[Federal Register Volume 84, Number 32 (Friday, February 15, 2019)]
[Notices]
[Pages 4594-4597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-02450]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85090; File No. PCAOB-2019-01]
Public Company Accounting Oversight Board; Notice of Filing of
and Immediate Effectiveness of Proposed Bylaw and Rule Amendments To
Provide That the Board's Appointment and Removal of Hearing Officers
Are Subject to Commission Approval
February 11, 2019.
Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the
``Act''), 15 U.S.C. 7217(b), notice is hereby given that on January 29,
2019, the Public Company Accounting Oversight Board (the ``Board'' or
the ``PCAOB'') filed with the Securities and Exchange Commission (the
``SEC'' or the ``Commission'') the proposed amendments described in
items I and II below, which items have been prepared by the Board. The
Commission is publishing this notice to solicit comments on the
proposed amendments from interested persons.
I. Board's Statement of the Terms of Substance of the Proposed
Amendments
On December 20, 2018, the Board adopted amendments to its bylaws
and rules (collectively, the ``proposed amendments'') to provide that
the PCAOB's appointment and removal of PCAOB hearing officers are
subject to Commission approval and to make related clarifying and
conforming changes to the PCAOB's rules. Specifically, the Board is
amending Article VI of its bylaws and PCAOB Rules 1001(h)(i), 5200, and
5402. The proposed amendments are concerned
[[Page 4595]]
solely with the administration of the PCAOB in that they relate to the
employment relationship between the Board and its hearing officers, its
interaction with the Commission in the Commission's performance of
oversight of the PCAOB, and the clarification of the delegations of
authority by the Board to PCAOB hearing officers.
The text of the proposed amendments appears in the Board's SEC Form
19b-4 filing and is available on the Board's website at https://pcaobus.org/Rulemaking/Pages/Docket045 and at the Commission's Public
Reference Room.
II. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Amendments
In its filing with the Commission, the Board included statements
concerning the purpose of, and basis for, the proposed amendments and
stated that the amendments are concerned solely with the administration
of the PCAOB. The text of these statements may be examined at the
places specified in Item IV below. The Board has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
A. Board's Statement of the Purpose of, and Statutory Basis for, the
Proposed Amendments
1. Purpose
The Board's duties under the Act include acting on registration
applications of public accounting firms that prepare audit reports for
issuers, brokers, or dealers,\1\ and conducting disciplinary
proceedings concerning, and imposing appropriate sanctions where
justified upon, registered public accounting firms and their associated
persons.\2\ In carrying out these duties, the Board may direct that a
PCAOB hearing officer preside over a disciplinary or other
proceeding.\3\ The Board's authority to do so derives from Section
101(f)(4) of the Act, permitting the Board, subject to Commission
oversight under Section 107 of the Act, ``to appoint such employees,
accountants, attorneys, and other agents as may be necessary or
appropriate, and to determine their qualifications, define their
duties, and fix their salaries or other compensation.'' Section
101(g)(2) of the Act further authorizes that ``[t]he rules of the Board
shall, subject to the approval of the Commission . . . permit, as the
Board determines necessary and appropriate, delegation by the Board of
any of its functions to an . . . employee of the Board, . . . including
functions with respect to hearing, determining, ordering, certifying,
reporting, or otherwise acting as to any matter.'' In 2004, the
Commission approved the Board's proposed rules relating to
investigations and adjudications, authorizing creation of the PCAOB's
hearing officer position.\4\
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\1\ The PCAOB has oversight authority with respect to audits of
brokers and dealers that are registered with the SEC. See Sections
110(3) and (4) of the Act, 15 U.S.C. 7220(3) and (4).
\2\ See, e.g., Sections 101(c)(1) & (4), 102(c), 105(a) &
(c)(1)-(3) of the Act, 15 U.S.C. 7211(c)(1) & (4), 7212(c), 7215(a)
& (c)(1)-(3).
\3\ See, e.g., Sections 101(f)(4) and 101(g)(2) of the Act, 15
U.S.C. 7211(f)(4) & (g)(2); PCAOB Rules 5200 (Commencement of
Disciplinary Proceedings), 5500 (Commencement of Hearing on
Disapproval of a Registration Application).
