[Federal Register Volume 68, Number 187 (Friday, September 26, 2003)]
[Notices]
[Pages 55673-55680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24382]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48506; File No. PCAOB-2003-04]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Ethics Code

September 22, 2003.
    Pursuant to section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act''), notice is hereby given that on September 23, 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 June 30, 2003, the Board adopted an Ethics Code (``Code'' or 
``EC'') to govern the conduct of its members, employees, and certain 
contractors and consultants. The proposed Code consists of 14 sections 
(EC 1 through 14). The text of the Ethics Code (technical numbering 
changes in this release made pursuant to authorization from the PCAOB) 
is as follows:

Ethics Code

EC1. Application of Code
    The provisions of this Ethics Code apply, according to their terms, 
to--
    (a) present and former Board members and staff;
    (b) the spouse, spousal equivalent, and dependents of Board members 
and staff; and
    (c) designated contractors and consultants to the Board.

    Note: Rule 3700(e) requires members of a Board advisory group to 
comply with certain provisions of the Ethics Code.

EC2. Definitions
    (a) Reference to Rules of the Board
    Unless the context requires otherwise, the definitions provided in 
Section 1001 of the Rules of the Board apply to the words and terms 
contained in this Ethics Code.
    (b) Code
    The term ``Code'' means this Ethics Code, as it may be amended from 
time to time.
    (c) Dependent
    The term ``dependent'' of a Board member or staff means a person 
who receives more than half of his or her support for the most recent 
calendar year from the Board member or staff.
    (d) Designated Contractors and Consultants
    The term ``designated contractors and consultants'' means certain 
persons or business organizations--
    (1) with which the Board enters into contracts for services, 
including contracts that provide for both goods and services;
    (2) which the Board, or its designate, has determined should be 
subject to this Code, in whole or in part; and
    (3) for which the contract contains a provision expressly 
incorporating this Code, in whole or in part.

    Note: The Board will maintain a list of designated contractors 
and consultants, which will be available to the public. Nothing in 
this provision will restrict the Board's right to impose additional 
contractual restrictions and limitations on any contractor or 
consultant. The Board is committed not to use its contracting 
authority to convert a person who would ordinarily be an employee to 
a contractor or consultant, as a means of allowing that person to be 
excluded from the provisions of this Code.

    (e) Honoraria
    The term ``honoraria'' means anything with more than a nominal 
value, whether provided in cash or otherwise, and which is provided in 
exchange for a speech, panel participation, publication or lecture. 
Neither the waiver of conference fees nor acceptance of a modest 
speakers-only meal constitutes ``honoraria.''

    Note: Items, which are provided to all conference participants, 
including speakers, are not provided ``in exchange for'' a speech 
and thus not considered to be ``honoraria.''

    (f) Practice
    The term ``practice'' means--
    (1) knowingly acting as an agent or attorney for, or otherwise 
representing any other person in any formal or informal appearance 
before the Board or Commission with respect to Board-related matters; 
or
    (2) making any oral or written communication on behalf of any other 
person to, and with the intent to influence, the Board or Commission 
with respect to Board-related matters.

    Note: For purposes of this definition, participating in the 
financial reporting process as the officer or director of an issuer 
or participating in an audit of an issuer's financial statements 
does not, in and of itself, constitute practice before the Board or 
the Commission.

    (g) Professional Staff or Professional Staff of the Board
    The terms ``professional staff'' or ``professional staff of the 
Board'' mean those persons who are employed by the Board and who are 
exempt, pursuant to Section 13(a)(1) of the Fair Labor Standards Act 
(29 U.S.C. 201 et sec.), from Sections 6 and 7 (minimum wage and 
overtime provisions) of that act.

    Note: These terms may, according to the context, alternatively 
be used to refer to a single such employee, or to all such 
employees.

    (h) Staff or Staff of the Board
    The terms ``staff'' or ``staff of the Board'' mean those persons 
who are employed by the Board.

    Note: These terms may, according to the context, alternatively 
be used to refer to a single such employee, or to all such 
employees.

EC3. General Principles
    (a) The purpose of this Code is to maintain the highest standards 
of ethical conduct among Board members and staff, and to provide the 
public with confidence in the objectivity of the Board's decisions by 
seeking to avoid both actual and perceived conflicts of interest among 
Board members and staff. The general principles within this section 
form the basis for the ethics rules and standards of conduct contained 
in the Code. When a situation is not covered by the Code's specific 
standards, Board members and staff shall apply the principles set forth 
in this section in determining whether their conduct is proper.

[[Page 55674]]

