[Federal Register Volume 69, Number 58 (Thursday, March 25, 2004)]
[Notices]
[Pages 15394-15411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6706]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49454; File No. PCAOB-2003-07]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules Relating to Investigations and Adjudications

March 19, 2004.
    Pursuant to section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act''), notice is hereby given that on October 10, 2003, the Public 
Company Accounting Oversight Board (the ``Board'' or the ``PCAOB'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
the proposed rules described in Items I, II, and III below, which items 
have been prepared by the Board. The Commission is publishing this 
notice to solicit comments on the proposed rules from interested 
persons.

I. Board's Statement of the Terms of Substance of the Proposed Rules

    On September 29, 2003, the Board adopted rules related to 
investigations and adjudications. The proposal includes 64 rules on 
investigations and adjudications (PCAOB Rules 5000 through 5501), a 
general rule on time computation (PCAOB Rule 1002) and 14 definitions 
that would appear in PCAOB Rule 1001. The text of the proposed rules is 
available for inspection at the Commission's Public Reference Room and 
on the PCOAB's Internet Web site, at http://www.pcaobus.org.

II. Board's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rules; Board's Statements on Burden on Competition and on 
Comments on the Proposed Rules

    In its filing with the Commission, the Board included statements 
concerning the purpose of, and basis for, the proposed rules and 
discussed the burden on competition and any comments it received on the 
proposed rules. The text of these statements may be examined at the 
places specified in Item IV below. The Board has prepared summaries, 
set forth in subsections A, B and C below, of the most significant 
aspects of such statements.

[[Page 15395]]

A. Board's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rules

(a) Purpose
    Section 105 of the Act grants the Board broad investigative and 
disciplinary authority over registered public accounting firms and 
persons associated with such firms. Specifically, the Act authorizes 
the Board to conduct an investigation of any act or practice, or 
omission to act, by a registered public accounting firm, any associated 
person of such firm, or both, that may violate any provision of the 
Act, the rules of the Board, the provisions of the securities laws 
relating to the preparation and issuance of audit reports and the 
obligations and liabilities of accountants with respect thereto, 
including the rules of the Commission issued under the Act, or 
professional standards. The Act also authorizes the Board to conduct 
hearings to determine whether a registered firm or associated person 
should be disciplined for any such violation. To implement this 
authority, Section 105(a) directs the Board to establish, by rule, fair 
procedures for the investigation and discipline of registered public 
accounting firms and associated persons of such firms. The Board has 
adopted the proposed rules and definitions to establish fair procedures 
for Board investigations, fair procedures for Board disciplinary 
proceedings, and fair sanctions for violations. Each of the rules and 
definitions is discussed below.

Rule 1001--Definitions of Terms Employed in Rules

    Rule 1001 contains definitions of terms used in the Board's rules. 
The rules relating to investigations and adjudications employ certain 
terms that the Board is adding to the terms defined in Rule 1001.

Accounting Board Demand

    Rule 1001(a)(ix) defines ``accounting board demand'' as a command 
to produce documents and/or to appear at a certain time and place to 
give testimony. The rules use this term only to identify demands made 
upon registered public accounting firms and associated persons of such 
firms. Under the Act, the Board has authority to require those firms 
and persons to provide any testimony or documents sought by the Board 
in furtherance of its responsibilities under the Act, and including in 
particular any testimony or documents that the Board considers relevant 
to an investigation.

Accounting Board Request

    Rule 1001(a)(x) defines ``accounting board request'' as a request 
to produce documents and/or to appear at a certain time and place to 
give testimony. The rules use this term to distinguish the Board's 
efforts to obtain documents and testimony from persons other than 
registered public accounting firms and their associated persons.

Bar

    Rule 1001(b)(ii) defines ``bar'' as a permanent disciplinary 
sanction prohibiting a person from being associated with a registered 
public accounting firm. The rules distinguish between the concepts of 
``bar'' and ``suspension.'' Both sanctions, when applied to an 
associated person, prohibit the person from being an associated person 
of a registered public accounting firm. A suspension, however, as 
defined below, is a time-limited sanction that expires at a fixed time 
after which the person may resume being an associated person without 
any other action by the person or the Board. In contrast, a bar is a 
permanent sanction that does not expire unless the person petitions the 
Board for termination of the bar, pursuant to the provisions of the 
rules, and the Board grants the petition. In some cases, the Board may 
impose a bar that expressly provides that a person may petition for 
termination of the bar after a fixed period. In other cases, the Board 
may impose a bar with no such provision.

Counsel

    Rule 1001(c)(ii) defines ``counsel'' as an attorney at law admitted 
to practice, and in good standing, before the Supreme Court of the 
United States or the highest court of any state.

Disciplinary Proceeding

    Rule 1001(d)(i) defines ``disciplinary proceeding'' as a proceeding 
initiated by an order instituting proceedings, held for the purpose of 
determining (1) whether a registered public accounting firm, or any 
person associated with a registered public accounting firm has (a) 
engaged in any act or practice, or omitted to act, in violation of the 
Act, the Rules of the Board, the provisions of the securities laws 
relating to the preparation and issuance of audit reports and the 
obligations and liabilities of accountants with respect thereto, 
including the rules of the Commission issued under the Act, or 
professional standards; or (b) failed reasonably to supervise an 
associated person in connection with any such violation by that person; 
or (c) failed to cooperate with the Board in connection with an 
investigation; and (2) whether to impose a sanction pursuant to Rule 
5300.

Document

    Rule 1001(d)(ii) defines ``document'' as synonymous in meaning and 
equal in scope to its usage in Federal Rule of Civil Procedure 34(a), 
including, without limitation, electronic or computerized data 
compilations. A draft or non-identical copy is a separate document 
within the meaning of this term. In no event shall the term 
``document'' be construed to be limited to audit work papers.

Hearing Officer

    Rule 1001(h)(i) defines ``hearing officer'' to mean a person, other 
than a Board member or staff of the interested division, duly 
authorized by the Board to preside at a hearing.

Interested Division

    Rule 1001(i)(iv) defines ``interested division'' as a division or 
office of the Board assigned primary responsibility by the Board to 
participate in a particular proceeding. As a general matter, the 
interested division in a disciplinary proceeding will be the Division 
of Enforcement and Investigations, and the interested division in a 
hearing on disapproval of a registration application will be the 
Division of Registration and Inspections. The definition is adapted 
from Rule 101(a)(6) of the Commission's Rules of Practice.

Order Instituting Proceedings

    Rule 1001(o)(ii) defines ``order instituting proceedings'' as an 
order issued by the Board commencing a disciplinary proceeding.

Party

    Rule 1001(p)(iii) defines ``party'' as the interested division, any 
person named as a respondent in an order instituting proceedings or 
notice of a hearing, any applicant named in the caption of any order, 
or any person seeking Board review of a decision.

Person

    Rule 1001(p)(iv) defines ``person'' as any natural person or any 
business, legal or governmental entity or association.

Revocation

    Rule 1001(r)(iii) defines ``revocation'' as a permanent 
disciplinary sanction terminating a firm's registration. The rules 
distinguish between the concepts of ``revocation'' and ``suspension.'' 
Both sanctions, when applied to a firm,

[[Page 15396]]

prohibit the firm from preparing or issuing, or participating in the 
preparation or issuance of, audit reports. A suspension, however, as 
defined below, is a time-limited sanction that expires at a fixed time 
after which the firm may resume such work without any other action by 
the firm or the Board. In contrast, revocation is a permanent sanction 
that does not expire unless the firm, with the Board's permission, 
reapplies for registration pursuant to the provisions of the rules, and 
the Board approves the application. In some cases, the Board may impose 
a revocation that expressly provides that a firm may reapply for 
registration after a fixed period. In other cases, the Board may impose 
a revocation with no such provision.

Secretary

    Rule 1001(s)(iii) defines ``Secretary'' as the Secretary of the 
Board.

Suspension

    Rule 1001(s)(iv) defines ``suspension'' as a temporary disciplinary 
sanction which lapses by its own terms and prohibits (1) a registered 
public accounting firm from preparing or issuing, or participating in 
the preparation or issuance of, any audit report with respect to any 
issuer; or (2) a person from being associated with a registered public 
accounting firm. A suspension is distinct from a bar (as to an 
associated person) and a revocation (as to a firm) in that a suspension 
is a sanction that expires by its own terms at a fixed time, with no 
further action required of the associated person, the firm, or the 
Board.

Rule 1002--Time Computation

    Rule 1002 describes the method by which the Board shall compute 
time for purposes of complying with deadlines in the Board's rules.

Rule 5000--General

    Rule 5000 requires that registered public accounting firms and any 
associated persons of such firms comply with all Board orders to which 
they are subject. The Act authorizes the Board to take certain action 
with respect to, or require certain things of, registered public 
accounting firms and their associated persons. For example, the Act 
authorizes the Board to require such firms and persons to produce 
documents or to provide testimony, and the Act authorizes the Board to 
impose significant disciplinary sanctions on such firms and persons for 
various violations and for non-cooperation with Board investigations. 
In exercising its authority, the Board will frequently act through the 
vehicle of a Board order. A requirement of compliance with such orders 
is implicit in the authority to take the action, and Rule 5000 makes 
that requirement explicit.

Part 1--Inquiries and Investigations

    Part 1 of the Board's Rules on Investigations and Adjudications 
consists of Rules 5100 through 5112. These rules address procedural 
matters concerning the conduct of informal inquiries by Board staff and 
formal Board investigations.

Rule 5100--Informal Inquiries

    The Board contemplates that the staff of the Division of 
Enforcement and Investigations will sometimes conduct informal 
inquiries to determine whether to recommend that the Board open a 
formal investigation on a matter. Rule 5100 describes generally the 
circumstances in which the staff may conduct an informal inquiry (Rule 
5100(a)) and the scope of the activity in which the staff may engage in 
an informal inquiry (Rule 5100(b)).
    Under Rule 5100(a), the staff may undertake an informal inquiry 
where it appears to the staff that an act or practice, or an omission 
to act, by a registered public accounting firm or an associated person 
may violate the Act, the Board's rules, the provisions of the 
securities laws relating to the preparation and issuance of audit 
reports and the obligations and liabilities of accountants with respect 
thereto, including the rules of the Commission issued under the Act, or 
professional standards. Under Rule 5100(b), the staff may pursue an 
informal inquiry by requesting documents, information, or testimony 
from any person. The staff may not, in an informal inquiry, issue 
accounting board demands.

Rule 5101--Commencement and Closure of Investigations

    Rule 5101 describes generally the processes by which the Board will 
commence and close formal investigations. The Board may commence a 
formal investigation when it appears that an act or practice, or 
omission to act, by a registered public accounting firm or any person 
associated with such a firm may violate any provision of the Act, the 
Rules of the Board, the provisions of the securities laws relating to 
the preparation and issuance of audit reports and the obligations and 
liabilities of accountants with respect thereto, including the rules of 
the Commission issued under the Act, or professional standards. Rule 
5101(a)(1) provides that the way the Board will commence an 
investigation is by issuing an order of formal investigation. Rule 
5101(a)(2) provides that the Board may, in the formal order, designate 
Board staff members, or groups of staff members (such as a particular 
division or office) authorized to issue accounting board demands and 
otherwise require or request the cooperation of any person in 
connection with the investigation. Rule 5101(b) provides that the Board 
may issue an order suspending a formal investigation for a specified 
period of time or terminating a formal investigation.

