[Federal Register: March 25, 2004 (Volume 69, Number 58)]
[Notices]
[Page 15394-15411]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25mr04-114]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49454; File No. PCAOB-2003-07]
Public Company Accounting Oversight Board; Notice of Filing of
Proposed Rules Relating to Investigations and Adjudications
March 19, 2004.
Pursuant to section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Act''), notice is hereby given that on October 10, 2003, the Public
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'')
filed with the Securities and Exchange Commission (the ``Commission'')
the proposed rules described in Items I, II, and III below, which items
have been prepared by the Board. The Commission is publishing this
notice to solicit comments on the proposed rules from interested
persons.
I. Board's Statement of the Terms of Substance of the Proposed Rules
On September 29, 2003, the Board adopted rules related to
investigations and adjudications. The proposal includes 64 rules on
investigations and adjudications (PCAOB Rules 5000 through 5501), a
general rule on time computation (PCAOB Rule 1002) and 14 definitions
that would appear in PCAOB Rule 1001. The text of the proposed rules is
available for inspection at the Commission's Public Reference Room and
on the PCOAB's Internet Web site, at http://www.pcaobus.org.
II. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules; Board's Statements on Burden on Competition and on
Comments on the Proposed Rules
In its filing with the Commission, the Board included statements
concerning the purpose of, and basis for, the proposed rules and
discussed the burden on competition and any comments it received on the
proposed rules. The text of these statements may be examined at the
places specified in Item IV below. The Board has prepared summaries,
set forth in subsections A, B and C below, of the most significant
aspects of such statements.
[[Page 15395]]
A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules
(a) Purpose
Section 105 of the Act grants the Board broad investigative and
disciplinary authority over registered public accounting firms and
persons associated with such firms. Specifically, the Act authorizes
the Board to conduct an investigation of any act or practice, or
omission to act, by a registered public accounting firm, any associated
person of such firm, or both, that may violate any provision of the
Act, the rules of the Board, the provisions of the securities laws
relating to the preparation and issuance of audit reports and the
obligations and liabilities of accountants with respect thereto,
including the rules of the Commission issued under the Act, or
professional standards. The Act also authorizes the Board to conduct
hearings to determine whether a registered firm or associated person
should be disciplined for any such violation. To implement this
authority, Section 105(a) directs the Board to establish, by rule, fair
procedures for the investigation and discipline of registered public
accounting firms and associated persons of such firms. The Board has
adopted the proposed rules and definitions to establish fair procedures
for Board investigations, fair procedures for Board disciplinary
proceedings, and fair sanctions for violations. Each of the rules and
definitions is discussed below.
Rule 1001--Definitions of Terms Employed in Rules
Rule 1001 contains definitions of terms used in the Board's rules.
The rules relating to investigations and adjudications employ certain
terms that the Board is adding to the terms defined in Rule 1001.
Accounting Board Demand
Rule 1001(a)(ix) defines ``accounting board demand'' as a command
to produce documents and/or to appear at a certain time and place to
give testimony. The rules use this term only to identify demands made
upon registered public accounting firms and associated persons of such
firms. Under the Act, the Board has authority to require those firms
and persons to provide any testimony or documents sought by the Board
in furtherance of its responsibilities under the Act, and including in
particular any testimony or documents that the Board considers relevant
to an investigation.
Accounting Board Request
Rule 1001(a)(x) defines ``accounting board request'' as a request
to produce documents and/or to appear at a certain time and place to
give testimony. The rules use this term to distinguish the Board's
efforts to obtain documents and testimony from persons other than
registered public accounting firms and their associated persons.
Bar
Rule 1001(b)(ii) defines ``bar'' as a permanent disciplinary
sanction prohibiting a person from being associated with a registered
public accounting firm. The rules distinguish between the concepts of
``bar'' and ``suspension.'' Both sanctions, when applied to an
associated person, prohibit the person from being an associated person
of a registered public accounting firm. A suspension, however, as
defined below, is a time-limited sanction that expires at a fixed time
after which the person may resume being an associated person without
any other action by the person or the Board. In contrast, a bar is a
permanent sanction that does not expire unless the person petitions the
Board for termination of the bar, pursuant to the provisions of the
rules, and the Board grants the petition. In some cases, the Board may
impose a bar that expressly provides that a person may petition for
termination of the bar after a fixed period. In other cases, the Board
may impose a bar with no such provision.
Counsel
Rule 1001(c)(ii) defines ``counsel'' as an attorney at law admitted
to practice, and in good standing, before the Supreme Court of the
United States or the highest court of any state.
Disciplinary Proceeding
Rule 1001(d)(i) defines ``disciplinary proceeding'' as a proceeding
initiated by an order instituting proceedings, held for the purpose of
determining (1) whether a registered public accounting firm, or any
person associated with a registered public accounting firm has (a)
engaged in any act or practice, or omitted to act, in violation of the
Act, the Rules of the Board, the provisions of the securities laws
relating to the preparation and issuance of audit reports and the
obligations and liabilities of accountants with respect thereto,
including the rules of the Commission issued under the Act, or
professional standards; or (b) failed reasonably to supervise an
associated person in connection with any such violation by that person;
or (c) failed to cooperate with the Board in connection with an
investigation; and (2) whether to impose a sanction pursuant to Rule
5300.
Document
Rule 1001(d)(ii) defines ``document'' as synonymous in meaning and
equal in scope to its usage in Federal Rule of Civil Procedure 34(a),
including, without limitation, electronic or computerized data
compilations. A draft or non-identical copy is a separate document
within the meaning of this term. In no event shall the term
``document'' be construed to be limited to audit work papers.
Hearing Officer
Rule 1001(h)(i) defines ``hearing officer'' to mean a person, other
than a Board member or staff of the interested division, duly
authorized by the Board to preside at a hearing.
Interested Division
Rule 1001(i)(iv) defines ``interested division'' as a division or
office of the Board assigned primary responsibility by the Board to
participate in a particular proceeding. As a general matter, the
interested division in a disciplinary proceeding will be the Division
of Enforcement and Investigations, and the interested division in a
hearing on disapproval of a registration application will be the
Division of Registration and Inspections. The definition is adapted
from Rule 101(a)(6) of the Commission's Rules of Practice.
Order Instituting Proceedings
Rule 1001(o)(ii) defines ``order instituting proceedings'' as an
order issued by the Board commencing a disciplinary proceeding.
Party
Rule 1001(p)(iii) defines ``party'' as the interested division, any
person named as a respondent in an order instituting proceedings or
notice of a hearing, any applicant named in the caption of any order,
or any person seeking Board review of a decision.
Person
Rule 1001(p)(iv) defines ``person'' as any natural person or any
business, legal or governmental entity or association.
Revocation
Rule 1001(r)(iii) defines ``revocation'' as a permanent
disciplinary sanction terminating a firm's registration. The rules
distinguish between the concepts of ``revocation'' and ``suspension.''
Both sanctions, when applied to a firm,
[[Page 15396]]
prohibit the firm from preparing or issuing, or participating in the
preparation or issuance of, audit reports. A suspension, however, as
defined below, is a time-limited sanction that expires at a fixed time
after which the firm may resume such work without any other action by
the firm or the Board. In contrast, revocation is a permanent sanction
that does not expire unless the firm, with the Board's permission,
reapplies for registration pursuant to the provisions of the rules, and
the Board approves the application. In some cases, the Board may impose
a revocation that expressly provides that a firm may reapply for
registration after a fixed period. In other cases, the Board may impose
a revocation with no such provision.
Secretary
Rule 1001(s)(iii) defines ``Secretary'' as the Secretary of the
Board.
Suspension
Rule 1001(s)(iv) defines ``suspension'' as a temporary disciplinary
sanction which lapses by its own terms and prohibits (1) a registered
public accounting firm from preparing or issuing, or participating in
the preparation or issuance of, any audit report with respect to any
issuer; or (2) a person from being associated with a registered public
accounting firm. A suspension is distinct from a bar (as to an
associated person) and a revocation (as to a firm) in that a suspension
is a sanction that expires by its own terms at a fixed time, with no
further action required of the associated person, the firm, or the
Board.
Rule 1002--Time Computation
Rule 1002 describes the method by which the Board shall compute
time for purposes of complying with deadlines in the Board's rules.
Rule 5000--General
Rule 5000 requires that registered public accounting firms and any
associated persons of such firms comply with all Board orders to which
they are subject. The Act authorizes the Board to take certain action
with respect to, or require certain things of, registered public
accounting firms and their associated persons. For example, the Act
authorizes the Board to require such firms and persons to produce
documents or to provide testimony, and the Act authorizes the Board to
impose significant disciplinary sanctions on such firms and persons for
various violations and for non-cooperation with Board investigations.
In exercising its authority, the Board will frequently act through the
vehicle of a Board order. A requirement of compliance with such orders
is implicit in the authority to take the action, and Rule 5000 makes
that requirement explicit.
Part 1--Inquiries and Investigations
Part 1 of the Board's Rules on Investigations and Adjudications
consists of Rules 5100 through 5112. These rules address procedural
matters concerning the conduct of informal inquiries by Board staff and
formal Board investigations.
Rule 5100--Informal Inquiries
The Board contemplates that the staff of the Division of
Enforcement and Investigations will sometimes conduct informal
inquiries to determine whether to recommend that the Board open a
formal investigation on a matter. Rule 5100 describes generally the
circumstances in which the staff may conduct an informal inquiry (Rule
5100(a)) and the scope of the activity in which the staff may engage in
an informal inquiry (Rule 5100(b)).
Under Rule 5100(a), the staff may undertake an informal inquiry
where it appears to the staff that an act or practice, or an omission
to act, by a registered public accounting firm or an associated person
may violate the Act, the Board's rules, the provisions of the
securities laws relating to the preparation and issuance of audit
reports and the obligations and liabilities of accountants with respect
thereto, including the rules of the Commission issued under the Act, or
professional standards. Under Rule 5100(b), the staff may pursue an
informal inquiry by requesting documents, information, or testimony
from any person. The staff may not, in an informal inquiry, issue
accounting board demands.
Rule 5101--Commencement and Closure of Investigations
Rule 5101 describes generally the processes by which the Board will
commence and close formal investigations. The Board may commence a
formal investigation when it appears that an act or practice, or
omission to act, by a registered public accounting firm or any person
associated with such a firm may violate any provision of the Act, the
Rules of the Board, the provisions of the securities laws relating to
the preparation and issuance of audit reports and the obligations and
liabilities of accountants with respect thereto, including the rules of
the Commission issued under the Act, or professional standards. Rule
5101(a)(1) provides that the way the Board will commence an
investigation is by issuing an order of formal investigation. Rule
5101(a)(2) provides that the Board may, in the formal order, designate
Board staff members, or groups of staff members (such as a particular
division or office) authorized to issue accounting board demands and
otherwise require or request the cooperation of any person in
connection with the investigation. Rule 5101(b) provides that the Board
may issue an order suspending a formal investigation for a specified
period of time or terminating a formal investigation.
Rule 5102--Testimony of Registered Public Accounting Firms and
Associated Persons in Investigations
Section 105(b)(2)(A) of the Act authorizes the Board to promulgate
rules requiring the testimony of any registered public accounting firm
or any associated person of such a firm with respect to any matter that
the Board considers relevant or material to an investigation. Rule
5102(a) implements that authority by providing that the Board and the
staff of the Board designated in the order of formal investigation may
require such testimony. Paragraphs (b) through (e) of Rule 5102
describe procedures related to obtaining and recording that testimony.
Rule 5102(b) provides that the Board or staff shall require
testimony by serving an accounting board demand. Under the rule, the
demand must give reasonable notice of the time and place for taking
testimony, must describe the methods by which the testimony will be
recorded, and, if the demand is directed to a firm rather than to a
natural person, must supply a description with reasonable particularity
of the matters on which examination is requested.
The rule does not impose any minimum period of notice for
testimony, but does require reasonable notice. We anticipate that it
will not be unusual for the staff to provide two to three weeks notice.