    (1) Board members and staff should at all times be mindful of their 
responsibilities to the Board, the sensitivity of their positions, and 
the need for public confidence in the objectivity and deliberative 
process of the Board.
    (2) Board members and staff should take great care to conduct 
themselves and all of their activities in such a manner so that their 
personal investments or other personal activities will not affect their 
professional independence or objectivity, or otherwise hinder the 
interests or reputation of the Board.
    (3) Board members and staff should recognize that the degree of 
public confidence in the function and activities of the Board depends 
heavily upon the observance of both the letter and spirit of this Code.
    (b) No Board member or staff shall act in a manner, regardless of 
whether specifically prohibited by this Code, which might reasonably 
result in or reasonably create the appearance that the employee is--
    (1) using his or her official position with the Board, or 
confidential information obtained through service for the Board, for 
the private gain of any person;
    (2) giving preferential treatment to any person with respect to the 
Board member or employee's work for the Board;
    (3) losing independence or objectivity with respect to his or her 
work for the Board;
    (4) adversely affecting the public confidence in, or the integrity, 
independence or objectivity of the Board; or
    (5) otherwise hindering the interests or reputation of the Board.
EC4. Financial and Employment Interests
    (a) While employed by the Board, no Board member or professional 
staff shall--
    (1) be owed, directly or indirectly, any financial or other 
obligation by any former employer, business partner, client, or 
publisher except--
    (A) routine banking and other routine commercial relationships;
    (B) securities and other investments permitted by this Code;
    (C) benefits under a bona fide pension, retirement, group life, 
health or accident insurance, or other employee welfare or benefit plan 
maintained by a former employer and related to prior services for the 
former employer, business partner or client;
    (D) profit-sharing, stock bonus or other payments related to prior 
services for the former employer, business partner or client;
    (E) royalties or other like payments with respect to writings and 
recordings completed prior to commencement of employment with the 
Board; or
    (F) such other obligations permitted by this Code, or as may be 
specifically and expressly approved by the Board; or
    (2) owe, directly or indirectly, any financial or other obligation 
to any former employer, business partner or client, except--
    (A) routine banking and other routine commercial relationships;
    (B) covenants not to compete;
    (C) non-disclosure agreements; or
    (D) such other obligations permitted by this Code, or as may be 
specifically and expressly approved by the Board.
    (b) Notwithstanding any other provision of this Code, no member of 
the Board or his or her spouse, spousal equivalent, or dependents may 
share in any of the profits of, or receive payments from, a public 
accounting firm, other than fixed continuing payments under standard 
arrangements for retirement from public accounting firms.
EC5. Investments
    (a) Except as provided in this Section, nothing in this Code 
prohibits Board members and staff, or their spouses, spousal 
equivalents, or dependents, from owning and holding securities 
(including futures), real estate, commodities (including futures), 
exchange-traded options and other investments held for personal 
investment purposes, except that no Board member or staff may have any 
financial interest in a public accounting firm.
    (b) Board members and staff should at all times be mindful of their 
responsibilities to the Board and shall avoid personal financial 
activities which might affect or reasonably create the appearance of 
affecting their independence or objectivity.
    (c) Board members and staff should at all times be mindful that, in 
the course and scope of their employment activities, they may obtain 
knowledge of confidential, non-public information which, if disclosed, 
might affect the value of particular securities or investments. 
Accordingly, Board members and staff may not--
    (1) disseminate or otherwise disclose any confidential, non-public 
information obtained by virtue of their position with the Board, 
regardless of whether that information may be considered to be 
``material'' under the securities laws; or
    (2) use such information for the financial gain of themselves or 
others.

    Note: Concurrent restrictions on disclosure of non-public 
information are provided in EC9.

    (d) Board members and professional staff shall annually disclose 
their holdings, and the holdings of their spouses, spousal equivalents, 
and dependents, in securities of issuers (including exchange-traded 
options and futures).
    (1) For initial disclosures, statements shall be filed with the 
Ethics Officer within the first 60 days of commencement of service with 
the Board, or 60 days from the effective date of this Code, whichever 
is later.
    (2) Subsequent disclosures shall be filed with the Ethics Officer 
on May 1, commencing the first year following the initial disclosure.
    (3) Disclosure statements by Board Members shall be made available 
to the public.
    (4) Disclosure statements by professional staff shall remain 
confidential.

    Note: The form and content of this disclosure statement shall be 
included in the Board's ethics manual.

EC6. Outside Activities
    (a) No member of the Board may undertake any employment or other 
activity for compensation outside of service to the Board.
    (b) Staff of the Board may only undertake other employment or other 
activity for compensation with the express and specific approval of the 
Board or such person to whom the Board may delegate such approval 
authority.
    (c) No Board member or staff of the Board shall engage in any 
outside activity, whether or not for compensation, which--
    (1) affects or reasonably creates the appearance of affecting his 
or her independence or objectivity;
    (2) interferes with his or her responsibilities to the Board; or
    (3) otherwise hinders the interests or reputation of the Board.
EC7. Gifts, Reimbursements, Honoraria and Other Things of Value
    (a) No Board member or professional staff shall, directly or 
indirectly, solicit or accept any gift, reimbursement, honoraria or 
anything of monetary value from any source, which might reasonably be 
viewed as--
    (1) interfering with his or her independence, objectivity or 
responsibilities to the Board; or
    (2) otherwise hindering the interests or reputation of the Board.


[[Page 55675]]


    Note: Although this provision does not extend to non-
professional staff, such staff should remain cognizant of 
corresponding duties imposed by EC3 and EC5.

    (b) No Board member or staff shall accept payment for or 
reimbursement of official travel-related expenses from any 
organization, except--
    (1) for travel that is in direct connection with the employee's 
participation in an educational forum; and
    (2) the educational forum is principally sponsored by and the 
travel-related expenses are paid or reimbursed by--
    (A) a federal, state or local governmental body, or an association 
of such bodies,
    (B) an accredited institution of higher learning,
    (C) an organization exempt from taxation under 501(c)(3) of the 
Internal Revenue Code, provided such organization is not principally 
funded from one or more public accounting firms or issuers, or
    (D) institutions equivalent to those in EC 7(b)(2)(A)-(C) outside 
the United States.
EC8. Disqualification
    (a) If a Board member or professional staff becomes, or reasonably 
should become, aware of facts which would lead a reasonable person to 
believe that he or she, or his or her spouse, spousal equivalent, or 
dependents, may have a financial interest or other similar relationship 
which might affect or reasonably create the appearance of affecting his 
or her independence or objectivity with respect to the Board's function 
or activities, then he or she shall, at the earliest possible date--
    (1) disclose such circumstances and facts, as set forth in 
subsection (b); and
    (2) recuse himself or herself from further Board functions or 
activities involving or affecting the financial interest or 
relationship.

