Trending Now

Building a Resilient Supply Chain with Advanced Predictive…

New Articles

Congress Passes Bipartisan Legislation Requiring Chinese and Other Firms Listed on US exchanges to meet US Audit Standards

exchanges
Archives, Banking, Global Trade Daily, News

Congress Passes Bipartisan Legislation Requiring Chinese and Other Firms Listed on US exchanges to meet US Audit Standards

Leave a comment

In near lightning speed, Congress now has passed, and the President is expected to imminently sign into law, the Holding Foreign Companies Accountable Act (HFCAA), a bipartisan piece of legislation that, while applicable more broadly, is directed at the audit practices of Chinese companies, especially those owned or controlled by the Chinese government, and establishes a process to delist from US exchanges those companies that do not meet certain US audit standards.

This legislation follows on the heels of the Trump Administration’s action last week to bar US persons from investing in publicly traded securities of Chinese firms determined by the US government to be owned or controlled by the Chinese military. Unlike this more limited investment prohibition, which was established by Executive Order and can be revoked by the new Administration by executive action, the HFCAA is binding legislation that President-elect Biden would have no authority to waive.

Thus, the legislation mandates the process for delisting and directs the US Securities and Exchange Commission (SEC), an independent agency, to implement the listing ban.

HFCAA requirements

The HFCAA, which was first introduced in the Senate in May 2020, passed the Senate by unanimous consent that same month and was just passed in the US House of Representatives by voice vote on December 2, 2020. It now goes to President Trump’s desk to be signed into law.

Specifically, by its terms, the HFCAA establishes that an issuer’s securities will be banned from trading on US national securities exchanges in the event that, for three consecutive years, the issuer utilized a registered public accounting firm that has a branch or office located in a foreign jurisdiction that the US Public Company Accounting Oversight Board (PCAOB) is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction. Each year in which this occurs is referred to a “non-inspection” year.

The SEC has the authority to eliminate an initial ban if the issuer certifies that it has retained a registered public accounting firm that the PCAOB has inspected, but the SEC may also reinstitute the ban in the event the issuer experiences a subsequent non-inspection year. A reinstituted ban lasts for at least five years, after which the SEC may end the ban if the issuer certifies that it will retain a registered public accounting firm that the PCAOB is able to inspect.

The HFCAA also has important disclosure obligations for issuers that experience non-inspection years. Specifically, among other things, in each non-inspection year the foreign issuer would be required to disclose to the SEC:

-The percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which in the issuer is incorporated or organized;

-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;

-The name of each official of the Chinese Communist Party who is a member of the board of directors of (1) the issuer, or (2) the operating entity with respect to the issuer; and

-Whether the issuer’s articles of incorporation (or equivalent organizing document) contains any charter of the Chinese Communist Party, including the text of any such charter.

The SEC is required to promulgate regulations implementing the HFCAA within 90 days of enactment.

The HFCAA in context

The HFCAA has enjoyed bipartisan support and little organized opposition since it was introduced in the Senate in May 2020. Its passage and impending enactment is the culmination of ongoing public debate in the United States on whether to delist from US exchanges Chinese companies—especially those owned or controlled by the Chinese government—with audit practices that do not meet US standards.

In December 2018, the SEC and the PCAOB, which oversees the auditing of public companies, issued a joint warning to investors about the challenges US regulators face when seeking to conduct oversight of US-listed companies whose operations are based in China and Hong Kong. Chinese law requires that records remain in China, and the Communist Party restricts access to typical accounting information on the grounds of national security and state secrecy.1 In February 2020, the SEC released a statement regarding the difficulties that US regulators face when auditing US-listed companies based in China, and said that US investors and the US capital markets have become generally more exposed to companies with significant operations in China.2

Thereafter, in February 2019, the US-China Economic and Security Review Commission identified 156 Chinese companies—including 11 state-owned enterprises—listed on three of the largest US exchanges with a combined market capitalization of $1.2 trillion.