We decline to codify a particular period of notice, however, because
there will be circumstances in which there is no compelling reason why
21, or even 14, days notice is necessary, and there may be legitimate
reasons for requiring the testimony sooner.
Rule 5102(c) describes procedures related to the actual conduct of
the examination. Rule 5102(c)(1) provides that each witness shall be
required to declare that the witness will testify truthfully, by oath
or affirmation. The oath or affirmation provision of the rule is
adapted from Federal Rule of
[[Page 15397]]
Evidence 603. The authority to administer and obtain such an oath or
affirmation is implicit in the Board's authority to require testimony.
Rule 5102(c)(2) provides that examinations shall be conducted
before a reporter designated by the Board's staff to record the
examination. Rule 5102(c)(3) imposes restrictions on who may be present
during the examination. Persons who may be present are limited to the
witness, the witness's counsel (subject to Rule 5109(b), discussed
below), any member of the Board or the Board's staff, the reporter, and
any other person whom the Board or the staff designated in the order of
formal investigation determine to be appropriate permit to be present.
All of these provisions, however, are qualified by the restriction that
in no event shall any person (other than the witness) who has been or
is reasonably likely to be examined in the investigation be present.
This last restriction is not limited to registered public accounting
firms and associated persons of such firms but also includes any other
person from whom the Board or the staff could seek to require testimony
pursuant to a Commission subpoena (as described in Rule 5111).
The rule allows counsel to represent a witness and the witness's
firm to the extent that such dual representation is consistent with
counsel's ethical obligations generally. The rule does not allow for
the presence of a firm's in-house counsel, or any other counsel, who
does not enter a notice of appearance affirmatively stating that he or
she represents the witness. Counsel who represents both the firm and
the witness, and who, during testimony, becomes aware of a conflict
that would cause him or her to cease representing the witness, may not
continue to be present.
Rule 5102(c)(4) is modeled on Rule 30(b)(6) of the Federal Rules of
Civil Procedure. Rule 5102(c)(4) provides that a registered public
accounting firm that is required to provide testimony shall designate
one or more persons to testify on its behalf and may set forth, for
each person designated, the matters on which the person will testify.
Those persons are then required to testify as to matters known or
reasonably available to the firm.
Rule 5102(e) allows a witness a period of time, after being
notified that the transcript or other recording of the examination is
available for review, to describe any changes in form or substance that
the witness would make and to supply the reasons for such changes.
Under the rule, the transcript shall be accompanied by the reporter's
certification that the witness was duly sworn and that the transcript
is a true record of the testimony, and shall indicate whether the
witness requested to review the transcript. The reporter shall also
append to the transcript any changes to the testimony made by the
witness during the review period described above.
Rule 5102(e) allow a witness 15 days to request changes to the
transcript, and allows for an extension of the 15-day period with the
approval of the Director of the Division of Enforcement and
Investigations.
Rule 5103--Demands for Production of Audit Workpapers and Other
Documents in Investigations From Registered Public Accounting Firms and
Associated Persons
Section 105(b)(2)(B) of the Act authorizes the Board to promulgate
rules requiring the production of audit workpapers and any other
document or information in the possession of any registered public
accounting firm or any associated person of such a firm, wherever
domiciled, with respect to any matter that the Board considers relevant
or material to an investigation. Rule 5103(a) implements that authority
by providing that the Board and the staff of the Board designated in
the order of formal investigation may require production of such
documents and information.
Rule 5103(b) provides that an accounting board demand for documents
or information shall set forth a reasonable time and place for such
production. Rule 5103(b) does not impose any minimum notice requirement
before production shall be due. We anticipate that it will not be
unusual for the staff to provide two to three weeks notice. The rule
does not codify a particular period of notice, however, because there
will be circumstances in which there is no compelling reason why 21, or
even 14, days notice is necessary and there may be legitimate reasons
for requiring the documents sooner.
Rule 5103(b) provides that the documents produced may be
photocopies unless otherwise specified in the accounting board demand.
The rule also requires, however, that the originals be maintained in a
reasonably accessible manner, be readily available for inspection by
the staff, and not be destroyed without the staff's consent. An
original document that could otherwise be destroyed consistent with any
applicable document retention requirements or other legal requirements
may nevertheless not be destroyed without the staff's consent if it is
responsive to an accounting board demand received by the firm.
Rule 5104--Examination of Books and Records in Aid of Investigations
Section 105(b)(2)(B) of the Act authorizes the Board to promulgate
rules allowing the Board to inspect the books and records of a
registered public accounting firm or any associated person of such a
firm, wherever domiciled, to verify the accuracy of any documents and
information supplied by the firm or person in an investigation. Rule
5104 implements that authority by providing that the Board and the
staff designated in an order of formal investigation may examine such
books and records to verify the accuracy of any documents or
information supplied in the course of an informal inquiry or formal
investigation. Any such examination would be separate and apart from
any Board inspection pursuant to Section 104 of the Act and the Board's
rules thereunder and would not be subject to the provisions of Section
104 or the Board's rules thereunder. Rule 5104 requires that the firm
or person allow such examination upon demand, and does not provide for
any minimum notice period.
Rule 5105--Requests for Testimony or Production of Documents From
Persons Not Associated With Registered Public Accounting Firms
Section 105(b)(2)(C) of the Act authorizes the Board to promulgate
rules to request that any person, including any client of a registered
public accounting firm, provide any testimony and documents that the
Board considers relevant or material to an investigation. The Act
requires the Board and the staff to provide appropriate notice of such
requests, subject to the needs of the investigation. Rule 5105
implements that authority by providing that the Board and the staff may
make such requests to any person. In this context, the rules use the
term ``accounting board request'' to distinguish it from an
``accounting board demand,'' which may be made only to registered
public accounting firms and associated persons of such firms.
Rule 5105 provides that the Board or staff shall give appropriate
notice when requesting testimony (Rule 5105(a)(1)) and specify a
reasonable time and place when requesting document production (Rule
5105(b)). What notice is appropriate for testimony, and what is a
reasonable time and place for production, may vary with the
circumstances and the needs of the investigation. Rule 5105(a)(1) also
[[Page 15398]]
provides that an accounting board request for testimony shall state the
method by which the testimony shall be recorded. The rule further
provides that if the person to be examined is an organized entity,
rather than a natural person, the accounting board request shall
provide a description with reasonable particularity of the matters on
which examination is requested.
Rule 5105(a)(2) incorporates, in the context of testimony pursuant
to an accounting board request, the procedural and transcript
provisions of testimony pursuant to an accounting board demand, as
discussed above with respect to Rules 5102(c)-(e).
Although the Board can only request, and not require, testimony or
production of documents from persons other than registered public
accounting firms and associated persons of such firms, the Board does
have the option of seeking a Commission subpoena to require testimony
or document production from any person, as discussed below with respect
to Rule 5111. The note to Rule 5105 serves as a reminder that this
option is available to the Board. The note, however, does not in any
way limit the Board's authority to seek a Commission subpoena at any
time, even if the Board has not first sought the testimony or documents
through an accounting board request. Neither the note, nor anything in
the Board's rules, creates any right in any person to receive an
accounting board request or any other form of notice from the Board
before the Board seeks a Commission subpoena to be served on that
person.
Rule 5106--Assertion of Claim of Privilege
Rule 5106 imposes requirements on any person who declines to
provide testimony, documents, or information required by an accounting
board demand, or a demand for examination under Rule 5104, on the
ground of an assertion of privilege. The rule specifies the types of
information that a person must supply related to the privilege
assertion. The rule is adapted from Rule 6.2 of the local rules of the
District Court for the Southern District of New York. Failure to supply
the required information is a violation of the rule, and may subject a
person to a disciplinary proceeding for violation of a Board rule or
for non-cooperation with an investigation.
Although not expressly reflected in the rule text, the Board does
not intend to invade the province of any legitimately asserted
privilege that would, under prevailing law, be treated as a valid basis
for declining to provide documents or information in response to a
Commission subpoena, including valid assertions of the privilege
against self-incrimination under the Fifth Amendment to the United
States Constitution. The Board fully intends, however, that assertions
of the Fifth Amendment privilege may be used as evidence in Board
disciplinary proceedings and will be the basis for evidentiary
inferences against the person asserting the privilege. In addition, the
Board may also report assertions of that privilege to other appropriate
authorities consistent with our authority under the Act to share
information.
Rule 5107--Uniform Definitions in Demands and Requests for Information
Rule 5107 supplies certain definitions and rules of construction
that shall be deemed to be incorporated by reference into all
accounting board demands and accounting board requests for information.
These definitions and rules of construction are modeled on those in use
by the federal districts courts in the Southern District of New York.
Rule 5107 does not preclude the Board or the staff, in any particular
accounting board demand or accounting board request, from defining
other terms, or from using abbreviations, or supplementing or using
only part of a definition of a term defined in Rule 5107.
Rule 5108--Confidentiality of Investigatory Records
Rule 5108(a) provides that unless otherwise ordered by the Board or
the Commission, all documents, testimony or other information prepared
or received by or specifically for the Board or its staff in connection
with an informal inquiry or a formal investigation shall be
confidential in the hands of the Board, unless and until presented in
connection with a public proceeding or released in accordance with
Section 105(c) of the Act and the Board's rules thereunder. Consistent
with Section 105(b)(5) of the Act, however, Rule 5108 provides that the
Board may supply any such information to the Commission and, when
determined by the Board to be necessary to accomplish the purposes of
the Act or to protect investors, to certain other government entities,
specifically: the Attorney General of the United States, an appropriate
Federal functional regulator (as defined in Section 509 of the Gramm-
Leach-Bliley Act) other than the Commission if the information pertains
to an audit report for an institution subject to the jurisdiction of
such regulator, state attorneys general in connection with any criminal
investigation, and appropriate state regulatory authorities.
Rule 5108(b) provides that nothing in paragraph (a) ``shall
prohibit the Board or the staff of the Board from disclosing any
documents, testimony, or other information to any other person as is
reasonably necessary to carry out the Board's responsibility, under
Section 105 of the Act, to conduct investigations according to fair
procedures.'' The purpose of this provision is to provide notice that
the Board does not interpret Section 105(b)(5)(A) to prohibit the Board
from doing such fundamental things as, for example, questioning a
witness about a document supplied to the staff by someone other than
that witness.
Read literally and in isolation, Section 105(b)(5)(A) could be
understood to prohibit the staff not only from showing exhibits to
witnesses, but even from transmitting to a firm a written accounting
board demand for documents, since the demand would be a document
encompassed by the language of Section 105(b)(5)(A) and would therefore
be confidential. We read Section 105(b)(5)(A) in light of, rather than
in isolation from, the rest of Section 105. Section 105 begins by
authorizing the Board to conduct investigations and requiring the Board
to do so according to fair procedures. An overly literal reading of
Section 105(b)(5)(A) would negate any possibility of doing so.
Rule 5108(b) reflects our understanding that the Act authorizes the
Board and its staff to disclose documents and information (even if
otherwise covered by Section 105(b)(5)(A)) as reasonably necessary to
execute the Board's authority and responsibility to conduct fair
investigations. Rule 5108(b)'s application does not extend outside the
sphere of a Board investigation. It is not authority for disclosing
information other than to a person from whom the Board demands or
requests information in connection with an investigation. Even as to
those persons, the rule is not authority for disclosing information
other than as reasonably necessary to carry out legitimate
investigative functions in a manner that is fair to the person.
We note that Section 105(b) of the Act appears to preempt state
open records laws with respect to materials and information provided by
the Board to an agency under Section 105(b)(5)(B).\1\ We
[[Page 15399]]
do not, however, see this as a point that has a place in the Board's
rules. The Act speaks clearly for itself on this point.
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\1\ Any otherwise applicable state or local law that would
conflict with a requirement of the Act or stand as an obstacle to
the accomplishment and execution of the full purposes and objectives
of Congress is preempted. See, e.g., Crosby v. National Foreign
Trade Council, 530 U.S. 363, 372-73 (2000); City of New York v. FCC,
486 U.S. 57, 64 (1988).
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For similar reasons, the rule does not seek to prohibit agencies
from disclosing materials that the Act itself forbids them to disclose.