\4\ See Order Approving Proposed Rules Relating to
Investigations and Adjudications, SEC Rel. No. 34-49704, 2004 WL
1439833 (May 14, 2004).
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On June 21, 2018, the U.S. Supreme Court held in Lucia v. SEC that
SEC Administrative Law Judges (ALJs) are inferior officers under the
Appointments Clause of the U.S. Constitution and that accordingly SEC
ALJs are required to be appointed by ``the President, a court of law,
or a head of department,'' such as the Commission.\5\ Since the Lucia
decision, the Commission has taken various actions, including issuance
of an order reiterating its November 30, 2017 approval of the prior
appointments of its ALJs by its staff as the Commission's own under the
Constitution.\6\ In light of the Lucia litigation, other federal
government agencies have taken similar measures as to their ALJs or
like officials, also out of an abundance of caution and for avoidance
of doubt.\7\
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\5\ 138 S. Ct. 2044, 2050-51 (2018).
\6\ See In re Pending Administrative Proceedings, SEC Rel. No.
34-83907, 2018 WL 4003609, *1 (Aug. 22, 2018).
\7\ See, e.g., USITC, The Appointment of the Commission's
Administrative Law Judges for Section 337 Investigations, 83 FR
45,678-01 (Sept. 10, 2018); FMSHRC, Ratification Notice (Apr. 3,
2018), available at www.fmshrc.gov/about/news/ commission-
ratification-notice; FDIC, Resolution of Board of Directors (July
19, 2018), available at https://www.fdic.gov/news/board/2018-07-19-085152.pdf; CFTC, Ratification and Reconsideration Order, In re
Pending Administrative Proceedings, 2018 WL 1966116 (Apr. 6, 2018);
Letter from Sec'y R. Alexander Acosta, Dep't of Labor, to Hon. Paul
R. Almanza, Admin. Law Judge, Dep't of Labor (Dec. 21, 2017),
available at https://www.oalj.dol.gov/PUBLIC/FOIA/Frequently_Requested_Records/ALJ_Appointments/Secretarys_Ratification_of_ALJ_Appointments_12_21_2017.pdf; FTC,
P130500 Federal Trade Commission Minute: Ratification of Appointment
of Administrative Law Judge and Chief Administrative Law Judge
(Sept. 11, 2015), attached as Ex. A to FTC, Order Denying Respondent
LabMD, Inc.'s Motion to Dismiss, In re LabMD Inc., No. 9357 (Sept.
14, 2015), available at https://www.ftc.gov/system/files/documents/cases/150914labmdmotion.pdf.
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The Lucia case did not involve a challenge to PCAOB hearing
officers, only to SEC ALJs. Nor has any court, the Commission, or the
Board adjudicated whether a PCAOB hearing officer is, like an SEC ALJ,
an inferior officer under the Appointments Clause.\8\ Indeed, there are
a number of differences between the position of an SEC ALJ and the
position of a PCAOB hearing officer.\9\
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\8\ An attempt was made to challenge the constitutionality of a
PCAOB hearing officer's appointment in Kabani v. SEC, but the court
held that the argument had not been timely raised and was forfeited.
733 F. App'x 918, 2018 WL 3828524, *1 (9th Cir. Aug. 13, 2018).
\9\ For example, an SEC ALJ may administer oaths and
affirmations; issue, revoke, quash, or modify subpoenas; issue
protective orders; and punish contemptuous conduct; a PCAOB hearing
officer does not have that authority. Compare 17 CFR 200.14(a)(1) &
(2), 200.111(b), 180(a), 232(e), 322 with PCAOB Rules 5103, 5105,
5200(b)(1), 5424.
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Nevertheless, out of an abundance of caution and to eliminate any
uncertainty about the status of PCAOB hearing officers that might
distract from the PCAOB's mission, including its important registration
and disciplinary functions, the Board is adopting certain amendments to
its bylaws and rules. These amendments modify the PCAOB's processes to
appoint and remove its hearing officers to provide that such
appointments and removals shall be subject to the approval of the
Commission, a head of department under the Appointments Clause.
