[Federal Register Volume 86, Number 13 (Friday, January 22, 2021)]
[Notices]
[Pages 6708-6710]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01311]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90930; File No. PCAOB-2020-01]


Public Company Accounting Oversight Board; Order Granting 
Approval of Amendments to PCAOB Interim Independence Standards and 
PCAOB Rules to Align with Amendments to Rule 2-01 of Regulation S-X

January 14, 2021.

I. Introduction

    On November 20, 2020, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 107(b) \1\ of the 
Sarbanes-Oxley Act of 2002 (the ``Sarbanes-Oxley Act'') and Section 
19(b) \2\ of the Securities Exchange Act of 1934 (the ``Exchange 
Act''), a proposal to adopt amendments to the PCAOB's interim 
independence standards and PCAOB rules to align with the Commission's 
recent adoption of amendments 17 CFR 210.2-01 (``Rule 2-01'') of 17 CFR 
210.01 et seq. (``Regulation S-X'') \3\ (collectively, the ``Proposed 
Rules'').\4\ The Proposed Rules were published for comment in the 
Federal Register on November 27, 2020.\5\ We received several comment 
letters in response to the notice.\6\ This order approves the Proposed 
Rules, which we find to be consistent with the requirements of the 
Sarbanes-Oxley Act and the securities laws and necessary or appropriate 
in the public interest or for the protection of investors.
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    \1\ 15 U.S.C. 7217(b).
    \2\ 15 U.S.C. 78s(b).
    \3\ See Qualifications of Accountants, Release No. 33-10876 
(Oct. 16, 2020) (``2020 Adopting Release'').
    \4\ See Amendments to PCAOB Interim Independence Standards and 
Board Rules to Align with Amendments to Rule 2-01of Regulation S-X, 
PCAOB Release No. 2020-03 (Nov. 19, 2020) (``PCAOB Adopting 
Release''), available at https://pcaobus.org/Rulemaking/Docket047/2020-003-Independence-final-rule.pdf.
    \5\ See Public Company Accounting Oversight Board; Notice of 
Filing of Proposed Rules on Amendments to PCAOB Interim Independence 
Standards and PCAOB Rules to Align with Amendments to Rule 2-01 of 
Regulation S-X, Release No. 34-90473 (Nov. 20, 2020) [85 FR 76131 
(Nov. 27, 2020)].
    \6\ See, e.g., comment letters from the Council of Institutional 
Investors, December 3, 2020 (``CII Letter''); Right Advisory LLC, 
December 7, 2020 (``RA Letter''); Deloitte LLP, December 11, 2020 
(``Deloitte Letter''); PricewaterhouseCoopers LLP, December 16, 2020 
(``PwC Letter''); Colorado PERA, December 16, 2020 (``COPERA''); 
International Corporate Governance Network, December 16, 2020 
(``ICGN Letter''); Consumer Federation of America and Certain Other 
Groups and Individuals, December 17, 2020 (``CFA, et al. Letter''); 
Ernst & Young LLP, December 18, 2020 (``EY Letter''); and the 
California Public Employees' Retirement System, December 18, 2020 
(``CalPERS Letter''). Copies of the comment letters received on the 
Commission order noticing the Proposed Rules are available on the 
Commission's website at https://www.sec.gov/comments/pcaob-2020-01/pcaob202001.htm.
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II. Description of the Proposed Rules

    On November 19, 2020, the Board adopted amendments to the PCAOB's 
interim independence standards and PCAOB rules to align with amendments 
by the SEC to Rule 2-01 of Regulation S-X.\7\ The Proposed Rules are 
intended to avoid differences and duplicative requirements. To that 
end, the Board adopted targeted amendments to its interim independence 
standards applicable to lending arrangements between auditors and audit 
clients. In addition, the Board adopted targeted amendments to align 
certain terms defined in PCAOB Rule 3501 with the Commission's recent 
amendments to its definitions of those terms in 17 CFR 210.2-01(f) 
(``Rule 2-01(f)'').
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    \7\ See supra note 4.
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A. Changes to PCAOB Standards