Rule 5102--Testimony of Registered Public Accounting Firms and 
Associated Persons in Investigations

    Section 105(b)(2)(A) of the Act authorizes the Board to promulgate 
rules requiring the testimony of any registered public accounting firm 
or any associated person of such a firm with respect to any matter that 
the Board considers relevant or material to an investigation. Rule 
5102(a) implements that authority by providing that the Board and the 
staff of the Board designated in the order of formal investigation may 
require such testimony. Paragraphs (b) through (e) of Rule 5102 
describe procedures related to obtaining and recording that testimony.
    Rule 5102(b) provides that the Board or staff shall require 
testimony by serving an accounting board demand. Under the rule, the 
demand must give reasonable notice of the time and place for taking 
testimony, must describe the methods by which the testimony will be 
recorded, and, if the demand is directed to a firm rather than to a 
natural person, must supply a description with reasonable particularity 
of the matters on which examination is requested.
    The rule does not impose any minimum period of notice for 
testimony, but does require reasonable notice. We anticipate that it 
will not be unusual for the staff to provide two to three weeks notice. 
We decline to codify a particular period of notice, however, because 
there will be circumstances in which there is no compelling reason why 
21, or even 14, days notice is necessary, and there may be legitimate 
reasons for requiring the testimony sooner.
    Rule 5102(c) describes procedures related to the actual conduct of 
the examination. Rule 5102(c)(1) provides that each witness shall be 
required to declare that the witness will testify truthfully, by oath 
or affirmation. The oath or affirmation provision of the rule is 
adapted from Federal Rule of

[[Page 15397]]

Evidence 603. The authority to administer and obtain such an oath or 
affirmation is implicit in the Board's authority to require testimony.
    Rule 5102(c)(2) provides that examinations shall be conducted 
before a reporter designated by the Board's staff to record the 
examination. Rule 5102(c)(3) imposes restrictions on who may be present 
during the examination. Persons who may be present are limited to the 
witness, the witness's counsel (subject to Rule 5109(b), discussed 
below), any member of the Board or the Board's staff, the reporter, and 
any other person whom the Board or the staff designated in the order of 
formal investigation determine to be appropriate permit to be present. 
All of these provisions, however, are qualified by the restriction that 
in no event shall any person (other than the witness) who has been or 
is reasonably likely to be examined in the investigation be present. 
This last restriction is not limited to registered public accounting 
firms and associated persons of such firms but also includes any other 
person from whom the Board or the staff could seek to require testimony 
pursuant to a Commission subpoena (as described in Rule 5111).
    The rule allows counsel to represent a witness and the witness's 
firm to the extent that such dual representation is consistent with 
counsel's ethical obligations generally. The rule does not allow for 
the presence of a firm's in-house counsel, or any other counsel, who 
does not enter a notice of appearance affirmatively stating that he or 
she represents the witness. Counsel who represents both the firm and 
the witness, and who, during testimony, becomes aware of a conflict 
that would cause him or her to cease representing the witness, may not 
continue to be present.
    Rule 5102(c)(4) is modeled on Rule 30(b)(6) of the Federal Rules of 
Civil Procedure. Rule 5102(c)(4) provides that a registered public 
accounting firm that is required to provide testimony shall designate 
one or more persons to testify on its behalf and may set forth, for 
each person designated, the matters on which the person will testify. 
Those persons are then required to testify as to matters known or 
reasonably available to the firm.
    Rule 5102(e) allows a witness a period of time, after being 
notified that the transcript or other recording of the examination is 
available for review, to describe any changes in form or substance that 
the witness would make and to supply the reasons for such changes. 
Under the rule, the transcript shall be accompanied by the reporter's 
certification that the witness was duly sworn and that the transcript 
is a true record of the testimony, and shall indicate whether the 
witness requested to review the transcript. The reporter shall also 
append to the transcript any changes to the testimony made by the 
witness during the review period described above.
    Rule 5102(e) allow a witness 15 days to request changes to the 
transcript, and allows for an extension of the 15-day period with the 
approval of the Director of the Division of Enforcement and 
Investigations.

Rule 5103--Demands for Production of Audit Workpapers and Other 
Documents in Investigations From Registered Public Accounting Firms and 
Associated Persons

    Section 105(b)(2)(B) of the Act authorizes the Board to promulgate 
rules requiring the production of audit workpapers and any other 
document or information in the possession of any registered public 
accounting firm or any associated person of such a firm, wherever 
domiciled, with respect to any matter that the Board considers relevant 
or material to an investigation. Rule 5103(a) implements that authority 
by providing that the Board and the staff of the Board designated in 
the order of formal investigation may require production of such 
documents and information.
    Rule 5103(b) provides that an accounting board demand for documents 
or information shall set forth a reasonable time and place for such 
production. Rule 5103(b) does not impose any minimum notice requirement 
before production shall be due. We anticipate that it will not be 
unusual for the staff to provide two to three weeks notice. The rule 
does not codify a particular period of notice, however, because there 
will be circumstances in which there is no compelling reason why 21, or 
even 14, days notice is necessary and there may be legitimate reasons 
for requiring the documents sooner.
    Rule 5103(b) provides that the documents produced may be 
photocopies unless otherwise specified in the accounting board demand. 
The rule also requires, however, that the originals be maintained in a 
reasonably accessible manner, be readily available for inspection by 
the staff, and not be destroyed without the staff's consent. An 
original document that could otherwise be destroyed consistent with any 
applicable document retention requirements or other legal requirements 
may nevertheless not be destroyed without the staff's consent if it is 
responsive to an accounting board demand received by the firm.

Rule 5104--Examination of Books and Records in Aid of Investigations

    Section 105(b)(2)(B) of the Act authorizes the Board to promulgate 
rules allowing the Board to inspect the books and records of a 
registered public accounting firm or any associated person of such a 
firm, wherever domiciled, to verify the accuracy of any documents and 
information supplied by the firm or person in an investigation. Rule 
5104 implements that authority by providing that the Board and the 
staff designated in an order of formal investigation may examine such 
books and records to verify the accuracy of any documents or 
information supplied in the course of an informal inquiry or formal 
investigation. Any such examination would be separate and apart from 
any Board inspection pursuant to Section 104 of the Act and the Board's 
rules thereunder and would not be subject to the provisions of Section 
104 or the Board's rules thereunder. Rule 5104 requires that the firm 
or person allow such examination upon demand, and does not provide for 
any minimum notice period.

Rule 5105--Requests for Testimony or Production of Documents From 
Persons Not Associated With Registered Public Accounting Firms

    Section 105(b)(2)(C) of the Act authorizes the Board to promulgate 
rules to request that any person, including any client of a registered 
public accounting firm, provide any testimony and documents that the 
Board considers relevant or material to an investigation. The Act 
requires the Board and the staff to provide appropriate notice of such 
requests, subject to the needs of the investigation. Rule 5105 
implements that authority by providing that the Board and the staff may 
make such requests to any person. In this context, the rules use the 
term ``accounting board request'' to distinguish it from an 
``accounting board demand,'' which may be made only to registered 
public accounting firms and associated persons of such firms.
    Rule 5105 provides that the Board or staff shall give appropriate 
notice when requesting testimony (Rule 5105(a)(1)) and specify a 
reasonable time and place when requesting document production (Rule 
5105(b)). What notice is appropriate for testimony, and what is a 
reasonable time and place for production, may vary with the 
circumstances and the needs of the investigation. Rule 5105(a)(1) also

[[Page 15398]]

provides that an accounting board request for testimony shall state the 
method by which the testimony shall be recorded. The rule further 
provides that if the person to be examined is an organized entity, 
rather than a natural person, the accounting board request shall 
provide a description with reasonable particularity of the matters on 
which examination is requested.
    Rule 5105(a)(2) incorporates, in the context of testimony pursuant 
to an accounting board request, the procedural and transcript 
provisions of testimony pursuant to an accounting board demand, as 
discussed above with respect to Rules 5102(c)-(e).
    Although the Board can only request, and not require, testimony or 
production of documents from persons other than registered public 
accounting firms and associated persons of such firms, the Board does 
have the option of seeking a Commission subpoena to require testimony 
or document production from any person, as discussed below with respect 
to Rule 5111. The note to Rule 5105 serves as a reminder that this 
option is available to the Board. The note, however, does not in any 
way limit the Board's authority to seek a Commission subpoena at any 
time, even if the Board has not first sought the testimony or documents 
through an accounting board request. Neither the note, nor anything in 
the Board's rules, creates any right in any person to receive an 
accounting board request or any other form of notice from the Board 
before the Board seeks a Commission subpoena to be served on that 
person.

Rule 5106--Assertion of Claim of Privilege

    Rule 5106 imposes requirements on any person who declines to 
provide testimony, documents, or information required by an accounting 
board demand, or a demand for examination under Rule 5104, on the 
ground of an assertion of privilege. The rule specifies the types of 
information that a person must supply related to the privilege 
assertion. The rule is adapted from Rule 6.2 of the local rules of the 
District Court for the Southern District of New York. Failure to supply 
the required information is a violation of the rule, and may subject a 
person to a disciplinary proceeding for violation of a Board rule or 
for non-cooperation with an investigation.
    Although not expressly reflected in the rule text, the Board does 
not intend to invade the province of any legitimately asserted 
privilege that would, under prevailing law, be treated as a valid basis 
for declining to provide documents or information in response to a 
Commission subpoena, including valid assertions of the privilege 
against self-incrimination under the Fifth Amendment to the United 
States Constitution. The Board fully intends, however, that assertions 
of the Fifth Amendment privilege may be used as evidence in Board 
disciplinary proceedings and will be the basis for evidentiary 
inferences against the person asserting the privilege. In addition, the 
Board may also report assertions of that privilege to other appropriate 
authorities consistent with our authority under the Act to share 
information.

Rule 5107--Uniform Definitions in Demands and Requests for Information

    Rule 5107 supplies certain definitions and rules of construction 
that shall be deemed to be incorporated by reference into all 
accounting board demands and accounting board requests for information. 
These definitions and rules of construction are modeled on those in use 
by the federal districts courts in the Southern District of New York. 
Rule 5107 does not preclude the Board or the staff, in any particular 
accounting board demand or accounting board request, from defining 
other terms, or from using abbreviations, or supplementing or using 
only part of a definition of a term defined in Rule 5107.

Rule 5108--Confidentiality of Investigatory Records

    Rule 5108(a) provides that unless otherwise ordered by the Board or 
the Commission, all documents, testimony or other information prepared 
or received by or specifically for the Board or its staff in connection 
with an informal inquiry or a formal investigation shall be 
confidential in the hands of the Board, unless and until presented in 
connection with a public proceeding or released in accordance with 
Section 105(c) of the Act and the Board's rules thereunder. Consistent 
with Section 105(b)(5) of the Act, however, Rule 5108 provides that the 
Board may supply any such information to the Commission and, when 
determined by the Board to be necessary to accomplish the purposes of 
the Act or to protect investors, to certain other government entities, 
specifically: the Attorney General of the United States, an appropriate 
Federal functional regulator (as defined in Section 509 of the Gramm-
Leach-Bliley Act) other than the Commission if the information pertains 
to an audit report for an institution subject to the jurisdiction of 
such regulator, state attorneys general in connection with any criminal 
investigation, and appropriate state regulatory authorities.
    Rule 5108(b) provides that nothing in paragraph (a) ``shall 
prohibit the Board or the staff of the Board from disclosing any 
documents, testimony, or other information to any other person as is 
reasonably necessary to carry out the Board's responsibility, under 
Section 105 of the Act, to conduct investigations according to fair 
procedures.'' The purpose of this provision is to provide notice that 
the Board does not interpret Section 105(b)(5)(A) to prohibit the Board 
from doing such fundamental things as, for example, questioning a 
witness about a document supplied to the staff by someone other than 
that witness.
    Read literally and in isolation, Section 105(b)(5)(A) could be 
understood to prohibit the staff not only from showing exhibits to 
witnesses, but even from transmitting to a firm a written accounting 
board demand for documents, since the demand would be a document 
encompassed by the language of Section 105(b)(5)(A) and would therefore 
be confidential. We read Section 105(b)(5)(A) in light of, rather than 
in isolation from, the rest of Section 105. Section 105 begins by 
authorizing the Board to conduct investigations and requiring the Board 
to do so according to fair procedures. An overly literal reading of 
Section 105(b)(5)(A) would negate any possibility of doing so.
    Rule 5108(b) reflects our understanding that the Act authorizes the 
Board and its staff to disclose documents and information (even if 
otherwise covered by Section 105(b)(5)(A)) as reasonably necessary to 
execute the Board's authority and responsibility to conduct fair 
investigations. Rule 5108(b)'s application does not extend outside the 
sphere of a Board investigation. It is not authority for disclosing 
information other than to a person from whom the Board demands or 
requests information in connection with an investigation. Even as to 
those persons, the rule is not authority for disclosing information 
other than as reasonably necessary to carry out legitimate 
investigative functions in a manner that is fair to the person.
    We note that Section 105(b) of the Act appears to preempt state 
open records laws with respect to materials and information provided by 
the Board to an agency under Section 105(b)(5)(B).\1\ We

[[Page 15399]]

do not, however, see this as a point that has a place in the Board's 
rules. The Act speaks clearly for itself on this point.
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    \1\ Any otherwise applicable state or local law that would 
conflict with a requirement of the Act or stand as an obstacle to 
the accomplishment and execution of the full purposes and objectives 
of Congress is preempted. See, e.g., Crosby v. National Foreign 
Trade Council, 530 U.S. 363, 372-73 (2000); City of New York v. FCC, 
486 U.S. 57, 64 (1988).
---------------------------------------------------------------------------

    For similar reasons, the rule does not seek to prohibit agencies 
from disclosing materials that the Act itself forbids them to disclose. 
Nor do we see a need to provide, by rule, for a confidentiality 
agreement in every case to reinforce the requirements of the Act. It is 
the Act, and not the Board's rules, that constrain the conduct of those 
agencies. In the event that we discover that any particular agency 
makes disclosures that we believe are inconsistent with Section 
105(b)(5), both the Act and Rule 5108 allow us the flexibility to 
decline to supply certain information to that agency or to require 
appropriate assurances of confidentiality.
    The second note to Rule 5108 points out that the Director of 
Enforcement and Investigations may engage in, and may authorize staff 
to engage in, discussions with persons identified in Rule 5108 
concerning documents, testimony, and information described in the rule.

