
[Federal Register Volume 76, Number 133 (Tuesday, July 12, 2011)]
[Notices]
[Pages 40961-40964]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17387]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64814; File No. PCAOB-2011-01)


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Temporary Rule for an Interim Program of Inspection Related to 
Audits of Brokers and Dealers

 July 6, 2011.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act''), notice is hereby given that on June 21, 2011, 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 and II below, which items have 
been prepared by the Board. The Commission is publishing this notice to 
solicit comments on the proposed rules from interested persons.

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

    On June 14, 2011, the Board adopted a temporary rule for an interim 
inspection program related to audits of brokers and dealers. The 
proposed Rule 4020T amends Section 4 of the Board's rules. The Board 
also adopted amendments to Section 1 of its rules to add notes 
following Rules 1001(a)(v), 1001(a)(vi), and 1001(p)(vi).
    The text of the proposed amendments is set out below. Language 
added by the amendments is underlined.

Rules of the Board

Section 1. General Provisions

* * *
    Rule 1001. Definitions of Terms Employed in Rules.
* * *

(a)(v) Audit

* * *
    Note: Effective [insert effective date of Rule 4020T], pursuant 
to Rule 4020T, when used in Rule 3502, Section 5 of the Rules of the 
Board, or the definition of ``disciplinary proceeding'' in Rule 
1001(d)(i), the term ``audit'' has the meaning provided in Section 
110 of the Act.

(a)(vi) Audit Report

* * *
    Note: Effective [insert effective date of Rule 4020T], pursuant 
to Rule 4020T, when used in Rule 3502, Section 5 of the Rules of the 
Board, or the definition of ``disciplinary proceeding'' in Rule 
1001(d)(i), the term ``audit report'' has the meaning provided in 
Section 110 of the Act.
* * *

(p)(vi) Professional Standards

* * *
    Note: Effective [insert effective date of Rule 4020T], pursuant 
to Rule 4020T, when used in Rule 3502, Section 5 of the Rules of the 
Board, or the definition of ``disciplinary proceeding'' in Rule 
1001(d)(i), the term ``professional standards'' has the meaning 
provided in Section 110 of the Act.
* * *

Section 4. Inspections

* * *
    Rule 4020T. Interim Inspection Program Related to Audits of 
Brokers and Dealers.

(a) Purposes of Interim Inspection Program

    This rule provides for an interim program of inspection in 
connection with audits of brokers and dealers in order, among other 
things--
    (1) to assess the degree of compliance of registered public 
accounting firms and their associated persons with the Act, the 
Board's rules, the Commission's rules, and professional standards in 
connection with the performance of audits, issuance of audit 
reports, and related matters involving brokers and dealers;
    (2) to inform the Board's consideration, in connection with 
establishing a permanent program of inspection to assess the matters 
described in paragraph (1), of--
    (i) whether to differentiate among classes of brokers and 
dealers;
    (ii) whether to exempt any category of public accounting firms; 
and
    (iii) the establishment of minimum inspection frequency 
schedules.

(b) Definitions

    When used in this rule, the term ``interim program,'' means the 
interim program of inspection described in paragraph (c). When used 
in this rule, Rule 3502, Section 5 of the Rules of the Board, or the 
definition of ``disciplinary proceeding'' in Rule 1001(d)(i), the 
terms ``audit,'' ``audit report,'' and ``professional standards'' 
have the meaning provided in Section 110 of the Act.

(c) Interim Program of Inspection

    On an interim basis, the Board shall conduct a program of 
inspection, for the purposes described in paragraph (a), that may 
include inspection procedures to assess the policies, practices, and 
procedures of any registered public accounting firm related to the 
performance of audits or the issuance of audit reports for any 
broker or dealer after July 21, 2010 and related matters involving 
brokers and dealers. The provisions of Rules 4000(b), 4000(c), 4004, 
4006, 4007, 4008, 4009 and 4010 shall apply to the interim program.

(d) Reporting

    No less frequently than every twelve months, beginning twelve 
months after the date this rule takes effect and continuing until 
rules for a permanent program of inspection in connection with 
audits of brokers and dealers take effect, the Board will publish a 
report that describes the progress of the interim program, including 
data about the number of registered public accounting firms and the 
number of broker or dealer audits that have been subjected to 
inspection procedures and any significant observations from those 
procedures.