Subsequently, in July 2020, the Presidential Working Group (PWG) on Financial Markets, at the direction of President Trump, completed its examination of measures to protect US investors and recommended policies consistent with those contained in the Senate and House versions of the HFCAA.3  The PWG was chaired by the US Secretary of the Treasury Steven Mnuchin, and included the Chairman of the Board of Governors of the Federal Reserve System Jerome Powell, the Chairman of the SEC Jay Clayton, and the Chairman of the US Commodity Futures Trading Commission Heath P. Tarbert. The PWG ultimately recommended Chinese companies be delisted beginning in 2022 unless US regulators can obtain access to their audits.

The American Securities Association, a securities advocacy group, also issued a report in August 2020 recommending that Chinese firms failing to comply with SEC audit requirements be forced to deregister within six months—a considerably shorter time frame than the three years set forth in HFCAA.

Potential impact of the HFCAA and what comes next

Under the HFCAA, as noted above, any foreign issuers would be delisted from US exchanges if, for three consecutive years, it utilizes a registered public accounting firm with an office or branch in its jurisdiction to conduct its audit and the issuer refuses inspection of the audit report based on the law of said jurisdiction. Additionally, for each “non-inspection year” identified by the SEC, the foreign issuer would be required to submit additional disclosures.

While covering all foreign issuers of securities traded on US exchanges, the HFCAA in fact is directed to Chinese companies listed on US exchanges that utilize auditing firms not subject to standards established by the PCAOB.  For example, SEC Chairman Jay Clayton has stated that “[t]he [HFCAA] is a legislative attempt to get China to comply with the oversight requirements” and that “[t]he status quo is not acceptable.” 4

While some might view this measure as spillover into the financial sector of the ongoing US-Chinese economic and trade tensions, other observers have noted that it is hard to argue with the logic that firms listed on major US exchanges, which are afforded access to the most liquid capital markets in the world, should without exception be subject to transparent and robust audit disciplines compliant with western standards.

Implementation issues

The SEC is required to promulgate implementing regulations within 90 days after enactment, and it is possible the SEC will attempt to push out proposed regulations before President Trump leaves office on January 20, 2021. Any such proposed regulations must go through a public comment period before final regulations are issued and implemented, however. Thus, it is also possible that the latter part of the rulemaking process would occur during the incoming Biden Administration.

As noted at the outset, the HFCAA mandates the delisting process and only affords the SEC the authority to establish rules to implement this process and provide the details of obligatory reporting by covered companies. Moreover, the SEC, as an independent agency, is not directly subject to oversight by the new Administration on its implementation of the HFCAA.

Nevertheless, there is the prospect that some greater flexibility can be injected into the delisting process. In this regard, US news outlets have recently reported that the SEC is also working on a separate proposal that would allow Chinese auditors to comply with the US inspection requirement without violating its own jurisdiction’s laws by permitting the companies to get a second review of their books by an accounting firm based in a country where auditors comply with PCAOB oversight.5  Such a rule would take weeks or months to finalize.

Moreover, it is possible that there could be some negotiations between the US and China over applicable accounting standards for Chinese issuers that meet PCAOB standards. Whether such negotiations occur, however, remains to be seen.

_______________________________________________________________

By Jeffrey P. Bialos, Ginger T. Faulk, Mark D. Herlach and Nicholas T. Hillman at Eversheds Sutherland. Republished with permission.

usmca
Archives, Global Trade Daily, In The News

Sizing up the USMCA Compromise Package – How Various Industries Will be Impacted

Leave a comment

On December 10, Speaker Nancy Pelosi, the Trump administration, along with leaders in Mexico and Canada, announced a compromise to the new North American trade deal, known as the U.S. Mexico and Canada Agreement.  Eleventh-hour concessions by the Administration and Mexico are likely to result in a win for labor, President Trump, and ultimately market stability.

The final deal gives Democrats in Congress a few big wins in the pharmaceutical and labor industries, as well as environmental standards, and gives President Trump the victory of having his new trade deal on the path to ratification by all countries involved. Canada managed to receive much of what they requested, despite the slight opening of the Canadian dairy market to U.S. producers.

