[Federal Register Volume 68, Number 124 (Friday, June 27, 2003)]
[Notices]
[Pages 38406-38409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16269]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48075; File No. PCAOB-2003-02]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rule on Funding

June 23, 2003.
    Pursuant to section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Sarbanes-Oxley Act'' or ``Act''), notice is hereby given that on 
April 16, 2003, the Public Company Accounting Oversight Board (the 
``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rules as 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 Rule

    On April 16, 2003, the Board adopted five proposed rules relating 
to public company funding of the Board's operations (PCAOB Rules 7100 
through 7104), plus certain definitions that would appear in PCAOB Rule 
1001, to implement section 109 of the Act. Section 109 provides that 
funds to cover the Board's annual budget (less registration and annual 
fees paid by public accounting firms) are to be collected from public 
companies (i.e., ``issuers,'' as defined in the Sarbanes-Oxley Act). 
The amount due from such companies is referred to in the Sarbanes-Oxley 
Act as the Board's ``accounting support fee.'' The five proposed rules 
provide for equitable allocation, assessment and collection of the 
Board's accounting support fee.

II. Board's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rule

    In its filing with the Commission, the Board included statements 
concerning the purpose of, and basis for, its proposed rules on funding 
and discussed comments it received on them. 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 Rule

(a) Purpose
    The Act established the Board as a nonprofit corporation, subject 
to and with all the powers conferred upon a nonprofit corporation by 
the District of Columbia Nonprofit Corporation Act, to oversee the 
audits of public companies that are subject to the securities laws, and 
related matters, in order to protect the interests of investors and 
further the public interest in the preparation of informative, 
accurate, and independent audit reports for companies the securities of 
which are sold to, and held by and for, public investors.
    Section 109 of the Act provides that funds to cover the Board's 
annual budget (less registration and annual fees paid by public 
accounting firms) are to be collected from public companies (i.e., 
``issuers,'' as defined in the Act). The amount due from such companies 
is referred to in the Act as the Board's ``accounting support fee.'' 
The Board has adopted five proposed rules relating to public company 
funding of the Board's operations (PCAOB Rules 7100 through 7104), plus 
certain definitions that would appear in Rule 1001, to implement 
section 109 of the Act.
    The Board's proposed rules provide for the accounting support fee 
to be allocated to, and payable by, two classes of issuers: (1) 
Publicly-traded companies with average, monthly U.S. equity market 
capitalizations during the preceding year, based on all classes of 
common stock, of greater than $25 million,\1\ and (2) investment 
companies with average, monthly U.S. equity market capitalizations (or 
net asset values) of greater than $250 million.\2\ In recognition of 
the structure of investment companies and the relatively less-complex 
nature of investment company audits (as compared to operating company 
audits), investment companies would be assessed at a lower rate. All 
other issuers, including (1) those that are not required to file 
audited financial statements with the Commission, (2) employee stock 
purchase, savings and similar plans, and (3) bankrupt issuers that file 
modified reports, would be allocated shares of zero.\3\
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    \1\ The definition of ``issuer market capitalization'' in Rule 
1001(i)(i) defines that term to include only the aggregate market 
value of securities traded in the United States, whether those 
securities are issued by entities based in the United States or 
elsewhere. The definition excludes the market value of securities 
traded outside the United States.
    \2\ This class would include both registered investment 
companies and issuers that have elected to be regulated as business 
development companies pursuant to section 54 of the Investment 
Company Act of 1940 (``Investment Company Act''). In the case of an 
investment company with multiple series, the average, monthly U.S. 
equity market capitalization, or net asset value, of each series 
would be measured against the $250 million threshold separately.
    \3\ In addition, issuers with average, monthly U.S. equity 
market capitalizations during the preceding year of less than $25 
million (or, in the case of investment companies, of less than $250 
million), issuers whose only outstanding public securities are debt 
securities would be allocated shares of zero, and issuers whose 
share price (or net asset value) on a monthly, or more frequent, 
basis is not publicly available.
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    (i) Computation of Accounting Support Fee and Allocation to 
Issuers. Once each year, the Board will compute the accounting support 
fee.\4\ The accounting support fee will be equal to the Board's budget 
for that year, as approved by the Commission, less the amount of 
registration and annual fees received during the prior year from public 
accounting firms.\5\
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    \4\ Rule 7100. The Board anticipates that the accounting support 
fee will normally be computed during the first 30 days of each 
calendar year.
    \5\ Id. The term ``accounting support fee'' is defined in Rule 
1001(a)(i) by reference to Rule 7100.
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    In establishing rules on the allocation of the accounting support 
fee, the Board was guided by two overarching principles that emanate 
from section 109 of the Act: that, generally, the accounting support 
fee must be allocated in a manner that reflects the proportionate sizes 
of issuers, and that, within that framework, the accounting support fee 
must be allocated in an