Rule 5109--Rights of Witnesses in Inquiries and Investigations

    Rule 5109 sets out certain rights accorded to persons from whom the 
Board seeks documents, testimony, or information in an investigation. 
Under Rule 5109(a), any person compelled to testify or produce 
documents pursuant to a Commission subpoena issued pursuant to Rule 
5111, and any person who testifies or produces documents pursuant to an 
accounting board demand, shall, upon request, be allowed to review the 
Board's order of formal investigation. No such person is entitled to 
obtain their own copy of the order of formal investigation, but the 
Director of Enforcement and Investigations may, in his or her 
discretion, allow a person to obtain a copy of the order. The Director 
of Enforcement and Investigations may, as a condition of granting a 
request for the formal order, impose limitations on its further 
dissemination. We intend for the Director to use this discretion as 
necessary to avoid undermining an investigation and to maintain, to the 
extent reasonably possible, the nonpublic nature of the formal order. 
We do not intend that this discretion routinely be used in a way that 
would inhibit legitimate uses of the document by a person or counsel, 
such as sharing of the document subject to a joint defense agreement.
    Rule 5109(b) allows any person who appears to testify in a formal 
investigation to be accompanied, represented, and advised by counsel. 
Rule 5109(b) grants this right on the condition that counsel 
affirmatively represents to the staff, either through a notice of 
appearance or a statement on the record at the beginning of the 
testimony, that he or she represents the witness. This rule is adapted 
from Rule 7(b) of the Commission's Rules Relating to Investigations. 
The right granted by Rule 5109(b) is also limited by Rule 5102(c)(3), 
which does not allow for the presence of any person, even counsel, who 
has been or is reasonably likely to be examined in the investigation.
    Rule 5109(c) provides that a witness may inspect the transcript of 
his or her own testimony. A person who has testified or provided 
documents may also request a copy of his or her transcript or of the 
documents he or she produced. If the request is granted, the transcript 
or documents may be obtained upon the payment of fees to cover the cost 
of reproduction. Any such request, however, may be denied by the 
Director of Enforcement and Investigations for good cause shown if the 
documents or testimony have not been presented in connection with a 
proceeding or released in accordance with Section 105(c) of the Act and 
the Board's rules thereunder. This rule is adapted in part from Rule 6 
of the Commission's Rules Relating to Investigations.
    Rule 5109(d) provides that registered public accounting firms and 
persons associated with such firms may, on their own initiative at any 
time, submit a written statement to the Board setting forth their 
interests and positions in regard to the subject matter of any 
investigation in which they have become involved. The staff, either 
upon request or on its own initiative, may--but is not required to--
advise any such person of the general nature of an investigation, 
including the indicated violations as they pertain to that person, and 
may prescribe a fixed period of time that will be allowed for the 
person to submit a statement of position and interests before the staff 
makes any recommendation to the Board. Rule 5109(d) provides that any 
such statement that is submitted will be forwarded to the Board in 
conjunction with any staff recommendation pertaining to the person 
submitting the statement. This rule is adapted from Rule 7(a) of the 
Commission's Rules Relating to Investigations.
    The purpose of the Rule 5109(d) process is to assist the Board in 
its decision-making. It is our expectation that the staff will 
routinely give a respondent a meaningful opportunity to make a Rule 
5109(d) submission. We also expect, though, that the staff will 
exercise its discretion not to provide that opportunity when doing so 
would be contrary to the public interest or the interests of 
investors--such as when circumstances call for expedited enforcement 
action, or when advance notice of particular charges to a respondent 
might undermine legitimate investigative objectives of the Board or of 
other regulatory or law enforcement agencies conducting parallel 
investigations. We therefore decline to create a right to make a Rule 
5109(d) submission, or a right to have a certain amount of time in 
every case where the opportunity is afforded.

Rule 5110--Non-Cooperation With an Investigation

    Section 105(b)(3) of the Act authorizes the Board to impose 
sanctions, including revocation of registration and bar on association, 
against any registered public accounting firm or associated person who 
refuses to testify, produce documents, or otherwise cooperate with the 
Board in connection with an investigation. Rule 5110 describes how the 
Board will implement that authority.
    Under Rule 5110(a), the Board may institute a disciplinary 
proceeding, in accordance with Rule 5200(a)(3), for non-cooperation 
with an investigation in certain circumstances. Under the rule as 
proposed, a non-cooperation proceeding would have been warranted if it 
appeared to the Board that a registered public accounting firm or an 
associated person may have failed to comply with an accounting board 
demand; may have knowingly made any false material declaration or made 
or used any other information, including any book, paper, document, 
record, recording, or other material, knowing the same to contain any 
false material declaration; may have abused the Board's processes for 
the purpose of obstructing an investigation; or may otherwise have 
failed to cooperate in connection with an investigation.
    We believe it is appropriate to include in the rule the general 
provision, echoing the Act, that non-cooperation proceedings may be 
instituted where a firm or associated person ``may otherwise have 
failed to cooperate.'' Depending upon the nature of the conduct, 
however, it may be appropriate in many circumstances for the staff to 
provide notice that it views certain conduct as non-cooperation, and to 
afford an opportunity to cease or cure

[[Page 15400]]

the conduct before recommending non-cooperation proceedings.
    The provision concern abuse of the Board's processes to obstruct an 
investigation includes a scienter requirement: We will not treat as 
non-cooperation every arguable abuse of the Board's processes, but only 
those that involve an intent to obstruct an investigation. We may, 
however, infer such an intent from circumstantial evidence, including, 
for example, circumstances indicating that a reasonable person would 
not have believed there was any genuine chance of prevailing on a 
particular petition for review of staff action or of a hearing officer 
ruling short of finding a violation.
    A disciplinary proceeding for non-cooperation shall proceed 
generally according to the hearing procedures set out in the Board's 
rules. Because of the nature of the conduct being sanctioned, however, 
a disciplinary proceeding for non-cooperation will generally be a 
streamlined proceeding focused on a narrow issue. For that reason, 
various of the procedural rules governing disciplinary proceedings 
include certain provisions that will apply only to disciplinary 
proceedings for non-cooperation.
    We recognize that some non-cooperation proceedings may present 
complex legal issues. Some, such as those involving allegations of 
false testimony, may also involve significant factual evidence. The 
rules provide sufficient flexibility to deal with complex non-
cooperation issues in an appropriate time frame. But the rules are also 
designed to address, during the course of an investigation, ongoing 
recalcitrance even in the absence of any significant factual or legal 
issue. The rules afford a streamlined approach that will allow for 
swift dealing with that type of recalcitrance, but the streamlined 
option should not be understood as a signal that the Board intends to 
give short shrift to genuinely complex factual and legal issues that 
may arise in the non-cooperation context.
    Nothing in the rules creates vicarious non-cooperation liability 
for a firm. Nevertheless, an associated person's non-cooperation has 
consequences for the firm. Pursuant to Section 102(b)(3) of the Act and 
the Board's rules, every registered public accounting firm will have 
agreed, as a condition of the continuing effectiveness of its 
registration, (1) to secure from each of its associated persons a 
consent to cooperate in and comply with Board demands, and (2) to 
enforce those consents. While the firm would face no vicarious 
liability for the associated person's non-cooperation, the firm's own 
registration status would be at risk if the firm failed either to 
secure the associated person's cooperation with the Board or to end its 
association with the person.

Rule 5111--Requests for Issuance of Commission Subpoenas in Aid of an 
Investigation

    Section 105(b)(2)(D) of the Act authorizes the Board to promulgate 
rules according to which the Board may seek issuance by the Commission, 
in a manner established by the Commission, of a subpoena on any person 
to require testimony and the production of documents that the Board 
considers relevant or material to an investigation. Rule 5111 
implements that authority by providing that the Board shall seek 
issuance of such subpoenas, and in seeking such subpoenas shall supply 
the Commission with a completed form of subpoena and such other 
information as the Commission may require.

Rule 5112--Coordination and Referral of Investigations

    Rule 5112(a) provides that the Board will notify the Commission of 
any pending investigation that involves a potential violation of the 
securities laws. The rule provides that the Board will do so as soon as 
practicable after entry of an order of formal investigation by sending 
a copy of the order to the Commission or appropriate Commission staff. 
Rule 5112(a) provides that the staff will then coordinate its work with 
the Commission's Division of Enforcement as necessary to protect any 
ongoing Commission investigation.
    Rule 5112(b) provides that the Board may refer any investigation to 
the Commission and, in the case of an investigation that concerns an 
audit report for an institution that is subject to the jurisdiction of 
any other Federal functional regulator (as defined in section 509 of 
the Gramm-Leach-Bliley Act), to that regulator.
    Rule 5112(c) provides that, at the direction of the Commission, the 
Board may refer any investigation to the Attorney General of the United 
States, the attorney general of one or more states, and an appropriate 
state regulatory authority.

Part 2--Disciplinary Proceedings

    Part 2 of the Board's Rules on Investigations and Adjudications 
consists of Rules 5200 through 5206. These rules address the 
commencement of disciplinary proceedings and the elements of those 
proceedings.

Rule 5200--Commencement of Disciplinary Proceedings

    Rule 5200 addresses the commencement of disciplinary proceedings 
and certain related matters. Rule 5200(a) identifies the three general 
categories of circumstances under which the Board may commence a 
disciplinary proceeding: when it appears to the Board that a hearing is 
warranted to determine whether (1) a registered public accounting firm 
or a person associated with such a firm has engaged in any act or 
practice, or omitted to act, in violation of the Act, the Rules of the 
Board, the provisions of the securities laws relating to the 
preparation and issuance of audit reports and the obligations and 
liabilities of accountants with respect thereto, including the rules of 
the Commission issued under the Act, or professional standards, (2) 
such a firm, or its supervisory personnel, has failed reasonably to 
supervise an associated person, either as required by the Rules of the 
Board relating to auditing or quality control standards, or otherwise, 
with a view to preventing violations of laws, rules, and standards, or 
(3) such a firm or a person associated with such a firm has failed to 
comply with an accounting board demand, given false testimony, or 
otherwise failed to cooperate in connection with an investigation.
    The Act plainly contemplates that disciplinary proceedings can be 
instituted for a violation based on a single negligent act. Section 
105(c)(5) of the Act provides that the Board may impose the more severe 
sanctions authorized by Section 105(c)(4) only in cases that involve 
intentional or knowing conduct (including reckless conduct) or repeated 
instances of negligent conduct. Implicit in that provision is that a 
violation based on a single instance of negligent conduct is sufficient 
to warrant a disciplinary proceeding to impose lesser sanctions. The 
rule is intended to implement the full scope of that authority.
    At this time, we are not providing specific guidance on the scope 
of supervisory liability under the Act. We will continue to consider 
whether additional guidance or rulemaking on this point would be 
appropriate. We see no reason, however, to limit the persons who may 
have supervisory liability to those occupying certain positions. A firm 
itself may have liability for failure to supervise, as may any 
associated person who plays a supervisory role. Moreover, even in the 
absence of additional, specific guidance, investigations may uncover

[[Page 15401]]

circumstances in which it would be appropriate, under any reasonable 
reading of the Act, to commence disciplinary proceedings for failure to 
supervise.
    Rule 5200(b) provides for an appointment of a hearing officer by 
the Board as soon as practicable after issuance of the order 
instituting proceedings or after a registration applicant has requested 
a hearing pursuant to Rule 5500(b). The rule is adapted from NASD Rule 
9213(a). Under Rule 5200(b), the Board shall notify the parties of the 
hearing officer's assignment. The hearing officer shall have authority 
to do all things necessary and appropriate to discharge his or her 
duties, including, but not limited to, the matters specified in Rule 
5200(b). The rule expressly subjects the hearing officer's authority to 
the limitations described in Rule 5402 (concerning hearing officer 
disqualification) and Rule 5403 (concerning ex parte communications).
    Rule 5200(c) provides that the Board will observe certain 
separation of functions principles. The rule provides that neither the 
staff of the Division of Enforcement and Investigations, nor any other 
staff who engaged in investigative or prosecutorial functions on a 
matter, may participate or advise in the decision, or the review of the 
decision, except as a witness or counsel. In addition, the rule 
provides that a hearing officer may not be responsible to or subject to 
the supervision or direction of an employee or agent engaged in the 
performance of investigative or prosecuting functions for the Board.
    With respect to proceedings that involve a common question of law 
or fact, Rule 5200(d) provides that the Board or a hearing officer may, 
by order, consolidate the proceedings for hearing of any or all matters 
at issue in the proceedings. The rule is adapted from Rule 201 of the 
Commission's Rules of Practice. The rule provides that consolidation 
shall not prejudice any rights that any party may have under the 
Board's Rules and shall not affect the right of any party to raise 
issues that could have been raised in the absence of consolidation.