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

    In its filing with the Commission, the Board included statements 
concerning the purpose of, and basis for, the proposed rules and 
discussed 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 sections A, B, 
and C below, of the most significant aspects of such statements.

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

    (a) Purpose
    On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act \1\ amended the Sarbanes-

[[Page 40962]]

Oxley Act to give the Board oversight authority with respect to audits 
of brokers and dealers that are registered with the Commission. Among 
other things, the amended Act authorizes the Board to establish an 
inspection program by rule.\2\ Section 104(a)(2) of the Act (1) 
Provides that, in establishing the program, the Board may allow for 
differentiation among classes of brokers and dealers; (2) requires that 
the Board consider whether differing inspection schedules would be 
appropriate with respect to auditors that issue audit reports only for 
brokers or dealers that do not receive, handle, or hold customer 
securities or cash or are not members of the Securities Investor 
Protection Corporation; and (3) provides that if the Board exempts any 
public accounting firm from such an inspection program, the firm would 
not be required to register with the Board.
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    \1\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
    \2\ Section 104(a)(2)(A) of the Act, as amended.
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    In a release issued on December 14, 2010, the Board explained that 
it intended to take a careful and informed approach to those questions 
in establishing a permanent program that appropriately protects the 
public interest and the interests of investors, including consideration 
of potential costs and regulatory burdens that would be imposed on 
different categories of registered public accounting firms and classes 
of brokers and dealers. The Board also explained that it did not intend 
to make the necessary judgments without first gathering and assessing 
relevant information, but that it did not intend to postpone all use of 
its new inspection authority until after those judgments were made. 
Accordingly, the Board proposed for public comment a temporary rule for 
an interim program of inspection that would allow the Board to begin 
inspections of relevant audits and auditors and provide a source of 
information to help guide decisions about the scope and elements of a 
permanent program.
    (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 rule changes will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule changes would apply equally to all registered public accounting 
firms that audit brokers and dealers.

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

    The Board released the proposed rule amendment for public comment 
in Release 2010-008 (December 14, 2010). A copy of Release No. 2010-008 
and the comment letters received in response to the PCAOB's request for 
comment are available on the PCAOB's Web site at http://www.pcaobus.org/Rules/Rulemaking/Pages/Docket032. The Board received 
twelve written comment letters. The Board has carefully considered the 
comment letters, as discussed below.
1. Scope of the Interim Program
    The temporary rule that the Board proposed did not reflect any 
exercise of the Board's authority to differentiate among classes of 
brokers and dealers or to exempt any category of public accounting 
firm. The Board received a number of comments addressing the inclusive 
scope of the proposed interim program. Some commenters supported the 
proposed scope, while nevertheless suggesting that the Board focus its 
interim inspection efforts on audits of certain categories of brokers 
and dealers, such as those that have possession and control of customer 
cash and securities or act as clearing, carrying, or custodial brokers. 
One of those commenters also suggested that the Board consider, in 
connection with a permanent program, whether the public interest would 
be best served by focusing on those that carry accounts and maintain 
customer cash and securities.
    Other commenters disagreed with the proposed approach. They argued, 
and some submitted data intended to support the argument, that certain 
categories of brokers and dealers pose little or no risk to the 
investing public. They suggested that the Board could identify those 
categories by focusing on factors such as whether the broker or dealer 
has custody of, or meaningful access to, client assets, or whether it 
is exclusively an introducing broker or dealer. These commenters 
suggested that the Board either should exempt the auditors of low-risk 
categories of firms from the Board's authority without delay or should 
collect and study currently available data on the question before 
subjecting auditors of all brokers and dealers to an inspection 
program. One commenter expressed concern that PCAOB regulation would 
significantly increase the cost of an audit to these entities, 
potentially forcing some of them out of business, with no corresponding 
contribution to meaningful protection of investors. Other commenters 
similarly expressed concern that the costs of compliance with PCAOB 
regulation may negatively impact auditors of introducing brokers and 
dealers, which are typically small businesses.
    After considering these comments, the Board decided to adopt a 
temporary rule for an interim program of the same scope as proposed. 
The Board explained in the release that the inclusive scope of the 
interim program should not be construed as either foreshadowing the 
likely scope of a permanent program or suggesting that every broker or 
dealer auditor will be inspected as part of the interim program. The 
Board expects to be able to gather the information necessary to inform 
its consideration of a permanent program without having to inspect most 
firms during the interim program. The Board intends to consider 
carefully whether there should be exemptions from the permanent 
program. For example, the Board expects to give consideration to 
whether a broker's or dealer's meaningful access to client assets is a 
relevant factor in determining the investor protection and public 
interest benefits of PCAOB oversight of the auditor of that broker or 
dealer.
    The Board continues to believe, however, that information gathered 
during the course of the interim program will be relevant to making 
appropriate judgments about that question and other significant 
elements of a permanent inspection program. While data of the type 
submitted by commenters who favor immediate exemptions will also be 
relevant to those judgments, the Board believes that it is not prepared 
at the present time to conclude that such data is the only type of 
information that will be relevant or that an analysis of all such data 
necessarily compels the exemptions urged by these commenters.
2. Processes Relating to Inspectors' Firm-Specific Observations
    A few commenters requested clarification on how the Board will 
bring deficiencies to the firm's attention and what the Board's 
expectations would be for the firm to address the issues. Two 
commenters suggested that the Board address that point in the text of 
the rule. In response to the commenters, the Board described in the 
release the general communication process between PCAOB inspectors and 
the audit engagement team or other representatives of the firm. The 
Board anticipates that communications with firms will follow a course 
similar to that in inspections of auditors of issuers, but the Board 
believes that the details of the