[[Page 38407]]

equitable manner. These two principles are related in that, at least as 
a general matter, size of issuer may serve as an indication of the 
complexity of an audit, which could be an equitable measure on which to 
base allocation of the accounting support fee.
    With respect to the measurability of issuers' proportionate sizes, 
the Board faces certain limitations. First, although section 109 
provides a formula based on equity market capitalization by which to 
measure the proportionate sizes of issuers, market data may not be 
reliable or even regularly available \6\ with respect to some issuers, 
such as issuers that are not traded on an exchange or quoted on Nasdaq, 
issuers whose securities are otherwise illiquid, and certain investment 
companies, such as unit investment trusts and insurance company 
separate accounts. In addition, issuers whose only publicly-traded 
securities are debt securities do not have equity market 
capitalizations.
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    \6\ Under section 109(g), the allocation of an issuer's share of 
the accounting support fee is to be based on the ``average monthly 
equity market capitalization of the issuer for the 12-month period 
immediately preceding the beginning of the fiscal year to which'' 
the budget relates.
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    Second, to the extent that there are issuers, as that term is 
defined in section 2(a)(7) of the Act, that are not required to file 
audited financial statements, it may not be equitable to allocate any 
share of the accounting support fee to them. Further, while most 
investment companies file annual audited financial statements, the 
assets of many of those companies consist of investments in issuers who 
will have themselves been allocated shares of the accounting support 
fee.
    In order to allocate the accounting support fee among issuers in a 
manner that takes into account the overarching principles and the 
inherent limitations of available data, the Board's proposed rules 
divide issuers into four classes:
    (1) All issuers whose average, monthly U.S. equity market 
capitalization during the preceding calendar year, based on all classes 
of common stock, is greater than $25 million and whose share price on a 
monthly, or more frequent, basis is publicly available.\7\ (Equity 
Issuers class)
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    \7\ Rule 7101(a). The Commission uses a similar threshold-public 
float of less than $25 million--as one of the criteria for 
determining whether a company qualifies as a small business issuer. 
See 17 CFR 228.10.
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    (2) Registered investment companies and issuers that have elected 
to be regulated as business development companies whose average, 
monthly market capitalization (or net asset value), during the 
preceding calendar year, is greater than $250 million and whose share 
price (or net asset value) on a monthly, or more frequent, basis is 
publicly available.\8\ (Investment Company Issuers class) As discussed 
below, the allocation formula scales market capitalization (or, for 
investment companies whose securities are not traded on an exchange or 
quoted on Nasdaq, net asset value) of investment companies down by 90%, 
such that a $250 million investment company would be allocated a share 
equal to that of a $25 million operating company.
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    \8\ Rule 7101(a)(2). The legislative history of the Act supports 
the Board's proposal to establish a separate class for investment 
company issuers and to allocate shares of the accounting support fee 
to members of that class at a reduced rate. See Floor Statement of 
Sen. Enzi, 148 Cong. Rec. S7356 (July 25, 2002):
    I also believe that the Conferees expect that the Board and the 
standard setting body will deem investment companies registered 
under section 8 of the Investment Company Act of 1940 to be a class 
of issuers for purposes of establishing the fees pursuant to this 
section, and that investment companies as a class will pay a fee 
rate that is consistent with the reduced risk they pose to investors 
when compared to an individual company. Audits of investment 
companies are substantially less complex than audits of corporate 
entities. The failure to treat investment companies as a separate 
class of issuers would result in investment companies paying a 
disproportionate level of fees.
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    (3) All issuers that, as of the date the accounting support fee is 