    Note 1: For the purposes of applying this provision to members 
of an advisory group convened by the Board, those members shall not 
be considered to lack independence or objectivity with regard to 
advisory group matters merely because they (or their employer, 
business partners or clients) are subject to the direct or indirect 
oversight of the Board.


    Note 2: Although this provision does not extend to non-
professional staff, such staff facing circumstances that may affect 
their ability to perform their functions should seek advice from the 
Board's Ethics Officer.

    (b) For a member of the Board, disclosure shall be made to all 
other members of the Board. For professional staff of the Board, 
disclosure shall be made to the Board Chair, or his or her designee.
    (c) For a period of 12 months commencing on date of appointment or 
employment, no Board member or professional staff may participate in 
the making of a decision which is reasonably likely to have a material 
effect, direct or indirect, on the Board or professional staff member's 
former employer, business partner or client, when such prior employment 
terminated within five years from the date of appointment or employment 
with the Board. For purposes of this section, participating in the 
making of a decision which affects a former employer, business partner 
or client to the same degree as similarly situated people or business 
organizations, does not constitute an ``indirect'' effect.
EC9. Non-Public Information
    (a) Unless authorized by the Board, no Board member or staff shall 
disseminate or otherwise disclose any information obtained in the 
course and scope of his or her employment, and which has not been 
released, announced, or otherwise made available publicly.
    (b) The provisions of this Section shall continue in effect after 
the termination of employment or Board membership.

    Note: Concurrent restrictions on disclosure of non-public 
information are provided in EC5(c).

EC10. Speaking for the Board
    Unless authorized to speak on behalf of the Board, Board members 
and professional staff shall include a disclaimer for any private 
publication or public statement by indicating that the views expressed 
are those of the author or speaker and do not necessarily reflect the 
view of the Board or other Board members or staff.
EC11. Ethics Officer
    The Board shall designate an Ethics Officer who shall be empowered 
to--
    (a) counsel Board members and staff regarding compliance with or 
potential violation of this Code;
    (b) issue advisory opinions, as deemed necessary, to Board members 
and staff regarding potential violations of this Code; and
    (c) make recommendations to the Board regarding waiver requests and 
potential violations of, or amendments to, this Code.
EC12. Post-Employment Restrictions
    (a) Negotiating Prospective Employment
    (1) Board members and professional staff may not negotiate 
prospective employment with a public accounting firm or issuer, without 
first disclosing (pursuant to the procedures in Section EC8(b)) the 
identity of the prospective employer and recusing himself or herself 
from all Board matters directly affecting that prospective employer.
    (2) For purposes of this section, ``negotiating prospective 
employment'' means participating in an employment interview; discussing 
an offer of employment; or accepting an offer of employment, even if 
the precise terms are still to be developed. Submitting a resume or job 
application to a group of employers or receiving an unsolicited inquiry 
of interest that is rejected, do not alone constitute ``negotiating 
prospective employment.''
    (b) Prohibition on Practice Before the Board or Commission
    (1) Board members and professional staff shall be restricted from 
practice before the Board, and the Commission with respect to Board-
related matters, for one year following termination of employment or 
Board membership.
    (2) Former Board members and professional staff shall not practice 
before the Board, or the Commission with respect to Board-related 
matters, on a particular matter in which the Board member or 
professional staff participated personally and substantially as a Board 
or staff member and which involved a specific party or specific parties 
at the time of such participation.
EC13. Waiver
    Unless otherwise prohibited by law, the Board (or person to whom 
the Board may delegate this responsibility as to staff) may grant a 
request for waiver of any provision of this Code. Such waivers must be 
requested in writing by the Board member or staff, and evaluated by the 
Ethics Officer. The Board will only grant waiver requests after a 
finding that the waiver would not otherwise hinder the interests or 
reputation of the Board. Waivers will be made available to the public, 
subject to the withholding of information that would constitute a 
clearly unwarranted invasion of personal privacy.
EC14. Certification
    Board members, staff and designated contractors and consultants 
agree to comply with this Code at the commencement of their service or 
contract with the Board and shall, throughout the term of their 
appointment, employment or contract, certify annually in writing their 
continuing compliance with it.

