Holding Foreign Companies Accountable Act (HFCAA): Triggers and Bans

The Holding Foreign Companies Accountable Act is a 2020 federal law, codified at 15 U.S.C. § 7214(i), that requires every company listed on a U.S. exchange to let American regulators inspect its outside auditor’s work, no matter where that auditor sits. If a foreign government blocks those inspections for two years running, the SEC must prohibit trading in the company’s securities on every U.S. exchange and over-the-counter market.¹ Signed in December 2020, the law was aimed at a longstanding standoff with China, where authorities had for years refused to let U.S. regulators review the books of firms auditing hundreds of American-listed Chinese companies.

The Inspection Gap the Law Closed

The Sarbanes-Oxley Act of 2002 gave the Public Company Accounting Oversight Board authority to inspect every registered accounting firm that audits a publicly traded company. Inspectors review the firm’s methods, working papers, and conclusions to confirm the audit meets professional standards.¹

That system worked domestically. It failed abroad. Several jurisdictions, most prominently mainland China and Hong Kong, blocked PCAOB inspectors from entering, citing national security and sovereignty. The result was a two-tier market: American companies faced full regulatory scrutiny while certain foreign-listed companies effectively operated with unaudited financials from the PCAOB’s perspective. Investors had no independent confirmation the numbers in those annual reports were accurate.

The HFCAA attached real consequences to that obstruction. Rather than continuing to ask for access, Congress gave regulators the power to push non-compliant companies out of American markets entirely.

How a Company Gets Flagged

The SEC identifies any public company whose audit report was signed by a firm the PCAOB cannot fully inspect because of foreign government restrictions. Those companies are placed on a public list of “Commission-Identified Issuers.” After a provisional identification, a company has 15 business days to contact the SEC with evidence it was flagged incorrectly before the identification becomes final.²

The identification has nothing to do with wrongdoing by the company. A business could have flawless books and still land on the list. The trigger is the auditor’s location and the PCAOB’s determination that the foreign jurisdiction prevents complete inspections. That call belongs to the PCAOB alone.

The Two-Year Clock and What a Ban Covers

Once a company is identified in two consecutive years, the SEC must prohibit trading in its securities. The original statute set the threshold at three years; the Consolidated Appropriations Act of 2023 shortened it to two.³

The ban is comprehensive. It reaches every national exchange, including the New York Stock Exchange and Nasdaq, and it extends to every form of over-the-counter trading within the SEC’s jurisdiction, covering the OTC Pink Market and the Grey Market.² The statute uses the word “shall,” leaving the SEC no discretion once the threshold is crossed.¹ Brokers and dealers are then barred from executing trades in the affected securities. The company loses access to American capital, and existing shareholders face severely limited options for selling.

Disclosures Required While Listed

For each year a company appears on the Commission-Identified Issuer list, it must file additional disclosures with its annual report. These reach past standard financial reporting and into the company’s relationship with any foreign government:⁴

The percentage of shares held by government entities in the company’s jurisdiction of incorporation.
Whether any government entity holds a controlling financial interest.
The name of every Chinese Communist Party official sitting on the board of the listed company or its operating entities.
Whether the company’s articles of incorporation contain any charter of the Chinese Communist Party, including the full text.

These items exist because investors often cannot tell where a private foreign business ends and a government begins. A company can look independent on paper while its board seats party officials and its founding documents incorporate political mandates. The rule forces those ties into the light.

Why VIE Structures Don’t Get Around the Rules

Many Chinese companies reach U.S. exchanges through a variable interest entity, or VIE. Because Chinese law restricts foreign ownership in certain industries, the shares American investors actually buy are usually in a shell incorporated outside China, often in the Cayman Islands. That shell doesn’t own the Chinese operating business. It controls it through contracts that let it consolidate the operating entity’s financials into its reports.

The SEC saw the workaround coming. If the listed entity is a Cayman shell, a company could truthfully say no foreign government owns shares in it while the operating business underneath is deeply entangled with the state. The implementing rules require identified issuers to look through any VIE or similar consolidating structure and provide the required disclosures for both the listed entity and every consolidated foreign operating entity beneath it.⁴ Ownership percentages, board-level party affiliations, and party charters have to be disclosed where they actually exist.

Lifting a Ban, and the Five-Year Penalty

A trading prohibition is not necessarily the end. To get a ban lifted, the company must certify to the SEC that it has retained a registered accounting firm the PCAOB can fully inspect, and it must back that certification by filing financial statements audited by such a firm.⁵

The law then raises the stakes. If the SEC lifts a prohibition and the company falls out of compliance again, even for a single year, the SEC must impose a new ban. That second ban lasts at least five years before the company can certify its way back.¹ The escalation is deliberate. It stops companies from cycling in and out of compliance and signals to foreign governments that temporary cooperation followed by renewed obstruction produces harsher results than the original standoff.

Where Things Stand After the 2022 China Agreement

The law’s leverage showed in late 2022. After years of failed talks, Chinese authorities let the PCAOB conduct on-site inspections and investigations of registered firms headquartered in mainland China and Hong Kong for the first time. On December 15, 2022, the PCAOB announced it had completed inspections meeting U.S. standards and vacated its earlier 2021 determinations that those jurisdictions had blocked access.⁶

The immediate effect was that the SEC stopped adding new issuers to the list based solely on having an auditor headquartered in China or Hong Kong. Companies identified based on audit reports filed before December 15, 2022 remained on the list, but the path toward trading prohibitions was paused.²

This is not a permanent settlement. The PCAOB makes its determination each year. If Chinese authorities reverse course in a future year, the clock restarts. The SEC has said no issuers are currently at risk of a trading prohibition, but the enforcement machinery is intact.

What Shareholders Should Do

If you hold shares in a company on the Commission-Identified Issuer list, the timeline is the thing to watch. The clock starts with the first identification, and once a prohibition takes effect your ability to sell through any normal U.S. channel disappears. The SEC has warned that investors in this position will have “severely limited opportunities to sell the securities,” which can significantly affect their value.³

Some holders of American Depositary Receipts may be able to convert them into ordinary shares trading on a foreign exchange, but conversion is not always available. Restrictions can arise if the ADR custodian’s books are closed, if foreign ownership limits have been reached, or if the underlying shares came through a private placement. Conversion carries fees and potential tax consequences. A sale or disposition at a loss, whether voluntary before a ban or forced after one, is reportable as a capital loss on Form 8949 and Schedule D.

Separately, a company identified under the HFCAA may face delisting under the exchange’s own listing standards, which can be triggered independently and on a separate timeline. The SEC advises shareholders of a Commission-Identified Issuer to look into their options before a prohibition order arrives rather than after.³

1
Office of the Law Revision Counsel. 15 USC 7214 – Inspections of Registered Public Accounting Firms
2
U.S. Securities and Exchange Commission. Holding Foreign Companies Accountable Act
3
Investor.gov. Trading Prohibitions for Foreign Companies Under the HFCAA
4
U.S. Securities and Exchange Commission. Holding Foreign Companies Accountable Act Disclosure
5
U.S. Securities and Exchange Commission. Holding Foreign Companies Accountable Act Final Amendments
6
U.S. Securities and Exchange Commission. Statement on PCAOB Determinations Regarding Public Accounting Firms in China and Hong Kong