calculated under Rule 7100, (i) have a basis, under a Commission rule 
or pursuant to other action of the Commission or its staff, not to file 
audited financial statements, (ii) are employee stock purchase, savings 
and similar plans, interests in which constitute securities registered 
under the Securities Act of 1933, as amended (the ``Securities Act''), 
or (iii) are subject to the jurisdiction of a bankruptcy court and 
satisfy the modified reporting requirements of Commission Staff Legal 
Bulletin No. 2.\9\ (Issuers Permitted Not to File Audited Financial 
Statements and Bankrupt Issuers That File Modified Reports class)
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    \9\ Rule 7101(a)(3). Paragraph (i) of this class currently 
includes (A) asset-backed issuers, (B) unit investment trusts, as 
defined in section 4(2) of the Investment Company Act, that have not 
filed or updated a registration statement that became effective 
during the preceding year, and (C) Small Business Investment 
Companies registered on Form N-5 under the Investment Company Act, 
that have not filed or updated a registration statement that became 
effective during the preceding year.
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    (4) All other issuers (i.e., issuers that do not fall in classes 
(1), (2), or (3)).\10\ (All Other Issuers class)
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    \10\ Rule 7101(a)(4).
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    A company's status as an issuer (or as an investment company, 
business development company, issuer excused from filing audited 
financial statements, or bankrupt issuer) will be determined as of the 
date on which the amount of the annual accounting support fee is set. 
Companies that are not issuers on that date will not be required to pay 
any fee during that year.
    The accounting support fee will be allocated among the issuers in 
the four classes in the following manner:
    (1) Each company in the Equity Issuer and Investment Company Issuer 
classes will be allocated an amount equal to the accounting support 
fee, multiplied by a fraction. The numerator of the fraction will be 
the issuer's average, monthly market capitalization during the 
preceding calendar year. The denominator will be the sum of the 
average, monthly market capitalizations of all Equity and Investment 
Company Issuers. For purposes of this allocation, however, the market 
capitalization of an investment company issuer will be ten percent of 
the investment company's market capitalization or net asset value.\11\
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    \11\ Rule 7101(b)(1).
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    (2) All issuers in the other two classes--issuers permitted not to 
file and all other issuers--will be allocated a share of zero.\12\
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    \12\ Rule 7101(b)(2).
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    Issuers will be required to pay their allocated shares of the 
accounting support fee, rounded to the nearest hundred. Accordingly, 
issuers whose shares of the accounting support fee are less than $50 
will have their shares rounded to zero and will not be assessed a fee.
    (ii) Notice of Allocation and Collection. Section 109 of the Act 
requires the Board to promulgate rules on assessment and collection of 
the accounting support fee. Accordingly, the proposed rules provide 
that, after the annual allocation of the accounting support fee is 
determined, the Board will send a notice to each issuer to which a 
share of the fee has been allocated.\13\ These notices will be sent 
either electronically or by first-class mail. Payment will be due on 
the 30th day after transmittal, after which interest will accrue at a 
rate of 6% per annum.\14\
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    \13\ Rule 7102. The Board will use its best efforts to send a 
notice to each issuer. Mailings will be to the address shown on such 
issuer's most recent periodic report filed with the Commission or 
submitted to the Commission's EDGAR system, unless the issuer 
provides another address to the Board. The Board's failure to send 
an issuer a notice, or the issuer's failure to receive a notice sent 
by the Board, will not excuse an issuer from its obligation to pay 
its share of the accounting support fee.
    \14\ Rule 7103(a).
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    The Board intends that notices will contain sufficient information 
to permit issuers to review the calculations by which their allocations 
were