[[Page 40963]]

process are subject to variation in light of circumstances during an 
inspection.
    The proposing release included references to the possibility of 
firm-specific inspection reports during the interim program.\3\ 
Commenters sought clarification on what they saw as a tension between 
references to that possibility and the statement in the proposing 
release that the Board would expect results of inspection procedures 
performed under the interim program to be included in firm-specific 
reports, if at all, only after rules for a permanent program take 
effect.
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    \3\ The proposing release stated that nothing in the temporary 
rule ``would necessarily preclude the Board from issuing a firm-
specific inspection report on, or including, inspection observations 
from the interim program before a permanent program takes effect.'' 
Proposing release at 11, n.21. The proposing release also noted that 
inspection procedures performed in the interim program would be 
carried out in accordance with, and subject to, the provisions of 
Section 104 of the Act, including provisions concerning a firm's 
opportunities to respond to a draft inspection report and to seek 
Commission review of certain matters in a final inspection. See 
proposing release at 6, n.10.
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    The Board intends for inspection procedures performed on a firm as 
part of the interim program to constitute a foundational portion of the 
first inspection of the firm's audit practice related to brokers and 
dealers, which would be completed after a permanent program is 
established. This means that, for firms that audit brokers or dealers 
but not issuers, the Board does not expect to issue a firm-specific 
inspection report unless and until a permanent program replaces the 
interim program, the firm is included in the scope of the permanent 
program, and the firm has been inspected under the permanent 
program.\4\ Unusual circumstances, however, could give rise to 
exceptions. As a precaution in light of that possibility, the Board has 
incorporated in the final version of Rule 4020T the provisions of PCAOB 
Rule 4007, Procedures Concerning Draft Inspection Reports, PCAOB Rule 
4008, Procedures Concerning Final Inspection Reports, and PCAOB Rule 
4009, Firm Response to Quality Control Defects.\5\
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    \4\ While the interim program is in place, a Board inspection of 
a firm that performs audit work for issuers and for brokers or 
dealers would include the full, regular inspection--including the 
firm-specific inspection report--of the firm's issuer practice. Such 
an inspection could also include inspection procedures under the 
interim program with respect to the firm's broker and dealer 
practice. As with firms that audit brokers or dealers but not 
issuers, the Board, absent unusual circumstances, would not 
incorporate any evaluation of the firm's broker and dealer practice 
into the public portion of a firm-specific report before the report 
on the first inspection of the firm that occurs after a permanent 
program takes effect and would not include observations from the 
interim program procedures in the nonpublic portion of any such 
report.
    \5\ Rule 4007 was not incorporated in the version of Rule 4020T 
that the Board proposed, and commenters noted the discrepancy 
between the omission of a provision incorporating Rule 4007 and the 
proposing release's references to the possibility of firm-specific 
inspection reports. To fully address that discrepancy, the Board has 
also incorporated Rules 4008 and 4009 in the final version of Rule 
4020T.
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    Commenters also expressed concern about including observations from 
the interim inspection program in a firm-specific inspection report 
that may be issued years later, after the permanent program is 
established and after the relevant standards and rules, as well as the 
firm's practices, may have changed. The commenters urged the Board to 
reconsider including observations from interim program procedures in 
the first firm-specific report. These commenters also requested 
clarification on whether the eventual report would present cumulative 
findings or deficiencies observed.
    During the interim program, the Board will be obtaining a broad 
view of practice related to audits of brokers and dealers under current 
standards and interpretive guidance, and at the same time the standards 
and rules applicable to the audits will be evolving. Having both that 
broad view and the new standards as a foundation will be helpful to 
making consistent and meaningful evaluations of the types of quality 
control issues that, going forward, firms need to address in their 
practices related to audits of brokers and dealers. It is possible that 
observations from interim program procedures will be relevant to the 
Board's inspection-related dialogue with a particular firm--though not 
