[Congressional Record Volume 166, Number 203 (Wednesday, December 2, 2020)]
[House]
[Pages H6031-H6035]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
HOLDING FOREIGN COMPANIES ACCOUNTABLE ACT
Mr. CLAY. Mr. Speaker, I move to suspend the rules and pass the bill
(S. 945) to amend the Sarbanes-Oxley Act of 2002 to require certain
issuers to disclose to the Securities and Exchange Commission
information regarding foreign jurisdictions that prevent the Public
Company Accounting Oversight Board from performing inspections under
that Act, and for other purposes, and for other purposes.
The Clerk read the title of the bill.
The text of the bill is as follows:
S. 945
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Holding Foreign Companies
Accountable Act''.
SEC. 2. DISCLOSURE REQUIREMENT.
Section 104 of the Sarbanes-Oxley Act of 2002 (15 U.S.C.
7214) is amended by adding at the end the following:
``(i) Disclosure Regarding Foreign Jurisdictions That
Prevent Inspections.--
``(1) Definitions.--In this subsection--
``(A) the term `covered issuer' means an issuer that is
required to file reports under section 13 or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)); and
``(B) the term `non-inspection year' means, with respect to
a covered issuer, a year--
``(i) during which the Commission identifies the covered
issuer under paragraph (2)(A) 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.
``(2) Disclosure to commission.--The Commission shall--
``(A) identify each covered issuer that, with respect to
the preparation of the audit report on the financial
statement of the covered issuer that is included in a report
described in paragraph (1)(A) filed by the covered issuer,
retains a registered public accounting firm that has a branch
or office that--
``(i) is located in a foreign jurisdiction; and
``(ii) the Board is unable to inspect or investigate
completely because of a position taken by an authority in the
foreign jurisdiction described in clause (i), as determined
by the Board; and
``(B) require each covered issuer identified under
subparagraph (A) to, in accordance with the rules issued by
the Commission under paragraph (4), submit to the Commission
documentation that establishes that the covered issuer is not
owned or controlled by a governmental entity in the foreign
jurisdiction described in subparagraph (A)(i).
``(3) Trading prohibition after 3 years of non-
inspections.--
``(A) In general.--If the Commission determines that a
covered issuer has 3 consecutive non-inspection years, the
Commission shall prohibit the securities of the covered
issuer from being traded--
``(i) on a national securities exchange; or
``(ii) through any other method that is within the
jurisdiction of the Commission to regulate, including through
the method of trading that is commonly referred to as the
`over-the-counter' trading of securities.
``(B) Removal of initial prohibition.--If, after the
Commission imposes a prohibition on a covered issuer under
subparagraph (A), the covered issuer certifies to the
Commission that the covered issuer has retained a registered
public accounting firm that the Board has inspected under
this section to the satisfaction of the Commission, the
Commission shall end that prohibition.
``(C) Recurrence of non-inspection years.--If, after the
Commission ends a prohibition under subparagraph (B) or (D)
with respect to a covered issuer, the Commission determines
that the covered issuer has a non-inspection year, the
Commission shall prohibit the securities of the covered
issuer from being traded--
``(i) on a national securities exchange; or
``(ii) through any other method that is within the
jurisdiction of the Commission to
[[Page H6032]]
regulate, including through the method of trading that is
commonly referred to as the `over-the-counter' trading of
securities.
``(D) Removal of subsequent prohibition.--If, after the end
of the 5-year period beginning on the date on which the
Commission imposes a prohibition on a covered issuer under
subparagraph (C), the covered issuer certifies to the
Commission that the covered issuer will retain a registered
public accounting firm that the Board is able to inspect
under this section, the Commission shall end that
prohibition.
``(4) Rules.--Not later than 90 days after the date of
enactment of this subsection, the Commission shall issue
rules that establish the manner and form in which a covered
issuer shall make a submission required under paragraph
(2)(B).''.
SEC. 3. ADDITIONAL DISCLOSURE.