[[Page 55676]]

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 Code and 
discussed any comments it received on it. 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
    Section 101(g)(3) of the Act requires the Board to establish ethics 
rules and standards of conduct for members and staff of the Board. 
Although the Act does not specify a deadline for the establishment of 
such rules and standards, the Board recognized that establishing a 
strict, enforceable Code early in the Board's development would send a 
strong message to the public that it takes its ethical obligations 
seriously in pursuing its mission to help restore confidence in issuer 
audits.
    The Code consists of 14 sections (EC 1 through 14). Each section of 
the Code is discussed below.
Application of Code
    EC1 provides that the provisions of the Ethics Code shall apply, 
according to their terms, to present and former Board members and 
staff, the spouses, spousal equivalents, and dependents of Board 
members and staff, and certain contractors and consultants to the 
Board. A note to the rule cross-references Rule 3700(e), which provides 
that members of Board advisory groups are subject to certain provisions 
in the Ethics Code.
EC1. Definitions
    EC2 contains definitions of terms used in the Board's Ethics 
Code.\1\
---------------------------------------------------------------------------

    \1\ Certain definitions in the Board's rules that are self-
explanatory are not discussed below.
---------------------------------------------------------------------------

Reference to Rules of the Board
    EC2(a) provides that, unless the context requires otherwise, the 
definitions provided in Section 1001 of the Rules of the Board apply to 
the words and terms contained in this Ethics Code.
Dependent
    EC2(c) defines ``dependent'' as any person who receives more than 
half of his or her support for the most recent calendar year from the 
Board member or staff. The Ethics Code, as proposed, did not contain a 
definition of ``dependent,'' but had defined the term ``immediate 
family.'' Two commenters recommended that the Board adopt a definition 
of ``immediate family'' that more closely resembles the Commission's 
definition of ``immediate family member'' in its auditor independence 
rules. The Commission's definition of ``immediate family'' covers an 
individual's ``spouse, spousal equivalent, and dependents.'' \2\
---------------------------------------------------------------------------

    \2\ See Rule 2-01(f)(13) of Regulation S-X, 17 CFR 210.1-
01(f)(13).
---------------------------------------------------------------------------

    The Board agreed, in principle, with this recommendation. To 
promote clarity, however, the Board eliminated its use of the defined 
term ``immediate family'' and added ``spouse, spousal equivalent, and 
dependents'' directly to those provisions of the Ethics Code that 
previously used the defined term ``immediate family.'' While the Board 
only included a definition, based on the Commission's interpretation of 
Regulation S-X, for ``dependent,'' the Board will interpret each of 
these terms in a manner consistent with how they are used in the 
Commission's Regulation S-X definition.\3\ Accordingly, ``spouse'' will 
mean husband or wife, whether by marriage or common law, and ``spousal 
equivalent'' will mean cohabitant occupying a relationship generally 
equivalent to that of a spouse.
---------------------------------------------------------------------------

    \3\ See Commission Final Rule: Revision of the Commission's 
Auditor Independence Requirements, Release No. 33-7919 (November 21, 
2000) (describing these terms in the context of the rule's 
definition of ``close family members'').
---------------------------------------------------------------------------

    While the definition of ``dependent'' applies equally to minor or 
adult dependents, depending on their receipt of support from the Board 
or staff member, there may be situations in which it might be 
appropriate for the Ethics Code to apply differently in the case of an 
adult dependent who does not reside with the Board or staff member. If 
appropriate and consistent with EC13, the Board envisions that the 
Board's Ethics Officer or other person to whom the Board delegates 
waiver authority with regard to staff will recommend a waiver in such 
situations.
Designated Contractors and Consultants
    EC2(d) defines the term ``designated contractors and consultants'' 
as those persons or business organizations with whom the Board enters 
into contracts for services, whom the Board (or its designate) 
determines should be subject to the Code, and for which the contract 
contains a provision expressly incorporating this Code (in whole or in 
part). The Board will develop and maintain a list of designated 
contractors and consultants, which will be available to the public and 
will reserve the right to contractually impose additional restrictions 
and limitations on any contractor or consultant.
    Two commenters indicated that they believed the original definition 
was overly vague and could apply to all providers of goods and services 
to the Board. The proposing release provided a two-part test for 
designated contractors and consultants. It indicated that designated 
contractors and consultants are those persons with whom the Board 
entered into contracts for services and for which the contracts 
expressly incorporated the Code, in whole or in part. Based upon these 
concerns, the Board added a third criterion--a requirement that the 
Board determine, on a case-by-case basis, whether, and to what degree, 
each contractor or consultant should be subject to the Code.
Honoraria
    EC2(e) defines ``honoraria'' as anything with more than a nominal 
value, whether provided in cash or otherwise, and which is provided in 
exchange for a speech, panel participation, publication or lecture. 
EC2(e) further indicates that neither the waiver or conference fee, nor 
the acceptance of a modest speakers-only meal shall constitute 
honoraria. ``Nominal value'' will initially be interpreted to mean fair 
market value of $50 or less.
Practice
    EC2(f) defines ``practice'' as it relates to activities before the 
Board or Commission. Subparagraph (1) of the definition provides that 
practice means knowingly acting as an agent or attorney for, or 
otherwise representing any person (other than oneself) in any formal or 
informal appearance before the Board or Commission. Subparagraph (2) 
provides an alternative meaning, indicating that practice also means 
making any oral or written communication on behalf of any person (other 
than oneself) to, and with the intent to influence, the Board or 
Commission.
    This definition, as incorporated in EC12(b), is intended to 
restrict affected persons from certain representational activities. 
However, this definition, as incorporated by EC12(b), is not intended 
to prevent affected persons from participating in the preparation of 
documents, communications, presentations or the like, provided the 
affected persons do not appear before, or

