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Emerging markets risk disclosures expected

Defining Issues | July 2023

SEC issues example comments on expected disclosures of financial reporting and other risks for companies based in China.


Updated: In July 2023, the SEC’s Division of Corporation Finance posted an illustrative letter (‘Dear Issuer letter’) with examples of comments issued to companies regarding China-specific disclosures, requesting more prominent, specific and tailored disclosures about China-specific matters highlighted in the statements and guidance outlined below.

SEC/PCAOB Joint Statement

  • Public companies, including registered investment companies and advisers

SEC Division of Corporation Finance – Disclosure Guidance Topic No. 10

  • Public companies, based in or with a majority of their operations in the People’s Republic of China

Relevant dates

  • Effective immediately

Key Impacts:

The SEC and PCAOB have been constrained from providing regulatory oversight and enforcement of non-US companies and their management in emerging markets, including China.

As a result, and because these constraints remain, the SEC and PCAOB continue to stress the importance of providing high quality, reliable audited financial information and risk disclosures for companies based in, or with significant exposure to, emerging markets.

In an April 2020 joint statement, leaders of both agencies summarized the risks and related considerations to issuers, auditors, index providers and investors that are associated with these emerging markets.

In November 2020, the SEC’s Division of Corporation Finance issued Disclosure Guidance (DG) Topic No. 10, outlining the staff’s views regarding certain disclosure considerations for companies based in China.

The joint statement and DG Topic No. 10 follow other statements made by the SEC and PCAOB, expressing their expectations that companies consider and make these disclosures.

The Dear Issuer Letter posted by the SEC staff in December 2021 reflects the continued focus on the disclosure considerations highlighted in DG Topic No. 10 and the joint statement. It seeks clearer and more prominent disclosure of the specific risks associated with China-based companies. 

The Dear Issuer Letter posted by the SEC staff in July 2023 expands on previously issued guidance issued by the SEC staff on China-specific disclosures. It reinforces the importance of more prominent, specific and tailored disclosures about China-specific matters so that investors have the material information they need to make informed investment and voting decisions. It focuses on three areas of disclosure related to China-specific matters.

April 2020 joint statement of SEC and PCAOB

Companies are expected to make prominent, plain-English and tailored disclosures over the following:

  • The risks and uncertainties from having operations in emerging markets, including those related to the sufficiency of controls, processes and personnel to address accounting and financial reporting issues.
  • Financial reporting and other disclosure risks, such as those resulting from less robust regulatory, accounting, auditing or auditor oversight requirements than required in US markets.
  • Jurisdictional limitations and other obstacles inhibiting the ability of US authorities, such as the SEC and Department of Justice, to pursue enforcement actions against ‘bad actors’ that are non-US companies and non-US persons.
  • Limitations on shareholder rights and recourse in emerging markets.
  • The potential risks related to the PCAOB’s lack of access to the work of PCAOB-registered accounting firms in China.
  • Investment advisers and funds that invest (or consider investing) in emerging markets should disclose the risks related to the quality or availability of the financial information of such investments, the impact of any potential market closures, and other related risks.
  • Investors should understand and consider the risks of investments in index funds tracking an emerging market index. These index funds generally would not weigh individual securities on the basis of investor protection limitations or differences in the quality of financial reporting and available oversight mechanisms.

Disclosure Guidance Topic No. 10 – China-based companies

China-based issuers must fully disclose material risks related to their operations in China. This disclosure guidance provides the SEC staff view regarding important disclosure considerations relating to risks associated with China-based companies as well as the differences in shareholder rights, governance and reporting that may be relevant to investors.

The guidance also provides a list of questions for these companies to consider as they assess their risks and disclosure obligations. 

The SEC staff views include considerations such as the following:

  • Risks related to high quality and reliable financial reporting:
    • Impact of restrictions on the PCAOB’s ability to inspect audit work and practices in China and Hong Kong.
    • Potential impacts of regulatory actions under consideration in the US which could make PCAOB access to inspect the auditor’s workpapers a condition of listing requirements.
  • Risks related to access to information and regulatory oversight:
    • Limitations and restrictions on the SEC’s and other US regulators’ ability to conduct investigations and pursue remedies as part of the effective enforcement of US federal securities laws.
  • Risks related to a company’s organizational structure:
    • Unique organizational structures and arrangements to comply with current Chinese regulations can pose additional risks and costs to investors.
  • Risks related to the regulatory environment:
    • Substantial differences in China’s legal system may create more uncertainty and inconsistency in the interpretation and enforcement of laws and regulations.
  • Differences related to limitations on shareholder rights and recourse:
    • Legal claims and remedies may be very different and even difficult to pursue in local courts and/or judgments in a US court may not be recognized in the jurisdiction of some China-based companies.
  • Differences in corporate law and governance:
    • Fiduciary duties of directors to investors may be narrower or substantially different.
    • Exemptions of certain US exchange requirements for foreign private issuers may result in differences in the structure of the board of directors and/or the independence of its members.
  • Differences in reporting requirements:
    • China-based companies that qualify as foreign private issuers are exempt from certain reporting requirements, such as those relating to quarterly reports and certifications, and current reports of specified events (those filed on Form 8-K by domestic companies).
    • Foreign private issuers also have four months after year-end to file their annual reports versus 60 to 90 days for domestic companies. 

Dear Issuer Letter, December 2021 – China-based companies

The sample comments included in the Dear Issuer Letter are not an exhaustive list of the issues that companies should consider, but include requests to provide more specific and more prominent disclosures, including in areas such as the following:

  • Information regarding the legal structure and contractual arrangements with VIEs and the unique legal and other risks that these structures may present to investors.
  •  Legal and operational risks associated with operations in China, including how recent statements and regulatory actions by China’s government have or may impact the company’s operations, foreign investments, or listing on US or foreign exchanges.
  • Whether the company’s auditor is subject to the determinations announced by the PCAOB related to the Holding Foreign Companies Accountable Act and how other provisions of the HFCAA may impact the company.
  •  Permissions or approvals that the company, its subsidiaries and/or VIEs are required to obtain from Chinese authorities and regulatory agencies to operate the business and to offer securities being registered to foreign investors.
  • Descriptions of how cash is transferred, earnings or dividends are distributed, and other transfers occur through the organizational structure, and any restrictions or limitations on the ability to distribute earnings from the company.

Dear Issuer Letter, July 2023 – Companies regarding China-specific disclosures

The sample comments included in the Dear Issuer Letter highlight three areas of disclosure related to China-specific matters the SEC is focusing on:

  • Disclosure obligations under the Holding Foreign Companies Accountable Act (HFCAA), which requires public companies identified as Commission-Identified Issuers (CIIs) under the HFCAA to comply with the submission and disclosure requirements under the HFCAA and Commission rules for each year in which they are identified.
  • More specific and prominent disclosure about materials risks of intervention or control by the People’s Republic of China (the PRC) in the operations of China-based companies.
  • Tailored disclosures about to the material impacts of certain statutes, such as the Uyghur Forced Labor Prevention Act (UFLPA).

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