(a) Definitions.--In this section--
(1) the term ``audit report'' has the meaning given the
term in section 2(a) of the Sarbanes-Oxley Act of 2002 (15
U.S.C. 7201(a));
(2) the term ``Commission'' means the Securities and
Exchange Commission;
(3) the term ``covered form''--
(A) means--
(i) the form described in section 249.310 of title 17, Code
of Federal Regulations, or any successor regulation; and
(ii) the form described in section 249.220f of title 17,
Code of Federal Regulations, or any successor regulation; and
(B) includes a form that--
(i) is the equivalent of, or substantially similar to, the
form described in clause (i) or (ii) of subparagraph (A); and
(ii) a foreign issuer files with the Commission under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or
rules issued under that Act;
(4) the terms ``covered issuer'' and ``non-inspection
year'' have the meanings given the terms in subsection (i)(1)
of section 104 of the Sarbanes-Oxley Act of 2002 (15 U.S.C.
7214), as added by section 2 of this Act; and
(5) the term ``foreign issuer'' has the meaning given the
term in section 240.3b-4 of title 17, Code of Federal
Regulations, or any successor regulation.
(b) Requirement.--Each covered issuer that is a foreign
issuer and for which, during a non-inspection year with
respect to the covered issuer, a registered public accounting
firm described in subsection (i)(2)(A) of section 104 of the
Sarbanes-Oxley Act of 2002 (15 U.S.C. 7214), as added by
section 2 of this Act, has prepared an audit report shall
disclose in each covered form filed by that issuer that
covers such a non-inspection year--
(1) that, during the period covered by the covered form,
such a registered public accounting firm has prepared an
audit report for the issuer;
(2) the percentage of the shares of the issuer owned by
governmental entities in the foreign jurisdiction in which
the issuer is incorporated or otherwise organized;
(3) whether governmental entities in the applicable foreign
jurisdiction with respect to that registered public
accounting firm have a controlling financial interest with
respect to the issuer;
(4) the name of each official of the Chinese Communist
Party who is a member of the board of directors of--
(A) the issuer; or
(B) the operating entity with respect to the issuer; and
(5) whether the articles of incorporation of the issuer (or
equivalent organizing document) contains any charter of the
Chinese Communist Party, including the text of any such
charter.
The SPEAKER pro tempore. Pursuant to the rule, the gentleman from
Missouri (Mr. Clay) and the gentleman from Ohio (Mr. Gonzalez) each
will control 20 minutes.
The Chair recognizes the gentleman from Missouri.
General Leave
Mr. CLAY. Mr. Speaker, I ask unanimous consent that all Members may
have 5 legislative days within which to revise and extend their remarks
on this legislation and to insert extraneous material thereon.
The SPEAKER pro tempore. Is there objection to the request of the
gentleman from Missouri?
There was no objection.
Mr. CLAY. Mr. Speaker, I yield myself such time as I may consume.
Mr. Speaker, I rise in support of S. 945, the Holding Foreign
Companies Accountable Act, which would suspend the trading of
securities of foreign issuers that retain accounting firms not subject
to audit by the Public Company Accounting Oversight Board after 3 years
of noncompliance, as well as require the issuer to disclose whether it
is owned or controlled by a foreign government.
I would like to thank Senator Kennedy and Representative Sherman, who
cosponsored the House version of S. 945, for working on this incredibly
important and long-overdue piece of legislation.
The Enron and WorldCom financial reporting scandals wiped out
billions of dollars from retirement accounts, eliminated tens of
thousands of jobs, and defrauded investors hundreds of billions of
dollars. To ensure U.S. investors, workers, retirees, and capital
markets were never again exposed to this type of egregious fraud,
Congress established the PCAOB through the Sarbanes-Oxley Act to
protect investors by overseeing the audits of public companies and
ensuring the preparation of informative, accurate, and independent
corporate disclosures and audit reports by inspection.
As former PCAOB board member Steven Harris noted: ``The PCAOB was
established because the accounting profession's framework of self-
regulation had failed,'' and the creation of an independent auditor to
inspect and verify corporate disclosures and audit work was necessary.
However, citing various foreign secrecy, privacy, and national
security laws, many foreign issuers who enjoy the full benefits and
privileges of trading on U.S. exchanges and access to U.S. public
markets have openly flouted U.S. investor protections and prohibited
the PCAOB from inspecting their corporate disclosures as well as the
auditor's work.
