[Federal Register Volume 76, Number 133 (Tuesday, July 12, 2011)]
[Notices]
[Pages 40961-40964]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17387]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64814; File No. PCAOB-2011-01)
Public Company Accounting Oversight Board; Notice of Filing of
Proposed Temporary Rule for an Interim Program of Inspection Related to
Audits of Brokers and Dealers
July 6, 2011.
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Act''), notice is hereby given that on June 21, 2011, 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 and II 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 June 14, 2011, the Board adopted a temporary rule for an interim
inspection program related to audits of brokers and dealers. The
proposed Rule 4020T amends Section 4 of the Board's rules. The Board
also adopted amendments to Section 1 of its rules to add notes
following Rules 1001(a)(v), 1001(a)(vi), and 1001(p)(vi).
The text of the proposed amendments is set out below. Language
added by the amendments is underlined.
Rules of the Board
Section 1. General Provisions
* * *
Rule 1001. Definitions of Terms Employed in Rules.
* * *
(a)(v) Audit
* * *
Note: Effective [insert effective date of Rule 4020T], pursuant
to Rule 4020T, when used in Rule 3502, Section 5 of the Rules of the
Board, or the definition of ``disciplinary proceeding'' in Rule
1001(d)(i), the term ``audit'' has the meaning provided in Section
110 of the Act.
(a)(vi) Audit Report
* * *
Note: Effective [insert effective date of Rule 4020T], pursuant
to Rule 4020T, when used in Rule 3502, Section 5 of the Rules of the
Board, or the definition of ``disciplinary proceeding'' in Rule
1001(d)(i), the term ``audit report'' has the meaning provided in
Section 110 of the Act.
* * *
(p)(vi) Professional Standards
* * *
Note: Effective [insert effective date of Rule 4020T], pursuant
to Rule 4020T, when used in Rule 3502, Section 5 of the Rules of the
Board, or the definition of ``disciplinary proceeding'' in Rule
1001(d)(i), the term ``professional standards'' has the meaning
provided in Section 110 of the Act.
* * *
Section 4. Inspections
* * *
Rule 4020T. Interim Inspection Program Related to Audits of
Brokers and Dealers.
(a) Purposes of Interim Inspection Program
This rule provides for an interim program of inspection in
connection with audits of brokers and dealers in order, among other
things--
(1) to assess the degree of compliance of registered public
accounting firms and their associated persons with the Act, the
Board's rules, the Commission's rules, and professional standards in
connection with the performance of audits, issuance of audit
reports, and related matters involving brokers and dealers;
(2) to inform the Board's consideration, in connection with
establishing a permanent program of inspection to assess the matters
described in paragraph (1), of--
(i) whether to differentiate among classes of brokers and
dealers;
(ii) whether to exempt any category of public accounting firms;
and
(iii) the establishment of minimum inspection frequency
schedules.
(b) Definitions
When used in this rule, the term ``interim program,'' means the
interim program of inspection described in paragraph (c). When used
in this rule, Rule 3502, Section 5 of the Rules of the Board, or the
definition of ``disciplinary proceeding'' in Rule 1001(d)(i), the
terms ``audit,'' ``audit report,'' and ``professional standards''
have the meaning provided in Section 110 of the Act.
(c) Interim Program of Inspection
On an interim basis, the Board shall conduct a program of
inspection, for the purposes described in paragraph (a), that may
include inspection procedures to assess the policies, practices, and
procedures of any registered public accounting firm related to the
performance of audits or the issuance of audit reports for any
broker or dealer after July 21, 2010 and related matters involving
brokers and dealers. The provisions of Rules 4000(b), 4000(c), 4004,
4006, 4007, 4008, 4009 and 4010 shall apply to the interim program.
(d) Reporting
No less frequently than every twelve months, beginning twelve
months after the date this rule takes effect and continuing until
rules for a permanent program of inspection in connection with
audits of brokers and dealers take effect, the Board will publish a
report that describes the progress of the interim program, including
data about the number of registered public accounting firms and the
number of broker or dealer audits that have been subjected to
inspection procedures and any significant observations from those
procedures.
II. Board's Statement of the Purpose of, and Statutory Basis for, 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 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 sections A, B,
and C below, of the most significant aspects of such statements.