Rule 5201--Notification of Commencement of Disciplinary Proceedings

    Rule 5201(a) provides that when the Board issues an order 
instituting proceedings, the Secretary shall give each person or firm 
charged appropriate notice of the order within a time reasonable in 
light of the circumstances. As described in the note to Rule 5201(a), 
in the case of emergency or expedited action, actual notice--by any 
means reasonably calculated to supply notice--may precede formal 
service of the order instituting proceedings. The rule also provides 
that if the order instituting proceedings sets a hearing date, each 
party shall be given notice of the hearing within a time reasonable, in 
light of the circumstances, in advance of the hearing. As a general 
matter, we expect that Board orders instituting proceedings will not 
specify a hearing date, unless the proceedings are for non-cooperation. 
In those proceedings, we may find that reasonable notice of a hearing 
date is less than 90 days or 60 days, and we decline to provide by rule 
for a longer minimum time that would delay the process even when there 
is no genuine need for delay.
    In matters where the Board's order does not set a hearing date, the 
hearing officer retains discretion to schedule a hearing date. We 
expect hearing officers to exercise that discretion prudently and 
fairly, consistent with avoiding unnecessary delays, but we decline to 
specify a minimum amount of notice that a party must have before a 
hearing may be held.
    Rule 5201(b) describes the content of an order instituting 
proceedings. The precise requirements concerning the content of the 
order vary depending upon whether the proceeding is commenced under 
Rule 5200(a)(1), Rule 5200(a)(2), or Rule 5200(a)(3). The rule provides 
that, in each case, the order must include a ``short and plain 
statement of the matters of fact and law to be considered and 
determined,'' including of the conduct alleged to constitute a 
violation and the rule, statutory provision, or standard violated. 
Where a violation requires a particular state of mind, then a necessary 
component of alleging the conduct is alleging the existence of that 
state of mind. In requiring that the order include a description of the 
``conduct,'' the rule necessarily requires more than just a conclusory 
statement that the respondent engaged in conduct that violated a rule, 
statute, or standard. The rule requires that the order allege the 
conduct in sufficient factual detail to advise the respondent of what 
conduct is at issue.
    Rule 5201(c) provides that, in the case of a hearing on a 
registration application commenced under Rule 5500, the notice of 
hearing shall state proposed grounds for disapproving the registration 
application.
    Rule 5201(d) provides that either the Board or, on the motion of 
the interested division, a hearing officer, may amend an order 
instituting proceedings. The Board may do so at any time to include new 
matters of fact or law. A hearing officer may do so only prior to the 
filing of an initial decision or, if no initial decision is to be 
filed, prior to the time fixed for filing final briefs with the Board. 
A hearing officer may amend an order only to include new matters of 
fact or law that are within the scope of the original order instituting 
proceedings, but may not initiate new charges or expand the scope of 
matters set for hearing beyond the framework of the Board's order 
instituting proceedings. The rule is adapted from Rule 200(d) of the 
Commission's Rules of Practice.

Rule 5202--Record of Disciplinary Proceedings

    Rule 5202(a) describes the material that shall make up the contents 
of the record in a disciplinary proceeding (Rule 5202(a)(1)) and the 
contents of the record on disapproval of an application for 
registration (Rule 5202(a)(2)). Under Rule 5202(b), any document 
offered as evidence but excluded, and any document marked for 
identification but not offered as an exhibit, shall not be considered 
part of the record but shall be maintained by the Secretary until all 
opportunities for Commission and judicial review have been exhausted or 
waived. Paragraphs (c)-(e) of Rule 5202 address the substitution of 
true copies for documents in the record, the preparation of the record 
and the certification of the record index, and the final transmittal of 
record items to the Secretary. The rule is adapted from Rules 350 and 
351 of the Commission's Rules of Practice.

Rule 5203--Public and Private Hearings

    Section 105(c)(2) of the Act provides that any proceeding by the 
Board to determine whether to discipline a registered public accounting 
firm or an associated person thereof shall not be public unless 
otherwise ordered by the Board for good cause shown, with the consent 
of the parties to the hearing. Rule 5203 implements that requirement by 
providing that proceedings commenced pursuant to Rule 5200(a) shall not 
be public unless the Board so orders, for good cause shown, with the 
consent of the parties.
    Rule 5203 also provides that all other Board hearings shall be 
nonpublic unless the Board otherwise orders. In practical effect, this 
provision applies only to a hearing on disapproval of a registration 
application, since that is the only type of hearing for which the rules 
provide other than the hearings expressly covered by Section 105(c)(2)

[[Page 15402]]

of the Act. The rule essentially creates a presumption that a hearing 
on disapproval of a registration application will be non-public. A 
disapproval hearing will, by its nature, involve a firm that is not yet 
a registered firm and may well involve a record that includes 
confidential information submitted as part of the registration 
application. The rule reserves to the Board the flexibility to make the 
hearing public if warranted by unusual circumstances. In any event, if 
the Board decides, after a hearing, to disapprove the application, that 
decision, along with the reasons for the decision, will be made public 
according to the provisions of Section 105(d) of the Act.

Rule 5204--Determinations in Disciplinary Proceedings

    Rule 5204(a) provides that in any disciplinary proceeding 
instituted pursuant to Rule 5200(a)(1), Rule 5200(a)(2), or Rule 
5200(a)(3), the interested division shall bear the burden of proving an 
alleged violation or failure to supervise by a preponderance of the 
evidence.
    Rule 5204(b) provides that, unless the Board orders otherwise, the 
hearing officer shall prepare an initial decision following a hearing. 
The rule provides that the initial decision shall include findings and 
conclusions, including sanctions, if appropriate, and the reasons or 
basis therefore, as to all the material issues of fact, law, or 
discretion presented on the record and such other information as the 
Board may require. The rule is adapted from Rule 360 of the 
Commission's Rules of Practice.
    The note to Rule 5204(b) sets out the Board's general expectations 
about the time frame within which a hearing officer should complete an 
initial decision in various types of cases. These time frames are 
nothing more than the Board's general expectations and do not create 
any right in any person to have an initial decision prepared within any 
particular period of time.
    Rule 5204(c) governs the hearing officer's filing of the initial 
decision with the Secretary and the Secretary's service of the initial 
decision on the parties.
    Rule 5204(d) provides the circumstances in which an initial 
decision of a hearing officer becomes the final decision of the Board 
as to a party. The rule is adapted from Rule 360(d) of the Commission's 
Rules of Practice. Rule 5204(d)(1) provides that the initial decision 
becomes the Board's final decision as to a party upon issuance by the 
Secretary of a notice of finality. Rule 5204(d)(2) provides that the 
Secretary shall issue the notice of finality no later than twenty days 
after the lapsing of the time period for filing a petition for Board 
review (as described in Rule 5460), unless one of the two conditions 
described in Rule 5204(d)(3) has occurred. Rule 5204(d)(3) provides 
that the Secretary shall not issue a notice of finality as to any party 
who has filed a timely petition for Board review or with respect to 
whom the Board, on its own motion, has ordered review of the initial 
decision pursuant to Rule 5460(b).

Rule 5205--Settlement of Disciplinary Proceedings Without a 
Determination After Hearing

    Rule 5205 governs certain matters related to possible settlement of 
disciplinary proceedings. The rule is adapted from Rule 240 of the 
Commission's Rules of Practice.
    Rule 5205 provides that any person who is or is to be a party to a 
disciplinary proceeding may at any time propose in writing an offer of 
settlement. The rule imposes requirements for the content of the offer, 
and requires that it be signed by the person making the offer, not by 
counsel.
    Rule 5205(c)(1) requires that the Director of Enforcement and 
Investigations present the offer to the Board along with a 
recommendation concerning the offer, except that, if the recommendation 
is unfavorable, the Director shall not present the offer to the Board 
unless the person making the offer so requests.
    Rule 5205(c)(2)-(3) set out various matters that the person making 
the offer must waive before the Board will consider the offer, 
including waiver of rights to hearings, rights to proposed findings of 
fact and conclusions of law, rights to proceedings before and an 
initial decision by a hearing officer, rights to post-hearing 
procedures, rights to judicial review, rights to have Board and Board 
staff observe separation of functions principles, and rights to claim 
bias or prejudgment by the Board based on consideration of or 
discussions concerning the settlement offer.
    Rule 5205(c)(4) provides that if the Board rejects the offer, the 
offer will be deemed withdrawn and will not constitute a part of the 
record. Rule 5205(c)(4) further provides that rejection of the offer 
will not affect the continued validity of waivers of rights to claim 
bias or prejudgment on the basis of discussions concerning the 
settlement offer.
    Rule 5205(c)(5) provides that Board acceptance of an offer will 
occur only upon the issuance of findings and an order by the Board.
    A note to Rule 5205 points out that in hearings on disapproval of 
registration, settlement offers will be handled by the Director of 
Registration and Inspections, rather than the Director of Enforcement 
and Investigations, in accordance with Rule 5205.

Rule 5206--Automatic Stay of Final Disciplinary Actions

    Rule 5206 provides that no final disciplinary sanction of the Board 
shall be effective until either (a) the dissolution by the Commission 
of the stay provided by Section 105(e) of the Act or (b) the expiration 
of the period during which the Commission, on its own motion or upon 
application under Section 19(d)(2) of the Exchange Act, may institute 
review of the sanction.

Part 3--Disciplinary Sanctions

    Part 3 of the Board's Rules on Investigations and Adjudications 
consists of Rules 5300 through 5304. These rules describe the sanctions 
the Board may impose in disciplinary proceedings and various matters 
related to the effect of, and the termination of, such sanctions.

Rule 5300--Sanctions

    Rule 5300 describes sanctions that the Board may impose in 
disciplinary proceedings. Rule 5300(a) describes sanctions that the 
Board may impose in disciplinary proceedings instituted other than for 
non-cooperation in an investigation. Subparagraphs (1) through (6) of 
Rule 5300(a) incorporate the sanctions expressly provided by Section 
105(c)(4) of the Act, including revocation of registration, bar from 
association, suspensions, limitations on activities, civil money 
penalties, censures, and a requirement of additional professional 
education or training. A note to subparagraph (3) of Rule 5300(a) 
contains a non-exclusive list of types of limitations on activities the 
Board may impose. Subparagraphs (7) through (10) of Rule 5300(a) 
identify other sanctions, pursuant to the authority given to the Board 
in Section 105(c)(4)(G) of the Act, including requiring a party to 
engage an independent monitor, to engage counsel or other consultants 
to design policies to effectuate compliance with the Act, to adopt or 
implement policies or undertake action to improve audit quality or to 
effectuate compliance with the Act, or to obtain an independent review 
and report on one or more engagements.
    The more serious the violation is, the more severe the appropriate 
penalty will be, and the Board retains discretion to assess the 
seriousness of the violation

[[Page 15403]]

and the severity of the penalty. Section 105(c)(5) of the Act requires 
scienter or repeated negligence for imposition of the most severe 
sanctions. The Act does not limit the standard that must be met for 
imposition of other sanctions.
    Rule 5300(b) describes the sanctions that the Board may impose in 
disciplinary proceedings for non-cooperation with an investigation. The 
sanctions include revocations, bars, and suspensions, as expressly 
provided by Section 105(b)(3)(A) of the Act. Rule 5300(b) also 
identifies other sanctions, pursuant to the authority given to the 
Board in Section 105(b)(3)(A)(iii), including civil money penalties, 
censures, limitations on activities, requiring a firm to engage a 
special master or independent monitor to monitor and report on the 
firm's compliance with accounting board demands, or authorizing the 
hearing officer to retain jurisdiction to monitor compliance with 
accounting board demands.
    When the Board revokes a firm's registration or bars a person from 
association with a registered public accounting firm, the sanction is 
permanent and will not expire of its own accord. In contrast, a 
suspension of registration or a suspension from association shall be 
for a fixed time period at the expiration of which a suspended firm 
shall resume its status as registered and a suspended person shall be 
free to associate with a registered firm.
    In the case of a revocation of registration or a bar on 
association, the Board may provide for a specified period after which 
the firm may reapply for registration, or the person may petition for 
termination of the bar. Modification or termination of sanctions is 
discussed below in connection with Rule 5302.
    A note to Rule 5300 points out that the rule does not preclude the 
imposition, on consent in the context of a settlement, of any other 
sanction not identified in the rule.