Nor do we see a need to provide, by rule, for a confidentiality
agreement in every case to reinforce the requirements of the Act. It is
the Act, and not the Board's rules, that constrain the conduct of those
agencies. In the event that we discover that any particular agency
makes disclosures that we believe are inconsistent with Section
105(b)(5), both the Act and Rule 5108 allow us the flexibility to
decline to supply certain information to that agency or to require
appropriate assurances of confidentiality.
The second note to Rule 5108 points out that the Director of
Enforcement and Investigations may engage in, and may authorize staff
to engage in, discussions with persons identified in Rule 5108
concerning documents, testimony, and information described in the rule.
Rule 5109--Rights of Witnesses in Inquiries and Investigations
Rule 5109 sets out certain rights accorded to persons from whom the
Board seeks documents, testimony, or information in an investigation.
Under Rule 5109(a), any person compelled to testify or produce
documents pursuant to a Commission subpoena issued pursuant to Rule
5111, and any person who testifies or produces documents pursuant to an
accounting board demand, shall, upon request, be allowed to review the
Board's order of formal investigation. No such person is entitled to
obtain their own copy of the order of formal investigation, but the
Director of Enforcement and Investigations may, in his or her
discretion, allow a person to obtain a copy of the order. The Director
of Enforcement and Investigations may, as a condition of granting a
request for the formal order, impose limitations on its further
dissemination. We intend for the Director to use this discretion as
necessary to avoid undermining an investigation and to maintain, to the
extent reasonably possible, the nonpublic nature of the formal order.
We do not intend that this discretion routinely be used in a way that
would inhibit legitimate uses of the document by a person or counsel,
such as sharing of the document subject to a joint defense agreement.
Rule 5109(b) allows any person who appears to testify in a formal
investigation to be accompanied, represented, and advised by counsel.
Rule 5109(b) grants this right on the condition that counsel
affirmatively represents to the staff, either through a notice of
appearance or a statement on the record at the beginning of the
testimony, that he or she represents the witness. This rule is adapted
from Rule 7(b) of the Commission's Rules Relating to Investigations.
The right granted by Rule 5109(b) is also limited by Rule 5102(c)(3),
which does not allow for the presence of any person, even counsel, who
has been or is reasonably likely to be examined in the investigation.
Rule 5109(c) provides that a witness may inspect the transcript of
his or her own testimony. A person who has testified or provided
documents may also request a copy of his or her transcript or of the
documents he or she produced. If the request is granted, the transcript
or documents may be obtained upon the payment of fees to cover the cost
of reproduction. Any such request, however, may be denied by the
Director of Enforcement and Investigations for good cause shown if the
documents or testimony have not been presented in connection with a
proceeding or released in accordance with Section 105(c) of the Act and
the Board's rules thereunder. This rule is adapted in part from Rule 6
of the Commission's Rules Relating to Investigations.
Rule 5109(d) provides that registered public accounting firms and
persons associated with such firms may, on their own initiative at any
time, submit a written statement to the Board setting forth their
interests and positions in regard to the subject matter of any
investigation in which they have become involved. The staff, either
upon request or on its own initiative, may--but is not required to--
advise any such person of the general nature of an investigation,
including the indicated violations as they pertain to that person, and
may prescribe a fixed period of time that will be allowed for the
person to submit a statement of position and interests before the staff
makes any recommendation to the Board. Rule 5109(d) provides that any
such statement that is submitted will be forwarded to the Board in
conjunction with any staff recommendation pertaining to the person
submitting the statement. This rule is adapted from Rule 7(a) of the
Commission's Rules Relating to Investigations.
The purpose of the Rule 5109(d) process is to assist the Board in
its decision-making. It is our expectation that the staff will
routinely give a respondent a meaningful opportunity to make a Rule
5109(d) submission. We also expect, though, that the staff will
exercise its discretion not to provide that opportunity when doing so
would be contrary to the public interest or the interests of
investors--such as when circumstances call for expedited enforcement
action, or when advance notice of particular charges to a respondent
might undermine legitimate investigative objectives of the Board or of
other regulatory or law enforcement agencies conducting parallel
investigations. We therefore decline to create a right to make a Rule
5109(d) submission, or a right to have a certain amount of time in
every case where the opportunity is afforded.
Rule 5110--Non-Cooperation With an Investigation
Section 105(b)(3) of the Act authorizes the Board to impose
sanctions, including revocation of registration and bar on association,
against any registered public accounting firm or associated person who
refuses to testify, produce documents, or otherwise cooperate with the
Board in connection with an investigation. Rule 5110 describes how the
Board will implement that authority.
Under Rule 5110(a), the Board may institute a disciplinary
proceeding, in accordance with Rule 5200(a)(3), for non-cooperation
with an investigation in certain circumstances. Under the rule as
proposed, a non-cooperation proceeding would have been warranted if it
appeared to the Board that a registered public accounting firm or an
associated person may have failed to comply with an accounting board
demand; may have knowingly made any false material declaration or made
or used any other information, including any book, paper, document,
record, recording, or other material, knowing the same to contain any
false material declaration; may have abused the Board's processes for
the purpose of obstructing an investigation; or may otherwise have
failed to cooperate in connection with an investigation.
We believe it is appropriate to include in the rule the general
provision, echoing the Act, that non-cooperation proceedings may be
instituted where a firm or associated person ``may otherwise have
failed to cooperate.'' Depending upon the nature of the conduct,
however, it may be appropriate in many circumstances for the staff to
provide notice that it views certain conduct as non-cooperation, and to
afford an opportunity to cease or cure
[[Page 15400]]
the conduct before recommending non-cooperation proceedings.
The provision concern abuse of the Board's processes to obstruct an
investigation includes a scienter requirement: We will not treat as
non-cooperation every arguable abuse of the Board's processes, but only
those that involve an intent to obstruct an investigation. We may,
however, infer such an intent from circumstantial evidence, including,
for example, circumstances indicating that a reasonable person would
not have believed there was any genuine chance of prevailing on a
particular petition for review of staff action or of a hearing officer
ruling short of finding a violation.
A disciplinary proceeding for non-cooperation shall proceed
generally according to the hearing procedures set out in the Board's
rules. Because of the nature of the conduct being sanctioned, however,
a disciplinary proceeding for non-cooperation will generally be a
streamlined proceeding focused on a narrow issue. For that reason,
various of the procedural rules governing disciplinary proceedings
include certain provisions that will apply only to disciplinary
proceedings for non-cooperation.
We recognize that some non-cooperation proceedings may present
complex legal issues. Some, such as those involving allegations of
false testimony, may also involve significant factual evidence. The
rules provide sufficient flexibility to deal with complex non-
cooperation issues in an appropriate time frame. But the rules are also
designed to address, during the course of an investigation, ongoing
recalcitrance even in the absence of any significant factual or legal
issue. The rules afford a streamlined approach that will allow for
swift dealing with that type of recalcitrance, but the streamlined
option should not be understood as a signal that the Board intends to
give short shrift to genuinely complex factual and legal issues that
may arise in the non-cooperation context.
Nothing in the rules creates vicarious non-cooperation liability
for a firm. Nevertheless, an associated person's non-cooperation has
consequences for the firm. Pursuant to Section 102(b)(3) of the Act and
the Board's rules, every registered public accounting firm will have
agreed, as a condition of the continuing effectiveness of its
registration, (1) to secure from each of its associated persons a
consent to cooperate in and comply with Board demands, and (2) to
enforce those consents. While the firm would face no vicarious
liability for the associated person's non-cooperation, the firm's own
registration status would be at risk if the firm failed either to
secure the associated person's cooperation with the Board or to end its
association with the person.
Rule 5111--Requests for Issuance of Commission Subpoenas in Aid of an
Investigation
Section 105(b)(2)(D) of the Act authorizes the Board to promulgate
rules according to which the Board may seek issuance by the Commission,
in a manner established by the Commission, of a subpoena on any person
to require testimony and the production of documents that the Board
considers relevant or material to an investigation. Rule 5111
implements that authority by providing that the Board shall seek
issuance of such subpoenas, and in seeking such subpoenas shall supply
the Commission with a completed form of subpoena and such other
information as the Commission may require.
Rule 5112--Coordination and Referral of Investigations
Rule 5112(a) provides that the Board will notify the Commission of
any pending investigation that involves a potential violation of the
securities laws. The rule provides that the Board will do so as soon as
practicable after entry of an order of formal investigation by sending
a copy of the order to the Commission or appropriate Commission staff.
Rule 5112(a) provides that the staff will then coordinate its work with
the Commission's Division of Enforcement as necessary to protect any
ongoing Commission investigation.
Rule 5112(b) provides that the Board may refer any investigation to
the Commission and, in the case of an investigation that concerns an
audit report for an institution that is subject to the jurisdiction of
any other Federal functional regulator (as defined in section 509 of
the Gramm-Leach-Bliley Act), to that regulator.
Rule 5112(c) provides that, at the direction of the Commission, the
Board may refer any investigation to the Attorney General of the United
States, the attorney general of one or more states, and an appropriate
state regulatory authority.
Part 2--Disciplinary Proceedings
Part 2 of the Board's Rules on Investigations and Adjudications
consists of Rules 5200 through 5206. These rules address the
commencement of disciplinary proceedings and the elements of those
proceedings.
Rule 5200--Commencement of Disciplinary Proceedings
Rule 5200 addresses the commencement of disciplinary proceedings
and certain related matters. Rule 5200(a) identifies the three general
categories of circumstances under which the Board may commence a
disciplinary proceeding: when it appears to the Board that a hearing is
warranted to determine whether (1) a registered public accounting firm
or a person associated with such a firm has engaged in any act or
practice, or omitted to act, in violation of the Act, the Rules of the
Board, the provisions of the securities laws relating to the
preparation and issuance of audit reports and the obligations and
liabilities of accountants with respect thereto, including the rules of
the Commission issued under the Act, or professional standards, (2)
such a firm, or its supervisory personnel, has failed reasonably to
supervise an associated person, either as required by the Rules of the
Board relating to auditing or quality control standards, or otherwise,
with a view to preventing violations of laws, rules, and standards, or
(3) such a firm or a person associated with such a firm has failed to
comply with an accounting board demand, given false testimony, or
otherwise failed to cooperate in connection with an investigation.
The Act plainly contemplates that disciplinary proceedings can be
instituted for a violation based on a single negligent act. Section
105(c)(5) of the Act provides that the Board may impose the more severe
sanctions authorized by Section 105(c)(4) only in cases that involve
intentional or knowing conduct (including reckless conduct) or repeated
instances of negligent conduct. Implicit in that provision is that a
violation based on a single instance of negligent conduct is sufficient
to warrant a disciplinary proceeding to impose lesser sanctions. The
rule is intended to implement the full scope of that authority.
At this time, we are not providing specific guidance on the scope
of supervisory liability under the Act. We will continue to consider
whether additional guidance or rulemaking on this point would be
appropriate. We see no reason, however, to limit the persons who may
have supervisory liability to those occupying certain positions. A firm
itself may have liability for failure to supervise, as may any
associated person who plays a supervisory role. Moreover, even in the
absence of additional, specific guidance, investigations may uncover
[[Page 15401]]
circumstances in which it would be appropriate, under any reasonable
reading of the Act, to commence disciplinary proceedings for failure to
supervise.
Rule 5200(b) provides for an appointment of a hearing officer by
the Board as soon as practicable after issuance of the order
instituting proceedings or after a registration applicant has requested
a hearing pursuant to Rule 5500(b). The rule is adapted from NASD Rule
9213(a). Under Rule 5200(b), the Board shall notify the parties of the
hearing officer's assignment. The hearing officer shall have authority
to do all things necessary and appropriate to discharge his or her
duties, including, but not limited to, the matters specified in Rule
5200(b). The rule expressly subjects the hearing officer's authority to
the limitations described in Rule 5402 (concerning hearing officer
disqualification) and Rule 5403 (concerning ex parte communications).
