Sample Letter to Companies Regarding China-Specific Disclosures

July 17, 2023

In the last several years, the Division of Corporation Finance has been issuing guidance regarding the disclosure obligations of companies[1] based in or with a majority of their operations in the People’s Republic of China (China-based Companies[2]).[3]  The guidance addresses an array of disclosure issues, including those related to the variable interest entity structure, the reliability of financial reporting, the regulatory environment in China, and corporate governance matters.  Recently, the Division noted, in the context of the Commission’s rules under the Holding Foreign Companies Accountable Act (HFCAA),[4] that it is monitoring disclosures by certain China-based Companies and may provide additional guidance.[5]  As part of its filing review process, the Division also issues comments to China-based Companies to enhance their compliance with disclosure obligations under the federal securities laws.  The Division continues to believe that companies should provide 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. 

In this regard, the Division is focused on three areas of disclosure related to China-specific matters.

First, we remind companies of their disclosure obligations under the HFCAA.  More particularly, public companies identified as Commission-Identified Issuers (CIIs) under the HFCAA must comply with the submission and disclosure requirements under the HFCAA and Commission rules for each year in which they are identified.[6]  CIIs are listed on the SEC website at www.sec.gov/HFCAA.  For CIIs that are foreign issuers, the required disclosures include, among other matters, the percentage of shares owned by foreign government entities, whether government entities in the foreign jurisdiction have a controlling financial interest with respect to the issuer, identification of all Chinese Communist Party (CCP) officials who are on the board of the issuer or the operating entity for the issuer, and whether the issuer’s articles of incorporation (or any equivalent organizing document) contain any “charter” of the CCP.  The Division will review the relevant filings for compliance with these submission and disclosure requirements.

Second, the Division continues to issue comments seeking more specific and prominent disclosure about material risks related to the role of the government of the People’s Republic of China (the PRC) in the operations of China-based Companies.[7]  In particular, the Division is seeking disclosures about any material impacts that intervention or control by the PRC in the operations of these companies has or may have on their business or the value of their securities.  We remind companies that there are other ways in which a government or any person can exercise control over a company beyond appointing members to the board or having formal powers under the company’s organizational documents.  The federal securities laws and regulations generally define the term “control” (including the terms “controlling,” “controlled by,” and “under common control with”) more broadly.  For purposes of the Commission’s rules under the Securities Act of 1933 and the Securities Exchange Act of 1934, control “means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”[8] 

Third, we note that companies may need to make disclosures related to material impacts of certain statutes.  On December 23, 2021, the Uyghur Forced Labor Prevention Act (UFLPA) became law in the United States.[9]  The UFLPA, among other matters, prohibits the import of goods from the Xinjiang Uyghur Autonomous Region of the PRC.  In light of the UFLPA, companies should evaluate their disclosures with a view towards providing investors with tailored disclosure about the material impacts of the provisions of this statute on their business.  These impacts may include material compliance risks or material supply chain disruptions that companies may face if conducting operations in, or relying on counterparties conducting operations in, the Xinjiang Uyghur Autonomous Region. 

The following illustrative letter contains sample comments that, depending on the particular facts and circumstances, the Division may issue to companies.  These sample comments do not constitute an exhaustive list of the issues that companies should consider.  The Division urges companies to consider these sample comments and additional developments in this area as they prepare their disclosure documents.  Companies should contact the industry office responsible for review of the company’s filings with any questions regarding the company’s proposed disclosure.

July 2023

Name
ABC Corporation
Address

Dear Issuer:

We have reviewed your filing and have the following comments. Please revise or update your disclosure in response to our comments.

