[Federal Register Volume 67, Number 227 (Monday, November 25, 2002)]
[Rules and Regulations]
[Pages 70529-70531]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29833]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 562

[No. 2002-54]
RIN 1550-AB54


Regulatory Reporting Standards: Qualifications for Independent 
Public Accountants Performing Audit Services for Voluntary Audit Filers

AGENCY: Office of Thrift Supervision, Treasury.

[[Page 70530]]


ACTION: Interim final rule with request for comments.

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SUMMARY: The Office of Thrift Supervision (OTS) is adopting an interim 
final rule that amends its annual independent audit requirements for 
small, non-public, highly rated savings associations that voluntarily 
obtain independent audits. This change will make OTS's requirements 
more consistent with those of the other federal banking agencies and 
will avoid the potential regulatory burden that could otherwise result 
from other regulatory action.

DATES: This interim rule is effective November 25, 2002. Written 
comments must be received by December 26, 2002.

ADDRESSES:
    Mail: Send comments to Regulation Comments, Chief Counsel's Office, 
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: No. 2002-54.
    Delivery: Hand deliver comments to the Guard's Desk, East Lobby 
Entrance, 1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, 
Attention: Regulation Comments, Chief Counsel's Office, No. 2002-54.
    Facsimiles: Send facsimile transmissions to FAX Number (202) 906-
6518, Attention: Regulations Comments, No. 2002-54.
    E-Mail: Send e-mails to [email protected], Attention: No. 
2002-54, and include your name and telephone number.
    Availability of comments: OTS will post comments and the related 
index on the OTS Internet Site at http://www.ots.treas.gov. In 
addition, you may inspect comments at the Public Reading Room, 1700 G 
Street, NW., by appointment. To make an appointment for access, call 
(202) 906-5922, send an e-mail to public.info@ots.treas.gov">public.info@ots.treas.gov, or send a 
facsimile transmission to (202) 906-7755. (Please identify the 
materials you would like to inspect to assist us in serving you.) We 
schedule appointments on business days between 10 a.m. and 4 p.m. In 
most cases, appointments will be available the business day after the 
date we receive a request.

FOR FURTHER INFORMATION CONTACT: Christine Smith, Project Manager, 
(202) 906-5740, Examination Policy Division, or Teresa A. Scott, 
Counsel (Banking & Finance), (202) 906-6478, Regulations and 
Legislation Division, Office of Thrift Supervision, 1700 G Street, NW., 
Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background and Changes