A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Rules
(a) Purpose
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act \1\ amended the Sarbanes-
[[Page 40962]]
Oxley Act to give the Board oversight authority with respect to audits
of brokers and dealers that are registered with the Commission. Among
other things, the amended Act authorizes the Board to establish an
inspection program by rule.\2\ Section 104(a)(2) of the Act (1)
Provides that, in establishing the program, the Board may allow for
differentiation among classes of brokers and dealers; (2) requires that
the Board consider whether differing inspection schedules would be
appropriate with respect to auditors that issue audit reports only for
brokers or dealers that do not receive, handle, or hold customer
securities or cash or are not members of the Securities Investor
Protection Corporation; and (3) provides that if the Board exempts any
public accounting firm from such an inspection program, the firm would
not be required to register with the Board.
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\1\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
\2\ Section 104(a)(2)(A) of the Act, as amended.
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In a release issued on December 14, 2010, the Board explained that
it intended to take a careful and informed approach to those questions
in establishing a permanent program that appropriately protects the
public interest and the interests of investors, including consideration
of potential costs and regulatory burdens that would be imposed on
different categories of registered public accounting firms and classes
of brokers and dealers. The Board also explained that it did not intend
to make the necessary judgments without first gathering and assessing
relevant information, but that it did not intend to postpone all use of
its new inspection authority until after those judgments were made.
Accordingly, the Board proposed for public comment a temporary rule for
an interim program of inspection that would allow the Board to begin
inspections of relevant audits and auditors and provide a source of
information to help guide decisions about the scope and elements of a
permanent program.
(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 rule changes will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The proposed
rule changes would apply equally to all registered public accounting
firms that audit brokers and dealers.
C. Board's Statement on Comments on the Proposed Rules Received From
Members, Participants or Others
The Board released the proposed rule amendment for public comment
in Release 2010-008 (December 14, 2010). A copy of Release No. 2010-008
and the comment letters received in response to the PCAOB's request for
comment are available on the PCAOB's Web site at http://www.pcaobus.org/Rules/Rulemaking/Pages/Docket032. The Board received
twelve written comment letters. The Board has carefully considered the
comment letters, as discussed below.
1. Scope of the Interim Program
The temporary rule that the Board proposed did not reflect any
exercise of the Board's authority to differentiate among classes of
brokers and dealers or to exempt any category of public accounting
firm. The Board received a number of comments addressing the inclusive
scope of the proposed interim program. Some commenters supported the
proposed scope, while nevertheless suggesting that the Board focus its
interim inspection efforts on audits of certain categories of brokers
and dealers, such as those that have possession and control of customer
cash and securities or act as clearing, carrying, or custodial brokers.
One of those commenters also suggested that the Board consider, in
connection with a permanent program, whether the public interest would
be best served by focusing on those that carry accounts and maintain
customer cash and securities.
Other commenters disagreed with the proposed approach. They argued,
and some submitted data intended to support the argument, that certain
categories of brokers and dealers pose little or no risk to the
investing public. They suggested that the Board could identify those
categories by focusing on factors such as whether the broker or dealer
has custody of, or meaningful access to, client assets, or whether it
is exclusively an introducing broker or dealer. These commenters
suggested that the Board either should exempt the auditors of low-risk
categories of firms from the Board's authority without delay or should
collect and study currently available data on the question before
subjecting auditors of all brokers and dealers to an inspection
program. One commenter expressed concern that PCAOB regulation would
significantly increase the cost of an audit to these entities,
potentially forcing some of them out of business, with no corresponding
contribution to meaningful protection of investors. Other commenters
similarly expressed concern that the costs of compliance with PCAOB
regulation may negatively impact auditors of introducing brokers and
dealers, which are typically small businesses.
After considering these comments, the Board decided to adopt a
temporary rule for an interim program of the same scope as proposed.
The Board explained in the release that the inclusive scope of the
interim program should not be construed as either foreshadowing the
likely scope of a permanent program or suggesting that every broker or
dealer auditor will be inspected as part of the interim program. The
Board expects to be able to gather the information necessary to inform
its consideration of a permanent program without having to inspect most
firms during the interim program. The Board intends to consider
carefully whether there should be exemptions from the permanent
program. For example, the Board expects to give consideration to
whether a broker's or dealer's meaningful access to client assets is a
relevant factor in determining the investor protection and public
interest benefits of PCAOB oversight of the auditor of that broker or
dealer.