Rule 5200(c) provides that the Board will observe certain
separation of functions principles. The rule provides that neither the
staff of the Division of Enforcement and Investigations, nor any other
staff who engaged in investigative or prosecutorial functions on a
matter, may participate or advise in the decision, or the review of the
decision, except as a witness or counsel. In addition, the rule
provides that a hearing officer may not be responsible to or subject to
the supervision or direction of an employee or agent engaged in the
performance of investigative or prosecuting functions for the Board.
With respect to proceedings that involve a common question of law
or fact, Rule 5200(d) provides that the Board or a hearing officer may,
by order, consolidate the proceedings for hearing of any or all matters
at issue in the proceedings. The rule is adapted from Rule 201 of the
Commission's Rules of Practice. The rule provides that consolidation
shall not prejudice any rights that any party may have under the
Board's Rules and shall not affect the right of any party to raise
issues that could have been raised in the absence of consolidation.
Rule 5201--Notification of Commencement of Disciplinary Proceedings
Rule 5201(a) provides that when the Board issues an order
instituting proceedings, the Secretary shall give each person or firm
charged appropriate notice of the order within a time reasonable in
light of the circumstances. As described in the note to Rule 5201(a),
in the case of emergency or expedited action, actual notice--by any
means reasonably calculated to supply notice--may precede formal
service of the order instituting proceedings. The rule also provides
that if the order instituting proceedings sets a hearing date, each
party shall be given notice of the hearing within a time reasonable, in
light of the circumstances, in advance of the hearing. As a general
matter, we expect that Board orders instituting proceedings will not
specify a hearing date, unless the proceedings are for non-cooperation.
In those proceedings, we may find that reasonable notice of a hearing
date is less than 90 days or 60 days, and we decline to provide by rule
for a longer minimum time that would delay the process even when there
is no genuine need for delay.
In matters where the Board's order does not set a hearing date, the
hearing officer retains discretion to schedule a hearing date. We
expect hearing officers to exercise that discretion prudently and
fairly, consistent with avoiding unnecessary delays, but we decline to
specify a minimum amount of notice that a party must have before a
hearing may be held.
Rule 5201(b) describes the content of an order instituting
proceedings. The precise requirements concerning the content of the
order vary depending upon whether the proceeding is commenced under
Rule 5200(a)(1), Rule 5200(a)(2), or Rule 5200(a)(3). The rule provides
that, in each case, the order must include a ``short and plain
statement of the matters of fact and law to be considered and
determined,'' including of the conduct alleged to constitute a
violation and the rule, statutory provision, or standard violated.
Where a violation requires a particular state of mind, then a necessary
component of alleging the conduct is alleging the existence of that
state of mind. In requiring that the order include a description of the
``conduct,'' the rule necessarily requires more than just a conclusory
statement that the respondent engaged in conduct that violated a rule,
statute, or standard. The rule requires that the order allege the
conduct in sufficient factual detail to advise the respondent of what
conduct is at issue.
Rule 5201(c) provides that, in the case of a hearing on a
registration application commenced under Rule 5500, the notice of
hearing shall state proposed grounds for disapproving the registration
application.
Rule 5201(d) provides that either the Board or, on the motion of
the interested division, a hearing officer, may amend an order
instituting proceedings. The Board may do so at any time to include new
matters of fact or law. A hearing officer may do so only prior to the
filing of an initial decision or, if no initial decision is to be
filed, prior to the time fixed for filing final briefs with the Board.
A hearing officer may amend an order only to include new matters of
fact or law that are within the scope of the original order instituting
proceedings, but may not initiate new charges or expand the scope of
matters set for hearing beyond the framework of the Board's order
instituting proceedings. The rule is adapted from Rule 200(d) of the
Commission's Rules of Practice.
Rule 5202--Record of Disciplinary Proceedings
Rule 5202(a) describes the material that shall make up the contents
of the record in a disciplinary proceeding (Rule 5202(a)(1)) and the
contents of the record on disapproval of an application for
registration (Rule 5202(a)(2)). Under Rule 5202(b), any document
offered as evidence but excluded, and any document marked for
identification but not offered as an exhibit, shall not be considered
part of the record but shall be maintained by the Secretary until all
opportunities for Commission and judicial review have been exhausted or
waived. Paragraphs (c)-(e) of Rule 5202 address the substitution of
true copies for documents in the record, the preparation of the record
and the certification of the record index, and the final transmittal of
record items to the Secretary. The rule is adapted from Rules 350 and
351 of the Commission's Rules of Practice.
Rule 5203--Public and Private Hearings
Section 105(c)(2) of the Act provides that any proceeding by the
Board to determine whether to discipline a registered public accounting
firm or an associated person thereof shall not be public unless
otherwise ordered by the Board for good cause shown, with the consent
of the parties to the hearing. Rule 5203 implements that requirement by
providing that proceedings commenced pursuant to Rule 5200(a) shall not
be public unless the Board so orders, for good cause shown, with the
consent of the parties.
Rule 5203 also provides that all other Board hearings shall be
nonpublic unless the Board otherwise orders. In practical effect, this
provision applies only to a hearing on disapproval of a registration
application, since that is the only type of hearing for which the rules
provide other than the hearings expressly covered by Section 105(c)(2)
[[Page 15402]]
of the Act. The rule essentially creates a presumption that a hearing
on disapproval of a registration application will be non-public. A
disapproval hearing will, by its nature, involve a firm that is not yet
a registered firm and may well involve a record that includes
confidential information submitted as part of the registration
application. The rule reserves to the Board the flexibility to make the
hearing public if warranted by unusual circumstances. In any event, if
the Board decides, after a hearing, to disapprove the application, that
decision, along with the reasons for the decision, will be made public
according to the provisions of Section 105(d) of the Act.
Rule 5204--Determinations in Disciplinary Proceedings
Rule 5204(a) provides that in any disciplinary proceeding
instituted pursuant to Rule 5200(a)(1), Rule 5200(a)(2), or Rule
5200(a)(3), the interested division shall bear the burden of proving an
alleged violation or failure to supervise by a preponderance of the
evidence.
Rule 5204(b) provides that, unless the Board orders otherwise, the
hearing officer shall prepare an initial decision following a hearing.
The rule provides that the initial decision shall include findings and
conclusions, including sanctions, if appropriate, and the reasons or
basis therefore, as to all the material issues of fact, law, or
discretion presented on the record and such other information as the
Board may require. The rule is adapted from Rule 360 of the
Commission's Rules of Practice.
The note to Rule 5204(b) sets out the Board's general expectations
about the time frame within which a hearing officer should complete an
initial decision in various types of cases. These time frames are
nothing more than the Board's general expectations and do not create
any right in any person to have an initial decision prepared within any
particular period of time.
Rule 5204(c) governs the hearing officer's filing of the initial
decision with the Secretary and the Secretary's service of the initial
decision on the parties.
Rule 5204(d) provides the circumstances in which an initial
decision of a hearing officer becomes the final decision of the Board
as to a party. The rule is adapted from Rule 360(d) of the Commission's
Rules of Practice. Rule 5204(d)(1) provides that the initial decision
becomes the Board's final decision as to a party upon issuance by the
Secretary of a notice of finality. Rule 5204(d)(2) provides that the
Secretary shall issue the notice of finality no later than twenty days
after the lapsing of the time period for filing a petition for Board
review (as described in Rule 5460), unless one of the two conditions
described in Rule 5204(d)(3) has occurred. Rule 5204(d)(3) provides
that the Secretary shall not issue a notice of finality as to any party
who has filed a timely petition for Board review or with respect to
whom the Board, on its own motion, has ordered review of the initial
decision pursuant to Rule 5460(b).
Rule 5205--Settlement of Disciplinary Proceedings Without a
Determination After Hearing
Rule 5205 governs certain matters related to possible settlement of
disciplinary proceedings. The rule is adapted from Rule 240 of the
Commission's Rules of Practice.
Rule 5205 provides that any person who is or is to be a party to a
disciplinary proceeding may at any time propose in writing an offer of
settlement. The rule imposes requirements for the content of the offer,
and requires that it be signed by the person making the offer, not by
counsel.
Rule 5205(c)(1) requires that the Director of Enforcement and
Investigations present the offer to the Board along with a
recommendation concerning the offer, except that, if the recommendation
is unfavorable, the Director shall not present the offer to the Board
unless the person making the offer so requests.
Rule 5205(c)(2)-(3) set out various matters that the person making
the offer must waive before the Board will consider the offer,
including waiver of rights to hearings, rights to proposed findings of
fact and conclusions of law, rights to proceedings before and an
initial decision by a hearing officer, rights to post-hearing
procedures, rights to judicial review, rights to have Board and Board
staff observe separation of functions principles, and rights to claim
bias or prejudgment by the Board based on consideration of or
discussions concerning the settlement offer.
Rule 5205(c)(4) provides that if the Board rejects the offer, the
offer will be deemed withdrawn and will not constitute a part of the
record. Rule 5205(c)(4) further provides that rejection of the offer
will not affect the continued validity of waivers of rights to claim
bias or prejudgment on the basis of discussions concerning the
settlement offer.
Rule 5205(c)(5) provides that Board acceptance of an offer will
occur only upon the issuance of findings and an order by the Board.
A note to Rule 5205 points out that in hearings on disapproval of
registration, settlement offers will be handled by the Director of
Registration and Inspections, rather than the Director of Enforcement
and Investigations, in accordance with Rule 5205.
Rule 5206--Automatic Stay of Final Disciplinary Actions
Rule 5206 provides that no final disciplinary sanction of the Board
shall be effective until either (a) the dissolution by the Commission
of the stay provided by Section 105(e) of the Act or (b) the expiration
of the period during which the Commission, on its own motion or upon
application under Section 19(d)(2) of the Exchange Act, may institute
review of the sanction.
Part 3--Disciplinary Sanctions
Part 3 of the Board's Rules on Investigations and Adjudications
consists of Rules 5300 through 5304. These rules describe the sanctions
the Board may impose in disciplinary proceedings and various matters
related to the effect of, and the termination of, such sanctions.
Rule 5300--Sanctions
Rule 5300 describes sanctions that the Board may impose in
disciplinary proceedings. Rule 5300(a) describes sanctions that the
Board may impose in disciplinary proceedings instituted other than for
non-cooperation in an investigation. Subparagraphs (1) through (6) of
Rule 5300(a) incorporate the sanctions expressly provided by Section
105(c)(4) of the Act, including revocation of registration, bar from
association, suspensions, limitations on activities, civil money
penalties, censures, and a requirement of additional professional
education or training. A note to subparagraph (3) of Rule 5300(a)
contains a non-exclusive list of types of limitations on activities the
Board may impose. Subparagraphs (7) through (10) of Rule 5300(a)
identify other sanctions, pursuant to the authority given to the Board
in Section 105(c)(4)(G) of the Act, including requiring a party to
engage an independent monitor, to engage counsel or other consultants
to design policies to effectuate compliance with the Act, to adopt or
implement policies or undertake action to improve audit quality or to
effectuate compliance with the Act, or to obtain an independent review
and report on one or more engagements.
The more serious the violation is, the more severe the appropriate
penalty will be, and the Board retains discretion to assess the
seriousness of the violation
[[Page 15403]]
and the severity of the penalty. Section 105(c)(5) of the Act requires
scienter or repeated negligence for imposition of the most severe
sanctions. The Act does not limit the standard that must be met for
imposition of other sanctions.
Rule 5300(b) describes the sanctions that the Board may impose in
disciplinary proceedings for non-cooperation with an investigation. The
sanctions include revocations, bars, and suspensions, as expressly
provided by Section 105(b)(3)(A) of the Act. Rule 5300(b) also
identifies other sanctions, pursuant to the authority given to the
Board in Section 105(b)(3)(A)(iii), including civil money penalties,
censures, limitations on activities, requiring a firm to engage a
special master or independent monitor to monitor and report on the
firm's compliance with accounting board demands, or authorizing the
hearing officer to retain jurisdiction to monitor compliance with
accounting board demands.