One of the biggest changes from the original draft USMCA in the compromise trade agreement is the negotiated labor monitoring and penalties for noncompliance. While the original draft required Mexico to change its laws to make it easier for workers to unionize, the compromise created an interagency committee that will monitor Mexico’s labor reform, established benchmarks and penalties for Mexico’s labor reform process, and established labor attachés in Mexico for on-the-ground reporting about Mexico’s labor practices.

Below is an outline of the changes to the USMCA – the House is expected to vote on the deal next week, though the Senate will likely not address the bill until the impeachment process has concluded:

For workers, language was removed that made it difficult to prove that trading partners are not protecting workers from violence in their respective countries. Now, Mexico has agreed to a “rapid-response labor mechanism” (see ANNEX 31-A) that allows independent, multinational three-person panels to investigate Mexican factories. Mexico, too, can have a panel investigate factories in the U.S. If a violation of union rights is found, a complaint can be filed, and the country making the accusation can determine the period of time that the accused county can have to address the concern. Provisions against Forced Labor also remain strong in the agreement. The deal is expected to also create 176,000 new jobs in the U.S. (See Article 23.3-23.4, ‘Labor Rights.)

For the environment, Democrats have promised that the deal has an added commitment that all the countries will have seven multilateral environment agreements (MEAs), alongside language that will allow the list to grow over time. Provisions include prioritization and monitoring of MEA commitments, and maintain and strengthen the protection of endangered species, the Montreal Protocol, prevention of pollution from ships, regulation of whaling, protection of the Ozone Layer and more (Article 1.3 Amendment and Article 24.9 Amendment)

For the pharmaceutical industry, the deal’s former provision that gave biologics a 10-year exclusivity period on the market is now entirely taken out. Democrats argued against the exclusivity period, concerned it could increase the cost of drugs, and succeeded in eliminating language that allows patent evergreening – when brand-name drug manufactures extend patents an additional to maintain power in the market when a new or related drug is created. (See the deletion of Article 20.49 ‘Biologics’)

For the internet, a Democratic concession led to maintained protections in the USMCA for technology companies, giving legal immunity for content posted by their users, as well as legal protections when these companies seek to moderate platforms. These provisions remain the same from Section 230 of the Communications Decency Act of the USMCA.

For the steel industry, while the deal already exempted the Canada and Mexico from steel and aluminum tariffs, the revised agreement has strict rules of origin in the automotive industry. The deal states that seven years after entry into the USMCA, all steel manufacturing must occur in one or more of the countries involved, except for the refinement of steel additives. Ten years after the agreement, the countries will consider appropriate requirements in the interest of all parties for aluminum to also be considered. (See Chapter 4, ‘Rules of Origin’)

For Canada and dairy, the U.S. will be able to export 3.6% of Canada’s dairy market, currently at 1%. Dairy companies in the U.S. can sell their products into Mexico duty-free, with access to common-named cheeses, while Canada is opening its market with more duty-free quotas for U.S. dairy products. The deal eliminates Canada’s 6/7 milk pricing system, and holds Canadian export of dairy to the standards of international trade rules.

And for the auto industry, in order to avoid tariffs, a car or truck must have 75% of its components made in the U.S., Mexico or Canada, up from 62.5% today.  Also, workers making the cars or trucks, at least 30% of the work, must be earning at least $16 an hour. By 2023, that number is 40% of the work done on cars.

With the United States positioning itself to negotiate several more trade deals, labor hopes that these last-minute changes set a benchmark for labor standards and enforcement moving forward and, likewise, the President hopes it demonstrates he can close a major trade deal.