The Board continues to believe, however, that information gathered
during the course of the interim program will be relevant to making
appropriate judgments about that question and other significant
elements of a permanent inspection program. While data of the type
submitted by commenters who favor immediate exemptions will also be
relevant to those judgments, the Board believes that it is not prepared
at the present time to conclude that such data is the only type of
information that will be relevant or that an analysis of all such data
necessarily compels the exemptions urged by these commenters.
2. Processes Relating to Inspectors' Firm-Specific Observations
A few commenters requested clarification on how the Board will
bring deficiencies to the firm's attention and what the Board's
expectations would be for the firm to address the issues. Two
commenters suggested that the Board address that point in the text of
the rule. In response to the commenters, the Board described in the
release the general communication process between PCAOB inspectors and
the audit engagement team or other representatives of the firm. The
Board anticipates that communications with firms will follow a course
similar to that in inspections of auditors of issuers, but the Board
believes that the details of the
[[Page 40963]]
process are subject to variation in light of circumstances during an
inspection.
The proposing release included references to the possibility of
firm-specific inspection reports during the interim program.\3\
Commenters sought clarification on what they saw as a tension between
references to that possibility and the statement in the proposing
release that the Board would expect results of inspection procedures
performed under the interim program to be included in firm-specific
reports, if at all, only after rules for a permanent program take
effect.
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\3\ The proposing release stated that nothing in the temporary
rule ``would necessarily preclude the Board from issuing a firm-
specific inspection report on, or including, inspection observations
from the interim program before a permanent program takes effect.''
Proposing release at 11, n.21. The proposing release also noted that
inspection procedures performed in the interim program would be
carried out in accordance with, and subject to, the provisions of
Section 104 of the Act, including provisions concerning a firm's
opportunities to respond to a draft inspection report and to seek
Commission review of certain matters in a final inspection. See
proposing release at 6, n.10.
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The Board intends for inspection procedures performed on a firm as
part of the interim program to constitute a foundational portion of the
first inspection of the firm's audit practice related to brokers and
dealers, which would be completed after a permanent program is
established. This means that, for firms that audit brokers or dealers
but not issuers, the Board does not expect to issue a firm-specific
inspection report unless and until a permanent program replaces the
interim program, the firm is included in the scope of the permanent
program, and the firm has been inspected under the permanent
program.\4\ Unusual circumstances, however, could give rise to
exceptions. As a precaution in light of that possibility, the Board has
incorporated in the final version of Rule 4020T the provisions of PCAOB
Rule 4007, Procedures Concerning Draft Inspection Reports, PCAOB Rule
4008, Procedures Concerning Final Inspection Reports, and PCAOB Rule
4009, Firm Response to Quality Control Defects.\5\
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\4\ While the interim program is in place, a Board inspection of
a firm that performs audit work for issuers and for brokers or
dealers would include the full, regular inspection--including the
firm-specific inspection report--of the firm's issuer practice. Such
an inspection could also include inspection procedures under the
interim program with respect to the firm's broker and dealer
practice. As with firms that audit brokers or dealers but not
issuers, the Board, absent unusual circumstances, would not
incorporate any evaluation of the firm's broker and dealer practice
into the public portion of a firm-specific report before the report
on the first inspection of the firm that occurs after a permanent
program takes effect and would not include observations from the
interim program procedures in the nonpublic portion of any such
report.
\5\ Rule 4007 was not incorporated in the version of Rule 4020T
that the Board proposed, and commenters noted the discrepancy
between the omission of a provision incorporating Rule 4007 and the
proposing release's references to the possibility of firm-specific
inspection reports. To fully address that discrepancy, the Board has
also incorporated Rules 4008 and 4009 in the final version of Rule
4020T.
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Commenters also expressed concern about including observations from
the interim inspection program in a firm-specific inspection report
that may be issued years later, after the permanent program is
established and after the relevant standards and rules, as well as the
firm's practices, may have changed. The commenters urged the Board to
reconsider including observations from interim program procedures in
the first firm-specific report. These commenters also requested
clarification on whether the eventual report would present cumulative
findings or deficiencies observed.