When the Board revokes a firm's registration or bars a person from
association with a registered public accounting firm, the sanction is
permanent and will not expire of its own accord. In contrast, a
suspension of registration or a suspension from association shall be
for a fixed time period at the expiration of which a suspended firm
shall resume its status as registered and a suspended person shall be
free to associate with a registered firm.
In the case of a revocation of registration or a bar on
association, the Board may provide for a specified period after which
the firm may reapply for registration, or the person may petition for
termination of the bar. Modification or termination of sanctions is
discussed below in connection with Rule 5302.
A note to Rule 5300 points out that the rule does not preclude the
imposition, on consent in the context of a settlement, of any other
sanction not identified in the rule.
Rule 5301--Effect of Sanctions
Rule 5301 describes the effect of certain sanctions imposed by the
Board. Rule 5301(a) applies to persons who have been suspended or
barred from association with a registered public accounting firm or who
have failed to comply with any other sanction imposed on them by the
Board. Rule 5301 prohibits such persons from willfully becoming or
remaining associated with any registered public accounting firm, unless
they first obtain the consent of the Board, pursuant to Rule 5302, or
of the Commission.
Rule 5301(b) applies to a registered public accounting firm. It
prohibits a firm from permitting a person to become or remain
associated with the firm if the firm knows, or in the exercise of
reasonable care should have known, that the person is subject to a bar
or suspension on such association, unless the firm first obtains the
consent of the Board, pursuant to Rule 5302, or of the Commission.
Both Rule 5301(a) and Rule 5301(b) are followed by notes that make
two fundamental points about the effect of sanctions. First, a barred
or suspended person may not receive a share of the firm's profits from
audit work. To the extent that any compensation is calculated as a
share of profits--whether a partner's draw, or any other employee's
bonus or other special compensation--the calculation must be adjusted
so that the portion of the firm's profits that is derived from audit
revenue is not counted in calculating that compensation.
Second, a person may not be compensated in any form for doing audit
work. This does not mean that a salaried employee must suffer a salary
cut that mirrors the portion of the firm's profits that are from audit
work, but it does reinforce the general prohibition on the person doing
any audit work.
The language does not prohibit a barred partner from receiving from
the firm a return of the partner's capital or a separation payment
provided for in the partnership agreement. Nor does the language
prohibit the payment of standard retirement benefits to which the
person was entitled on the day the sanction took effect.
One commenter suggested that the rules prescribe at least one
procedure which, if followed by a firm to determine whether a person is
barred or suspended, would be ``reasonable per se'' and effectively
provide a safe harbor for the firm from liability for associating with
the person. The commenter suggested, as an example, that obtaining
signed statements from individuals certifying that they are not
suspended or barred could be a sufficient procedure for the firm to
avoid liability.
We will continue to consider what, if any, sort of safe harbor
procedure might be made available with respect to a firm's obligations
to make efforts to know whether an associated person has been barred or
is serving a suspension. A bar or suspension, once it takes effect,
will be a matter of public record, and the rule effectively requires
that firms make reasonable efforts to confirm, through public records,
that an individual is not barred or suspended. The Board will consider
ways to make information about bars and suspensions more readily
accessible to firms.
Rule 5302--Application for Relief From, or Modification of, Revocations
and Bars
Rule 5302 provides mechanisms by which a firm or person subject to
a Board sanction may apply to the Board for relief from, or
modification of, that sanction. Under Rule 5302(a), a firm that has had
its registration revoked pursuant to a Board determination that
permitted the firm an opportunity to reapply for registration after a
specified period of time may, after the expiration of the specified
period, file an application for registration pursuant to Rule 2101. The
revocation shall continue, however, unless and until the Board
affirmatively approves such a registration application.
Under Rule 5302(b), a person subject to a bar on association that
contains a provision allowing the person to seek termination of the bar
after a specified period of time may, after the expiration of the
specified period, file a petition to terminate the bar. Subparagraphs
(2) through (5) of Rule 5302(b) govern the process related to such a
petition.
The burdens of the rule should not be viewed as falling solely on
the individual. As a practical matter, the petition submitted by the
individual should be a collaborative effort between the individual and
the firm that wishes to associate with the individual. The firm should
readily be able to supply some of the information necessary for the
individual to satisfy the rule. The rule is based on Rule 193(b)(4)(iv)
of the Commission's Rules of Practice, which imposes similar
requirements on barred individuals seeking to associate with a broker-
dealer.
Rule 5302(c) governs modification of revocations and bars that do
not expressly provide a time period after which the firm may reapply
for registration or the person may petition to terminate the bar. Such
firm or person may at any time request leave to reapply for
registration or leave to file a petition to terminate a bar. They may
not file a registration application or a petition to terminate the bar
unless the Board grants such leave. The revocation and bar shall
continue until the Board has both granted such leave and approved a
subsequent application or petition.
Under Rule 5302(d), a firm or person subject to an ongoing sanction
imposed for non-cooperation with an investigation may file an
application for termination of that sanction once the firm or person
has remedied the non-cooperation that formed the basis for the
[[Page 15404]]
sanction. The sanction shall continue, however, unless and until the
Board orders it terminated.
Under Rule 5302(e), any firm or person subject to a sanction
described in subparagraphs (3), (6), (7), (8), (9), or (10) of Rule
5300(a) may file an application for termination of the sanction at any
time. The Board may, in its discretion, grant a hearing on the
application. The sanction shall continue, however, unless and until the
Board orders it terminated.
Rule 5303--Use of Money Penalties
Rule 5303 provides that all money penalties collected by the Board
shall be used to fund a merit scholarship program as required by, and
described in, Section 109(c)(2) of the Act.
Rule 5304--Summary Suspension for Failure To Pay Money Penalties
Under Rule 5304, the failure of a registered public accounting firm
or an associated person to pay money penalties imposed by the Board may
result in summary suspension, and effective revocation, of the firm's
registration and summary suspension or bar from association. Under Rule
5304(a), if a firm fails to pay a money penalty after the exhaustion of
all reviews and appeals and the termination of any stay, the Board may
summarily suspend the firm's registration.
The rule allows a thirty-day period for payment after a money
penalty becomes final. If payment is not made in that 30-day period,
the Board may send a notice that failure to make payment within seven
days will result in summary suspension.
Once such a suspension is imposed, it shall terminate upon payment
of the penalty by the firm within 90 days of the onset of the
suspension. If payment is not made within 90 days, the firm's
registration will effectively be revoked, and the firm can re-register
only by paying the penalty, plus interest, and filing an application
for registration under Rule 2101 and obtaining Board approval of that
application.
Under Rule 5304(b), if an associated person fails to pay a money
penalty after exhaustion of all reviews and appeals and the termination
of any stay, the Board may summarily suspend the person from
association with a registered firm. Rule 5304(b) allows a thirty-day
period for payment after a money penalty becomes final, after which the
Board may send a notice that failure to pay within seven days will
result in summary suspension. Once a suspension is imposed, it shall
terminate upon payment of the penalty, plus interest, within 90 days of
the onset of the suspension. If payment is not made within 90 days, the
Board may summarily bar the person from association with a registered
firm.
Part 4--Rules of Board Procedure
Part 4 of the Board's Rules on Investigations and Adjudications
consists of Rules 5400 through 5469. These rules are further divided
into general rules (5400 through 5411), prehearing rules (5420 through
5427), hearing rules (5440 through 5445), and appeals to the Board
(5460 through 5469).
Rule 5400--Hearings
Rule 5400 provides for hearings to be held only upon order of the
Board and to be conducted in a fair, impartial, expeditious and orderly
manner. The rule is adapted from Rule 200 of the Commission's Rules of
Practice.
Rule 5401--Appearance and Practice Before the Board
Rule 5401 provides that a person may appear on his own behalf
before the Board or may be represented by counsel. Rule 5401 further
provides that a member of a partnership may represent the partnership
and a bona fide officer of a corporation, trust, or association may
represent the corporation, trust, or association. Rule 5401(c) imposes
certain procedural requirements related to representation and
withdrawal.
Rule 5402--Hearing Officer Disqualification and Withdrawal
Rule 5402 allows a party to make a motion for withdrawal of a
hearing officer and governs the circumstances under which such a motion
may be made and the time within which it must be made. Rule 5402 also
provides for appointment of a replacement hearing officer in the event
of withdrawal or disqualification. The rule is based on Rule 112 of the
Commission's Rules of Practice and NASD Rule 9233.
Rule 5403--Ex Parte Communications
Rule 5403 prohibits a hearing officer from having ex parte
communications with a person or party, except to the extent permitted
by law or by the Board's rules for the disposition of ex parte matters.
The rule also prohibits any party (including the interested division)
and any Board staff that has had substantial involvement in a matter
from having ex parte communication with the Board or any Board member
on a fact in issue, except as permitted by law or by the Board's rules.
The rule includes a specific exception allowing staff to discuss
settlement offers with the Board when a party has provided the
prejudgment waiver described in Rule 5205(c)(3). The rule is based in
part on Rule 120 of the Commission's Rules of Practice.
Rule 5404--Service of Papers by Parties
Rule 5404 requires service of papers on each party in a manner
calculated to bring the paper to the attention of the party served. The
rule is flexible enough to accommodate service by first class mail, or
by other means, such as through electronic communication.
Rule 5405--Filing of Papers With the Board: Procedure
Rule 5405 governs procedures for filing papers with the Board.
Rule 5406--Filing of Papers: Form
Rule 5406 governs the form of papers to be filed with the Board.
Rule 5407--Filing of Papers: Signature Requirement and Effect
Rule 5407 requires every paper filed to be signed either by the
party, if the party represents himself or herself, or by counsel if the
party is represented by counsel. Because the Board expects most papers
to be filed electronically, a note to the rule states that the
signature should be scanned into an electronic document where
practicable, but that otherwise certain indicia of electronic signature
will suffice.
Rule 5408--Motions
Rule 5408 describes procedures and length limitations related to
motions and supporting briefs.
Rule 5409--Default and Motions to Set Aside Default
Rule 5409 describes the circumstances that shall constitute a
default and the procedure for seeking to set aside a default. The rule
is adapted from Rule 155 of the Commission's Rules of Practice.
Rule 5410--Extra Time for Service by Mail
Rule 5410 provides an additional three days for service made by
mail.
Rule 5411--Modifications of Time, Postponements and Adjournments
Rule 5411 provides that the Board maintains discretion, except as
otherwise provided by law, to adjust the time limits prescribed by the
rules or to postpone or adjourn any hearing.
Rule 5420--Leave To Participate To Request a Stay
Rule 5420 provides a procedure by which certain entities may seek a
stay of a hearing. The entities that may seek
[[Page 15405]]
such a stay are the Commission, the United States Department of Justice
or any United States Attorney's Office, any criminal prosecutorial
authority of a state or political subdivision of a state, and an
appropriate state regulatory authority.
Under Rule 5420, an authorized representative of any such entity
may seek leave to participate on a limited basis to request a stay.
Rule 5420 provides that a stay shall be granted upon a showing that a
stay is necessary to protect an ongoing Commission investigation, and
that a stay shall otherwise be favored upon a showing that it is in the
public interest or for the protection of investors.
Rule 5421--Answer to Allegations
Rule 5421 governs the filing of answers to orders instituting
proceedings. A party may file an answer in any matter, but is not
required to file an answer unless ordered to do so in the order
instituting proceedings.
Rule 5422--Availability of Documents for Inspection and Copying
Rule 5422 governs the obligations of Board staff to make documents
available to a party for inspection and copying. Under the rule, the
staff's obligation varies according to whether the proceeding is
commenced under Rule 5200(a)(1)-(2) for violations or failures
reasonably to supervise, Rule 5200(a)(3) for non-cooperation, or Rule
5500 concerning disapproval of a registration application.
Paragraphs (a) through (c) of Rule 5422 are the core provisions for
determining what documents the staff must make available. Paragraph (a)
describes generally the documents that the staff must make available to
a respondent. Paragraph (b) limits paragraph (a) by describing
categories of documents that the staff may withhold, subject to an
overriding obligation not to withhold material exculpatory evidence.
Paragraph (c) prescribes procedures the staff must follow when
withholding certain categories of documents, and procedures for a
hearing officer to determine whether withholding is appropriate.