According to a June 2020 PCAOB report, China alone had 202 public
companies listed on U.S. exchanges representing $1.8 trillion in market
capitalization that the PCAOB has been unable to fully and adequately
inspect.
Make no mistake, the ability of foreign issuers to circumvent PCAOB
inspection affirmatively allows foreign companies to exploit U.S.
workers and retirees and comes at the direct expense of U.S. investors
and the integrity of U.S. markets. To continue with business as usual
reverts us back to the Enron and WorldCom status quo.
By suspending the trading of securities issued by foreign issuers who
are not fully compliant with PCAOB audit inspections for 3 years, the
Holding Foreign Companies Accountable Act will hold noncompliant
foreign issuers accountable and help safeguard U.S. investors and the
integrity of our markets.
We can no longer allow foreign issuers to exploit our system. I call
on my colleagues on both sides of the aisle to stand with me in
protecting American workers, retirees, and investors by supporting the
bipartisan Holding Foreign Companies Accountable Act.
Mr. Speaker, I reserve the balance of my time.
{time} 1630
Mr. GONZALEZ of Ohio. Mr. Speaker, I yield myself such time as I may
consume.
Mr. Speaker, the bill before us today relates to an issue that the
President's Working Group on Financial Markets and the Securities and
Exchange Commission are diligently working to address: the Public
Company Accounting Oversight Board's inability to inspect the audit
work and practices of PCAOB-registered auditing firms in China.
The mission of the PCAOB is to oversee the audits of public companies
and provide the public with informative, accurate, and independent
audit reports. The Sarbanes-Oxley Act and the PCAOB's rules impose
requirements on firms that perform audit work for public companies,
which include providing complete and timely access for PCAOB
inspections.
Conducting inspections in the United States is simple; however,
conducting them internationally requires agreements with foreign
regulators and firms.
Over the years, the PCAOB has worked closely with their foreign
counterparts on specific requirements for nearly all jurisdictions that
have U.S.-listed public companies. This collaboration allows for joint
inspections and enforcement matters. However, there are a few countries
for which no such agreements exist. The outstanding jurisdictions
include Belgium, France, Hong Kong, and China.
The Board is currently working on agreements that would lead to
cooperation in Belgium and France and expects to have a final
cooperative agreement to facilitate access in the near future.
China, on the other hand, has skirted these requirements. They have
done so without showing any interest in allowing for such cooperation.
As a result, the PCAOB cannot inspect the audit work and practices of
firms in China and Hong Kong to the extent their clients have
operations in mainland
[[Page H6033]]
China. The Chinese Government has exacerbated the situation by
prohibiting audit firms from providing this information without the
consent of Chinese financial regulators.
Mr. Speaker, this bill before us today prohibits the securities of a
public company from being traded on a national securities exchange if
the issuer has had 3 consecutive ``non-inspection years,'' that is,
years that the PCAOB is unable to inspect a public company's auditors.
During these non-inspection years, each company would be required to
disclose the percentage of the shares owned by governmental entities,
the governmental entities that have a controlling financial interest,
and if any official of the Chinese Communist Party is a member of the
company's board as well as any ownership by the CCP.
As the title of this legislation suggests, the Holding Foreign
Companies Accountable Act is designed to prevent companies based in
China and certain other jurisdictions from taking advantage of our deep
and liquid capital markets while avoiding the scrutiny that comes with
inspection of their financial statement audits.
This situation is unfair and dangerous for investors. For that
reason, the act should be read to apply to companies where the auditor
that signs the audit report is located in a jurisdiction that does not
permit PCAOB inspection access.
Mr. Speaker, nearly 6 months ago, the President released the
Memorandum on Protecting United States Investors from Significant Risks
from Chinese Companies. The memo directed the President's Working Group
on Financial Markets to provide recommendations to address the issues
with China. Three months ago, the President's Working Group released
that report.
The report comprehensively details a number of recommendations to
level the playing field for all companies listed on our exchanges and
improve disclosure on the risks of investing in emerging markets. The
implementation of these recommendations would effectuate the intent of
Senator Kennedy's legislation.
Moreover, immediately following the release of the report, SEC
Chairman Clayton directed staff to prepare proposals to address these
recommendations in a comprehensive and transparent manner through the
rulemaking process.
