SEC Seeking More Detailed Disclosures From Chinese Companies on UFLPA Compliance

The Securities and Exchange Commission is pressing companies based in China to provide more detailed disclosures on Uyghur Forced Labor Prevention Act compliance and the role of the Chinese government in their operations, according to a sample letter recently posted to the agency’s website.

The SEC’s Division of Corporation Finance has been issuing “comments” to China-based companies asking them to “enhance their compliance with disclosure obligations under the federal securities laws,” it said. 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,” it said.

For UFLPA, the SEC said “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.”

A question in the SEC’s sample letter tells the hypothetical China-based company that appears to conduct operations in Xinjiang or relies on a counterparty with operations in Xinjiang to “describe how your business segments, products, lines of service, projects, or operations are impacted by” UFLPA.

Likewise, the SEC is seeking more information on “any material impacts that intervention or control by the [Chinese government] in the operations of these companies has or may have on their business or the value of their securities.”

A question in the sample letter asks China-based companies with “significant oversight and discretion of the government” of China to “describe any material impact that intervention or control by the [Chinese] government has or may have on your business or on the value of your securities.” The letter includes a reminder that, “pursuant to federal securities rules, the term ‘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.’”