    Savings associations that are publicly traded,\1\ have assets of 
$500 million or more,\2\ or have a 3, 4, or 5 CAMEL rating \3\ must 
obtain and file an annual independent audit. Small, non-public, 1- or 
2-rated savings associations are not required to obtain an independent 
audit. Currently, OTS regulations require that public accountants 
conducting these independent audits (whether required or voluntary) 
follow the SEC independence rules, including those governing 
outsourcing of non-audit services. 12 CFR 562.4(d) and (e) (2002).
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    \1\ 17 U.S.C. 78m (West 2002). Generally, federally-chartered 
publicly traded savings associations file annual audits with OTS, 
while generally publicly traded federally-chartered thrift holding 
companies file audits with the Securities and Exchange Commission 
(SEC).
    \2\ 12 CFR 363.2 (2002). These institutions file annual audits 
with the Federal Deposit Insurance Corporation and OTS.
    \3\ 12 CFR 562.4(b). These savings associations file annual 
audits with OTS.
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    In 1994 when OTS originally promulgated Sec. Sec.  562.4(d) and 
(e), OTS believed that the SEC independence rules provided an 
appropriate standard for assessing auditor independence and that this 
standard would not unduly burden small, non-public, highly rated 
savings associations that file voluntary audits with OTS.\4\ Because 
recent statutory changes intended to reach publicly traded institutions 
would indirectly affect these voluntary filers, OTS has reexamined the 
use of this standard.
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    \4\ The SEC modified its independence rules in December 2000. 
The modified rules, although more restrictive than those in effect 
in 1994, continued to provide an appropriate standard for savings 
associations that file audits voluntarily. However, see discussion 
below concerning changes required by the Sarbanes-Oxley Act of 2002, 
Pub. L. No. 107-204, Sec.  201, 116 Stat. 745 (2002).
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    On July 30, 2002, Congress passed the Sarbanes-Oxley Act of 
2002.\5\ Title II of that act sets forth standards for auditor 
independence. Specifically, section 201(g)(5) prohibits a registered 
public accountant from performing an audit for a public company 
contemporaneously with providing that company with delineated non-audit 
services, including internal audit outsourcing services. This 
congressional mandate would affect a change in the SEC independence 
rules.
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    \5\ Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, Sec.  201, 
116 Stat. 745 (2002).
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    If OTS rules remain unchanged, a savings association that obtains a 
voluntary audit may not use its external auditors to perform non-
auditing services.\6\ Although OTS encourages non-publicly held savings 
associations that voluntarily file audits with the agency to follow the 
prohibition from Sarbanes-Oxley, OTS is concerned that an absolute 
prohibition in this manner may be unnecessarily detrimental to some 
voluntary filers. Specifically, OTS believes that small institutions 
with less complex operations and limited staff, may, in some instances, 
use their independent public accountant to perform both an external 
audit and some or all of an audit client's non-audit activities 
consistent with the OTS's safety and soundness objectives. Some of 
these institutions may not have access to a full range of qualified 
public accountants such that they could engage both an external auditor 
and a different outside firm to perform non-audit functions. Other 
institutions may reasonably have determined that the costs of having a 
full time in-house staff to perform those services exceed the benefits.
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    \6\ These services include bookkeeping, financial information 
systems design, appraisal, valuation, and actuarial services, and 
internal audit outsourcing services. For a complete list of 
prohibited activities, see id. at Sec.  201.
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    Moreover, none of the other banking agencies require that 
institutions that file voluntary audits follow the SEC independence 
rules. Requiring savings associations to do so may place these savings 
associations at an unnecessary competitive disadvantage as these 
requirements became more restrictive. Therefore, OTS is amending its 
regulation to eliminate the requirement that institutions voluntarily 
filing audits comply with the SEC independence rules.\7\
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    \7\ OTS understands that passage of the Sarbanes-Oxley Act may 
place increased responsibilities on small publicly held savings 
associations, including the prohibitions against outsourcing 
internal non-audit services to the association's external auditor. 
Nothing in this rule affects those requirements.
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    On the other hand, OTS continues to believe that auditor 
independence is important to the safety and soundness of all 
institutions and thus OTS is retaining the requirement that 
institutions filing voluntary audits comply with the AICPA Professional 
Conduct Code, including those sections that address independence. 
Further, OTS may monitor voluntary audit filers' non-audit outsourcing 
to ensure that institutions are properly preserving the independence 
between the two functions. OTS believes that this approach is the most 
effective means of maintaining comparability and consistency with the 
other banking agencies. This approach also reduces regulatory burden on 
savings associations filing voluntary audits consistent with safe and 
sound regulation.

[[Page 70531]]

II. Justification for Interim Rule

A. Notice and Comment Requirement

    Section 553 of the Administrative Procedure Act (APA) permits an 
agency to issue rules without prior notice and comment if the agency 
finds good cause and explains its finding when it publishes the rule. 5 
U.S.C. 553(b)(B). A finding that notice and comment are impracticable, 
unnecessary, or contrary to the public interest constitutes good cause.
    As discussed more fully above, OTS has examined the legislative 
changes made by the Sarbanes-Oxley Act and the potential impact of any 
implementing regulations on small, non-public savings associations. OTS 
believes that the interaction of these changes with OTS's current 
regulations on voluntary audits could significantly increase the 
regulatory burden on these small thrifts. Small, non-public banks and 
non-depository institutions are not covered by the new independence 
rules. Small, non-public, highly rated thrifts do not pose any greater 
risks.
    Elimination of the regulatory requirement decreases burden on the 
industry and permits certain savings associations more flexibility in 
accessing the marketplace in search of non-audit services that may be 
performed by outside entities. The change also aligns OTS regulations 
more closely to those of the other banking agencies. Accordingly, OTS 
concludes that public notice and comment on these changes in advance of 
implementation are unnecessary and contrary to the public interest. 
Nonetheless, OTS invites comments on this interim rule during the 60-
day period following its publication. In developing a final rule, OTS 
will consider all public comments it receives within that period.