Mr. Speaker, I applaud Senator Kennedy and his staff for their
efforts and the President's Working Group on Financial Markets, as well
as the PCAOB for their diligence.
I also thank House Minority Leader McCarthy and House Committee on
Foreign Affairs Ranking Member McCaul for their leadership on the China
Task Force. Republicans have and will continue to fight against
communism and the global threat the Chinese Government poses.
Mr. Speaker, finally, I thank Mr. Sherman for working with me to have
similar legislation included in the House NDAA and his work in bringing
this legislation to the floor today.
Again, I thank the gentleman from Louisiana, Senator Kennedy, for all
his work in standing up to China, and I reserve the balance of my time.
Mr. CLAY. Mr. Speaker, it gives me great pleasure to yield such time
as he may consume to the gentleman from California (Mr. Sherman), my
20-year friend and colleague.
Mr. SHERMAN. Mr. Speaker, I thank the gentleman for yielding. I will
speak longer than I usually do on these bills because I both want to
persuade people to support the bill and also provide important
information to the entire House that will be part of the legislative
history of this bill and is designed to guide the SEC in issuing
appropriate regulations.
Mr. Speaker, I rise in strong support of S. 945, the Holding Foreign
Companies Accountable Act. I thank Chairwoman Waters and her staff for
working with my office, and all the members who have been involved in
this bill and making this issue a priority.
Mr. Speaker, I believe this will be perhaps the most significant
piece of investor protection legislation that the Congress adopts this
Congress because it applies to some 224 publicly traded companies and
assures investors of the financial statement integrity that they expect
from all companies that are traded in the United States.
Mr. Speaker, let's go back in history a bit. For well over a century,
investors in corporations have insisted that the financial statements
they get are audited by an independent auditor. But at the beginning of
this century, we learned that that was not enough. We saw Enron and
WorldCom. We passed the Sarbanes-Oxley bill, and created the PCAOB so
that we have a system where not only are the companies' financial
statements audited, but the audit is subject to being audited by a
governmental entity. That is essential in this century to have
investors adequately protected. So when we are dealing with 224 public
companies with $1.8 trillion in capitalization, we need that level of
protection.
Mr. Speaker, I thank my colleague from Ohio (Congressman Gonzalez)
for joining me in leading on this issue in the House. I thank my good
friend and cochair of the bicameral, bipartisan CPA Caucus, Mike
Conaway, who has been working on these issues for many years. And I
thank Senators Kennedy and Van Hollen for their leadership in advancing
this bill.
Mr. Speaker, currently the PCAOB, the Public Company Accounting
Oversight Board, is unable to inspect the audit work and practices of
certain audit firms in a handful of jurisdictions. Today, that includes
Belgium and France to some degree, but, primarily, the issue is China.
In most cases, audit firms in those jurisdictions cite local laws
related to data protection or national security as a reason for being
unable to provide the PCAOB with the information they need.
Accordingly, as I mentioned before, the PCAOB has noted that the
auditor for some 224 U.S.-listed companies with a combined total
capitalization of $1.8 trillion is not subject to the enhanced
oversight that this Congress has insisted upon since 2002.
Since it was created, the PCAOB has established a formal cooperative
relationship with foreign audit regulators that have allowed it to
conduct inspections of firms in more than 59 U.S. jurisdictions.
However, the PCAOB and the Securities Exchange Commission have tried to
engage with Chinese regulators for over a decade in an effort to reach
a similar cooperative agreement and are still not able to conduct
inspections with regard to China or Hong Kong.
Mr. Speaker, our legislation will bring an end to this sort of risk
for investors in U.S. markets by requiring the SEC to stop trading in a
company's stocks if the PCAOB is unable to inspect the audit report and
the audit work papers for a period of 3 years.
Mr. Speaker, this is an investor protection bill. I am chair of the
Investor Protection and Capital Markets Subcommittee. This bill is not
anti-China, and it is not designed to prohibit the trading of Chinese
companies. Rather, it provides a 3-year window, during which we expect
China will enter into a reasonable agreement with the SEC and the PCAOB
so that we have the additional level of protection for investors that
we expect and have demanded since we passed the Sarbanes-Oxley bill in
2002.