necessarily with every firm--even after standards and rules have 
changed, and it may be appropriate for aspects of those observations to 
be included in the first inspection report that addresses the firm's 
audit practice related to audits of brokers and dealers. The Board does 
not contemplate that firms' first reports will routinely serve as 
historical records of all observations from interim program procedures. 
Depending on the circumstances, however, aspects of some observations 
may retain their relevance to an assessment of audit quality issues at 
a particular firm even at the time of the first report, and those 
aspects may be discussed in a report. If that occurs, the Board intends 
that the report will make clear the timing of the original inspection 
observation at issue.
3. General Reports During the Inspection Period
    The temporary rule provides that the Board will publish a report on 
the interim program no less frequently than every twelve months, 
beginning twelve months after the date the rule takes effect and 
continuing until rules for a permanent program take effect. Each report 
will describe the progress of the interim program and any significant 
observations that either may bear on the Board's consideration of a 
permanent program or the publication of which may otherwise be 
appropriate to protect the interests of investors or to further the 
public interest.
    Commenters supported the Board's proposal to publish a report at 
least annually on the progress of the interim inspection program. Some 
commenters suggested that the Board include in the report sufficient 
details on the nature and types of brokers and dealers inspected and 
group the inspection observations based on these classifications to 
help public accounting firms understand the specific issues identified 
in the report. The Board will take those suggestions into consideration 
when preparing the progress reports.
4. Voluntary Cooperation
    When Rule 4020T takes effect, cooperation with Board inspection 
procedures under the interim program will be mandatory for registered 
firms and their associated persons. The proposing release also noted, 
however, that even before the rule takes effect, the Board might 
conduct relevant procedures with the voluntary cooperation of certain 
firms. Two commenters inquired about the Board's expectations for 
voluntary cooperation. Specifically, commenters sought clarification on 
whether the procedures with which the Board may request voluntary 
cooperation would include actual inspections of audits of brokers and 
dealers or be limited in scope. These commenters also requested 
information on the timing of the voluntary cooperation and the identity 
of registered public accounting firms expected to cooperate 
voluntarily.
    The Board explained in the release that it does not have any 
expectation for particular firms to cooperate voluntarily, or have a 
view that there is a particular scope of procedures to which firms 
should voluntarily consent. The Board's ongoing inspections of auditors 
of issuers include inspections of some firms that audit brokers and 
dealers in addition to issuers. During regular inspections of any such 
firm's

[[Page 40964]]

issuer audit practice before Rule 4020T takes effect, inspection staff 
may discuss with the firm the possibility of the firm submitting 
voluntarily to inspection procedures concerning its audit practice 
related to brokers and dealers. The Board does not contemplate 
discussing the possibility of voluntary cooperation with any firm that 
the Board is not otherwise inspecting because of the firm's issuer 
audit practice.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) As the 
Commission may designate 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 or disapprove such proposed rule; or
    (b) Institute proceedings to determine whether the proposed rule 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed 
rules are consistent with the requirements of Title I of the Sarbanes-
Oxley Act. Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/pcaob.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number PCAOB-2011-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number PCAOB-2011-01. This file 
number should be included on the subject line if e-mail 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 Web site (http://www.sec.gov/rules/pcaob/shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule changes that are 
filed with the Commission, and all written communications relating to 
the proposed rule changes between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, on official business 
days between the hours of 10 a.m. and 3 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; we do 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. PCAOB-2011-01 and should be 
submitted on or before August 2, 2011.

    For the Commission, by the Office of the Chief Accountant, 
pursuant to delegated authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-17387 Filed 7-11-11; 8:45 am]
BILLING CODE 8011-01-P