B. Effective Date Requirement

    Section 302 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (CDRIA), 12 U.S.C. 4802, requires that new OTS 
regulations and amendments to existing regulations take effect on the 
first day of a calendar quarter that begins on or after the date of 
publication of the rule. This delayed effective date provision applies 
only if the rule imposes additional reporting, disclosure, or other new 
requirements on insured depository institutions.
    As a related matter, section 553(d) of the APA states that a rule 
must not be made effective before 30 days after its publication. 5 
U.S.C. 553(b)(B). This APA provision does not apply, however, if the 
rule grants or recognizes an exemption or relieves a restriction.
    OTS concludes that neither CDRIA nor the APA precludes the 
publication of this rule with an immediate effective date. This rule 
makes only burden reducing amendments to OTS rules and relieves current 
requirements on independence and non-audit outsourcing activities.

II. Findings and Certifications

A. Executive Order 12866

    The Director of OTS has determined that this interim rule does not 
constitute a ``significant regulatory action'' for the purposes of 
Executive Order 12866.

B. Regulatory Flexibility Act

    Under the Regulatory Flexibility Act, OTS must either provide an 
Initial Regulatory Flexibility Analysis (IRFA) with this interim rule, 
or certify that the rule would not have a significant economic impact 
on a substantial number of small entities. Pursuant to section 605(b) 
of the Regulatory Flexibility Act, OTS certifies that this interim rule 
will not have a significant economic impact on a substantial number of 
small entities. It removes a requirement that could, if left unchecked, 
inadvertently lead to potential additional regulatory burden. The 
interim rule, which is written in plain language, reduces regulatory 
burden.

C. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995 \8\ 
(Unfunded Mandates Act) requires that an agency prepare a budgetary 
impact statement before promulgating a rule that includes a federal 
mandate that may result in expenditures by state, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 205 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. OTS has determined that this 
interim rule will not result in expenditures by state, local, or tribal 
governments, or by the private sector, of $100 million or more in any 
one year. Accordingly, section 202 of the Unfunded Mandates Act does 
not require the OTS to prepare a budgetary impact statement for this 
rule.
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    \8\ Pub. L. 104-4, 109 Stat. 48 (1995) (codified at 2 U.S.C. 
Chs. 17A, 25).
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D. Paperwork Reduction Act

    The OTS has determined that this interim final rule does not 
involve a change to collections of information previously approved 
under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

List of Subjects in 12 CFR Part 562

    Accounting, Reporting and recordkeeping requirements, Savings 
associations.

    For the reasons set out in the preamble, the Office of Thrift 
Supervision amends part 562 of chapter V, title 12, of the Code of 
Federal Regulations as follows:

PART 562--REGULATORY REPORTING STANDARDS

    1. The authority citation for part 562 continues to read as 
follows:

    Authority: 12 U.S.C. 1463

    2. Amend Sec.  562.4 by revising paragraphs (d)(3) and (e) to read 
as follows:


Sec.  562.4  Audit of savings associations and savings association 
holding companies.

* * * * *
    (d) * * *
    (3)(i) Is in compliance with the American Institute of Certified 
Public Accountants' (AICPA) Code of Professional Conduct; and
    (ii) Meets the independence requirements and interpretations of the 
Securities and Exchange Commission and its staff; and
* * * * *
    (e) Voluntary audits. When a savings association, savings and loan 
holding company, or affiliate (as defined by 12 CFR 563.41(b)(1)) 
obtains an independent audit voluntarily, it must be performed by an 
independent public accountant who satisfies the requirements of 
paragraphs (d)(1), (d)(2), and (d)(3)(i) of this section.

    Dated: November 18, 2002.
    By the Office of Thrift Supervision.
James Gilleran,
Director.
[FR Doc. 02-29833 Filed 11-22-02; 8:45 am]
BILLING CODE 6720-01-P