Mr. Speaker, I am pleased to say that the House has already passed
this legislation in similar--and actually, superior--form as an
amendment to the 2001 NDAA, National Defense Authorization Act. It is
the intention of the authors of this Senate bill to achieve exactly
what that language--approved by the House earlier this year--sets
forward. And that amendment to the NDAA is part of the legislative
history of this bill and our consideration of it today.
Mr. Speaker, in order to guide the interpretation of this bill,
Senator Kennedy and I have a statement, and I include in the Record
that statement.
United States Senate
Statement: S. 945--Holding Foreign Companies Accountable Act.
Considered on Friday, December 2, 2020
Madam Speaker, I write to submit a statement for the record
to address S. 945, the Holding Foreign Companies Accountable
Act.
It is the intent of this legislation to provide the
Securities and Exchange Commission with the discretion
necessary to determine how much of a company's total audit
must be performed by a firm beyond the reach of PCAOB
inspections before trading in the company's securities is
prohibited by the Commission. Consistent with our work with
the Securities and Exchange Commission on this legislation,
it is our expectation that the Commission will not prohibit
trading in
[[Page H6034]]
the securities of companies under this act, as long as not
more than one third of a company's total audit is performed
by a firm beyond the reach of PCAOB inspections. This
legislation provides the Commission with the authority to
determine how an audit would be measured, whether that be
total revenue, assets, or another metric.
Furthermore, the scope of this legislation is not intended
to be limited to public companies which rely on foreign audit
firms that have some form of ownership relationship with a
PCAOB-registered public accounting firm. Specifically, it is
intended to also encompass public companies which rely on
foreign audit firms that are affiliated with or maintain some
form of affiliation agreement with a PCAOB-registered public
accounting firm.
John Kennedy,
U.S. Senator.
Mr. SHERMAN. Mr. Speaker, I will read it so that it is before the
entire House.
``It is the intent of this legislation to provide the Securities and
Exchange Commission with the discretion necessary to determine how much
of a company's total audit must be performed by a firm beyond the reach
of PCAOB inspections before trading in the company's securities is
prohibited by the Commission. Consistent with our work with the
Securities and Exchange Commission on this legislation, it is our
expectation that the Commission will not prohibit trading in the
securities of companies under this act, as long as not more than one-
third of a company's total audit is performed by a firm beyond the
reach of the PCAOB inspections. This legislation provides the
Commission with the authority to determine how an audit would be
measured, whether that be total revenue, assets, or another metric.
``Furthermore, the scope of this legislation is not intended to be
limited to public companies which rely on foreign audit firms that have
some form of ownership relationship with a PCAOB-registered public
accounting firm. Specifically, it is intended to also encompass public
companies which rely on foreign audit firms that are affiliated with or
maintain some form of affiliation agreement with a PCAOB-registered
public accounting firm.''
Mr. Speaker, one particular comment to draw your attention to is that
it is not the intention of this bill to cover firms that have some
small part of their audit being done in China, perhaps one subsidiary
in China, but is rather designed to apply when a third or more of the
audit is not subject to PCAOB inspection. And how you define one-third
of the audit, whether that is the audit of one-third of the revenues or
one-third of the assets, or some other metric, is left to the SEC.
As House sponsor of this legislation, I have cosigned the statement I
have just read, prepared by Senator Kennedy, but would have the
following additional remarks:
I will take this opportunity to make clear, it is not the intention
of this legislation that every public company, which is a client of an
audit firm with a branch, office, or affiliate in a jurisdiction beyond
the reach of the PCAOB inspections, be subject to a trading
prohibition.
Instead, the trading prohibitions required under this bill are
intended to be applied when a significant portion of the audit is
prepared by an audit firm or the branch, or office, or affiliate of an
audit firm which the PCAOB is unable to inspect, and the SEC has the
authority to interpret this provision.
As chair of the Investor Protection and Capital Markets Subcommittee,
I appreciate how critical it is for investors on U.S. stock exchanges
to have the additional protection that the financial statements have
not just been audited, but that that audit is subject to review by the
PCAOB.
Mr. Speaker, I appreciate my colleagues for their support of this
legislation, and look forward to its passage here today.