Rule 5422(a)(1) applies to proceedings commenced under Rule
5200(a)(1) or Rule 5200(a)(2). The rule provides that in those
proceedings, the Division of Enforcement and Investigations shall make
available all documents in four specific categories: (1) Accounting
board requests, subpoenas, and accounting board demands for documents,
testimony, or information issued in the investigation or in the
informal inquiry, if any, that preceded the investigation, (2)
responses to those accounting board requests, subpoenas, and accounting
board demands, including any documents produced in response, (3)
testimony transcripts and exhibits, and any other verbatim records of
witness statements, and (4) all other documents prepared or obtained by
the Division of Enforcement and Investigations in connection with the
investigation prior to the institution of proceedings.
Rule 5422(a)(2) applies to non-cooperation proceedings commenced
under Rule 5200(a)(3). Rule 5422(a)(2) requires that the Division of
Enforcement and Investigations make available all documents on which
the Division intends to rely in seeking a finding of non-cooperation.
The rule expressly provides that the Division shall not be required to
make available any other documents in a proceeding based on non-
cooperation, subject only to the general requirement to make available
material exculpatory evidence on the issue of non-cooperation.
We anticipate that non-cooperation proceedings will narrowly focus
on such things as, for example, the demand with which there has been no
compliance, or the testimony that is allegedly false. The only
documents that would be relevant in those examples are the documents
that the Division would use to prove non-cooperation and any documents
that would tend to show that the person did comply with the demand, or
that that person's testimony was not false. Under the rule, all such
documents must be made available to the respondent in a non-cooperation
proceeding.
We have declined, however, to adopt a ``relevance'' standard and
open the door to broader disputes about what documents might be
``relevant.'' Liability for non-cooperation is independent of whether
the party has otherwise violated any law, rule, or standard enforceable
by the Board. Non-cooperation is not excusable on the basis of a
conviction that the staff's investigation is misguided. We do not
intend for non-cooperation proceedings to become a forum for
demonstrating, through broad access to the investigative record, that
the investigation is flawed and that something less than full
cooperation was therefore justified. A non-cooperation proceeding
focuses only on the obligation to cooperate, which is not a qualified
obligation that varies depending upon one's view of the merits of the
investigation.
Moreover, we intend that non-cooperation proceedings will generally
be commenced as soon as the grounds for such a proceeding appear,
rather than waiting until the conclusion of an investigation.\2\ An
important objective of a non-cooperation proceeding will be not only to
impose a sanction if appropriate, but also to compel the cooperation at
a time when it is still meaningful to the investigation. At that point
in time, to require the staff to make available any portion of the
investigative record other than that directly bearing on non-
cooperation could compromise the investigation, and might also
compromise investigations by the Commission or other authorities.
Indeed, to allow access to any portion of the investigative record in
the course of a non-cooperation proceeding would supply a
counterproductive incentive that might cause some persons to fail to
cooperate specifically for the purpose of obtaining access to that
record.
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\2\ The rules do not preclude the Board from commencing a
proceeding for non-cooperation after an investigation and
prosecuting it separately from or consolidated with a proceeding for
alleged violations of laws, rules, or standards enforceable by the
Board. For example, the Board may, in its discretion, institute
proceedings for violations of the Act and simultaneously institute
proceedings for non-cooperation in an investigation against the same
respondent for conduct (for example, false testimony) during the
investigation.
---------------------------------------------------------------------------
Rule 5422(a)(3) applies to registration disapproval proceedings
commenced pursuant to Rule 5500. Rule 5422(a)(3) requires the Division
of Registration and Inspections to make available all documents
obtained by the Division in connection with the registration
application prior to the notice of hearing.
Rule 5422(a) includes specific exceptions for, and must be read in
conjunction with, Rule 5422(b), which describes four categories of
documents that the Division may withhold from a respondent even if Rule
5422(a) would otherwise require the Division to make the document
available. Moreover, withholding documents may trigger the procedural
requirements of Rule 5422(c). We therefore individually address each of
the four categories of documents that may be withheld under Rule
5422(b), and any Rule 5422(c) procedures related to withholding those
documents.
Under Rule 5422(b)(1)(i), the Division need not make available any
document prepared by a member of the Board or the Board's staff that
has not been disclosed to any person other than Board members, Board
staff, or persons retained by the Board or Board staff to provide
services in connection with the investigation, disciplinary proceeding,
or hearing on disapproval of registration. Withholding such documents
does not trigger any
[[Page 15406]]
procedural requirements under Rule 5422(c).
Under Rule 5422(b)(1)(ii), the Division need not make available any
other document that, while not encompassed within the first category,
is nevertheless protected by a privilege or by the attorney work
product doctrine. This category would include, for example, documents
that were privileged in the hands of the person who supplied them to
the Board, but who supplied them pursuant to an understanding that
doing so would not otherwise waive the privilege. As to this category
of withheld documents, Rule 5422(c)(1) requires the Division to supply
to the hearing officer and each respondent a log providing all of the
same information that Rule 5106 requires a person to submit when
asserting a privilege against production to the Board.
Under Rule 5422(b)(1)(iii), the Division need not make available
any document that would disclose the identity of a confidential source.
The rule also provides, however, that the staff may not withhold a
document on this basis if doing so results in withholding material
exculpatory evidence. Rule 5422(c)(2) requires the Division to provide
the hearing officer with a list of any documents withheld to protect
the identity of a confidential informant. The rule requires the
Division to provide the same list to each respondent, although the
staff may redact as much information as necessary from that list
(including, in appropriate circumstances, all information) to protect
the interests related to the Division's reason for withholding the
document. The hearing officer, in his or her discretion, may review any
such document in camera to assess the grounds for withholding it and to
assess whether it includes material exculpatory evidence.
Under Rule 5422(b)(1)(iv), the Division need not make available any
other document that the staff identifies for the hearing officer's
consideration as to whether the document may be withheld as not
relevant to the subject matter of the proceeding or otherwise for good
cause shown. We believe that such a general exception is necessary for
categories of documents that the staff may occasionally have but may
not intend to use as evidence. For example, the staff might have
documents supplied by a foreign regulator under a confidentiality
agreement. If the staff does not intend to use them, the ``good cause''
exception allows the staff to withhold them to honor the
confidentiality agreement. Again, however, the good cause exception
does not allow the staff to withhold a document that contains material
exculpatory evidence. Rule 5422(c)'s procedures, described above with
respect to confidential informant documents, apply in the same fashion
to documents withheld as irrelevant or otherwise for good cause.
In addition to the procedural protections described above, Rule
5422(b)(2) provides an over-arching restriction on what the Division
may withhold. It provides that nothing in paragraph (b), and nothing in
paragraph (a)(2)'s limitation on what the staff must make available in
a non-cooperation proceeding, authorizes the interested division to
withhold documents that contain material exculpatory evidence.
Rule 5422(d) governs the time period in which the staff must make
the documents available. Under the rule, the staff must make the
documents available within seven days of the institution of a
proceeding under Rule 5200(a)(3) for non-cooperation, and within 14
days of the institution of proceedings under Rules 5200(a)(1),
5200(a)(2), and 5500.
Rule 5422(e) provides that the staff shall make the documents
available at the Board's office where the documents are normally
maintained, or at such other place as the parties agree upon in
writing. Rule 5422(d) further provides that, except as subject to any
specific contrary agreement with the staff, a party shall not have
custody of the documents and shall not remove the documents from the
Board's offices, though the party may make and retain copies of the
documents. Rule 5422(f) provides that a party wishing to make copies of
the documents must bear the cost of copying.
Rule 5422(g) addresses any failure by the interested division to
make available any document that these rules required it to make
available. The rule provides that, in that event, no person shall be
entitled to a rehearing or redecision in a matter already heard or
decided unless that person first establishes that the failure to make
the document available did not constitute harmless error.
A note following Rule 5422 points out that the obligations of the
interested division under this rule extend only to documents obtained
by that division, and that this Rule does not require the interested
division to make available documents located only in the files of other
divisions or offices. The proviso, however, is not intended to relieve
the interested division of the obligation to make available any such
document that the division knows of and intends to introduce as
evidence. Any such document should be treated, for purposes of Rule
5422, just as if it were physically located in the division's files.
Rule 5423--Production of Witness Statements
Rule 5423(a) provides that a respondent may move that the
interested division produce any statement of a person, called or to be
called as a witness by the division, that pertains or is expected to
pertain to his or her direct testimony and that would be required to be
produced pursuant to the Jencks Act, 18 U.S.C. 3500, if the Board were
a governmental entity. The hearing officer shall have authority to
grant such a motion and require production of any such statement. Rule
5423(b) provides, however, that the interested division's failure to
produce any such statement shall not be grounds for rehearing or
redecision of a matter already heard or decided unless the respondent
first establishes that the failure to produce the statement was not
harmless error. The rule is based on Rule 231 of the Commission's Rules
of Practice.
Rule 5424--Accounting Board Demands and Commission Subpoenas
Rule 5424 provides for mechanisms by which any party may seek to
secure testimony or evidence relevant to a proceeding. Rule 5424(a)
describes procedures by which any party may seek to have an accounting
board demand served on any registered public accounting firm or
associated person of such a firm, or seek to have an accounting board
request served on any other person. Under the rule, the party must make
a request to the hearing officer for issuance of the accounting board
demand or accounting board request. In the event of the hearing
officer's unavailability, the party may present its request, through
the Secretary, to any member of the Board, or any other person
designated by the Board to issue such demands and requests.
The application for an accounting board demand or accounting board
request may be denied, or may be granted with modifications, if it is
unreasonable, oppressive, excessive in scope, or unduly burdensome. The
rule provides that a person whose application for an accounting board
demand or accounting board request has been denied or modified may not
make the same application to another person and may not apply to the
Board for a Commission subpoena covering the same testimony, documents,
or information as the denied application covered or as was excluded by
modification in granting an application.
[[Page 15407]]
Rule 5424(a) also provides that a party who applies for an accounting
board demand or accounting board request to summon a witness shall pay
the witness's reasonable expenses.
Rule 5424(b) provides that the Board, on its own initiative or on
the application of any party, may seek issuance of a subpoena by the
Commission to any person in order to seek to secure testimony or
evidence that the Board considers relevant or material to the
proceeding. Unlike Rule 5424(a), which provides that an application for
an accounting board demand or request shall be granted if certain
criteria are satisfied, Rule 5424(b) leaves entirely to the discretion
of the hearing officer or other Board designee whether to grant a
party's request to seek a Commission subpoena. The rule does not create
any entitlement, under any circumstances, to have the Board seek a
Commission subpoena on behalf of a party. Moreover, if the Board does
seek a Commission subpoena requested by a party, the rule does not, and
should not be understood to, give rise to or justify any expectation
about how or whether the Commission will respond to the request.
Accordingly, the rule does not create any entitlement to have any Board
proceedings stayed or delayed while any such request is pending.
Rule 5425--Depositions To Preserve Testimony for Hearing
Rule 5425 provides procedures by which a party may seek a
deposition for the purpose of preserving for a hearing the testimony of
a person who may be unavailable to appear at the hearing. Rule 5425
does not provide for depositions taken for the purpose of discovery.
The rule is adapted from Rule 233 of the Commission's Rules of
Practice.
Under Rule 5425(a), a party seeking to take a deposition to
preserve testimony must make a written motion setting out the reasons
why the deposition is necessary and specifically including the reasons
that the party believes the witness will be unable to testify at the
hearing. The motion must also identify the witness, the matters on
which the party intends to question the witness, and the proposed time
and place of the deposition. Under Rule 5425(b), the hearing officer
may grant the motion if the hearing officer finds that the witness will
likely give testimony material to the proceeding, that it is likely the
witness will be unable to appear at the hearing because of age,
sickness, infirmity, imprisonment or other disability, or will
otherwise be unavailable, and that the taking of the deposition will
serve the interests of justice. Rules 5425(c) through (e) describe
certain procedures governing any such deposition allowed by the hearing
officer.