    The Proposed Rules will make the following changes:
     Amend ET Sec.  101.02 of the American Institute of 
Certified Public Accountants (``AICPA'') Code of Professional Conduct, 
Interpretation of Rule 101, as in existence on April 16, 2003 and 
incorporated in the Board's auditing and related professional practice.
     Delete ET Sec.  101.07 of the AICPA's Code of Professional 
Conduct, Loans from financial institution clients and related 
terminology, as in existence on April 16, 2003 and incorporated in the 
Board's auditing and related professional practice standards by PCAOB 
Rule 3500T.
     Delete ET Sec. Sec.  191.150-.151, ET Sec. Sec.  
191.182-.183, ET Sec. Sec.  191.196-.197, and ET Sec. Sec.  
191.220-.222, of the AICPA's Code of Professional Conduct, as in 
existence on April 16, 2003 and incorporated in the Board's auditing 
and related professional practice standards by PCAOB Rule 3500T, which 
are four Ethics Rulings under Rule 101 that also address lending 
arrangements and are part of the Board's interim independence 
standards.
     Amend PCAOB Rules 3501(a)(ii), (a)(iii), and (i)(ii).

B. Applicability and Effective Date

    The Proposed Rules will be effective June 9, 2021, 180 days after 
the date of the publication of the Commission's October 16, 2020 
amendments to Rule 2-01 in the Federal Register. The June 9, 2021 
effective date is aligned with the effective date of the Commission's 
amendments to Rule 2-01.\8\ Auditors may elect to comply before the 
effective date at any point after SEC approval of the Board's 
amendments, provided that the final amendments are applied in their 
entirety. The PCAOB has recommended that the Proposed Rules to apply to 
audits of emerging growth companies (``EGCs''),\9\ as discussed in 
Section IV below, and audits of brokers and dealers under 17 CFR 
240.17a-5 (``Exchange Act Rule 17a-5'').
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    \8\ See 2020 Adopting Release at 81.
    \9\ The term ``emerging growth company'' is defined in Section 
3(a)(80) of the Exchange Act (15 U.S.C. 78c(a)(80)). See also 
Release No. 33-10332 Inflation Adjustments and Other Technical 
Amendments Under Titles I and III of the JOBS Act (Mar. 31, 2017), 
82 FR 17545 (Apr. 12, 2017).
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III. Comment Letters

    The comment period on the Proposed Rules ended on December 18, 
2020. We received several comment letters representing investor 
organizations, advisory firms, accounting firms, trade organizations, 
and other interested parties. Some commenters were supportive \10\ of 
the Proposed Rules

[[Page 6709]]