Rule 5301--Effect of Sanctions

    Rule 5301 describes the effect of certain sanctions imposed by the 
Board. Rule 5301(a) applies to persons who have been suspended or 
barred from association with a registered public accounting firm or who 
have failed to comply with any other sanction imposed on them by the 
Board. Rule 5301 prohibits such persons from willfully becoming or 
remaining associated with any registered public accounting firm, unless 
they first obtain the consent of the Board, pursuant to Rule 5302, or 
of the Commission.
    Rule 5301(b) applies to a registered public accounting firm. It 
prohibits a firm from permitting a person to become or remain 
associated with the firm if the firm knows, or in the exercise of 
reasonable care should have known, that the person is subject to a bar 
or suspension on such association, unless the firm first obtains the 
consent of the Board, pursuant to Rule 5302, or of the Commission.
    Both Rule 5301(a) and Rule 5301(b) are followed by notes that make 
two fundamental points about the effect of sanctions. First, a barred 
or suspended person may not receive a share of the firm's profits from 
audit work. To the extent that any compensation is calculated as a 
share of profits--whether a partner's draw, or any other employee's 
bonus or other special compensation--the calculation must be adjusted 
so that the portion of the firm's profits that is derived from audit 
revenue is not counted in calculating that compensation.
    Second, a person may not be compensated in any form for doing audit 
work. This does not mean that a salaried employee must suffer a salary 
cut that mirrors the portion of the firm's profits that are from audit 
work, but it does reinforce the general prohibition on the person doing 
any audit work.
    The language does not prohibit a barred partner from receiving from 
the firm a return of the partner's capital or a separation payment 
provided for in the partnership agreement. Nor does the language 
prohibit the payment of standard retirement benefits to which the 
person was entitled on the day the sanction took effect.
    One commenter suggested that the rules prescribe at least one 
procedure which, if followed by a firm to determine whether a person is 
barred or suspended, would be ``reasonable per se'' and effectively 
provide a safe harbor for the firm from liability for associating with 
the person. The commenter suggested, as an example, that obtaining 
signed statements from individuals certifying that they are not 
suspended or barred could be a sufficient procedure for the firm to 
avoid liability.
    We will continue to consider what, if any, sort of safe harbor 
procedure might be made available with respect to a firm's obligations 
to make efforts to know whether an associated person has been barred or 
is serving a suspension. A bar or suspension, once it takes effect, 
will be a matter of public record, and the rule effectively requires 
that firms make reasonable efforts to confirm, through public records, 
that an individual is not barred or suspended. The Board will consider 
ways to make information about bars and suspensions more readily 
accessible to firms.

Rule 5302--Application for Relief From, or Modification of, Revocations 
and Bars

    Rule 5302 provides mechanisms by which a firm or person subject to 
a Board sanction may apply to the Board for relief from, or 
modification of, that sanction. Under Rule 5302(a), a firm that has had 
its registration revoked pursuant to a Board determination that 
permitted the firm an opportunity to reapply for registration after a 
specified period of time may, after the expiration of the specified 
period, file an application for registration pursuant to Rule 2101. The 
revocation shall continue, however, unless and until the Board 
affirmatively approves such a registration application.
    Under Rule 5302(b), a person subject to a bar on association that 
contains a provision allowing the person to seek termination of the bar 
after a specified period of time may, after the expiration of the 
specified period, file a petition to terminate the bar. Subparagraphs 
(2) through (5) of Rule 5302(b) govern the process related to such a 
petition.
    The burdens of the rule should not be viewed as falling solely on 
the individual. As a practical matter, the petition submitted by the 
individual should be a collaborative effort between the individual and 
the firm that wishes to associate with the individual. The firm should 
readily be able to supply some of the information necessary for the 
individual to satisfy the rule. The rule is based on Rule 193(b)(4)(iv) 
of the Commission's Rules of Practice, which imposes similar 
requirements on barred individuals seeking to associate with a broker-
dealer.
    Rule 5302(c) governs modification of revocations and bars that do 
not expressly provide a time period after which the firm may reapply 
for registration or the person may petition to terminate the bar. Such 
firm or person may at any time request leave to reapply for 
registration or leave to file a petition to terminate a bar. They may 
not file a registration application or a petition to terminate the bar 
unless the Board grants such leave. The revocation and bar shall 
continue until the Board has both granted such leave and approved a 
subsequent application or petition.
    Under Rule 5302(d), a firm or person subject to an ongoing sanction 
imposed for non-cooperation with an investigation may file an 
application for termination of that sanction once the firm or person 
has remedied the non-cooperation that formed the basis for the

[[Page 15404]]

sanction. The sanction shall continue, however, unless and until the 
Board orders it terminated.
    Under Rule 5302(e), any firm or person subject to a sanction 
described in subparagraphs (3), (6), (7), (8), (9), or (10) of Rule 
5300(a) may file an application for termination of the sanction at any 
time. The Board may, in its discretion, grant a hearing on the 
application. The sanction shall continue, however, unless and until the 
Board orders it terminated.

Rule 5303--Use of Money Penalties

    Rule 5303 provides that all money penalties collected by the Board 
shall be used to fund a merit scholarship program as required by, and 
described in, Section 109(c)(2) of the Act.

Rule 5304--Summary Suspension for Failure To Pay Money Penalties

    Under Rule 5304, the failure of a registered public accounting firm 
or an associated person to pay money penalties imposed by the Board may 
result in summary suspension, and effective revocation, of the firm's 
registration and summary suspension or bar from association. Under Rule 
5304(a), if a firm fails to pay a money penalty after the exhaustion of 
all reviews and appeals and the termination of any stay, the Board may 
summarily suspend the firm's registration.
    The rule allows a thirty-day period for payment after a money 
penalty becomes final. If payment is not made in that 30-day period, 
the Board may send a notice that failure to make payment within seven 
days will result in summary suspension.
    Once such a suspension is imposed, it shall terminate upon payment 
of the penalty by the firm within 90 days of the onset of the 
suspension. If payment is not made within 90 days, the firm's 
registration will effectively be revoked, and the firm can re-register 
only by paying the penalty, plus interest, and filing an application 
for registration under Rule 2101 and obtaining Board approval of that 
application.
    Under Rule 5304(b), if an associated person fails to pay a money 
penalty after exhaustion of all reviews and appeals and the termination 
of any stay, the Board may summarily suspend the person from 
association with a registered firm. Rule 5304(b) allows a thirty-day 
period for payment after a money penalty becomes final, after which the 
Board may send a notice that failure to pay within seven days will 
result in summary suspension. Once a suspension is imposed, it shall 
terminate upon payment of the penalty, plus interest, within 90 days of 
the onset of the suspension. If payment is not made within 90 days, the 
Board may summarily bar the person from association with a registered 
firm.

Part 4--Rules of Board Procedure

    Part 4 of the Board's Rules on Investigations and Adjudications 
consists of Rules 5400 through 5469. These rules are further divided 
into general rules (5400 through 5411), prehearing rules (5420 through 
5427), hearing rules (5440 through 5445), and appeals to the Board 
(5460 through 5469).

Rule 5400--Hearings

    Rule 5400 provides for hearings to be held only upon order of the 
Board and to be conducted in a fair, impartial, expeditious and orderly 
manner. The rule is adapted from Rule 200 of the Commission's Rules of 
Practice.

Rule 5401--Appearance and Practice Before the Board

    Rule 5401 provides that a person may appear on his own behalf 
before the Board or may be represented by counsel. Rule 5401 further 
provides that a member of a partnership may represent the partnership 
and a bona fide officer of a corporation, trust, or association may 
represent the corporation, trust, or association. Rule 5401(c) imposes 
certain procedural requirements related to representation and 
withdrawal.

Rule 5402--Hearing Officer Disqualification and Withdrawal

    Rule 5402 allows a party to make a motion for withdrawal of a 
hearing officer and governs the circumstances under which such a motion 
may be made and the time within which it must be made. Rule 5402 also 
provides for appointment of a replacement hearing officer in the event 
of withdrawal or disqualification. The rule is based on Rule 112 of the 
Commission's Rules of Practice and NASD Rule 9233.

Rule 5403--Ex Parte Communications

    Rule 5403 prohibits a hearing officer from having ex parte 
communications with a person or party, except to the extent permitted 
by law or by the Board's rules for the disposition of ex parte matters. 
The rule also prohibits any party (including the interested division) 
and any Board staff that has had substantial involvement in a matter 
from having ex parte communication with the Board or any Board member 
on a fact in issue, except as permitted by law or by the Board's rules.
    The rule includes a specific exception allowing staff to discuss 
settlement offers with the Board when a party has provided the 
prejudgment waiver described in Rule 5205(c)(3). The rule is based in 
part on Rule 120 of the Commission's Rules of Practice.

Rule 5404--Service of Papers by Parties

    Rule 5404 requires service of papers on each party in a manner 
calculated to bring the paper to the attention of the party served. The 
rule is flexible enough to accommodate service by first class mail, or 
by other means, such as through electronic communication.

Rule 5405--Filing of Papers With the Board: Procedure

    Rule 5405 governs procedures for filing papers with the Board.

Rule 5406--Filing of Papers: Form

    Rule 5406 governs the form of papers to be filed with the Board.

Rule 5407--Filing of Papers: Signature Requirement and Effect

    Rule 5407 requires every paper filed to be signed either by the 
party, if the party represents himself or herself, or by counsel if the 
party is represented by counsel. Because the Board expects most papers 
to be filed electronically, a note to the rule states that the 
signature should be scanned into an electronic document where 
practicable, but that otherwise certain indicia of electronic signature 
will suffice.

Rule 5408--Motions

    Rule 5408 describes procedures and length limitations related to 
motions and supporting briefs.

Rule 5409--Default and Motions to Set Aside Default

    Rule 5409 describes the circumstances that shall constitute a 
default and the procedure for seeking to set aside a default. The rule 
is adapted from Rule 155 of the Commission's Rules of Practice.

Rule 5410--Extra Time for Service by Mail

    Rule 5410 provides an additional three days for service made by 
mail.

Rule 5411--Modifications of Time, Postponements and Adjournments

    Rule 5411 provides that the Board maintains discretion, except as 
otherwise provided by law, to adjust the time limits prescribed by the 
rules or to postpone or adjourn any hearing.

Rule 5420--Leave To Participate To Request a Stay

    Rule 5420 provides a procedure by which certain entities may seek a 
stay of a hearing. The entities that may seek

[[Page 15405]]

such a stay are the Commission, the United States Department of Justice 
or any United States Attorney's Office, any criminal prosecutorial 
authority of a state or political subdivision of a state, and an 
appropriate state regulatory authority.
    Under Rule 5420, an authorized representative of any such entity 
may seek leave to participate on a limited basis to request a stay. 
Rule 5420 provides that a stay shall be granted upon a showing that a 
stay is necessary to protect an ongoing Commission investigation, and 
that a stay shall otherwise be favored upon a showing that it is in the 
public interest or for the protection of investors.

Rule 5421--Answer to Allegations

    Rule 5421 governs the filing of answers to orders instituting 
proceedings. A party may file an answer in any matter, but is not 
required to file an answer unless ordered to do so in the order 
instituting proceedings.