Rule 5426--Prior Sworn Statements of Witnesses in Lieu of Live
Testimony
Rule 5426 provides procedures by which a party may introduce into
evidence a witness's prior sworn statement in lieu of live testimony by
the witness. Rule 5426 is not a limitation on any party's ability to
introduce a prior sworn statement with respect to a witness who appears
in person and testifies (for purposes of impeachment, for example). But
Rule 5426 does limit the circumstances in which a party may introduce a
prior sworn statement in lieu of live testimony by the witness.
Rule 5426 identifies five circumstances in which the hearing
officer may grant a motion to introduce a prior sworn statement in lieu
of live testimony: (1) If the witness is dead, (2) if the witness is
outside of the United States, unless it appears that the witness's
absence from the country was procured by the party offering the prior
sworn statement, (3) if the witness is unable to attend because of age,
sickness, infirmity, imprisonment or other disability, (4) if the party
offering the prior sworn statement has been unable to procure the
attendance of the witness by accounting board demand, or (5) if, in the
discretion of the Board or the hearing officer, it would be desirable,
in the interests of justice, to allow the prior sworn statement to be
used. In granting a motion to introduce a prior sworn statement, a
hearing officer has the discretion, under Rule 5426, to require that
all relevant portions of the statement be included or to exclude
portions of the statement not relevant to the proceeding.
Rule 5427--Motion for Summary Disposition
Rule 5427 provides for any party to make a motion for summary
disposition. Under Rule 5427(a), the interested division may make such
a motion only after the party against whom the motion is directed has
filed an answer and has had documents made available to it pursuant to
Rule 5422. Under Rule 5427(b), a respondent may make such a motion at
any time.
Rule 5427(c) requires that any party that would move for summary
disposition must first request and attend a pre-motion conference with
the hearing officer. Under the rule, the hearing officer would, at the
conference, set a due date for the motion. The hearing officer has
discretion either to set a due date for a response to the motion or to
spare the opposing party the need to prepare a response until the
hearing officer has reviewed the motion. If the hearing officer chooses
that approach, the hearing officer shall review the motion and then
either deny the motion without any response being filed or shall give
the opposing party an opportunity to file a response.
Rule 5427(d) provides that a hearing officer shall grant a motion
for summary disposition if the pleadings, depositions, and admissions
on file, together with any affidavits, show that there is no genuine
issue as to any material fact and that the moving party is entitled to
a disposition as a matter of law. A hearing officer may also enter a
summary disposition that is limited to the issue of liability even
though there may be a genuine and contested issue as to the appropriate
sanction. Rule 5427(d) also provides that the denial of a motion for
summary disposition is not subject to interlocutory appeal. Rule
5427(e) governs page limitations on briefs related to motions for
summary disposition.
Rule 5440--Record of Hearings
Rule 5440 describes procedures related to the creation, correction,
and availability of hearing transcripts.
Rule 5441--Evidence: Admissibility
Rule 5441 provides that a hearing officer may receive relevant
evidence and shall exclude all evidence that is irrelevant, immaterial
or unduly repetitious. The standard in Rule 5441 is based on the
Administrative Procedure Act.\3\ In addition, the same standard is used
in the Commission's Rules of Practice.\4\ By using this phrase in Rule
5441, the Board intends for evidentiary issues in PCAOB hearings to be
addressed in a generally similar manner to Commission administrative
hearings, and the administrative hearings of most other administrative
agencies. Rule 5441 is not intended to limit a hearing officer's
authority to exclude or allow evidence based on reasonable principles
of admissibility, but is intended to allow a hearing officer reasonable
flexibility.\5\ In particular, the
[[Page 15408]]
three bases in the rule--irrelevance, immateriality, and undue
repetition--are not the only permissible bases on which a hearing
officer may exclude evidence under administrative practice. Nor does
the standard in Rule 5441 preclude a hearing officer from referring to
principles from the Federal Rules of Evidence or other authoritative
sources in exercising his or her discretion to resolve evidentiary
issues.\6\
---------------------------------------------------------------------------
\3\ 5 U.S.C. 556(c)(3) and (d).
\4\ See SEC Rule of Practice 320, 17 C.F.R. 201.320 (``The
Commission or the hearing officer may receive relevant evidence and
shall exclude all evidence that is irrelevant, immaterial or unduly
repetitious.'')
\5\ See, e.g., Commission Opinion: Wheat, First Securities,
Inc.; Rel. No. 34-48378, (August 20, 2003) (holding that hearsay is
admissible in a Commission administrative hearing, but noting that
the ``record shows the probative and reliable nature of this
evidence'').
\6\ See id. (explaining that same result would have been reached
had the administrative law judge applied the Federal Rules of
Evidence).
---------------------------------------------------------------------------
Rule 5442--Evidence: Objections and Offers of Proof
Rule 5442(a) provides that any objections must be made on the
record and must be in short form, stating the grounds relied upon.
Under Rule 5442(a) any exception to a hearing officer's ruling on an
objection need not be noted at the time of the ruling but will be
deemed waived on appeal to the Board unless the exception was raised
(1) on interlocutory review under Rule 5461, (2) in a proposed finding
or conclusion filed under Rule 5445, or (3) in a petition for Board
review of an initial decision filed under Rule 5460. Rule 5442(b)
provides that when evidence is excluded from the record, the party
offering the evidence may make an offer of proof, which shall be
included in the record. The excluded material itself would be retained
under Rule 5202(b).
Rule 5443--Evidence: Presentation Under Oath or Affirmation
Rule 5443 provides that witnesses at a hearing shall testify under
oath or affirmation.
Rule 5444--Evidence: Rebuttal and Cross-Examination
Rule 5444 provides that a party may present its case or defense by
oral or documentary evidence, submit rebuttal evidence, and conduct
such cross-examination as, in the discretion of the Board or the
hearing officer, may be required for a full and true disclosure of the
facts. The rule provides that the Board or hearing officer shall
determine the scope and form of evidence, rebuttal evidence, and cross-
examination in any proceeding. The rule is adapted from Rule 326 of the
Commission's Rules of Practice.
Rule 5445--Post-Hearing Briefs and Other Submissions
Rule 5445 provides procedures relating to the submission of post-
hearing briefs and other submissions.
Rule 5460--Board Review of Determinations of Hearing Officers
Rule 5460 concerns Board review of initial decisions. Under Rule
5460, a party may obtain Board review of an initial decision by filing
a timely petition setting forth specific findings and conclusions of
the initial decision to which the party takes exception and setting
forth the supporting reasons for each exception. To be timely, a
petition must be filed within 10 days of an initial decision in a
proceeding commenced under Rule 5200(a)(3) for non-cooperation, and
within 30 days of an initial decision in other proceedings. The rule is
based in part on Rule 410 of the Commission's Rules of Practice.
Also under Rule 5460(a), if one party submits a timely petition for
review, any other party then has an additional ten days to submit its
own petition for review, even if its petition raises different issues
than those raised by the first party to submit a petition. The purpose
of this rule is to avoid the unnecessary expenditure of Board resources
in cases where no party would appeal if it knew that the other party
would not appeal, but in which one or more parties nevertheless appeal
because of a concern that failing to appeal will deprive it of the
opportunity to raise its issues in any appeal lodged by another party.
Under Rule 5460(a), no party need guess about the other party's
intentions, and no party sacrifices anything by waiting to see whether
another party files a timely petition for review.
Rule 5460(b) provides that the Board may, on its own initiative,
order review of all or any portion of an initial decision even if no
party seeks review. The Board may order such review, however, only if
it does so before the initial decision would otherwise become the final
decision of the Board pursuant to the operation of Rule 5204(c). In
effect, this allows the Board to order review on its own initiative for
a period of 20 days beyond the deadline for a party to petition for
review. The rule is based in part on Rule 411 of the Commission's Rules
of Practice. Rules 5460(c) through (e) set out procedural matters
related to Board review.
Rule 5461--Interlocutory Review
Rule 5461 concerns Board interlocutory review of hearing officer
rulings. Under Rule 5461(a), the Board will not grant interlocutory
review absent extraordinary circumstances, but also may direct at any
time that any matter or ruling be submitted to the Board for review.
Rule 5461(b) provides that a hearing officer shall certify a ruling for
interlocutory review only if (1) the ruling would compel testimony of
Board members, officers or employees or the production of documentary
evidence in their custody, or (2) the ruling involves a controlling
question of law as to which there is substantial ground for difference
of opinion and immediate review of the order may materially advance
completion of the proceeding. Rule 5461(c) provides that neither an
application for, nor the granting of, interlocutory review shall stay
the proceeding unless otherwise ordered by the hearing officer or the
Board. The rule is adapted from Rule 400 of the Commission's Rules of
Practice and 28 U.S.C. 1292(b).
Rule 5462--Briefs Filed With the Board
Rule 5462 describes procedural requirements related to briefs and
the filing of briefs. The rule is adapted from Rule 450 of the
Commission's Rules of Practice.
Rule 5463--Oral Argument Before the Board
Rule 5463 concerns oral argument before the Board. Under Rule
5463(a), the Board may order oral argument, with or without the motion
of a party, on any matter. The rule provides that, in general, motions
for oral argument will be granted unless exceptional circumstances make
oral argument impractical or inadvisable. Rules 5463(b)-(c) provide for
procedures relating to oral argument. Rule 5463(d) provides that a
member of the Board who is not present for oral argument may
nevertheless participate in the Board's decision as long as the Board
member reviews a transcript of the argument before participating in the
decision. The rule provides that any party may request oral argument,
but the party must do so in its initial brief on the merits.
Rule 5464--Additional Evidence
Rule 5464 provides that the Board may, upon its own motion or the
motion of a party, allow the submission of additional evidence in
connection with the Board's review of an initial decision. The rule is
adapted from Rule 452 of the Commission's Rules of Practice.
Rule 5465--Record Before the Board
Rule 5465 provides that the Board shall determine each matter on
the basis of the record and provides certain requirements concerning
the record. The rule is adapted from Rule 460 of the Commission's Rules
of Practice.
[[Page 15409]]
Rule 5466--Reconsideration
Rule 5466 provides procedures by which a party may seek
reconsideration of a Board decision. The rule is adapted from Rule 470
of the Commission's Rules of Practice.
Rule 5467--Receipt of Petitions for Commission or Judicial Review
Rule 5467 is intended to ensure that the Board has notice of any
petitions filed by a party for review of a Board decision, or for
review of a Commission order with respect to a Board decision. Rule
5467 is separate from, and in addition to, any notice or service
requirements that the Commission imposes with respect to petitions for
review filed with the Commission. Rule 5467, a registered public
accounting firm must notify the Secretary, or any requirements of the
Federal Rules of Appellate Procedure or any court within 10 days after
the firm or any person associated with the firm files with the
Commission a petition for review of a Board decision or files a
petition for court review of a Commission order with respect to such a
sanction. The rule is modeled in part on Rule 490 of the Commission's
Rules of Practice.
A firm will generally have in place a mechanism for regular
reporting to the Board, and the Board will have in place a mechanism
for receiving reports from a firm. These things generally will not be
true with respect to individuals who are associated persons. An
associated person who is in the position of petitioning for review of a
sanction is a person who, necessarily, has been sanctioned. That
sanction--and whether it becomes final by virtue of an appeal period
running without the person having petitioned for review--is something
that the firm must necessarily monitor since it affects how the firm
may or must interact with the associated person. Accordingly, we expect
the firm as a matter of course to know whether and when its associated
person has petitioned for review. The rule leaves to the firm the
creation and enforcement of internal procedures to ensure that its
associated persons report the information to the firm.
Rule 5468--Appeal of Actions Made Pursuant to Delegated Authority
As directed by Section 101(g)(2) of the Act, Rule 5468 provides
procedures for seeking Board review of any action by someone other than
the Board pursuant to authority delegated by the Board. The rule
requires a person to act within five days to provide notice to the
Board that the person intends to seek review. The rule allows the
person another five days beyond that notice in which to submit the
petition for review. The rule also includes a provision designed to
ensure that a person will not unfairly be denied an opportunity to
petition for review if, through no fault of the person, service of
notice of the staff action in question was delayed in reaching them.