while other commenters asked the Commission to consider certain changes 
to auditor independence unrelated to the Proposed Rules \11\ or 
reiterated comments addressed by the Commission in the 2020 Adopting 
Release.\12\
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    \10\ See RA Letter; Deloitte Letter; PwC Letter; and EY Letter.
    \11\ See RA Letter.
    \12\ See CII Letter; CFA, et al. Letter.
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    The Sarbanes-Oxley Act requires us to determine whether the 
Proposed Rules are consistent with the requirements of the Sarbanes-
Oxley Act and the securities laws, or are necessary or appropriate in 
the public interest or for the protection of investors.\13\ In making 
this determination, we have considered the comments we received. The 
comments received on the Proposed Rules did not raise new issues for 
the Commission to address. The commenters in support of the 
Commission's approval of the Proposed Rules reiterated their prior 
support for the 2020 Adopting Release and noted the benefits of 
eliminating differences between the Commission's and the PCAOB's 
auditor independence rules while focusing on those relationships and 
services that are more likely to threaten an auditor's objectivity and 
impartiality.\14\ Commenters opposing the Commission's approval of the 
Proposed Rules reiterated certain concerns regarding amendments in the 
Commission's 2020 Adopting Release or expressed concerns about the 
PCAOB's process to adopt the Proposed Rules at this time. For example, 
some commenters \15\ expressed concerns about the ``Affiliate of the 
Audit Client'' definition while one commenter \16\ broadly opposed many 
of the specific amendments within the Commission's 2020 Adopting 
Release. Some commenters \17\ also expressed the desire for a rule that 
would specify the documentation that auditors should prepare and 
maintain when additional services are provided to an affiliate of an 
audit client.\18\ One commenter \19\ suggested a public certification 
of the design and operating effectiveness of controls over audit 
quality and independence by executives of the audit firm.\20\ The 
commenters \21\ who expressed concerns about the PCAOB's process to 
adopt the Proposed Rules at this time requested the PCAOB to use its 
independent authority to expand the scope of the rulemaking beyond 
conforming amendments to the Commission's 2019 and 2020 Adopting 
Releases.
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    \13\ See Section 107(b)(3) of the Sarbanes-Oxley Act. The 
Sarbanes-Oxley Act also specifies that the provisions of Section 
19(b) of the Exchange Act shall govern the proposed rules of the 
Board. See Section 107(b)(4) of the Sarbanes-Oxley Act. Section 19 
of the Exchange Act pertains to the registration, responsibilities, 
and oversight of self-regulatory organizations. Under the procedures 
prescribed by the Sarbanes-Oxley Act and Section 19(b)(2) of the 
Exchange Act, the Commission must either approve or disapprove, or 
institute proceedings to determine whether the proposed rules of the 
Board should be disapproved; and these procedures do not expressly 
permit the Commission to amend or supplement the proposed rules of 
the Board.
    \14\ See Deloitte Letter; PwC Letter; EY Letter; RA Letter.
    \15\ See CII Letter; CFA et al. Letter; and CalPERS Letter.
    \16\ See CFA et al. Letter.
    \17\ See supra note 15.
    \18\ In considering a rule adopted by the PCAOB under the 
Sarbanes-Oxley Act, the Commission may only take action to approve 
or disapprove any such rule. As such, any recommendation to alter 
the Proposed Rules is outside the scope of this Order.
    \19\ See supra note 11.
    \20\ See supra note 18.
    \21\ See CFA et al Letter, COPERA Letter; ICGN Letter; and 
CalPERS Letter. One commenter specifically expressed concerns 
regarding the PCAOB relying on the Commission's deliberation in 
adopting the 2020 Adopting Release. See CalPERS Letter. In the PCAOB 
Adopting Release, the Board noted its consideration of the 
Commission's rulemaking record and stated that ``[it] believes that 
this process--structured by the Commission to satisfy the 
requirements of the Administrative Procedure Act--is at least as 
robust as the Board's process would have been had the PCAOB 
considered amendments to the Board's independence requirements 
without the benefit of the SEC's analysis.'' See PCAOB Adopting 
Release, at 12. The Board further noted that it did not perceive 
``any reason or compelling basis in the [Commission's] rulemaking 
record'' to diverge from the Commission's stated goals and maintain 
disparate independence requirements. Id. Because we agree with the 
Board's conclusions on these points, we are not persuaded by the 
commenter who objected to the PCAOB's processes.
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    After considering the public comments and recommendations, we are 
approving the Proposed Rules. The comments the Commission has received 
with respect to the Proposed Rules are generally similar to the 
comments the Commission considered when approving the 2020 Adopting 
Release and the Auditor Independence with Respect to Certain Loans or 
Debtor-Creditor Relationships Release (the ``2019 Adopting 
Release'').\22\ As the Commission noted in the 2020 Adopting Release, 
the Commission expects the amendments to Rule 2-01 to more effectively 
focus the independence analysis on those relationships or services that 
are more likely to pose threats to an auditor's objectivity and 
impartiality. After considering public comments, the Commission noted 
that the amendments to Rule 2-01 would benefit audit firms, audit 
clients, and investors in several ways. First, by revising the rules to 
emphasize those relationships and services that are more likely to 
threaten auditor objectivity and impartiality, the Commission 
anticipates the amendments will reduce compliance costs for audit firms 
and their clients. Similarly, under the amended rules, auditors and 
their clients will be able to focus their resources and attention on 
monitoring those relationships and services that pose the greatest risk 
to auditor independence, reducing overall compliance burdens without 
significantly diminishing investor protections. \23\ The Proposed 
Rules, which conform the PCAOB's independence requirements to the 2020 
Adopting Release, will allow firms, audit clients and investors to take 
advantage fully of the anticipated benefits of the amendments to Rule 
2-01.
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    \22\ See Adopting Release, at 88-90.
    \23\ See Release No. 33-10648 (June 18, 2019), [84 FR 32040 
(July 5, 2019)]. Some commenters explicitly cited to their prior 
comment letters submitted when the Commission considered the 2020 
Adopting release and the 2019 Adopting Release. See CII Letter, 
Deloitte Letter, PwC Letter, and Consumer Federation of America, et 
al. Letter.
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IV. Effect on Emerging Growth Companies