[[Page 55677]]

speak to, the Board, and are not the signatory of any written 
correspondence or communication to the Board.
    The Board added a note to this subsection that clarifies that 
participating in the financial reporting process as an officer or 
director of an issuer or participating in an audit or an issuer does 
not, by itself, constitute practice before the Board.
Professional Staff or Professional Staff of the Board
    EC2(g) defines the terms ``professional staff'' or ``professional 
staff of the Board'' as those persons who are employed by the Board and 
who are exempt from minimum wage and overtime provisions under Federal 
law.
Staff or Staff of the Board
    EC2(h) defines the terms ``staff'' or ``staff of the Board'' as 
those persons who are employed by the Board.
EC3. General Principles
    EC3 provides broad principles designed to maintain the highest 
standards of ethical conduct among Board members and staff, and to 
provide the public with confidence in the objectivity of the Board's 
decisions by seeking to avoid both actual and perceived conflicts of 
interest among Board members and staff. The three subparagraphs to 
paragraph (a) are intended to guide Board members and staff when a 
situation is not covered by the Code's specific standards.
    EC3(a)(1) instructs Board members and staff to at all times be 
mindful of their responsibilities to the Board, the sensitivity of 
their positions, and the need for public confidence in the objectivity 
and deliberative process of the Board. EC3(a)(2) instructs Board 
members and staff to take great care to conduct themselves and all of 
their activities in such a manner so that their personal investments or 
other personal activities will not affect their professional 
independence or objectivity, or otherwise hinder the interests or 
reputation of the Board. EC3(a)(3) further instructs Board members and 
staff to recognize that the degree of public confidence in the function 
and activities of the Board depends heavily upon the observance of both 
the letter and spirit of this Code.
    EC3(b) prohibits Board members and staff from acting in a manner 
that creates or reasonably results in the appearance of certain 
situations described in subparagraphs (1) through (5),\4\ regardless of 
whether specifically prohibited by this Code.
---------------------------------------------------------------------------

    \4\ The situations described in these subparagraphs are self-
explanatory and are not discussed below.
---------------------------------------------------------------------------

    The Board, or its Ethics Officer, may issue interpretative guidance 
relating to these principles.
    One commenter indicated that he did not believe the Board's general 
principles provided any meaningful guidance to the Board or its staff. 
Recognizing that the general principles are meant to be broad enough to 
guide the conduct of members and staff in those situations in which a 
specific provision of the Code does not apply, the Board concluded that 
its general principles are sufficient and has not changed them.
EC4. Financial and Employment Interests
    EC4 limits Board members and/or professional staff from certain 
financial and employment interests. Subparagraph (a) prohibits Board 
members and professional staff from being owed or owing any financial 
or other obligation to a former employer, business partner, client or 
publisher, with limited exceptions. The Board extended this prohibition 
to a Board member or professional staff's publisher.
    EC4(a)(1) restricts Board members and professional staff from being 
owed any financial or other obligation, except those items contained in 
subparagraphs (A) through (F).\5\
---------------------------------------------------------------------------

    \5\ Certain excepted items under this subparagraph are self-
explanatory and are not discussed below.
---------------------------------------------------------------------------

    One commenter requested that the Board define what it meant by 
``routine banking and other routine commercial relationships'' as 
identified in EC4(a)(1)(A) and EC4(a)(2)(A). The Board will apply this 
exception to those arrangements that are akin to those generally 
available to the public at large through arms-length negotiations. The 
Board does not believe that the exception requires further refinement 
in the Code.
    EC4(a)(1)(C) excepts from the general prohibition benefits under a 
bona fide pension, retirement, group life, health or accident 
insurance, or other employee welfare or benefit plan maintained by a 
former employer and related to prior services for the former employer, 
business partner or client. This rule does not prevent Board members or 
staff from receiving ongoing bona fide pension payments, even if the 
funding for those payments is tied to the profitability of the former 
employer. Board members and professional staff, however, remain subject 
to EC8. As discussed in more detail below, EC8(a) requires Board 
members and professional staff to disclose circumstances that would 
lead a reasonable person to believe that the Board or staff member may 
have a financial interest that might affect or reasonably create the 
appearance of affecting his or her independence or objectivity and to 
recuse himself or herself from participating in functions or activities 
involving or affecting the financial interest. If a Board or staff 
member were receiving pension payments, the funding for which is tied 
to the profitability of a former employer, that would constitute the 
type of financial interest requiring disclosure and recusal from 
matters involving that former employer pursuant to EC8(a).\6\
---------------------------------------------------------------------------

    \6\ EC8 also generally restricts Board members and staff from 
participating in making a decision which is reasonably likely to 
have a material effect on their former employer for one year after 
joining the Board.
---------------------------------------------------------------------------

    EC4(a)(1)(D) and (E) each excepts payments and the like for prior 
service. EC4(a)(1)(D) excepts profit-sharing, stock bonus or other 
payments related to prior services for the former employer, business 
partner or client, while EC4(a)(1)(E) excepts royalties or other like 
payments with respect to writings and recordings completed prior to 
commencement of employment with the Board.
    EC4(a)(2) restricts Board members and professional staff from owing 
any financial or other obligation, except those items contained in 
subparagraphs (A) through (D).\7\
---------------------------------------------------------------------------

    \7\ The items excepted under this subparagraph are self-
explanatory and are not discussed below.
---------------------------------------------------------------------------

    EC4(b) reiterates the statutory constraints on Board members 
receiving profits of, or payments from, public accounting firms. As 
proposed, EC4(b) was limited to Board members only. Based on public 
comment, this subparagraph was extended to spouses, spousal 
equivalents, and dependents of Board members.
EC5. Investments
    EC5 addresses the issue of investments by Board members and staff 
and their spouses, spousal equivalents, and dependents.
    EC5(a) provides that there are no prohibited investments by Board 
members, staff and their spouses, spousal equivalents, and dependents, 
except that subparagraph (1) restricts Board members and professional 
staff from having any financial interest in a public accounting 
firm.\8\
---------------------------------------------------------------------------

    \8\ The Board revised EC5(a) to not cover Board members and 
professional staff's spouses, spousal equivalents and dependents. 
Under EC8(a), if a Board member or professional staff's spouse, 
spousal equivalent, or dependent had a financial interest in a 
public accounting firm, that interest would have to be disclosed and 
the Board or staff member would be recused from participating in any 
matter involving that public accounting firm. In addition, Board 
member spouses, spousal equivalents, and dependents are subject to 
the restrictions on payments from public accounting firms in EC4(b).