Rule 5422--Availability of Documents for Inspection and Copying

    Rule 5422 governs the obligations of Board staff to make documents 
available to a party for inspection and copying. Under the rule, the 
staff's obligation varies according to whether the proceeding is 
commenced under Rule 5200(a)(1)-(2) for violations or failures 
reasonably to supervise, Rule 5200(a)(3) for non-cooperation, or Rule 
5500 concerning disapproval of a registration application.
    Paragraphs (a) through (c) of Rule 5422 are the core provisions for 
determining what documents the staff must make available. Paragraph (a) 
describes generally the documents that the staff must make available to 
a respondent. Paragraph (b) limits paragraph (a) by describing 
categories of documents that the staff may withhold, subject to an 
overriding obligation not to withhold material exculpatory evidence. 
Paragraph (c) prescribes procedures the staff must follow when 
withholding certain categories of documents, and procedures for a 
hearing officer to determine whether withholding is appropriate.
    Rule 5422(a)(1) applies to proceedings commenced under Rule 
5200(a)(1) or Rule 5200(a)(2). The rule provides that in those 
proceedings, the Division of Enforcement and Investigations shall make 
available all documents in four specific categories: (1) Accounting 
board requests, subpoenas, and accounting board demands for documents, 
testimony, or information issued in the investigation or in the 
informal inquiry, if any, that preceded the investigation, (2) 
responses to those accounting board requests, subpoenas, and accounting 
board demands, including any documents produced in response, (3) 
testimony transcripts and exhibits, and any other verbatim records of 
witness statements, and (4) all other documents prepared or obtained by 
the Division of Enforcement and Investigations in connection with the 
investigation prior to the institution of proceedings.
    Rule 5422(a)(2) applies to non-cooperation proceedings commenced 
under Rule 5200(a)(3). Rule 5422(a)(2) requires that the Division of 
Enforcement and Investigations make available all documents on which 
the Division intends to rely in seeking a finding of non-cooperation. 
The rule expressly provides that the Division shall not be required to 
make available any other documents in a proceeding based on non-
cooperation, subject only to the general requirement to make available 
material exculpatory evidence on the issue of non-cooperation.
    We anticipate that non-cooperation proceedings will narrowly focus 
on such things as, for example, the demand with which there has been no 
compliance, or the testimony that is allegedly false. The only 
documents that would be relevant in those examples are the documents 
that the Division would use to prove non-cooperation and any documents 
that would tend to show that the person did comply with the demand, or 
that that person's testimony was not false. Under the rule, all such 
documents must be made available to the respondent in a non-cooperation 
proceeding.
    We have declined, however, to adopt a ``relevance'' standard and 
open the door to broader disputes about what documents might be 
``relevant.'' Liability for non-cooperation is independent of whether 
the party has otherwise violated any law, rule, or standard enforceable 
by the Board. Non-cooperation is not excusable on the basis of a 
conviction that the staff's investigation is misguided. We do not 
intend for non-cooperation proceedings to become a forum for 
demonstrating, through broad access to the investigative record, that 
the investigation is flawed and that something less than full 
cooperation was therefore justified. A non-cooperation proceeding 
focuses only on the obligation to cooperate, which is not a qualified 
obligation that varies depending upon one's view of the merits of the 
investigation.
    Moreover, we intend that non-cooperation proceedings will generally 
be commenced as soon as the grounds for such a proceeding appear, 
rather than waiting until the conclusion of an investigation.\2\ An 
important objective of a non-cooperation proceeding will be not only to 
impose a sanction if appropriate, but also to compel the cooperation at 
a time when it is still meaningful to the investigation. At that point 
in time, to require the staff to make available any portion of the 
investigative record other than that directly bearing on non-
cooperation could compromise the investigation, and might also 
compromise investigations by the Commission or other authorities. 
Indeed, to allow access to any portion of the investigative record in 
the course of a non-cooperation proceeding would supply a 
counterproductive incentive that might cause some persons to fail to 
cooperate specifically for the purpose of obtaining access to that 
record.
---------------------------------------------------------------------------

    \2\ The rules do not preclude the Board from commencing a 
proceeding for non-cooperation after an investigation and 
prosecuting it separately from or consolidated with a proceeding for 
alleged violations of laws, rules, or standards enforceable by the 
Board. For example, the Board may, in its discretion, institute 
proceedings for violations of the Act and simultaneously institute 
proceedings for non-cooperation in an investigation against the same 
respondent for conduct (for example, false testimony) during the 
investigation.
---------------------------------------------------------------------------

    Rule 5422(a)(3) applies to registration disapproval proceedings 
commenced pursuant to Rule 5500. Rule 5422(a)(3) requires the Division 
of Registration and Inspections to make available all documents 
obtained by the Division in connection with the registration 
application prior to the notice of hearing.
    Rule 5422(a) includes specific exceptions for, and must be read in 
conjunction with, Rule 5422(b), which describes four categories of 
documents that the Division may withhold from a respondent even if Rule 
5422(a) would otherwise require the Division to make the document 
available. Moreover, withholding documents may trigger the procedural 
requirements of Rule 5422(c). We therefore individually address each of 
the four categories of documents that may be withheld under Rule 
5422(b), and any Rule 5422(c) procedures related to withholding those 
documents.
    Under Rule 5422(b)(1)(i), the Division need not make available any 
document prepared by a member of the Board or the Board's staff that 
has not been disclosed to any person other than Board members, Board 
staff, or persons retained by the Board or Board staff to provide 
services in connection with the investigation, disciplinary proceeding, 
or hearing on disapproval of registration. Withholding such documents 
does not trigger any

[[Page 15406]]

procedural requirements under Rule 5422(c).
    Under Rule 5422(b)(1)(ii), the Division need not make available any 
other document that, while not encompassed within the first category, 
is nevertheless protected by a privilege or by the attorney work 
product doctrine. This category would include, for example, documents 
that were privileged in the hands of the person who supplied them to 
the Board, but who supplied them pursuant to an understanding that 
doing so would not otherwise waive the privilege. As to this category 
of withheld documents, Rule 5422(c)(1) requires the Division to supply 
to the hearing officer and each respondent a log providing all of the 
same information that Rule 5106 requires a person to submit when 
asserting a privilege against production to the Board.
    Under Rule 5422(b)(1)(iii), the Division need not make available 
any document that would disclose the identity of a confidential source. 
The rule also provides, however, that the staff may not withhold a 
document on this basis if doing so results in withholding material 
exculpatory evidence. Rule 5422(c)(2) requires the Division to provide 
the hearing officer with a list of any documents withheld to protect 
the identity of a confidential informant. The rule requires the 
Division to provide the same list to each respondent, although the 
staff may redact as much information as necessary from that list 
(including, in appropriate circumstances, all information) to protect 
the interests related to the Division's reason for withholding the 
document. The hearing officer, in his or her discretion, may review any 
such document in camera to assess the grounds for withholding it and to 
assess whether it includes material exculpatory evidence.
    Under Rule 5422(b)(1)(iv), the Division need not make available any 
other document that the staff identifies for the hearing officer's 
consideration as to whether the document may be withheld as not 
relevant to the subject matter of the proceeding or otherwise for good 
cause shown. We believe that such a general exception is necessary for 
categories of documents that the staff may occasionally have but may 
not intend to use as evidence. For example, the staff might have 
documents supplied by a foreign regulator under a confidentiality 
agreement. If the staff does not intend to use them, the ``good cause'' 
exception allows the staff to withhold them to honor the 
confidentiality agreement. Again, however, the good cause exception 
does not allow the staff to withhold a document that contains material 
exculpatory evidence. Rule 5422(c)'s procedures, described above with 
respect to confidential informant documents, apply in the same fashion 
to documents withheld as irrelevant or otherwise for good cause.
    In addition to the procedural protections described above, Rule 
5422(b)(2) provides an over-arching restriction on what the Division 
may withhold. It provides that nothing in paragraph (b), and nothing in 
paragraph (a)(2)'s limitation on what the staff must make available in 
a non-cooperation proceeding, authorizes the interested division to 
withhold documents that contain material exculpatory evidence.
    Rule 5422(d) governs the time period in which the staff must make 
the documents available. Under the rule, the staff must make the 
documents available within seven days of the institution of a 
proceeding under Rule 5200(a)(3) for non-cooperation, and within 14 
days of the institution of proceedings under Rules 5200(a)(1), 
5200(a)(2), and 5500.
    Rule 5422(e) provides that the staff shall make the documents 
available at the Board's office where the documents are normally 
maintained, or at such other place as the parties agree upon in 
writing. Rule 5422(d) further provides that, except as subject to any 
specific contrary agreement with the staff, a party shall not have 
custody of the documents and shall not remove the documents from the 
Board's offices, though the party may make and retain copies of the 
documents. Rule 5422(f) provides that a party wishing to make copies of 
the documents must bear the cost of copying.
    Rule 5422(g) addresses any failure by the interested division to 
make available any document that these rules required it to make 
available. The rule provides that, in that event, no person shall be 
entitled to a rehearing or redecision in a matter already heard or 
decided unless that person first establishes that the failure to make 
the document available did not constitute harmless error.
    A note following Rule 5422 points out that the obligations of the 
interested division under this rule extend only to documents obtained 
by that division, and that this Rule does not require the interested 
division to make available documents located only in the files of other 
divisions or offices. The proviso, however, is not intended to relieve 
the interested division of the obligation to make available any such 
document that the division knows of and intends to introduce as 
evidence. Any such document should be treated, for purposes of Rule 
5422, just as if it were physically located in the division's files.

Rule 5423--Production of Witness Statements

    Rule 5423(a) provides that a respondent may move that the 
interested division produce any statement of a person, called or to be 
called as a witness by the division, that pertains or is expected to 
pertain to his or her direct testimony and that would be required to be 
produced pursuant to the Jencks Act, 18 U.S.C. 3500, if the Board were 
a governmental entity. The hearing officer shall have authority to 
grant such a motion and require production of any such statement. Rule 
5423(b) provides, however, that the interested division's failure to 
produce any such statement shall not be grounds for rehearing or 
redecision of a matter already heard or decided unless the respondent 
first establishes that the failure to produce the statement was not 
harmless error. The rule is based on Rule 231 of the Commission's Rules 
of Practice.

Rule 5424--Accounting Board Demands and Commission Subpoenas

    Rule 5424 provides for mechanisms by which any party may seek to 
secure testimony or evidence relevant to a proceeding. Rule 5424(a) 
describes procedures by which any party may seek to have an accounting 
board demand served on any registered public accounting firm or 
associated person of such a firm, or seek to have an accounting board 
request served on any other person. Under the rule, the party must make 
a request to the hearing officer for issuance of the accounting board 
demand or accounting board request. In the event of the hearing 
officer's unavailability, the party may present its request, through 
the Secretary, to any member of the Board, or any other person 
designated by the Board to issue such demands and requests.
    The application for an accounting board demand or accounting board 
request may be denied, or may be granted with modifications, if it is 
unreasonable, oppressive, excessive in scope, or unduly burdensome. The 
rule provides that a person whose application for an accounting board 
demand or accounting board request has been denied or modified may not 
make the same application to another person and may not apply to the 
Board for a Commission subpoena covering the same testimony, documents, 
or information as the denied application covered or as was excluded by 
modification in granting an application.

[[Page 15407]]

Rule 5424(a) also provides that a party who applies for an accounting 
board demand or accounting board request to summon a witness shall pay 
the witness's reasonable expenses.
    Rule 5424(b) provides that the Board, on its own initiative or on 
the application of any party, may seek issuance of a subpoena by the 
Commission to any person in order to seek to secure testimony or 
evidence that the Board considers relevant or material to the 
proceeding. Unlike Rule 5424(a), which provides that an application for 
an accounting board demand or request shall be granted if certain 
criteria are satisfied, Rule 5424(b) leaves entirely to the discretion 
of the hearing officer or other Board designee whether to grant a 
party's request to seek a Commission subpoena. The rule does not create 
any entitlement, under any circumstances, to have the Board seek a 
Commission subpoena on behalf of a party. Moreover, if the Board does 
seek a Commission subpoena requested by a party, the rule does not, and 
should not be understood to, give rise to or justify any expectation 
about how or whether the Commission will respond to the request. 
Accordingly, the rule does not create any entitlement to have any Board 
proceedings stayed or delayed while any such request is pending.

Rule 5425--Depositions To Preserve Testimony for Hearing

    Rule 5425 provides procedures by which a party may seek a 
deposition for the purpose of preserving for a hearing the testimony of 
a person who may be unavailable to appear at the hearing. Rule 5425 
does not provide for depositions taken for the purpose of discovery. 
The rule is adapted from Rule 233 of the Commission's Rules of 
Practice.
    Under Rule 5425(a), a party seeking to take a deposition to 
preserve testimony must make a written motion setting out the reasons 
why the deposition is necessary and specifically including the reasons 
that the party believes the witness will be unable to testify at the 
hearing. The motion must also identify the witness, the matters on 
which the party intends to question the witness, and the proposed time 
and place of the deposition. Under Rule 5425(b), the hearing officer 
may grant the motion if the hearing officer finds that the witness will 
likely give testimony material to the proceeding, that it is likely the 
witness will be unable to appear at the hearing because of age, 
sickness, infirmity, imprisonment or other disability, or will 
otherwise be unavailable, and that the taking of the deposition will 
serve the interests of justice. Rules 5425(c) through (e) describe 
certain procedures governing any such deposition allowed by the hearing 
officer.