    In the PCAOB Adopting Release, the Board recommended that the 
Commission determine that the Proposed Rules apply to audits of 
EGCs.\24\ Section 103(a)(3)(C) of the Sarbanes-Oxley Act, as amended by 
Section 104 of the Jumpstart Our Business Startups Act of 2012, 
requires that any rules of the Board ``requiring mandatory audit firm 
rotation or a supplement to the auditor's report in which the auditor 
would be required to provide additional information about the audit and 
the financial statements of the issuer (auditor discussion and 
analysis) shall not apply to an audit of an [EGC].'' The provisions of 
the Proposed Rules do not fall into these categories.
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    \24\ See PCAOB Adopting Release at 27.
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    Section 103(a)(3)(C) further provides that ``[a]ny additional 
rules'' adopted by the PCAOB after April 5, 2012, do not apply to 
audits of EGCs ``unless the Commission determines that the application 
of such additional requirements is necessary or appropriate in the 
public interest, after considering the protection of investors and 
whether the action will promote efficiency, competition, and capital 
formation.'' The Proposed Rules fall within this category. Having 
considered those statutory factors, we find that applying the Proposed 
Rules to the audits of EGCs is necessary or appropriate in the public 
interest.
    To inform consideration of the application of auditing standards to 
audits of EGCs, the PCAOB staff

[[Page 6710]]

published a white paper that provides general information about 
characteristics of EGCs (``EGC White Paper'').\25\ In the EGC White 
Paper, the PCAOB staff stated that ``[a]pproximately 96% of EGC filers 
were audited by accounting firms that also audit issuers that are not 
EGC filers.'' \26\ Additionally, the PCAOB Adopting Release discussed 
the Commission's intent to improve the practical application of Rule 2-
01 of Regulation S-X and reduce compliance burdens, which may lead to 
increased competition among auditors and facilitate capital formation. 
The Board noted that if the Proposed Rules were determined not to apply 
to the audits of EGCs, auditors would be required to address the 
differing independence requirements in their independence policies and 
procedures and in their quality control systems as a result of the 
differences between the Board and Commission requirements, which would 
create the potential for confusion.\27\
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    \25\ See Characteristics of Emerging Growth Companies and their 
Audit Firms as of November 15, 2019 (November 9, 2020), available at 
https://archive.pcaobus.org/EconomicAndRiskAnalysis/ProjectsOther/Documents/White-Paper-Characteristics-Emerging-Growth-Companies-November-15-2019.pdf.
    \26\ See EGC White Paper at 13.
    \27\ See PCAOB Adopting Release at 27.
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    We agree with the Board's analysis. We believe the Proposed Rules 
will benefit EGCs at least as much as non-EGCs, in part, because the 
Commission's amendments to Rule 2-01 were meant to more effectively 
focus the independence analysis on those relationships or services that 
are more likely to pose threats to an auditor's objectivity and 
impartiality.
    As such, after considering the protection of investors and whether 
the action will promote efficiency, competition, and capital formation, 
we believe there is a sufficient basis to determine that applying the 
Proposed Rules to the audits of EGCs is necessary or appropriate in the 
public interest.

V. Conclusion

    The Commission has carefully reviewed and considered the Proposed 
Rules, the information submitted therewith by the PCAOB and the comment 
letters received. In connection with the PCAOB's filing and the 
Commission's review,
    A. The Commission finds that the Proposed Rules are consistent with 
the requirements of the Sarbanes-Oxley Act and the securities laws and 
are necessary or appropriate in the public interest or for the 
protection of investors; and
    B. Separately, the Commission finds that the application of the 
Proposed Rules to the audits of EGCs is necessary or appropriate in the 
public interest, after considering the protection of investors and 
whether the action will promote efficiency, competition, and capital 
formation.
    It is therefore ordered, pursuant to Section 107 of the Sarbanes-
Oxley Act and Section 19(b)(2) of the Exchange Act, that the Proposed 
Rules (File No.PCAOB-2020-01) be and hereby are approved.

    By the Commission.

Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-01311 Filed 1-21-21; 8:45 am]
BILLING CODE 8011-01-P