Mr. Speaker, I thank the gentleman for yielding me enough time to
both describe the major parts of the legislation and also make it clear
to the regulators what expectations the House and Senate have for the
regulations that they will issue.
Mr. GONZALEZ of Ohio. Mr. Speaker, may I inquire how much time each
side has remaining.
The SPEAKER pro tempore. The gentlemen from Ohio has 16 minutes
remaining. The gentleman from Missouri has 6\1/2\ remaining.
Mr. GONZALEZ of Ohio. Mr. Speaker, I yield myself such time as I may
consume.
Mr. Speaker, I simply urge my colleagues to support S. 945.
Again, I thank everyone for making this legislation possible. I thank
Mr. Sherman for his comments and his work and partnership on this
important issue.
I yield back the balance of my time.
Mr. CLAY. Mr. Speaker, I yield myself the balance of my time.
Mr. Speaker, let me first thank my friend from Maryland, Senator
Chris Van Hollen, for his cosponsorship of this legislation.
The Holding Foreign Companies Accountable Act would require the SEC
to suspend the trading of securities at issue by foreign issuers who
are not fully compliant with PCAOB audit inspection for 3 years,
commencing upon the enactment of this bill, as well as require foreign
issuers to disclose whether they are owned or controlled by a foreign
government.
For too long, foreign issuers have circumvented important investor
protections crafted by Congress to protect U.S. investors, retirees,
workers, and U.S. capital markets. This commonsense bill does nothing
more than ensure a level playing field by requiring foreign issuers to
play by the same rules as everyone else.
Additionally, with passage of this bill, investors and markets can be
assured that the legally required disclosures they are receiving
pursuant to U.S. law from the company they are investing in have been
thoroughly vetted by an independent entity whose mission is to protect
investors and safeguard market integrity.
Maintaining the status quo would allow foreign issuers to continue to
exploit U.S. retirees, workers, and investors, all while allowing them
continued access to the greatest, most dynamic capital market system in
the world.
I call on all my colleagues on both sides of the aisle to join me in
supporting the bipartisan Holding Foreign Companies Accountable Act.
Mr. Speaker, I yield back the balance of my time.
Mr. BARR. Mr. Speaker, I rise in strong support of S. 945. The United
States has the most robust and advanced capital markets in the world.
They provide access to capital for some of the most innovative
businesses, and create an avenue for investors of all levels to save
for retirement and plan for their futures.
It follows that companies from around the globe flock to the U.S.
capital markets to fund their businesses; and the U.S. is happy to be
the destination for these firms. However, to play in our markets,
companies need to play by our rules; and Chinese firms listed on
American exchanges are the worst and most frequent offenders. Gone are
the days when we can sit idly by and let Chinese firms, many with
strong ties to the Chinese Communist Party, participate in our markets
at the expense of protection for everyday investors.
Most publicly traded firms are audited by public accounting firms,
which, in turn, are overseen by the PCAOB. This gives investors
confidence that the books are accurate. China, however, refuses to let
the PCAOB review its auditors.
The result? At best, investors lack confidence in the validity and
reliability of a company's financial data. Even worse, thousands of
investors are downright defrauded. The worst case scenario--American
savers are unwittingly funding efforts by Chinese SOEs to usurp
America's global supremacy and compromise U.S. national security.
I was proud to serve on the House China Task Force, where we closely
examined, among other things, China's participation in U.S. capital
markets. Earlier this year, we published a report with over 130
recommendations--most of which are bipartisan. Passage of the House
companion to S. 945, sponsored by Mr. Sherman, was among the
recommendations.
Also among the recommendations was passage of my bill, the
Transparency in Chinese Government Investment Act, which would direct
the SEC to investigate whether disclosure of a business's ties to the
CCP or other malign Chinese initiatives is material for investors; and,
if so, require companies to report.
We can no longer allow China to take advantage of our rules, defraud
our investors, and challenge the spirit of free enterprise. I urge
support of S. 945.
{time} 1645
The SPEAKER pro tempore. The question is on the motion offered by the
gentleman from Missouri (Mr. Clay) that the House suspend the rules and
pass the bill, S. 945.
The question was taken; and (two-thirds being in the affirmative) the
[[Page H6035]]
rules were suspended and the bill was passed.
A motion to reconsider was laid on the table.
____________________