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Federal Register / Vol. 86, No. 234 / Thursday, December 9, 2021 / Rules and Regulations by a government in non-cooperating foreign jurisdictions and the degree of control a government in the noncooperating jurisdiction may exert on the registrant through channels other than ownership. Providing standardized disclosure could facilitate more efficient comparisons of government ownership and control information across Commission-Identified Foreign Issuers and thus reduce investor search costs.
The amendments also will require registrants to disclose information about potential additional links to the CCP.
Such disclosure is likely to be informative of the registrants governance, and may also lead investors to re-assess potential political risks that may not have been previously known through existing registrants disclosures.
For example, such links between the registrant and the CCP may indicate increased political influence on registrants decision-making processes and consequent impacts on registrants value. While some, but not all, of the information in the required disclosures may already be publicly available through disclosures in forms other than in annual reports, the content of such disclosures may not be standardized across registrants. We expect these specific disclosures may potentially impact registrants cost of capital, particularly for registrants about which such information is not otherwise known by the market.

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2. Benefits and Costs of HFCA Act Submission Requirement The amendments implementing the submission requirement of Section 104i1B of the Sarbanes-Oxley Act as added by Section 2 of the HFCA Act provide that a Commission-Identified Issuer that is not owned or controlled by a foreign governmental entity in a foreign jurisdiction that prevents PCAOB inspections must submit documentation to the Commission that establishes that the registrant is not so owned or controlled. As discussed above, the amendments specify that if an affected registrant is owned or controlled by a foreign governmental entity, it will not be required to submit such documentation. We estimate in the baseline that a large majority of current registrants that are potential future Commission-Identified Issuers are also foreign issuers that will be subject to the disclosures required by Section 3 of the HFCA Act. Therefore, we expect the submission requirement to serve as a complement to these required disclosures.

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a. Investors We anticipate that requiring Commission-Identified Issuers to provide documentation to support a lack of foreign control will provide further reassurance to investors that the registrants disclosures in this regard are materially accurate and complete. In particular, because the submission requirement generally would apply to those Commission-Identified Issuers who otherwise do not disclose that they are owned or controlled by a foreign governmental entity, this requirement will provide some reassurance to investors that such control does not exist. We believe that greater certainty about which Commission-Identified Issuers lack governmental ownership and control may improve investors assessments of the risks of investing in Commission-Identified Issuers securities. One commenter suggested that registrants typically are not providing the detailed disclosures required by the HFCA Act and that current risk factor disclosure tends to be insufficient for investors to understand the consequences of non-inspection.132
Since the submitted documentation will be publicly available, we expect the reassurance benefit to be larger than if the submission were available only to the Commission. Because affected registrants will have flexibility to determine the specific types of documentation to submit to the Commission, we expect the magnitude of the reassurance benefit to depend on the nature of information issuers submit. We generally expect this reassurance benefit to be limited given the HFCA Acts required Section 3
disclosure and other information about ownership and control required by existing Commission rules.133
Because we expect the submission requirement to impose on average only minor compliance costs on affected registrants and no other significant costs, we also do not generally expect any significant negative effects on investors from this requirement, such as a reduction in the prices of affected registrants securities they currently own.
b. Registrants Commission-Identified Issuers who lack ownership or control by a governmental entity in the foreign jurisdiction of the registered public accounting firm that the PCAOB is unable to inspect or investigate 132 See
letter from U.S. Acctg. Academics.
supra Section IV.B.1 for a description of current regulatory requirements regarding disclosure of ownership and control more generally.
133 See
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completely will incur some direct compliance costs related to producing the documentation they will be required to submit to the Commission. The magnitude of these compliance costs will depend on how easily the affected registrants can produce documentation to satisfy the submission requirement.
The amendments do not specify particular types of documentation that can or must be submitted to satisfy this requirement. Affected registrants will thus have flexibility to determine how best to establish that they are not owned or controlled by a foreign governmental entity. This should help limit compliance costs, as registrants will be able to produce documentation that is suited to their particular circumstances.
At the same time, at least as an initial matter, uncertainty about the scope of the requirement could lead some registrants to seek additional advice from attorneys and other advisers, which could marginally increase compliance costs. Overall, because we expect that affected registrants will have information readily available about their ownership structures and controlling parties, we expect the direct compliance costs associated with this requirement will be minor.134
3. Impact on Efficiency, Competition, and Capital Formation As discussed above, the required disclosures may provide new or more easily accessible information about whether registrants have retained noninspected registered auditors and whether such registrants are owned or controlled by governmental entities of the foreign jurisdictions that prevent PCAOB inspections. To the extent this disclosed information is new or reduces search costs, we expect it could potentially reduce information asymmetries in securities markets, thereby improving price efficiency and helping investors achieve more efficient portfolio allocations. Overall, we believe that any efficiency gains will be modest since the potential increase in informational content and reduction in search costs to investors is likely to be limited given existing disclosures.
To the extent the amendments will reduce information asymmetries, affected registrants may experience a change in cost of capital either a reduction or an increase is possible, depending on circumstances, which may in turn affect capital formation.
However, similar to any effects on efficiency, we expect such capital formation effects to be small in aggregate. Likewise, we do not expect 134 See
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supra note 128.

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