Rule 5426--Prior Sworn Statements of Witnesses in Lieu of Live 
Testimony

    Rule 5426 provides procedures by which a party may introduce into 
evidence a witness's prior sworn statement in lieu of live testimony by 
the witness. Rule 5426 is not a limitation on any party's ability to 
introduce a prior sworn statement with respect to a witness who appears 
in person and testifies (for purposes of impeachment, for example). But 
Rule 5426 does limit the circumstances in which a party may introduce a 
prior sworn statement in lieu of live testimony by the witness.
    Rule 5426 identifies five circumstances in which the hearing 
officer may grant a motion to introduce a prior sworn statement in lieu 
of live testimony: (1) If the witness is dead, (2) if the witness is 
outside of the United States, unless it appears that the witness's 
absence from the country was procured by the party offering the prior 
sworn statement, (3) if the witness is unable to attend because of age, 
sickness, infirmity, imprisonment or other disability, (4) if the party 
offering the prior sworn statement has been unable to procure the 
attendance of the witness by accounting board demand, or (5) if, in the 
discretion of the Board or the hearing officer, it would be desirable, 
in the interests of justice, to allow the prior sworn statement to be 
used. In granting a motion to introduce a prior sworn statement, a 
hearing officer has the discretion, under Rule 5426, to require that 
all relevant portions of the statement be included or to exclude 
portions of the statement not relevant to the proceeding.

Rule 5427--Motion for Summary Disposition

    Rule 5427 provides for any party to make a motion for summary 
disposition. Under Rule 5427(a), the interested division may make such 
a motion only after the party against whom the motion is directed has 
filed an answer and has had documents made available to it pursuant to 
Rule 5422. Under Rule 5427(b), a respondent may make such a motion at 
any time.
    Rule 5427(c) requires that any party that would move for summary 
disposition must first request and attend a pre-motion conference with 
the hearing officer. Under the rule, the hearing officer would, at the 
conference, set a due date for the motion. The hearing officer has 
discretion either to set a due date for a response to the motion or to 
spare the opposing party the need to prepare a response until the 
hearing officer has reviewed the motion. If the hearing officer chooses 
that approach, the hearing officer shall review the motion and then 
either deny the motion without any response being filed or shall give 
the opposing party an opportunity to file a response.
    Rule 5427(d) provides that a hearing officer shall grant a motion 
for summary disposition if the pleadings, depositions, and admissions 
on file, together with any affidavits, show that there is no genuine 
issue as to any material fact and that the moving party is entitled to 
a disposition as a matter of law. A hearing officer may also enter a 
summary disposition that is limited to the issue of liability even 
though there may be a genuine and contested issue as to the appropriate 
sanction. Rule 5427(d) also provides that the denial of a motion for 
summary disposition is not subject to interlocutory appeal. Rule 
5427(e) governs page limitations on briefs related to motions for 
summary disposition.

Rule 5440--Record of Hearings

    Rule 5440 describes procedures related to the creation, correction, 
and availability of hearing transcripts.

Rule 5441--Evidence: Admissibility

    Rule 5441 provides that a hearing officer may receive relevant 
evidence and shall exclude all evidence that is irrelevant, immaterial 
or unduly repetitious. The standard in Rule 5441 is based on the 
Administrative Procedure Act.\3\ In addition, the same standard is used 
in the Commission's Rules of Practice.\4\ By using this phrase in Rule 
5441, the Board intends for evidentiary issues in PCAOB hearings to be 
addressed in a generally similar manner to Commission administrative 
hearings, and the administrative hearings of most other administrative 
agencies. Rule 5441 is not intended to limit a hearing officer's 
authority to exclude or allow evidence based on reasonable principles 
of admissibility, but is intended to allow a hearing officer reasonable 
flexibility.\5\ In particular, the

[[Page 15408]]

three bases in the rule--irrelevance, immateriality, and undue 
repetition--are not the only permissible bases on which a hearing 
officer may exclude evidence under administrative practice. Nor does 
the standard in Rule 5441 preclude a hearing officer from referring to 
principles from the Federal Rules of Evidence or other authoritative 
sources in exercising his or her discretion to resolve evidentiary 
issues.\6\
---------------------------------------------------------------------------

    \3\ 5 U.S.C. 556(c)(3) and (d).
    \4\ See SEC Rule of Practice 320, 17 C.F.R. 201.320 (``The 
Commission or the hearing officer may receive relevant evidence and 
shall exclude all evidence that is irrelevant, immaterial or unduly 
repetitious.'')
    \5\ See, e.g., Commission Opinion: Wheat, First Securities, 
Inc.; Rel. No. 34-48378, (August 20, 2003) (holding that hearsay is 
admissible in a Commission administrative hearing, but noting that 
the ``record shows the probative and reliable nature of this 
evidence'').
    \6\ See id. (explaining that same result would have been reached 
had the administrative law judge applied the Federal Rules of 
Evidence).
---------------------------------------------------------------------------

Rule 5442--Evidence: Objections and Offers of Proof

    Rule 5442(a) provides that any objections must be made on the 
record and must be in short form, stating the grounds relied upon. 
Under Rule 5442(a) any exception to a hearing officer's ruling on an 
objection need not be noted at the time of the ruling but will be 
deemed waived on appeal to the Board unless the exception was raised 
(1) on interlocutory review under Rule 5461, (2) in a proposed finding 
or conclusion filed under Rule 5445, or (3) in a petition for Board 
review of an initial decision filed under Rule 5460. Rule 5442(b) 
provides that when evidence is excluded from the record, the party 
offering the evidence may make an offer of proof, which shall be 
included in the record. The excluded material itself would be retained 
under Rule 5202(b).

Rule 5443--Evidence: Presentation Under Oath or Affirmation

    Rule 5443 provides that witnesses at a hearing shall testify under 
oath or affirmation.

Rule 5444--Evidence: Rebuttal and Cross-Examination

    Rule 5444 provides that a party may present its case or defense by 
oral or documentary evidence, submit rebuttal evidence, and conduct 
such cross-examination as, in the discretion of the Board or the 
hearing officer, may be required for a full and true disclosure of the 
facts. The rule provides that the Board or hearing officer shall 
determine the scope and form of evidence, rebuttal evidence, and cross-
examination in any proceeding. The rule is adapted from Rule 326 of the 
Commission's Rules of Practice.

Rule 5445--Post-Hearing Briefs and Other Submissions

    Rule 5445 provides procedures relating to the submission of post-
hearing briefs and other submissions.

Rule 5460--Board Review of Determinations of Hearing Officers

    Rule 5460 concerns Board review of initial decisions. Under Rule 
5460, a party may obtain Board review of an initial decision by filing 
a timely petition setting forth specific findings and conclusions of 
the initial decision to which the party takes exception and setting 
forth the supporting reasons for each exception. To be timely, a 
petition must be filed within 10 days of an initial decision in a 
proceeding commenced under Rule 5200(a)(3) for non-cooperation, and 
within 30 days of an initial decision in other proceedings. The rule is 
based in part on Rule 410 of the Commission's Rules of Practice.
    Also under Rule 5460(a), if one party submits a timely petition for 
review, any other party then has an additional ten days to submit its 
own petition for review, even if its petition raises different issues 
than those raised by the first party to submit a petition. The purpose 
of this rule is to avoid the unnecessary expenditure of Board resources 
in cases where no party would appeal if it knew that the other party 
would not appeal, but in which one or more parties nevertheless appeal 
because of a concern that failing to appeal will deprive it of the 
opportunity to raise its issues in any appeal lodged by another party. 
Under Rule 5460(a), no party need guess about the other party's 
intentions, and no party sacrifices anything by waiting to see whether 
another party files a timely petition for review.
    Rule 5460(b) provides that the Board may, on its own initiative, 
order review of all or any portion of an initial decision even if no 
party seeks review. The Board may order such review, however, only if 
it does so before the initial decision would otherwise become the final 
decision of the Board pursuant to the operation of Rule 5204(c). In 
effect, this allows the Board to order review on its own initiative for 
a period of 20 days beyond the deadline for a party to petition for 
review. The rule is based in part on Rule 411 of the Commission's Rules 
of Practice. Rules 5460(c) through (e) set out procedural matters 
related to Board review.

Rule 5461--Interlocutory Review

    Rule 5461 concerns Board interlocutory review of hearing officer 
rulings. Under Rule 5461(a), the Board will not grant interlocutory 
review absent extraordinary circumstances, but also may direct at any 
time that any matter or ruling be submitted to the Board for review. 
Rule 5461(b) provides that a hearing officer shall certify a ruling for 
interlocutory review only if (1) the ruling would compel testimony of 
Board members, officers or employees or the production of documentary 
evidence in their custody, or (2) the ruling involves a controlling 
question of law as to which there is substantial ground for difference 
of opinion and immediate review of the order may materially advance 
completion of the proceeding. Rule 5461(c) provides that neither an 
application for, nor the granting of, interlocutory review shall stay 
the proceeding unless otherwise ordered by the hearing officer or the 
Board. The rule is adapted from Rule 400 of the Commission's Rules of 
Practice and 28 U.S.C. 1292(b).

Rule 5462--Briefs Filed With the Board

    Rule 5462 describes procedural requirements related to briefs and 
the filing of briefs. The rule is adapted from Rule 450 of the 
Commission's Rules of Practice.

Rule 5463--Oral Argument Before the Board

    Rule 5463 concerns oral argument before the Board. Under Rule 
5463(a), the Board may order oral argument, with or without the motion 
of a party, on any matter. The rule provides that, in general, motions 
for oral argument will be granted unless exceptional circumstances make 
oral argument impractical or inadvisable. Rules 5463(b)-(c) provide for 
procedures relating to oral argument. Rule 5463(d) provides that a 
member of the Board who is not present for oral argument may 
nevertheless participate in the Board's decision as long as the Board 
member reviews a transcript of the argument before participating in the 
decision. The rule provides that any party may request oral argument, 
but the party must do so in its initial brief on the merits.

Rule 5464--Additional Evidence

    Rule 5464 provides that the Board may, upon its own motion or the 
motion of a party, allow the submission of additional evidence in 
connection with the Board's review of an initial decision. The rule is 
adapted from Rule 452 of the Commission's Rules of Practice.

Rule 5465--Record Before the Board

    Rule 5465 provides that the Board shall determine each matter on 
the basis of the record and provides certain requirements concerning 
the record. The rule is adapted from Rule 460 of the Commission's Rules 
of Practice.

[[Page 15409]]

Rule 5466--Reconsideration

    Rule 5466 provides procedures by which a party may seek 
reconsideration of a Board decision. The rule is adapted from Rule 470 
of the Commission's Rules of Practice.

Rule 5467--Receipt of Petitions for Commission or Judicial Review

    Rule 5467 is intended to ensure that the Board has notice of any 
petitions filed by a party for review of a Board decision, or for 
review of a Commission order with respect to a Board decision. Rule 
5467 is separate from, and in addition to, any notice or service 
requirements that the Commission imposes with respect to petitions for 
review filed with the Commission. Rule 5467, a registered public 
accounting firm must notify the Secretary, or any requirements of the 
Federal Rules of Appellate Procedure or any court within 10 days after 
the firm or any person associated with the firm files with the 
Commission a petition for review of a Board decision or files a 
petition for court review of a Commission order with respect to such a 
sanction. The rule is modeled in part on Rule 490 of the Commission's 
Rules of Practice.
    A firm will generally have in place a mechanism for regular 
reporting to the Board, and the Board will have in place a mechanism 
for receiving reports from a firm. These things generally will not be 
true with respect to individuals who are associated persons. An 
associated person who is in the position of petitioning for review of a 
sanction is a person who, necessarily, has been sanctioned. That 
sanction--and whether it becomes final by virtue of an appeal period 
running without the person having petitioned for review--is something 
that the firm must necessarily monitor since it affects how the firm 
may or must interact with the associated person. Accordingly, we expect 
the firm as a matter of course to know whether and when its associated 
person has petitioned for review. The rule leaves to the firm the 
creation and enforcement of internal procedures to ensure that its 
associated persons report the information to the firm.

Rule 5468--Appeal of Actions Made Pursuant to Delegated Authority

    As directed by Section 101(g)(2) of the Act, Rule 5468 provides 
procedures for seeking Board review of any action by someone other than 
the Board pursuant to authority delegated by the Board. The rule 
requires a person to act within five days to provide notice to the 
Board that the person intends to seek review. The rule allows the 
person another five days beyond that notice in which to submit the 
petition for review. The rule also includes a provision designed to 
ensure that a person will not unfairly be denied an opportunity to 
petition for review if, through no fault of the person, service of 
notice of the staff action in question was delayed in reaching them.