---------------------------------------------------------------------------

[[Page 55678]]

    EC5(b) instructs Board members and professional staff to at all 
times be mindful of their responsibilities to the Board and to avoid 
personal financial activities which might affect or reasonably create 
the appearance of affecting their independence or objectivity.
    EC5(c) instructs Board members and staff to at all times be mindful 
that, in the course and scope of their employment activities, they may 
obtain knowledge of confidential, non-public information which, if 
disclosed, might affect the value of particular securities or 
investments and places restrictions on the disclosure and use of non-
public information. Subparagraph (1) prohibits the dissemination or 
disclosure of any confidential, non-public information obtained by 
virtue of their position with the Board, whether that information may 
be considered to be ``material'' under the securities laws or not and 
subparagraph (2) restricts the use of such information for the 
financial gain of themselves or others.
    EC5(d) was added at the suggestion of several commenters and 
requires that Board members and professional staff annually disclose 
their holdings in securities of issuers, including exchange-traded 
options and futures. Disclosure statements must be filed with the 
Ethics Officer. In addition, Board members' disclosure statements will 
be made available to the public.
    For initial disclosures, newly appointed members or newly hired 
professional staff have 60 days from the date of commencement of 
service with the Board to complete and file the necessary statements. 
Current Board members and professional staff have 60 days from the 
effective date of the Code to file the necessary statements.
    For subsequent disclosures, Board members and professional staff 
shall file the necessary statements on May 1, commencing the first year 
following the initial disclosure.
    The form and content of the disclosure shall be included in the 
Board's ethics manual and will require disclosure of investments based 
upon categories--such as individual operating company holdings, mutual 
fund holdings, index fund holdings, exchange-traded options holdings, 
stock futures holdings and other holdings the Board deems relevant.
    It is currently contemplated that all values will be disclosed in 
ranges, and based on market value. For example, a Board member or 
professional staff member would be required to identify whether their 
assets in mutual funds were between two fixed dollar values--$0-
$50,000, $50,000-$100,000, etc.
    It is further contemplated that broad based classes of investments, 
such as mutual fund holdings, could be disclosed in lump sum (i.e., all 
mutual fund holdings could be aggregated for convenience), while 
individual holdings (equities, options and futures) would be required 
to be specifically identified, along with the range of valuation for 
each issue.
EC6. Outside Activities
    EC6 governs the participation in outside activities for Board 
members and staff.
    EC6(a) provides that no member of the Board may undertake any 
employment or other activity for compensation outside of service to the 
Board.
    EC6(b) dictates that staff of the Board may only undertake other 
employment or other activity for compensation with the express and 
specific approval of the Board or such person to whom the Board may 
delegate such approval authority. As with other delegations of Board 
functions, section 101(g)(2) of the Act will define the parameters of 
the delegation.
    While EC6(b) applies to all paid outside activities, the Board 
envisions that the Board's Ethics Officer or other person to whom the 
Board delegates approval authority will recommend approval on a case-
by-case basis, or, where appropriate, a ``blanket'' basis for those 
activities unrelated to the Board's oversight and which would not 
otherwise impair staff independence or hinder the reputation of the 
Board.
    EC6(c) prohibits any outside activities by Board members and staff, 
whether or not for compensation, that violate certain general 
principles that are specified in subparagraphs (1) through (3) of 
EC6(c).\9\
---------------------------------------------------------------------------

    \9\ The circumstances described in these subparagraphs are self-
explanatory and are not discussed below.
---------------------------------------------------------------------------

EC7. Gifts, Reimbursements, Honoraria and Other Things of Value
    EC7 places restrictions on the receipt of gifts, honoraria, 
reimbursement for travel and other things of value by Board members and 
professional staff. EC7(a) provides that no Board member or 
professional staff shall, directly or indirectly, solicit or accept any 
gift, reimbursement, honoraria or anything of monetary value from any 
source, under the circumstances described in subparagraphs (1) and 
(2).\10\
---------------------------------------------------------------------------

    \10\ The circumstances described in these subparagraphs are 
self-explanatory and are not discussed below.
---------------------------------------------------------------------------