Item 9C of Form 10-K - Commission-Identified Issuers[10]

  1. We note your statement that you reviewed public filings in connection with your required submission under paragraph (a) of Item 9C of Form 10-K.  Please supplementally describe any additional materials that were reviewed and tell us whether you relied upon any legal opinions or third-party certifications, such as affidavits, as the basis for your submission.  In your response, please provide a similarly detailed discussion of the materials reviewed and legal opinions or third-party certifications relied upon in connection with the required disclosures under paragraphs (b)(2) and (3) of Item 9C of Form 10-K.
  1. In order to clarify the scope of your review, please supplementally describe the steps you have taken to confirm that none of the members of your board or the boards of your consolidated foreign operating entities are officials of the Chinese Communist Party.  For instance, please tell us how the board members’ current or prior memberships on, or affiliations with, committees of the Chinese Communist Party factored into your determination.  In addition, please tell us whether you have relied upon third-party certifications, such as affidavits, as the basis for your disclosure.
  1. With respect to your disclosure pursuant to paragraph (b)(5) of Item 9C of Form 10-K, we note that you have included language that such disclosure is “to our best knowledge.”  Please supplementally confirm without qualification, if true, that your and your consolidated foreign operating entities’ articles of incorporation do not contain wording from any charter of the Chinese Communist Party.

Risk of Intervention or Control by the PRC Government (Risk Factors)

  1. Given the significant oversight and discretion of the government of the People’s Republic of China (PRC) over the operations of your business, please describe any material impact that intervention or control by the PRC government has or may have on your business or on the value of your securities.  We remind you that, pursuant to federal securities rules, the term “control” (including the terms “controlling,” “controlled by,” and “under common control with”) means “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”[11]   

Uyghur Forced Labor Prevention Act (Management’s Discussion and Analysis of Financial Condition and Results of Operations)

  1. We note that you appear to conduct a portion of your operations in, or appear to rely on counterparties that conduct operations in, the Xinjiang Uyghur Autonomous Region.  To the extent material, please describe how your business segments, products, lines of service, projects, or operations are impacted by the Uyghur Forced Labor Prevention Act (UFLPA), that, among other matters, prohibits the import of goods from the Xinjiang Uyghur Autonomous Region.  

We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action, or absence of action by the staff.

Sincerely,

Division of Corporation Finance

 
 

[1] The statements in this guidance represent the views of the staff of the Division of Corporation Finance. This guidance is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”). The Commission has neither approved nor disapproved its content. This guidance, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.

[2]In prior guidance we have referred to companies based in or with a majority of their operations in the People’s Republic of China as “China-based Issuers.” 

[3]See Division of Corporation Finance, CF Disclosure Guidance: Topic No. 10, Disclosure Considerations for China-Based Issuers (Nov. 23, 2020), available at https://www.sec.gov/corpfin/disclosure-considerations-china-based-issuersand Division of Corporation Finance, Sample Letter to China-Based Companies (Dec. 20, 2021), available at https://www.sec.gov/corpfin/sample-letter-china-based-companies. Commission Chair Gary Gensler also issued a Statement on Investor Protection Related to Recent Developments in China (July 30, 2021), available at https://www.sec.gov/news/public-statement/gensler-2021-07-30.

[4]See Holding Foreign Companies Accountable Act, Pub. L. 116-222, 134 Stat. 1063 (Dec. 18, 2020), Holding Foreign Companies Accountable Act Disclosure, Release No. 34-93701 (Dec. 2, 2021).

[5]See Division of Corporation Finance and Division of Trading and Markets, Staff Statement on the Holding Foreign Companies Accountable Act and the Consolidated Appropriations Act, 2023 (Apr. 6, 2023), available at https://www.sec.gov/news/statement/statement-hfcaa-040623.

[6]  The HFCAA, as amended, requires that, every year, the SEC identify any public companies that file annual reports with financial statements audited by an auditor located in a foreign jurisdiction where the Public Company Accounting Oversight Board (PCAOB) has determined it is unable to inspect or investigate completely because of a position taken by a foreign authority. Under the amended HFCAA, once a company is identified as a Commission-Identified Issuer (CII) for two consecutive years, the Commission must apply certain trading prohibitions to that CII’s securities.

[7]Comments about the need to provide disclosure regarding the risk of Chinese government intervention or control apply equally to China-based companies and CIIs under the HFCAA, as these disclosure obligations arise under Securities Act and Securities Exchange Act rules other than those implementing the HFCAA. 

[8]17 CFR § 230.405 and 17 CFR § 240.12b-2. 

[9]Pub. L. 117–78, 135 Stat. 1525 (Dec. 23, 2021).

[10]Similar disclosure is required by Item 16 of Form 20-F.

[11]  17 CFR § 230.405 and 17 CFR § 240.12b-2.

Last Reviewed or Updated: June 26, 2024