Rule 5469--Board Consideration of Actions Made Pursuant to Delegated 
Authority

    Rule 5469 provides procedures relating to Board consideration of 
petitions for review of actions made pursuant to authority delegated by 
the Board. Rule 5469(a) provides that the Board may act summarily on 
the basis of the petition, or on the basis of the petition and any 
staff response, or may require additional statements in support of or 
opposition to the petition. Rule 5469(b) provides that the filing of a 
petition for review will not stay the effect of any staff action unless 
specifically ordered by the Board.

Part 5--Hearings on Disapproval of Registration Applications

    Part 5 of the Board's Rules on Investigations and Adjudications 
consists of Rules 5500 and 5501. These rules relate to adjudications on 
certain registration applications.

Rule 5500--Commencement of Hearing on Disapproval of a Registration 
Application

    Rule 5500 describes the procedure relating to the commencement of a 
Board adjudication proceeding to consider an application for 
registration. Under the Board's registration rules, if the Board is 
unable to make the determination necessary to approve a registration 
application, the Board will provide the applicant with notice of a 
hearing. Rule 5500 provides the procedures through which such a 
proceeding would be commenced.
    Specifically, Rule 5500 provides that a proceeding would commence 
after the Board provides a notice of hearing under Rule 2106(b)(2)(ii) 
and the applicant timely files a request for a hearing date and notice 
of appearance, rather than opting to treat the Board's notice of 
hearing as a denial of the application. Under Rule 5500(b), a request 
for hearing must include a statement that the applicant has elected not 
to treat the notice of hearing as a disapproval of its application and 
a statement describing with specificity why the applicant believes that 
the Board should not disapprove the application.

Rule 5501--Procedures for a Hearing on Disapproval of a Registration 
Application

    Rule 5501 provides that proceedings commenced pursuant to Rule 5500 
are subject to the procedures set out in Parts 2 and 4 of Section 5 of 
the Board's rules.
(b) Statutory Basis
    The statutory basis for the proposed rules is Title I of the Act.

B. Board's Statement on Burden on Competition

    The Board does not believe that the proposed rules will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rules provide 
procedures by which the Board will carry out its authority and 
responsibility to conduct investigations and disciplinary proceedings. 
The proposed rules will provide for procedural fairness and for 
uniformity of procedures governing investigations and disciplinary 
proceedings with respect to all persons subject to obligations imposed 
by the Board in those investigations and proceedings. The proposed 
rules implement the Act's provisions on investigations and discipline 
without imposing any burden on competition.

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

    The Board released the proposed rules for public comment in PCAOB 
Release No. 2003-012 (July 28, 2003). A copy of PCAOB Release No. 2003-
012 and the comment letters received in response to the PCAOB's request 
for comment are available on the PCAOB's web site at pcaobus.org. The 
Board received 17 written comments. The Board has clarified and 
modified certain aspects of the proposed rules in response to comments 
it received, as discussed below.
    One commenter suggested that the Board add a good standing 
requirement to the definition of ``counsel.'' The Board incorporated 
that suggestion in the final rule.
    The Board proposed a definition of ``hearing officer'' that 
included a panel of Board members constituting less than a quorum of 
the Board, an individual Board member, or any other person duly 
authorized by the Board to preside at a hearing. Several commenters 
expressed the view that neither Board members nor staff of the 
interested division should ever serve as hearing officers. After 
considering those comments, the Board adopted a final rule that 
excludes the possibility of any Board member or

[[Page 15410]]

staff of the interested division serving as a hearing officer.
    Proposed Rule 5103(b) would have required that unless otherwise 
requested or permitted, the documents produced in response to an 
accounting board demand be the originals. Commenters stated that 
production of original documents, including workpapers, can be 
disruptive to ongoing audit engagements and suggested that the rule 
provide for production of copies rather than originals. To accommodate 
this concern, the Board modified the rule to permit production of 
copies unless otherwise specified in the accounting board demand.
    In response to a comment on proposed Rule 5108, concerning the 
confidentiality of materials obtained by the Board, the Board deleted 
the phrase ``unless otherwise ordered by the Board or the Commission'' 
from the beginning of the rule. This change makes clear that the rule 
is not intended to suggest any Board authority to make materials public 
other than in a manner consistent with the Act.
    With respect to proposed Rule 5110, commenters expressed concern 
about the prospect of a non-cooperation proceeding for providing 
testimony that ``omits material information.'' After consideration of 
the comments, the Board revised the scope of the rule on this point. 
The Board deleted the language concerning testimony that is false or 
misleading or that omits material information. In its place, the rule 
now uses the language of the federal perjury statute, 18 U.S.C. Sec.  
1623. The final rule provides for instituting a non-cooperation 
proceeding where it appears to the Board that a person may have 
``knowingly made any false material declaration or made or used any 
other information, including any book, paper, document, record, 
recording, or other material, knowing the same to contain any false 
material declaration.''
    Moreover, in response to a request for clarification, the Board 
added an additional point to the list of items that may warrant 
institution of non-cooperation proceedings. Specifically, the final 
rule states that the Board may authorize non-cooperation proceedings 
where it appears that a firm or associated person may have abused the 
Board's processes for the purpose of obstructing an investigation.
    This new provision grew out of a comment made in connection with 
Rule 5402. The commenter suggested that the Board should impose fines 
for frivolous interlocutory appeals. The Board agreed that abuse of the 
Board's processes is a form of failing to ``otherwise cooperate'' and 
added this provision to Rule 5110 to provide notice that the Board will 
impose sanctions for this form of non-cooperation.
    Rule 5200(c) provides that the Board will observe certain 
separation of functions principles. The proposed rule provided that any 
Board employee or agent engaged in investigative or prosecutorial 
functions for the Board in a proceeding could not, in that same 
proceeding or a factually related proceeding, participate or advise in 
the decision, or in Board review of the decision, except as a witness 
or counsel in the proceeding. One commenter suggested that this rule 
should clearly exclude all enforcement personnel from participating in 
the adjudication of a disciplinary proceeding, whether or not they had 
an investigative or prosecutorial role in the matter. The Board was 
persuaded that this represents a good policy choice and revised the 
rule accordingly. The final rule provides that neither the staff of the 
Division of Enforcement and Investigations, nor any other staff who 
engaged in investigative or prosecutorial functions on a matter, may 
participate or advise in the decision, or the review of the decision, 
except as a witness or counsel. In addition, the rule provides, as 
proposed, that a hearing officer may not be responsible to or subject 
to the supervision or direction of an employee or agent engaged in the 
performance of investigative or prosecuting functions for the Board.
    One commenter expressed a concern that the proposed rules do not 
provide for the burdens of proof in a disciplinary proceeding. In 
response, the Board added a new Rule 5204(a). Rule 5204(a) provides 
that in any disciplinary proceeding instituted pursuant to Rule 
5200(a)(1), Rule 5200(a)(2), or Rule 5200(a)(3), the interested 
division shall bear the burden of proving an alleged violation or 
failure to supervise by a preponderance of the evidence.
    Rule 5304 concerns the imposition of summary suspensions for 
registered firms or associated persons that fail to pay a money penalty 
imposed by the Board. Rule 5304(a), as proposed, required only that the 
Board provide written notice at least seven days before any such 
suspension. One commenter understood the proposal to mean that a firm 
or associated person might have only seven days between the date the 
sanction becomes final and the date of summary suspension under the 
rule. The commenter suggested that the rule provide for at least 30 
days between the sanction becoming final and the Board sending the 
seven-day notice.
    The commenter's suggestion was consistent with what was intended by 
the proposal, and the Board modified the rule to make that intent 
explicit. The final rule allows a 30-day period for payment after a 
money penalty becomes final. If payment is not made in that 30-day 
period, the Board may send a notice that failure to make payment within 
seven days will result in summary suspension.
    Proposed Rule 5401(c)(4) provided that an individual's withdrawal 
from representation of a party would be permitted only with the 
approval of the Board or the hearing officer. Commenters suggested that 
the rules should provide that permission to withdraw would not be 
unreasonably withheld.
    The Board is sensitive to the importance of counsel being free to 
withdraw in appropriate circumstances, and the importance of a party 
being free to change counsel in appropriate circumstances. The Board is 
also mindful of the ways in which an ostensible desire to withdraw or 
to change counsel can be used to delay or disrupt proceedings. To 
provide some assurance of the limited scope within which the Board 
intends for the Board or hearing officer to withhold permission to 
withdraw, the Board adopted the commenters' suggestion that the rule 
provide that permission to withdraw would not be unreasonably withheld.
    Rule 5403 prohibits a hearing officer from having ex parte 
communications with a person or party, except to the extent permitted 
by law or by the Board's rules for the disposition of ex parte matters. 
The proposed rule also prohibited a party from having ex parte 
communication with the Board or any Board member on a fact in issue, 
except as permitted by law or by the Board's rules. Commenters 
suggested that the restriction should extend beyond the interested 
division to any Board staff that has had substantial involvement in a 
matter. The Board has revised Rule 5403(b) to impose the restriction 
not only on a party (including the interested division) but also on any 
Board staff that substantially assists the interested division on the 
particular matter, whether before or during the hearing,
    Rule 5420 provides that certain entities may seek leave to request 
a stay of a Board disciplinary proceeding. Under the proposed rule, the 
entities that could seek such a stay would have been the Commission, 
the United States Department of Justice or any United States Attorney's 
Office, and any criminal prosecutorial authority of a state or 
political subdivision of a state.

[[Page 15411]]

One commenter suggested that the list should be expanded to include an 
appropriate state regulatory authority. The Board agreed with that 
comment and modified the rule accordingly.
    Rule 5422 governs the obligations of Board staff to make documents 
available to a party for inspection and copying. Under the rule, the 
staff's obligation varies according to whether the proceeding is 
commenced under Rule 5200(a)(1)-(2) for violations or failures 
reasonably to supervise, Rule 5200(a)(3) for non-cooperation, or Rule 
5500 concerning disapproval of a registration application. In response 
to comments, the Board made several changes to Rule 5422. In 
particular, the Board revised the structure of the rule in response to 
suggestions that the rule should more closely track the Commission's 
approach with respect to so-called Brady material. The Board added 
provisions to reinforce the principle that material exculpatory 
evidence will not be withheld even if the confidential informant 
privilege or other good cause would otherwise justify withholding it. 
The Board also modified the rule to provide that documents made 
available in a non-cooperation proceeding will include any documents 
that contain material exculpatory evidence on the issue of non-
cooperation. Finally, the Board revised the rule to require the 
Division to provide a privilege log with respect to a certain category 
of documents.

III. Date of Effectiveness of the Proposed Rules and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the Board consents, the Commission will:
    (A) By order approve the proposed rules; or
    (B) Institute proceedings to determine whether the proposed rules 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed 
rules are consistent with the Act.\7\ Comments may be submitted 
electronically or by paper. Electronic comments may be submitted by: 
(1) Electronic form on the SEC Web site (http://www.sec.gov) or (2) e-
mail to [email protected]. Mail paper comments in triplicate to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-0609. All submissions should 
refer to File No. PCAOB-2003-07; this file number should be included on 
the subject line if e-mail is used. To help us process and review your 
comments more efficiently, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site (http://www.sec.gov). Comments are also available for public inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
NW., Washington, DC 20549. We do not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All comments should be submitted 
on or before April 15, 2004.
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    \7\ The Commission notes, in connection with proposed Rule 
5424(b), that the issuance of Commission subpoenas in connection 
with PCAOB disciplinary proceedings would be a novel and potentially 
complex arrangement, and the Commission staff has discussed with the 
PCAOB staff the need to develop and implement additional rules and 
procedures regarding the handling of subpoena requests. These 
additional rules and procedures would address, among other things, 
the steps that the parties to PCAOB proceedings would need to follow 
prior to applying for Commission subpoenas as well as the 
Commission's processes for handling such requests once they are 
received. We have discussed with the PCAOB staff the fact that Rule 
5424(b) will not be available for use in PCAOB proceedings until 
such additional rules and procedures have been developed and 
implemented to the satisfaction of the Commission. Comments are 
specifically solicited on Rule 5424(b) in light of applicable 
statutory, due process and other legal considerations, including any 
relevant distinctions between the functions of the PCAOB and those 
of self-regulatory organizations.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-6706 Filed 3-24-04; 8:45 am]
BILLING CODE 8010-01-P