[[Page 38408]]

determined. Specifically, all notices will include the amount of the 
accounting support fee, the date on which the accounting support fee 
was calculated, the class in which the issuer was placed, the issuer's 
average, monthly U.S. equity market capitalization for the preceding 
year, and the sum of the average, monthly U.S. equity market 
capitalizations of all issuers in the Equity Issuer and Investment 
Company Issuer classes during the preceding year.\15\ Issuers that 
disagree with the class in which they have been placed, or with the 
calculation by which their allocations were determined, may petition 
the Board for a correction, in writing.\16\
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    \15\ As discussed above, the allocation formula will use only 10 
percent of the average, monthly market capitalization (or net asset 
value) of investment companies. Both the market capitalization (or 
net asset value) and the percentage thereof used in the formula will 
be disclosed as part of the notice.
    \16\ Rule 7102(c). After the date on which the accounting 
support fee is calculated under Rule 7100 and allocated under Rule 
7101, any change or recalculation of the share allocated to an 
issuer will not affect the share allocated to any other issuer. Rule 
7101(c).
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    If an issuer has not paid its share of the accounting support fee 
by the 60th day after a notice was sent, and the issuer does not have a 
petition pursuant to Rule 7102(c) pending, the Board may send a second 
notice by certified mail.\17\ If the Board has sent a second notice and 
payment has still not been made by the 90th day after the original 
notice was sent, the Board may report the issuer's non-payment to the 
Commission.\18\ An issuer's failure to pay its share of the accounting 
support fee is a violation of section 13(b)(2) of the Securities 
Exchange Act of 1934 (``Exchange Act'') and could, like any other 
Exchange Act violation, result in administrative, civil, or criminal 
sanctions.\19\
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    \17\ Rule 7103(c).
    \18\ Rule 7103(c).
    \19\ See sections 21C(a), 21(d), and 32(a) of the Exchange Act.
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    In addition, the Board's proposed rules require that no registered 
public accounting firm may sign an unqualified audit opinion (or issue 
a consent) with respect to an issuer's financial statements if that 
issuer has outstanding any past-due share of the accounting support fee 
and the issuer has not filed a petition for a correction to its share 
of the accounting support fee.\20\ The Board's proposed rules would 
permit a qualified, adverse or disclaimed opinion irrespective of 
whether the issuer's share had been paid.\21\ The collection measures 
in the Board's proposed rules are intended to ensure the reliability of 
the independent funding source the Act provides for the Board and to 
promote fairness to all issuers allocated a share of the accounting 
support fee. The Board intends the requirement that auditors confirm 
payment of an issuer's share of the accounting support fee before 
issuing an unqualified audit opinion to serve as a reliable and cost-
effective means of maintaining integrity in the assessment and 
collection process. A note to proposed Rule 7103(b) explains that a 
registered public accounting firm may confirm an issuer's payment of 
the accounting support fee by obtaining a management representation of 
payment. In addition, the Board plans to build systems that would 
enable auditors quickly and easily to ascertain whether their issuer 
audit clients have outstanding any past-due shares of the accounting 
support fee.
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    \20\ Rule 7103(b).
    \21\ Rule 7103(b) does not prevent, in any way, a registered 
accounting firm from publicly disclosing departures from GAAP, or 
any other reservations about financial statements, that would be 
disclosed in a qualified opinion, an adverse opinion, or a 
disclaimer of an opinion. See AICPA Codification of Statements on 
Auditing Standards, AU Sec. Sec.  508.20, 508.58-59, 508.61-62 
(AICPA 2002).
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    (iii) Collection of Fees for Standard-Setting Body. Under the Act, 
the standard-setting body designated by the Commission to establish 
accounting principles is also authorized to collect an accounting 
support fee from public companies to cover its annual budget.\22\ The 
Board's proposed rules recognize that, as contemplated in the Act, the 
standard-setting body could designate an agent to assess and collect 
its fees and the Board could be that agent.\23\ If that occurs, the 
Board's assessment and collection of the standard-setting body's fees 
will be governed by the same rules as apply to the Board's fees.
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    \22\ See section 109(e) of the Act.
    \23\ Rule 7104.
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    Consistent with section 109(e) of the Act, the Board would not be 
responsible for calculating the standard-setting body's accounting 
support fee or for allocating its accounting support fee among issuers. 
While section 109 of the Act governs both the Board's and the standard-
setting body's accounting support fee, the standard-setting body is not 
required to use the Board's allocation formula. If the standard-setting 
body designates the Board as its collection agent, however, the Board's 
proposed rules would effectively require the standard-setting body to 
agree to the same assessment and collection process (for example, 
rounding issuers' shares to the nearest hundred, and reporting issuers' 
non-payment to the Commission) as applies to the Board's accounting 
support fee. The Board envisions that, if it is designated to serve as 
the standard-setting body's collection agent, issuers would receive one 
notice and make one payment. The notice would clearly distinguish 
between the amount that goes to the Board and the amount that goes to 
the accounting standard-setter, and it would provide issuers with 
separate calculations of how the amount of each assessment was reached.
(b) Statutory Basis
    The statutory basis for the Board's proposed rules on funding is 
Title I of the Sarbanes-Oxley Act.

B. Board's Statement on Burden on Competition

    The Board has stated that the proposed rules on funding do not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of Title I of the Sarbanes-Oxley Act.

C. Board's Statement on Comments on the Proposed Rule Change Received 
From the Public

    The proposed rules on funding were published for public comment in 
PCAOB Release No. 2003-002 (March 14, 2003). A copy of PCAOB Release 
No. 2003-002 and copies of 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. The Board received eight written comments, 
from the following firms and individuals:

a. Alcon, Inc.
b. Boeing Company
c. Deloitte & Touche
d. Ernst & Young LLP
e. Henjes, Conner, Williams & Grimsley
f. Investment Company Institute
g. KPMG
h. Paul B.W. Miller, PhD, CPA, University of Colorado at Colorado 
Springs/Paul R. Bahnson, PhD, CPA, Boise State University