___________________________________________________________

Note: Ryan Bernstein, formerly chief of staff to Senator John Hoeven (R-ND) is a senior vice president with McGuireWoods Consulting federal public affairs group.Mariam Eatedali is a research associate at McGuireWoods Consulting; she previously consulted with former representatives and senators to address foreign economic and diplomatic concerns while she was a fellow for the U.S. Association of Former Members of Congress

phase one
Archives, Global Trade Daily, International Trade

The Phase One Deal: How We Got Here And What Is Next

Leave a comment

President Trump announced that the United States and China had reached a partial “Phase One” trade deal in mid-October, signaling a pause in the trade tensions that have steadily grown over the past two and half years.  While the precise goals of the President’s trade action against China have always been vague, there was an unquestionable desire to change certain structural issues of the Chinese economy, particularly with the country’s intellectual property and forced technology practices.  

To put the proposed Phase One deal in its proper context, this article breaks down (1) the various stages of escalation since President Trump took office, (2) what’s known about the contents of agreement, and (3) the potential risks that could derail the deal from being signed.  

The Escalation of the Trade War

The President’s most high-profile actions against China have been his use of long-thought-defunct trade authority, Section 301 of the Trade Act of 1974 (“Section 301”).  Section 301 grants the President the authority to impose tariffs on countries if it determines that the acts, policies, or practices of a country are unjustifiable and burden or restrict U.S. commerce.  

Following a lengthy investigation, the Office of the U.S. Trade Representative (“USTR”) officially determined in March 2018 that China’s policies result in harm to the U.S. economy.  Simultaneously, President Trump signed a Presidential Memorandum outlining a series of remedies that his Administration would take in response to these findings, most notably the imposition of tariffs.  

President Trump’s Section 301 tariffs currently cover most products imported from China, after having been rolled out in four different lists:  

-List 1 of the Section 301 tariffs went into effect July 2018 and imposes a 25 percent tariff on $34 billion worth of goods from China.  

-List 2 went into effect August 2018 and imposes a 25 percent tariff on $16 billion worth of goods.  

-Following China’s retaliatory tariffs on Lists 1 and 2, the United States announced List 3, which began imposing a 10 percent tariff on $200 billion of Chinese products in September 2018.  The List 3 tariffs were increased to 25 percent after negotiations between the two countries fell apart.

-List 4 could hit almost $300 billion more of Chinese products.  Part of the list (“List 4a”) went into effect on September 1 and imposes 15 percent tariffs on $112 billion of Chinese products.  The U.S. is scheduled to impose 15 percent tariffs on the remaining $160 billion of the list (“List 4b”) starting December 15.  

The Trump Administration has taken aggressive action to increase pressure on China that goes well beyond the Section 301 tariffs.  Since President Trump took office, he has targeted China’s steel and aluminum industries through global tariffs on these products. He has (at least temporarily) sanctioned major Chinese tech firms or restricted their ability to do business with the United States.  He has sanctioned Chinese individuals and entities connected to North Korea and others related to the treatment of the Uighurs in western China. He signed into law a major expansion of authority for the Committee on Foreign Investment in the United States (“CFIUS”), which has immediate and future implications for Chinese investment in the United States. 

Additionally, the Administration has moved closer to Taiwan. President Trump has authorized significant military sales to Taiwan, and as President-elect, he took a call from Taiwan’s leader Tsai Ing-wen, the first such call by a U.S. President or President-elect since the 1970s. The Administration has either directly or indirectly made clear that these restrictions, sanctions, and geopolitical relationships can be used as points of leverage in the trade negotiations.  

The Phase One Deal

Many details about what is included in the Phase One deal remain unknown.  In announcing the deal, President Trump said “We have a great deal. We’re papering it now.  Over the next three or four or five weeks, hopefully, it’ll get finished. A tremendous benefit to our farmers, technology, and many other things — the banking industry, financial services.”  As the two sides “paper” the agreement into finalized text, what is known about the deal has come largely from statements made by both sides. We know that as part of the deal, the United States will not pursue plans to increase the List 1-3 tariffs from 25 percent to 30 percent. We also know China plans to make large purchases of U.S. agricultural products.  

