
[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 rule-comments@sec.gov. 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


