise might not be available or relatively costly to obtain. We do not expect significant compliance costs for Commission-Identified Foreign Issuers given that these registrants likely already possess the information required by the amendment; however, registrants may incur additional compliance costs if the required information is not readily accessible to them or needs to be formatted for the required disclosure.
a. Investors
The amendments will require disclosure that a registered public accounting firm that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction has issued an audit report for the registrant. The disclosure will provide transparency about the inspection status of the engaged audit firm. As discussed above, the academic literature provides evidence that the C. Economic Effects PCAOBs oversight has led to 1. Benefits and Costs of HFCA Act improvements in audit quality and Disclosure Requirements financial reporting quality, for both domestic and foreign issuers. The For Commission-Identified Foreign inability of the PCAOB to inspect the Issuers, the amendments will require auditors of these registrants could specific disclosures to be made in these registrants annual reports.121 In general, generate uncertainty regarding their financial reporting quality. Thus, to the as discussed above, the required disclosures elicit information that some extent this information is new to investors,122 we expect the specific academic literature has found is valuerequired disclosure to potentially only one foreign exchange, while approximately 79
facilitate investors capital allocation percent only disclosed listing on a U.S. national decisions. We further expect that the exchange. Of these registrants, 13 equal to six presentation of such information in a percent self-identified in their 2020 disclosures as standardized form in the annual report state-owned enterprises.
119 Executive Order 14032, titled Addressing the is likely to be helpful to investors by Threat From Securities Investments That Finance reducing their search costs.
Certain Companies of the Peoples Republic of The amendments will require China, was signed by United States President Joe disclosure of the percentage of the Biden on June 3, 2021, and came into effect on shares of the registrant owned by a August 2, 2021 86 FR 30145, June 7, 2021. It generally prohibits U.S. persons from purchasing or government entity in the foreign selling securities of issuers identified as Communist jurisdiction. As discussed above, Chinese Military-Industrial Companies. The annex government ownership is information to the Executive order includes a list of such that is likely relevant to investors companies as determined by the US Treasury.
120 Justin Hopkins, Mark H. Lang & Jianxin capital allocation decisions. For Donny Zhao, The Rise of US-Listed VIEs from example, disclosure of government China: Balancing State Control and Access to ownership may allow investors to better Foreign Capital, Darden Business School Working assess potential political risks/effects Paper No. 3119912, Kenan Institute of Private Enterprise Research Paper No. 1917 2018, available at http dx.doi.org/10.2139/ssrn.3119912.
121 See supra Section II.B for a detailed description of the disclosure requirements mandated by Section 3 of the HFCA Act.

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122 See supra Section IV.B.1 for a description of current practice and regulatory requirements regarding disclosure of the registrants auditor inspection status.

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