There are reports the Phase One deal could also delay or cancel the planned List 4b tariffs. Other reports suggest that China is seeking additional eliminations or reductions of the Section 301 tariffs.  

As for the structural changes to the Chinese economy sought by the Trump Administration, it seems as though they could be mentioned in the Phase One deal, but the real work will be addressed in subsequent phases.  

What Comes Next

The stars were aligning for President Trump and President Xi to sign the Phase One deal at the Asia-Pacific Economic Cooperation (“APEC”) meetings in Santiago, Chile this week.  Unfortunately, the APEC meetings were unexpectedly cancelled due to protests in the country, highlighting that a few weeks can feel like an eternity for sensitive trade talks.  

Assuming the U.S. and China can find another location, there are still risks out there that could prevent the deal’s signing.  

One big risk to the deal is the events unfolding in Hong Kong. The Trump Administration has been notably quiet on the protests, outside of President Trump expressing his faith in President Xi to satisfactorily resolve the situation.  The strongest statement from the Administration came from Vice President Pence, who recently said, “[T]he United States will continue to urge China to show restraint, to honor its commitments, and respect the people of Hong Kong.  And to the millions in Hong Kong who have been peacefully demonstrating to protect your rights these past months, we stand with you.”

According to multiple reports, President Trump pledged to Chinese President Xi Jinping that his Administration would remain quiet on the Hong Kong protests throughout the trade talks.  However, the Administration’s hand could be forced if the protests escalate into more sustained violence or if, as is expected, Congress passes legislation in support of Hong Kong with veto-proof majorities.  

Another risk is more vocal opposition from so-called “China hawks” that are dissatisfied that Phase One doesn’t get to the heart of the problems they have with China’s economic practices.  Senate Minority Leader Chuck Schumer (D-NY) cautioned the President that he “shouldn’t be giving in to China unless we get something big in return.” Senator Marco Rubio (R-FL) doubted China’s commitment to the deal long-term, saying, “I do believe that [China] will agree to things they don’t intend to comply with.” There are reports that China hawks within the White House are also pushing the President to reject the deal, notably Director of the Office of Trade and Manufacturing Policy Peter Navarro.  

A deal to end or pause the trade tensions between the United States and China would provide the private sector with more certainty as they make decisions about 2020 and beyond.  The Phase One deal looks to provide at least a pause, but geopolitical actions or domestic opposition could still derail the agreement before it is signed.   

___________________________________________________________

Rory Murphy is an Associate at Squire Patton Boggs, where his practice focuses on providing US public policy guidance, global cultural and business diplomacy advice that helps US and foreign governments and entities with doing business around the globe.

USMCA
Archives, Global Trade Daily, News

Has Move to Impeach President Trump Pushed Aside the USMCA?

Leave a comment

The momentum to impeach in Washington, D.C., is not only hurtling Congress and President Donald Trump toward a potential constitutional crisis, but the prospect of reaching a solution to the ongoing trade standoffs has dimmed considerably.

That’s the opinion of leading international trade lawyer Clifford Sosnow, who notes the time frame for passing the U.S.-Mexico-Canada Agreement (USMCA)—and thereby revamping the North America Free Trade Agreement (NAFTA)—is growing shorter by the day, denting plans for global companies that rely heavily on exports.

“With impeachment officially on the table and the hyper-partisan climate in the lead-up to next year’s elections, there is serious concern whether the USMCA is dead in the water,” says Sosnow, an Ottawa-based partner with Canadian law firm Fasken.

“It’s unclear how much of a window is even left for approval of the USMCA. There are also high odds of failure post-election, especially if the Democrats win. The party has not shown any enthusiasm for the USMCA in its current form.”

Sosnow is not shooting from the hip in an easy chair. He has appeared before NAFTA and WTO panels and the Canadian International Trade Tribunal, and he has numerous clients affected by tariffs as well as any decisions on NAFTA, including automobile manufacturers, banks, service companies, IT companies, large retailers, manufacturers, agriculture business, aerospace firms, and transportation companies.