    The Board both clarified and modified certain aspects of the 
proposed rules in response to the comments received. For instance, one 
commenter requested that the Board clarify how average monthly market 
capitalization would be determined. The proposed rules and release now 
explain that average monthly market capitalization will be based on 
closing prices on the last day of each month measured and, in general, 
on the number of shares outstanding reported in the issuer's periodic 
filings with the Commission.
    Some commenters also requested that the Board broaden the classes 
of issuers described as ``Equity Issuers'' and ``Investment Company 
Issuers,'' in

[[Page 38409]]

proposed Rule 7101(a)(1) and (2), to include all public companies and 
investment companies, regardless of their market capitalizations, and 
also include issuers with only registered debt securities. Some 
commenters also suggested establishing a minimum fee for small issuers 
as an alternative to the formula provided in the Act. The Board's 
proposal to restrict the Equity Issuers class to issuers whose average 
monthly market capitalization exceeds $25 million and to restrict the 
Investment Company class to issuers whose average monthly market 
capitalization (or net asset value) exceeds $250 million was to ensure 
that the rules can be administered in a reliable and cost-effective 
manner. As discussed above, reliable market data is difficult to obtain 
with respect to issuers that are not traded on an exchange or on 
Nasdaq, and based on the Board's inquiry, data may not consistently be 
available with respect to issuers below the proposed rule's thresholds. 
Based in part on these comments, however, the Board has clarified Rule 
7101(a) to more explicitly exclude from those classes issuers whose 
market capitalization (or net asset value) on a monthly, or more 
frequent, basis is not publicly available. Also, with respect to 
issuers of debt securities, section 109(g) of the Act only provides for 
the assessment of a share of the accounting support fee based on 
``equity'' market capitalization.
    The Board also received a comment suggesting that preferred stock 
should be included in the definition of issuer market capitalization. 
The Board proposed that the definition of issuer market capitalization 
include capitalization of all classes of common stock. After 
consideration, the Board believes that determining whether each 
issuer's preferred stock resembles equity or debt would unduly burden 
the Board's administration of its funding system. Therefore, the Board 
did not adopt this suggestion.
    While one commenter supported the proposed rules with respect to 
investment companies as proposed, another commenter suggested that the 
90 percent reduction in investment company market capitalizations (or 
net asset values), for purposes of calculating the accounting support 
fee in proposed Rule 7101(b)(1), was too great a reduction. This 
commenter did not provide any data to support its position, although it 
recommended further study of this issue. Based on a comparison of audit 
fees paid by investment companies to audit fees paid by publicly-traded 
companies, which was provided by the commenter who supported the 
Board's proposal, the Board has determined that assessing investment 
companies at ten percent of that assessed public companies was 
appropriate.
    In addition, the Board received several comments from accounting 
firms, suggesting that the Board rely on its referral of delinquent 
issuers to the Commission instead of require, pursuant to proposed Rule 
7103(b), that registered public accounting firms ascertain, before 
signing an unqualified audit opinion, that issuer audit clients have no 
outstanding past-due shares of the accounting support fee. While the 
Board has proposed to refer delinquent issuers to the Commission, the 
uncertainty, given the Commission's limited resources and other 
priorities, that the Commission would bring civil actions against such 
issuers makes a referral alone an unreliable collections mechanism. 
These commenters also suggested that the Board clarify how this rule 
would work in practice. In response, the Board has clarified that Rule 
7103(b) may be satisfied by obtaining a representation from the issuer 
that no past due share of the fee is outstanding. The Board has also 
made clear that an issuer that has filed a written petition for a 
correction of its share will not be deemed to have a past due share 
outstanding.
    Finally, the Board held two informational meetings during the 
comment period, one in Washington, DC, and one in San Francisco, CA, 
with representatives of issuers to explain the proposed rules on 
funding. No substantive comments were received as a result of either 
meeting.

III. Date of Effectiveness of the Proposed Rule 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 Board's proposed rules on funding; or
    (b) Institute proceedings to determine whether the Board's proposed 
rules on funding 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 rule 
is consistent with the requirements of Title I of the Sarbanes-Oxley 
Act and the Exchange Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of 
the submission, all subsequent amendments, all written statements with 
respect to the proposed rule that are filed with the Commission, and 
all written communications relating to the proposed rule 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 in Washington, DC. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
PCAOB. All submissions should refer to File No. PCAOB-2003-02 and 
should be submitted by July 18, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-16269 Filed 6-26-03; 8:45 am]
BILLING CODE 8010-01-P