    EC7(b) describes the circumstances under which, and from whom, 
travel reimbursement may be paid. Subparagraph (1) limits such 
reimbursements for travel that is in direct connection with the 
employee's participation in an educational forum. Subparagraph (2) 
further limits reimbursement to educational forums that are principally 
sponsored by and the travel-related expenses are paid or reimbursed by 
a federal, state or local governmental body or an association of such 
bodies, an accredited institution of higher learning, an organization 
exempt from taxation under 501(c)(3) of the Internal Revenue Code 
(provided such organization is not principally funded from one or more 
public accounting firms or issuers), or equivalent institutions outside 
the United States.
    At the request of a commenter, the Board added association of 
governmental bodies to the list of organizations from which travel 
expenses may be reimbursed. The Board also added equivalent 
institutions outside the United States to make clear that this 
provision of its Ethics Code applies equally to non-U.S. entities.
EC8. Disqualification
    EC8 contains provisions requiring the disclosure, recusal and 
disqualification from participation in certain matters by Board members 
or professional staff.
    As referenced above in EC4, EC8(a) provides that if a Board member 
or professional staff becomes, or reasonably should become, aware of 
facts which would lead a reasonable person to believe that he or she 
(or his or her spouse, spousal equivalent, and dependents) may have a 
financial interest or similar relationship which might affect (or 
reasonably create the appearance of affecting) his or her independence 
or objectivity, then he or she must, at the earliest possible date, 
take the actions described in subparagraphs (1) and (2). Subparagraph 
(1) requires disclosure of such circumstances and facts. Subparagraph 
(2) instructs the Board member or professional staff to recuse himself 
or herself from further Board functions or activities involving or 
affecting the financial interest or relationship.
    At the suggestion of several commenters, the Board imposed a

[[Page 55679]]

``reasonable person'' standard to use to determine whether a financial 
relationship requires disclosure and disqualification.
    The Board also added two clarifying notes following EC8(a). The 
first note clarifies that for the purposes of applying this provision 
to members of an advisory group, those members shall not be considered 
to lack independence or objectivity with regard to advisory group 
matters merely because they (or their employer, business partners or 
clients) are subject to the direct or indirect oversight of the Board. 
The second note advises non-professional staff to seek the counsel of 
the Ethics Officer if they face circumstances concerning financial 
relationships that may affect their ability to perform their functions.
    EC8(b) indicates that for a member of the Board, disclosure shall 
be made to all other members of the Board. For professional staff of 
the Board, disclosure shall be made to the Board Chair, or the person 
or persons designated by the Chair (e.g., the Ethics Officer).
    EC8(c) restricts Board members and professional staff for a period 
of 12 months commencing on date of appointment or employment from 
participating in the making of a decision which is reasonably likely to 
have a material effect on the Board or professional staff member's 
former employer, business partner or client, when such prior employment 
terminated within five years from the date of appointment or employment 
with the Board.
    Several commenters requested that the Board clarify that broad 
policy decisions are not ``indirect effects.'' In response to this 
suggestion the Board added language that indicates that participating 
in the making of a decision that affects a former employer, business 
partner or client to the same degree as similarly situated people or 
business organizations, does not constitute an ``indirect'' effect. 
This is meant to cover matters of general applicability to a broad 
class of persons.
EC9. Non-Public Information
    EC9 restricts Board members and staff from disseminating or 
disclosing certain information. Subparagraph (a) provides that unless 
authorized by the Board, no Board member or staff shall disseminate or 
otherwise disclose any information obtained in the course and scope of 
his or her employment, and which has not been released, announced, or 
otherwise made available publicly and subparagraph (b) provides that 
the restriction in EC9 shall continue in effect after the termination 
of employment or Board membership. As proposed, the restriction on 
disclosure of non-public information only applied for five years after 
the Board or professional staff member left the Board. Due to the 
importance of preserving confidential information, the Board decided to 
strengthen this provision by extending its application indefinitely.
EC10. Speaking for the Board
    EC10 provides that, unless authorized to speak on behalf of the 
Board, Board members and professional staff shall include a disclaimer 
for any private publication or public statement by indicating that the 
views expressed are those of the author or speaker and do not 
necessarily reflect the view of the Board or other Board members or 
staff.
EC11. Ethics Officer
    EC11 directs the Board to designate an Ethics Officer with the 
power and responsibilities identified in subparagraphs (a) through 
(c).\11\
---------------------------------------------------------------------------

    \11\ The powers and responsibilities described in these 
subparagraphs are self-explanatory and are not discussed below.
---------------------------------------------------------------------------

EC12. Post-Employment Restrictions
    EC12 imposes certain post-employment restrictions on Board members 
and professional staff. Subparagraph (a)(1) prohibits Board members and 
professional staff from negotiating prospective employment with a 
public accounting firm, without first disclosing (pursuant to the 
procedures in section EC8(b)) the identity of the prospective employer 
and recusing himself or herself from all Board matters directly 
affecting that prospective employer.
    Subparagraph (a)(2) was added at the request of several commenters 
and defines ``negotiating prospective employment'' to mean 
participating in an employment interview; discussing an offer of 
employment; or accepting an offer of employment, even if the precise 
terms are still to be developed. Submitting a resume or job application 
to a group of employers, or receiving an unsolicited inquiry of 
interest that is rejected, do not alone constitute ``negotiating 
prospective employment.'' This additional language is consistent with 
Regulations Concerning Post Employment Conflicts of Interest (5 CFR 
2637.101 et seq.), to which federal government employees are subject.
    Subparagraph (b) contains two restrictions on former Board members 
and professional staff. First, it restricts Board members and 
professional staff from practicing before the Board, and the Commission 
with respect to Board-related matters, for one year following 
termination of employment or Board membership. Second, the Board added 
EC 12(b)(2), which provides that former Board members and professional 
staff shall not practice before the Board, or the Commission with 
respect to Board-related matters, on a particular matter in which the 
Board member or professional staff participated personally and 
substantially as a Board or staff member and which involved a specific 
party or parties at the time of such participation. The Board based 
this restriction on the comparable restriction applicable to federal 
government employees in 18 U.S.C. 207(a). Since this rule is limited to 
particular matters, it would not cover matters of general 
applicability, such as rulemakings the person participated in while at 
the Board.
EC13. Waiver
    EC13 establishes a mechanism for the Board to waive any provision 
of the Ethics Code, provided the granting of the waiver would not 
otherwise be prohibited by law. EC13 provides that waivers must be 
requested in writing by the Board member or staff, and evaluated by the 
Ethics Officer and that the Board will only grant waiver requests after 
a finding that the waiver would not otherwise hinder the interests or 
reputation of the Board. Subject to section 101(g)(2) of the Act, the 
Board may delegate approval authority as to staff requests.
    Several commenters suggested that the Board disclose waivers of its 
Ethics Code. In response to these comments, the Board decided to make 
waivers available to the public, subject to withholding information 
that would constitute a clearly unwarranted invasion of personal 
privacy.\12\ The Board believes that this approach provides for 
transparency of the Board's administration of its Ethics Code, while 
still protecting individuals' privacy interests.
---------------------------------------------------------------------------