The amendments to Article VI of the Board's bylaws and PCAOB Rule
1001(h)(i), the language of which rule is changed to cross-reference
the bylaw amendment, specify that the PCAOB's appointment and removal
of any PCAOB hearing officer are subject to Commission approval. These
changes are consistent with the Commission's broad authority to oversee
the Board under Section 107 of the Act, see Sections 101(c) & (f) and
107 of the Act, 15 U.S.C. 7211(c) & (f), 7217, and the Commission's
authority to ``appoint . . . officers, attorneys, economists,
examiners, and other employees'' under Section 4(b) of the Securities
Exchange Act of 1934 (``Exchange Act''), 15 U.S.C. 78d(b).
As contemplated by these amendments, when the PCAOB's Governing
Board, as defined by the bylaws,\10\ has reached a decision on the
appointment or removal of any PCAOB hearing officer, that decision
shall be
[[Page 4596]]
submitted to the Commission for consideration. The proposed appointment
or removal of a hearing officer by the PCAOB cannot be effectuated
until Commission approval has been given. The Commission's approval of
a PCAOB hearing officer's appointment will result in the hearing
officer being appointed in the manner of an inferior officer for
purposes of the Appointments Clause.\11\
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\10\ See Articles IV and VI of the PCAOB's bylaws (stating that
``[t]he Governing Board shall consist of those persons appointed
thereto by the Securities and Exchange Commission, pursuant to
Section 101 of the Act'' and that ``[t]he Chairman of the Governing
Board . . . shall also be the President and Chief Executive Officer
of the Corporation''). In Free Enterprise Fund v. PCAOB, 561 U.S.
477, 510 (2010), the Supreme Court held that PCAOB Governing Board
members are inferior officers under the Appointments Clause.
\11\ See Free Enterprise Fund, 561 U.S. at 512 n.13 (noting
examples of precedents in which ``[w]e have previously found that
the department head's approval [of the appointment of personnel]
satisfies the Appointments Clause'').
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The Board is also adopting certain clarifying and conforming
amendments to its adjudications rules in light of the rule changes
discussed above. Specifically, the Board is adding a new subsection to
Rule 5200 to summarize the framework within which the hearing officer
functions under the Act and the Board's rules. That new subsection
explains that all proceedings shall be presided over by the Board,
which is the entity empowered to act on registration applications and
to conduct disciplinary proceedings.\12\ Alternatively, the Board may
order that the proceedings be conducted in the first instance by a
hearing officer to whom the Board has, under certain conditions,
delegated adjudicatory responsibilities.\13\ The new subsection makes
even more explicit the manner in which current PCAOB rules, such as
Rules 5200(b)(10), 5201(d)(2), 5204(b), and 5445, situate the hearing
officer within PCAOB adjudication processes.\14\
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\12\ See, e.g., Sections 101(c)(1) & (4) of the Act, 15 U.S.C.
7211(c)(1) & (4) (``the Board shall . . . register public accounting
firms . . . [and] conduct . . . disciplinary proceedings . . .'')
(emphasis added).
\13\ See Section 101(g)(2) of the Act, 15 U.S.C. 7211(g)(2)
(permitting, under specified conditions, ``delegation by the Board
of any of its functions to an . . . employee of the Board . . . ,
including functions with respect to hearing, determining, ordering,
certifying, reporting, or otherwise acting as to any matter'').
\14\ The provision is also analogous to SEC Rule of Practice
110, 17 CFR 201.110.
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Additionally, the amendments make clarifying and conforming edits
to the heading of current PCAOB Rule 5200(b) and to the heading and
text of PCAOB Rule 5402(b). Specifically, the words ``appointment'' and
``appoint'' in these current rules are replaced with ``assignment'' and
``assign,'' and current Rule 5200(b) is renumbered Rule 5200(c) and
cross-referenced to new Rule 5200(b). These changes avoid any confusion
between the actions of the Board and the Commission in appointing, and
approving the appointment of, a hearing officer, and the PCAOB
Secretary's ministerial act of assigning a specific hearing officer to
a specific proceeding pursuant to a Board order.
