Rising Regulatory Risks for Foreign-Listed Firms and U.S. Market Gatekeepers

The U.S. capital markets have long served as a gateway for foreign-listed firms seeking access to global liquidity. However, the regulatory environment is rapidly evolving under the Holding Foreign Companies Accountable Act (HFCA Act) and intensified enforcement by the Public Company Accounting Oversight Board (PCAOB). These developments are reshaping investor due diligence practices and portfolio risk mitigation strategies, particularly for firms operating in jurisdictions where PCAOB inspections face barriers.

The HFCA Act and PCAOB’s Expanding Oversight

The HFCA Act, enacted in 2020, mandates that foreign issuers listed on U.S. exchanges must provide audit reports reviewed by the PCAOB. If the PCAOB determines it cannot fully inspect an issuer’s auditor—due to jurisdictional restrictions—the SEC may prohibit trading of those securities. This framework has disproportionately impacted firms from China, where initial restrictions on PCAOB access led to the identification of over 200 U.S.-listed companies as “Commission-Identified Issuers” [1].

A pivotal shift occurred in December 2022, when the PCAOB vacated its 2021 determination that it could not inspect mainland China and Hong Kong-based auditors [2]. This decision followed a breakthrough agreement allowing PCAOB inspectors to access audit workpapers and conduct on-site reviews. However, the PCAOB’s 2022 inspections of firms like KPMG Huazhen and PricewaterhouseCoopers Hong Kong revealed “significant audit deficiencies,” including inadequate evidence collection and poor communication with audit committees [3]. These findings led to three settled enforcement actions in 2023, signaling a new era of accountability for foreign auditors [3].

Investor Due Diligence in a High-Risk Environment

Investors are recalibrating their due diligence frameworks to account for HFCA Act risks. According to a report by Ropes & Gray, advisers are now required to implement “reasonably designed procedures” to assess the audit quality and governance of foreign issuers [4]. This includes scrutinizing whether an issuer’s auditor is PCAOB-registered and whether the firm has been flagged for deficiencies. For example, China-based companies that switched auditors to PCAOB-accessible firms like Marcum LLP faced new challenges, as these firms struggled with capacity constraints and quality control, leading to PCAOB enforcement actions in 2023 [5].

The SEC’s XBRL-tagging requirements for audit firm identifiers have further empowered investors to track compliance risks in real time. Registrants now have a 15-business-day window to dispute provisional identifications, but prolonged designation under the HFCA Act could trigger delisting as early as 2024 [1]. This has prompted investors to prioritize transparency in their portfolios, with some divesting from firms with opaque audit practices or those operating in jurisdictions with a history of PCAOB access disputes (e.g., France and Belgium) [6].

Portfolio Risk Mitigation Strategies

To mitigate HFCA Act and PCAOB-related risks, investors are adopting a multi-pronged approach:
1. Divestment and Rebalancing: Firms identified as Commission-Identified Issuers are being systematically excluded from portfolios. For instance, after the PCAOB’s 2022 inspections, several China-listed U.S. equities saw sharp declines in institutional ownership [3].
2. Enhanced Scrutiny of Audit Quality: Investors are engaging third-party auditors to review financial statements of foreign issuers, particularly those in high-risk sectors like technology and healthcare [4].
3. Alternative Compliance Strategies: Some investors are hedging against delisting risks by investing in U.S.-listed ETFs that exclude HFCA-affected firms or by diversifying holdings into domestic U.S. equities [6].

The Road Ahead: Regulatory Uncertainty and Investor Preparedness

While the PCAOB’s 2022 access to China-based auditors reduced immediate delisting risks, regulatory uncertainty remains. The PCAOB’s Rule 6100 allows annual reassessments of jurisdictions, meaning a reversal in U.S.-China regulatory cooperation could reignite HFCA Act enforcement [3]. Additionally, the SEC’s 2024 focus on late Form D filings and private offering compliance underscores a broader trend of tightening oversight [7].

Investors must also prepare for evolving disclosure requirements. For example, foreign private issuers (FPIs) are now required to file updated insider trading policies and confirm their eligibility as emerging growth companies by April 30, 2025 [8]. Failure to comply could result in heightened scrutiny or loss of regulatory benefits.

Conclusion

The HFCA Act and PCAOB’s enforcement agenda have redefined the risk calculus for foreign-listed firms and U.S. market gatekeepers. Investors who integrate rigorous due diligence and proactive portfolio adjustments will be better positioned to navigate this dynamic landscape. As regulatory scrutiny intensifies, the mantra for institutional investors remains clear: transparency, adaptability, and a relentless focus on audit quality.

Source:
[1] SEC adopts amendments to finalize HFCA Act-related rules [https://kpmg.com/us/en/frv/reference-library/2023/sec-adopts-interim-amendments-hfca-act.html]
[2] Holding Foreign Companies Accountable Act [https://www.sec.gov/rules-regulations/holding-foreign-companies-accountable-act]
[3] The PCAOB and China: What's Happened Since the HFCAA Became Law [https://www.jgacpa.com/the-pcaob-and-china-whats-happened-since-the-hfcaa-became-law]
[4] Ropes & Gray's Investment Management Update [https://www.ropesgray.com/en/insights/alerts/2022/02/ropes-grays-investment-management-update-december-2021-january-2022]
[5] The PCAOB and China: What's Happened Since the HFCAA Became Law [https://www.jgacpa.com/the-pcaob-and-china-whats-happened-since-the-hfcaa-became-law]
[6] Foreign Companies May Lose Access to U.S. Capital Markets Under Just Passed Senate Legislation [https://www.bhfs.com/insights/alerts-articles/2020/foreign-companies-may-lose-access-to-u-s-capital-markets-under-just-passed-senate-legislation]
[7] SEC Enforcement Actions For Late Form D Filings [https://securities-law-blog.com/2025/01/21/sec-enforcement-actions-for-late-form-d-filings/]
[8] Key Considerations for the 2025 Annual Reporting Season [https://www.whitecase.com/insight-alert/key-considerations-2025-annual-reporting-season-your-upcoming-form-20-f-and-other-fpi]