Rule 5469--Board Consideration of Actions Made Pursuant to Delegated
Authority
Rule 5469 provides procedures relating to Board consideration of
petitions for review of actions made pursuant to authority delegated by
the Board. Rule 5469(a) provides that the Board may act summarily on
the basis of the petition, or on the basis of the petition and any
staff response, or may require additional statements in support of or
opposition to the petition. Rule 5469(b) provides that the filing of a
petition for review will not stay the effect of any staff action unless
specifically ordered by the Board.
Part 5--Hearings on Disapproval of Registration Applications
Part 5 of the Board's Rules on Investigations and Adjudications
consists of Rules 5500 and 5501. These rules relate to adjudications on
certain registration applications.
Rule 5500--Commencement of Hearing on Disapproval of a Registration
Application
Rule 5500 describes the procedure relating to the commencement of a
Board adjudication proceeding to consider an application for
registration. Under the Board's registration rules, if the Board is
unable to make the determination necessary to approve a registration
application, the Board will provide the applicant with notice of a
hearing. Rule 5500 provides the procedures through which such a
proceeding would be commenced.
Specifically, Rule 5500 provides that a proceeding would commence
after the Board provides a notice of hearing under Rule 2106(b)(2)(ii)
and the applicant timely files a request for a hearing date and notice
of appearance, rather than opting to treat the Board's notice of
hearing as a denial of the application. Under Rule 5500(b), a request
for hearing must include a statement that the applicant has elected not
to treat the notice of hearing as a disapproval of its application and
a statement describing with specificity why the applicant believes that
the Board should not disapprove the application.
Rule 5501--Procedures for a Hearing on Disapproval of a Registration
Application
Rule 5501 provides that proceedings commenced pursuant to Rule 5500
are subject to the procedures set out in Parts 2 and 4 of Section 5 of
the Board's rules.
(b) Statutory Basis
The statutory basis for the proposed rules is Title I of the Act.
B. Board's Statement on Burden on Competition
The Board does not believe that the proposed rules will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rules provide
procedures by which the Board will carry out its authority and
responsibility to conduct investigations and disciplinary proceedings.
The proposed rules will provide for procedural fairness and for
uniformity of procedures governing investigations and disciplinary
proceedings with respect to all persons subject to obligations imposed
by the Board in those investigations and proceedings. The proposed
rules implement the Act's provisions on investigations and discipline
without imposing any burden on competition.
C. Board's Statement on Comments on the Proposed Rules Received From
Members, Participants or Others
The Board released the proposed rules for public comment in PCAOB
Release No. 2003-012 (July 28, 2003). A copy of PCAOB Release No. 2003-
012 and the comment letters received in response to the PCAOB's request
for comment are available on the PCAOB's web site at pcaobus.org. The
Board received 17 written comments. The Board has clarified and
modified certain aspects of the proposed rules in response to comments
it received, as discussed below.
One commenter suggested that the Board add a good standing
requirement to the definition of ``counsel.'' The Board incorporated
that suggestion in the final rule.
The Board proposed a definition of ``hearing officer'' that
included a panel of Board members constituting less than a quorum of
the Board, an individual Board member, or any other person duly
authorized by the Board to preside at a hearing. Several commenters
expressed the view that neither Board members nor staff of the
interested division should ever serve as hearing officers. After
considering those comments, the Board adopted a final rule that
excludes the possibility of any Board member or
[[Page 15410]]
staff of the interested division serving as a hearing officer.
Proposed Rule 5103(b) would have required that unless otherwise
requested or permitted, the documents produced in response to an
accounting board demand be the originals. Commenters stated that
production of original documents, including workpapers, can be
disruptive to ongoing audit engagements and suggested that the rule
provide for production of copies rather than originals. To accommodate
this concern, the Board modified the rule to permit production of
copies unless otherwise specified in the accounting board demand.
In response to a comment on proposed Rule 5108, concerning the
confidentiality of materials obtained by the Board, the Board deleted
the phrase ``unless otherwise ordered by the Board or the Commission''
from the beginning of the rule. This change makes clear that the rule
is not intended to suggest any Board authority to make materials public
other than in a manner consistent with the Act.
With respect to proposed Rule 5110, commenters expressed concern
about the prospect of a non-cooperation proceeding for providing
testimony that ``omits material information.'' After consideration of
the comments, the Board revised the scope of the rule on this point.
The Board deleted the language concerning testimony that is false or
misleading or that omits material information. In its place, the rule
now uses the language of the federal perjury statute, 18 U.S.C. Sec.
1623. The final rule provides for instituting a non-cooperation
proceeding where it appears to the Board that a person may have
``knowingly made any false material declaration or made or used any
other information, including any book, paper, document, record,
recording, or other material, knowing the same to contain any false
material declaration.''
Moreover, in response to a request for clarification, the Board
added an additional point to the list of items that may warrant
institution of non-cooperation proceedings. Specifically, the final
rule states that the Board may authorize non-cooperation proceedings
where it appears that a firm or associated person may have abused the
Board's processes for the purpose of obstructing an investigation.
This new provision grew out of a comment made in connection with
Rule 5402. The commenter suggested that the Board should impose fines
for frivolous interlocutory appeals. The Board agreed that abuse of the
Board's processes is a form of failing to ``otherwise cooperate'' and
added this provision to Rule 5110 to provide notice that the Board will
impose sanctions for this form of non-cooperation.
Rule 5200(c) provides that the Board will observe certain
separation of functions principles. The proposed rule provided that any
Board employee or agent engaged in investigative or prosecutorial
functions for the Board in a proceeding could not, in that same
proceeding or a factually related proceeding, participate or advise in
the decision, or in Board review of the decision, except as a witness
or counsel in the proceeding. One commenter suggested that this rule
should clearly exclude all enforcement personnel from participating in
the adjudication of a disciplinary proceeding, whether or not they had
an investigative or prosecutorial role in the matter. The Board was
persuaded that this represents a good policy choice and revised the
rule accordingly. The final rule provides that neither the staff of the
Division of Enforcement and Investigations, nor any other staff who
engaged in investigative or prosecutorial functions on a matter, may
participate or advise in the decision, or the review of the decision,
except as a witness or counsel. In addition, the rule provides, as
proposed, that a hearing officer may not be responsible to or subject
to the supervision or direction of an employee or agent engaged in the
performance of investigative or prosecuting functions for the Board.
One commenter expressed a concern that the proposed rules do not
provide for the burdens of proof in a disciplinary proceeding. In
response, the Board added a new Rule 5204(a). Rule 5204(a) provides
that in any disciplinary proceeding instituted pursuant to Rule
5200(a)(1), Rule 5200(a)(2), or Rule 5200(a)(3), the interested
division shall bear the burden of proving an alleged violation or
failure to supervise by a preponderance of the evidence.
Rule 5304 concerns the imposition of summary suspensions for
registered firms or associated persons that fail to pay a money penalty
imposed by the Board. Rule 5304(a), as proposed, required only that the
Board provide written notice at least seven days before any such
suspension. One commenter understood the proposal to mean that a firm
or associated person might have only seven days between the date the
sanction becomes final and the date of summary suspension under the
rule. The commenter suggested that the rule provide for at least 30
days between the sanction becoming final and the Board sending the
seven-day notice.
The commenter's suggestion was consistent with what was intended by
the proposal, and the Board modified the rule to make that intent
explicit. The final rule allows a 30-day period for payment after a
money penalty becomes final. If payment is not made in that 30-day
period, the Board may send a notice that failure to make payment within
seven days will result in summary suspension.
Proposed Rule 5401(c)(4) provided that an individual's withdrawal
from representation of a party would be permitted only with the
approval of the Board or the hearing officer. Commenters suggested that
the rules should provide that permission to withdraw would not be
unreasonably withheld.
The Board is sensitive to the importance of counsel being free to
withdraw in appropriate circumstances, and the importance of a party
being free to change counsel in appropriate circumstances. The Board is
also mindful of the ways in which an ostensible desire to withdraw or
to change counsel can be used to delay or disrupt proceedings. To
provide some assurance of the limited scope within which the Board
intends for the Board or hearing officer to withhold permission to
withdraw, the Board adopted the commenters' suggestion that the rule
provide that permission to withdraw would not be unreasonably withheld.
Rule 5403 prohibits a hearing officer from having ex parte
communications with a person or party, except to the extent permitted
by law or by the Board's rules for the disposition of ex parte matters.
The proposed rule also prohibited a party from having ex parte
communication with the Board or any Board member on a fact in issue,
except as permitted by law or by the Board's rules. Commenters
suggested that the restriction should extend beyond the interested
division to any Board staff that has had substantial involvement in a
matter. The Board has revised Rule 5403(b) to impose the restriction
not only on a party (including the interested division) but also on any
Board staff that substantially assists the interested division on the
particular matter, whether before or during the hearing,
Rule 5420 provides that certain entities may seek leave to request
a stay of a Board disciplinary proceeding. Under the proposed rule, the
entities that could seek such a stay would have been the Commission,
the United States Department of Justice or any United States Attorney's
Office, and any criminal prosecutorial authority of a state or
political subdivision of a state.
[[Page 15411]]
One commenter suggested that the list should be expanded to include an
appropriate state regulatory authority. The Board agreed with that
comment and modified the rule accordingly.
Rule 5422 governs the obligations of Board staff to make documents
available to a party for inspection and copying. Under the rule, the
staff's obligation varies according to whether the proceeding is
commenced under Rule 5200(a)(1)-(2) for violations or failures
reasonably to supervise, Rule 5200(a)(3) for non-cooperation, or Rule
5500 concerning disapproval of a registration application. In response
to comments, the Board made several changes to Rule 5422. In
particular, the Board revised the structure of the rule in response to
suggestions that the rule should more closely track the Commission's
approach with respect to so-called Brady material. The Board added
provisions to reinforce the principle that material exculpatory
evidence will not be withheld even if the confidential informant
privilege or other good cause would otherwise justify withholding it.
The Board also modified the rule to provide that documents made
available in a non-cooperation proceeding will include any documents
that contain material exculpatory evidence on the issue of non-
cooperation. Finally, the Board revised the rule to require the
Division to provide a privilege log with respect to a certain category
of documents.
III. Date of Effectiveness of the Proposed Rules and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the Board consents, the Commission will:
(A) By order approve the proposed rules; or
(B) Institute proceedings to determine whether the proposed rules
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed
rules are consistent with the Act.\7\ Comments may be submitted
electronically or by paper. Electronic comments may be submitted by:
(1) Electronic form on the SEC Web site (http://www.sec.gov) or (2) e-
mail to rule-comments@sec.gov. Mail paper comments in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 20549-0609. All submissions should
refer to File No. PCAOB-2003-07; this file number should be included on
the subject line if e-mail is used. To help us process and review your
comments more efficiently, please use only one method. The Commission
will post all comments on the Commission's Internet Web site (http://www.sec.gov
). Comments are also available for public inspection and
copying in the Commission's Public Reference Room, 450 Fifth Street,
NW., Washington, DC 20549. We do not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All comments should be submitted
on or before April 15, 2004.
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\7\ The Commission notes, in connection with proposed Rule
5424(b), that the issuance of Commission subpoenas in connection
with PCAOB disciplinary proceedings would be a novel and potentially
complex arrangement, and the Commission staff has discussed with the
PCAOB staff the need to develop and implement additional rules and
procedures regarding the handling of subpoena requests. These
additional rules and procedures would address, among other things,
the steps that the parties to PCAOB proceedings would need to follow
prior to applying for Commission subpoenas as well as the
Commission's processes for handling such requests once they are
received. We have discussed with the PCAOB staff the fact that Rule
5424(b) will not be available for use in PCAOB proceedings until
such additional rules and procedures have been developed and
implemented to the satisfaction of the Commission. Comments are
specifically solicited on Rule 5424(b) in light of applicable
statutory, due process and other legal considerations, including any
relevant distinctions between the functions of the PCAOB and those
of self-regulatory organizations.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-6706 Filed 3-24-04; 8:45 am]
BILLING CODE 8010-01-P