    \12\ This standard is based on, and consistent with, one of the 
exemptions to the Freedom of Information Act. See 5 U.S.C. 
552(b)(6).
---------------------------------------------------------------------------

EC14. Certification
    EC14 provides that Board members, staff, and designated contractors 
and consultants agree to comply with this Code at the commencement of 
their service with the Board and shall annually certify in writing 
their continuing compliance with it. The Board modified this provision 
to also apply to designated contractors and

[[Page 55680]]

consultants after careful consideration of recommendations by 
commenters.
(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 impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Board's Statement on Comments on the Proposed Rules Received from 
Members, Participants or Others

    The Board released its proposed Code for public comment on April 
18, 2003. See PCAOB Release No. 2003-004 (April 18, 2003). The Board 
received eight written comment letters on its proposal. A copy of PCAOB 
Release No. 2003-004 and the comment letters received in response to 
the PCAOB's request for comment are available on the PCAOB's Web site 
at www.pcaobus.org.
    The Board has carefully considered all comments it has received. In 
response to the written comments received, the Board clarified and 
modified certain aspects of its proposed Code. Specifically, the Board 
made 12 principal changes to its proposal. First, the Board revised its 
proposal to clarify that the Code's application to ``designated 
contractors and consultants'' will require a three step process: first, 
there must be a contract for services; second, the Board (or its 
designate) must determine that the Code should be applied to the 
contractor, in whole or in part; and last, the contract must contain 
specific provisions incorporating those portions of this Code 
applicable to the contractor. Second, the Board eliminated the 
definition of ``immediate family'' and clarified which provisions of 
the Ethics Code apply to a Board or staff member's spouse, spousal 
equivalent, and dependents. Third, the Board decided to impose the 
obligation upon Board members and professional staff to disclose their 
personal investments, and those of their spouses, spousal equivalents 
and dependents, in the securities of issuers.
    Fourth, the Board decided to expand the narrow list of sponsors who 
are permitted to pay for Board-related travel to include associations 
of governmental (federal, state or local) bodies and non-U.S. 
institutions equivalent to the permissible domestic sponsors. Fifth, 
the Board created a ``reasonable person'' standard for Board members 
and professional staff to use to determine whether a financial 
relationship requires disclosure and disqualification. Sixth, the Board 
clarified that, in the context of members of an advisory group,\13\ 
independence and objectivity are not per se impaired because the group 
member's employer, business client or partner is subject to the Board's 
direct or indirect oversight.
---------------------------------------------------------------------------

    \13\ See PCAOB Release No. 2003-009, and PCAOB Rule 3700 
(regarding advisory groups).
---------------------------------------------------------------------------

    Seventh, the revised Code clarifies that Board members and 
professional staff are not required to disqualify themselves from 
participating in making or developing broad policies or procedures 
which may have some effect on a former employer, business partner or 
client, so long as the policy or procedure effects all similarly 
situated people and organizations to the same degree. Eighth, the Board 
chose to define those circumstances which trigger (and do not trigger) 
the requirement for Board members and professional staff to internally 
disclose when they are ``negotiating prospective employment'' with a 
public accounting firm or issue.\14\ Ninth, the Board required 
designated contractors and consultants to certify compliance with the 
Code (as applied to them) to the same extent as Board members and 
staff.
---------------------------------------------------------------------------

    \14\ When this disclosure is triggered, Board members and 
professional staff must also disqualify themselves from 
participating in decisions directly affecting the prospective 
employer.
---------------------------------------------------------------------------

    Tenth, the Board added a restriction on former Board members and 
professional staff participating in a matter they personally and 
substantially participated in while at the Board. Eleventh, the Board 
extended indefinitely the restriction on former Board members and 
professional staff from disclosing non-public Board information. 
Twelfth, and finally, the Board chose to make publicly available 
information on waivers of the Ethics Code. Additional discussion of the 
Board's response to these and other comments it received is included in 
section II(a)(A) above.

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 such 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 requirements of Title I of the 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 rules 
that are filed with the Commission, and all written communications 
relating to the proposed rules 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. 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-2003-04 and should be submitted by October 17, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24382 Filed 9-25-03; 8:45 am]
BILLING CODE 8010-01-P