The above-described, targeted amendments seek to dispel any legal
uncertainty arising from Lucia about the PCAOB hearing officer, who, as
noted, may be tasked with presiding over a disciplinary or other
proceeding. This will facilitate and make more efficient the Board's
performance of its duties under the Act to take ``[a]ction on
[a]pplications'' for the ``regist[ration] [of] public accounting firms
that prepare audit reports for issuers, brokers, and dealers''; to
``conduct . . . disciplinary proceedings concerning, and impose
appropriate sanctions where justified upon, registered public
accounting firms and associated persons of such firms''; and to
``enforce compliance with th[e] Act, the rules of the Board,
professional standards, and the securities laws relating to the
preparation and issuance of audit reports and the obligations and
liabilities of accountants with respect thereto, by registered public
accounting firms and associated persons thereof.'' \15\ These functions
are part of the Board's responsibility ``to oversee the audit of
companies that are subject to the securities laws, and related matters,
in order to protect the interests of investors and further the public
interest in the preparation of informative, accurate, and independent
audit reports.'' \16\
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\15\ See, e.g., Sections 101(c)(1), (4) & (6), 102(c), 105(a) &
(c)(1)-(3) of the Act, 15 U.S.C. 7211(c)(1), (4) & (6), 7212(c),
7215(a) & (c)(1)-(3).
\16\ See Section 101(a) of the Act, 15 U.S.C. 7211(a).
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Moreover, additional benefits will flow from the amendments because
the Appointments Clause serves an important public purpose. The Supreme
Court has described the Clause's requirements as ``among the
significant structural safeguards of the constitutional scheme,''
``designed to preserve political accountability relative to important
government assignments.'' \17\ The Board has chosen to remedy the
uncertainty caused by Lucia by conforming the appointment and removal
of its hearing officers to those requirements. Thus, the Appointments
Clause's benefits and protections are explicitly extended to
respondents in PCAOB proceedings, and to the public more broadly.
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\17\ Edmond v. United States, 520 U.S. 651, 659, 663 (1997).
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2. Statutory Basis
The statutory basis for the proposed amendments is Title I of the
Act. Specifically, Section 101(f)(2) of the Act empowers the Board,
subject to Commission oversight under Section 107 of the Act, ``to
conduct its operations and maintain offices, and to exercise all other
rights and powers authorized by this Act.'' Section 101(f)(4), as
discussed, empowers the Board, subject to Commission oversight under
Section 107 of the Act, to appoint personnel. Section 101(g)(1) directs
the Board, ``subject to the approval of the Commission . . . [to]
provide for the operation and administration of the Board, the exercise
of its authority, and the performance of its responsibilities under
th[e] Act.'' And Section 101(g)(2), as discussed, permits the Board,
``subject to the approval of the Commission,'' to delegate its hearing
functions within the PCAOB. Furthermore, the amendments directly relate
to statutory duties of the Board and purposes for its establishment
that are discussed above.
B. Board's Statement on Burden on Competition
Not applicable. The proposed amendments are concerned solely with
the administration of the PCAOB, as discussed in Item I above.
C. Board's Statement on Comments on the Proposed Amendments Received
From Members, Participants or Others
Written comments were neither solicited nor received. The proposed
amendments are concerned solely with the administration of the PCAOB,
as discussed in Item I above.
III. Date of Effectiveness of the Proposed Amendments and Timing for
Commission
The foregoing proposed amendments have become effective pursuant to
Section 19(b)(3)(A) of the Securities Exchange Act of 1934 \18\ and
paragraph (f)(3) of Rule 19b-4 thereunder.\19\ At any time within 60
days of the filing of the proposed amendments, the Commission summarily
may temporarily suspend such amendments if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
Act.
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\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(3).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed
amendments are consistent with the requirements of Title I of the Act.
Comments may be submitted by any of the following methods:
[[Page 4597]]
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/pcaob.shtml); or
Send an email to [email protected]. Please include
PCAOB-2019-01 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to PCAOB-2019-01. This file number should
be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (http://www.sec.gov/rules/pcaob.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed amendments that are filed with
the Commission, and all written communications relating to the proposed
amendments between the Commission and any person, other than those that
may be withheld from the public in accordance with the provisions of 5
U.S.C. 552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549-1090, on official business days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of such filing will also be available for
inspection and copying at the principal office of the PCAOB. All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to PCAOB-2019-01 and should be submitted on or
before March 8, 2019.
For the Commission, by the Office of the Chief Accountant,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-11(b)(2).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-02450 Filed 2-14-19; 8:45 am]
BILLING CODE 8011-01-P