During the interim program, the Board will be obtaining a broad
view of practice related to audits of brokers and dealers under current
standards and interpretive guidance, and at the same time the standards
and rules applicable to the audits will be evolving. Having both that
broad view and the new standards as a foundation will be helpful to
making consistent and meaningful evaluations of the types of quality
control issues that, going forward, firms need to address in their
practices related to audits of brokers and dealers. It is possible that
observations from interim program procedures will be relevant to the
Board's inspection-related dialogue with a particular firm--though not
necessarily with every firm--even after standards and rules have
changed, and it may be appropriate for aspects of those observations to
be included in the first inspection report that addresses the firm's
audit practice related to audits of brokers and dealers. The Board does
not contemplate that firms' first reports will routinely serve as
historical records of all observations from interim program procedures.
Depending on the circumstances, however, aspects of some observations
may retain their relevance to an assessment of audit quality issues at
a particular firm even at the time of the first report, and those
aspects may be discussed in a report. If that occurs, the Board intends
that the report will make clear the timing of the original inspection
observation at issue.
3. General Reports During the Inspection Period
The temporary rule provides that the Board will publish a report on
the interim program no less frequently than every twelve months,
beginning twelve months after the date the rule takes effect and
continuing until rules for a permanent program take effect. Each report
will describe the progress of the interim program and any significant
observations that either may bear on the Board's consideration of a
permanent program or the publication of which may otherwise be
appropriate to protect the interests of investors or to further the
public interest.
Commenters supported the Board's proposal to publish a report at
least annually on the progress of the interim inspection program. Some
commenters suggested that the Board include in the report sufficient
details on the nature and types of brokers and dealers inspected and
group the inspection observations based on these classifications to
help public accounting firms understand the specific issues identified
in the report. The Board will take those suggestions into consideration
when preparing the progress reports.
4. Voluntary Cooperation
When Rule 4020T takes effect, cooperation with Board inspection
procedures under the interim program will be mandatory for registered
firms and their associated persons. The proposing release also noted,
however, that even before the rule takes effect, the Board might
conduct relevant procedures with the voluntary cooperation of certain
firms. Two commenters inquired about the Board's expectations for
voluntary cooperation. Specifically, commenters sought clarification on
whether the procedures with which the Board may request voluntary
cooperation would include actual inspections of audits of brokers and
dealers or be limited in scope. These commenters also requested
information on the timing of the voluntary cooperation and the identity
of registered public accounting firms expected to cooperate
voluntarily.
The Board explained in the release that it does not have any
expectation for particular firms to cooperate voluntarily, or have a
view that there is a particular scope of procedures to which firms
should voluntarily consent. The Board's ongoing inspections of auditors
of issuers include inspections of some firms that audit brokers and
dealers in addition to issuers. During regular inspections of any such
firm's
[[Page 40964]]
issuer audit practice before Rule 4020T takes effect, inspection staff
may discuss with the firm the possibility of the firm submitting
voluntarily to inspection procedures concerning its audit practice
related to brokers and dealers. The Board does not contemplate
discussing the possibility of voluntary cooperation with any firm that
the Board is not otherwise inspecting because of the firm's issuer
audit practice.
III. Date of Effectiveness of the Proposed Rules and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) As the
Commission may designate 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 or disapprove such proposed rule; or
(b) Institute proceedings to determine whether the proposed rule
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 requirements of Title I of the Sarbanes-
Oxley Act. Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/pcaob.shtml); or
Send an e-mail to [email protected]. Please include
File Number PCAOB-2011-01 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number PCAOB-2011-01. This file
number should be included on the subject line if e-mail is used. To
help the Commission 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/rules/pcaob/shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule changes that are
filed with the Commission, and all written communications relating to
the proposed rule changes between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room, on official business
days between the hours of 10 a.m. and 3 p.m. Copies of such filing will
also be available for inspection and copying at the principal office of
the PCAOB. All comments received will be posted without change; we do
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. PCAOB-2011-01 and should be
submitted on or before August 2, 2011.
For the Commission, by the Office of the Chief Accountant,
pursuant to delegated authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-17387 Filed 7-11-11; 8:45 am]
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