2015-14159
Federal Register, Volume 80 Issue 111 (Wednesday, June 10, 2015)
[Federal Register Volume 80, Number 111 (Wednesday, June 10, 2015)]
[Rules and Regulations]
[Pages 32855-32857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14159]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 80, No. 111 / Wednesday, June 10, 2015 /
Rules and Regulations
[[Page 32855]]
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 14
RIN 3038-AE21
Proceedings Before the Commodity Futures Trading Commission;
Rules Relating to Suspension or Disbarment From Appearance and Practice
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') amends its regulations to clarify the standard used for
determining when an accountant has engaged in ``unethical or improper
professional conduct''--grounds for a temporary or permanent denial of
the privilege to practice before the Commission. The amendment enhances
transparency by codifying the standard used in Commission adjudications
of accountant conduct under the Commission's regulations.
DATES: This rule is effective July 10, 2015.
FOR FURTHER INFORMATION CONTACT: Jason Gizzarelli, Director, Office of
Proceedings, (202) 418-5395, [email protected], Office of the
Executive Director, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
Part 14 of the Commission's regulations addresses the circumstances
under which the Commission may deny attorneys and accountants,
temporarily or permanently, the privilege of practicing their
respective professions before it. Rule 14.8 specifically provides that
the Commission, after notice and opportunity for a hearing and an
adverse finding by a preponderance of the evidence, may bar an attorney
or accountant found: (a) Not to possess the requisite qualifications to
represent others; or (b) to be lacking in character or integrity; or
(c) to have engaged in unethical or improper professional conduct
either in the course of an adjudicatory, investigative, rulemaking, or
other proceeding before the Commission or otherwise.\1\
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\1\ 17 CFR 14.8.
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Prior to this amendment, rule 14.8 did not further articulate what
constitutes ``unethical or improper professional conduct'' by an
accountant under paragraph (c). However, since 1996, the Commission has
filed six administrative actions alleging violations of rule 14.8
against accountants appearing and practicing before it.\2\ In each
case, the Commission accepted a settlement banning the defendants from
practicing before it for a specified time period.
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\2\ In re Deloitte & Touche and Thomas Lux, CFTC Docket No. 96-
10, 1996 WL 547883 (CFTC September 25, 1996); In re Sherald Griffin,
CPA & Donna Laubscher, CPA, CFTC Docket No. 98-12, 1998 WL 161709
(CFTC April 8, 1998); In re Anatoly Osadchy, CPA, CFTC Docket No.
99-2, 1998 WL 754637 (CFTC October 29, 1998); In re G. Victor
Johnson and Altschuler, Melvoin & Glasser, LLP, CFTC Docket No. 04-
29, 2005 WL 1398672 (CFTC June 13, 2005); In re G. Victor Johnson
II, McGladrey & Pullen, LLP and Altshuler, Melvoin & Glasser, LLP,
CFTC Docket No. 11-01, 2010 WL 3903905 (CFTC October 4 2010; In re
Jeannie Veraja-Snelling, CFTC Docket No. 13-29, 2013 WL 4647784
(CFTC filed Aug. 26, 2013).
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Section 201.102(e) of the Securities and Exchange Commission's
(``SEC's'') regulations (``SEC rule of practice 102(e)'') \3\ addresses
the standard of conduct for accountants practicing before that
commission. Parallel to Commission rule 14.8, SEC rule of practice
102(e)(1)(ii) sets out ``unethical or improper professional conduct''
as grounds for accountant suspension and disbarment from practice
before the SEC. As amended in 1998,\4\ the SEC regulation further
provides that with respect to persons licensed to practice as
accountants, ``improper professional conduct'' under SEC rule of
practice 102(e)(1)(ii) means intentional or knowing conduct, including
reckless conduct, that results in a violation of applicable
professional standards; or either of the following two types of
negligent conduct: A single instance of highly unreasonable conduct
that results in a violation of applicable professional standards in
circumstances in which an accountant knows, or should know, that
heightened scrutiny is warranted; or repeated instances of unreasonable
conduct, each resulting in a violation of applicable professional
standards, that indicate a lack of competence to practice before the
Commission.\5\
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\3\ 17 CFR 201.102(e).
\4\ See Amendment to Rule 102(e) of the Commission's Rule of
Practice, 63 FR 57164 (Oct. 26, 1998).
\5\ 17 CFR 201.102(e)(1)(iv).
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The standard for accountant ``improper professional conduct''
expressed in SEC rule of practice 102(e)(1) is consistent with that
applied by the Commission in its earlier-referenced adjudications of
accountant conduct under rule 14.8.
II. The Proposed Amendment to Rule 14.8; Consideration of Comments
On October 23, 2014, the Commission published a proposed amendment
to rule 14.8 (``the Proposal'') for public comment.\6\ As proposed, the
amendment sought to add language to rule 14.8(c) to clarify the meaning
of accountant ``improper professional conduct.'' As explained in the
Proposal, the proposed amendment mirrors in substance the standard
prescribed in SEC rule of practice 102(e)(1)(iv), and comports with the
standard historically applied by the Commission in adjudications of
accountant conduct.
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\6\ Proceedings before the Commodity Futures Trading Commission;
Rules Relating to Suspension or Disbarment from Appearance and
Practice, 79 FR 63343 (Oct. 23, 2014).
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The Commission received three comments on the Proposal.\7\ Each
commenter supported the amended rule as proposed without raising
substantive issues. For example Deloitte LLP stated that it
``support[s] the CFTC's decision to seek regulatory consistency by
adopting a definition that is identical to the definition provided
under Rule 102(e) of the Rules of Practice of the U.S. Securities and
Exchange Commission.'' \8\ Ernst & Young LLP wrote that ``[a]dopting a
rule that is modeled after SEC Rule 102(e), which would be the case
with respect to the proposed amendment, strikes us as a reasonable
approach given the lengthy
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history and background of the SEC's rule.'' \9\ A third commenter wrote
that the proposed rule ``requires the accountant to act with integrity
and perform its duties with competence and care and will promote market
integrity, ensure regulators consistency (with the SEC), enhance
customer protection and improve risk management.'' \10\ Accordingly,
the Commission is adopting the amendment to rule 14.8, as proposed.
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\7\ The three commenters on the proposed rule amendment were
Ernst & Young LLP, Deloitte LLP and Chris Barnard.
\8\ Deloitte LLP Comment Letter at 1 (November 24, 2014).
\9\ Ernst & Young LLP Comment Letter at 1 (November 24, 2014).
\10\ Chris Barnard Comment Letter at 2 (November 4, 2014).
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III. Role of and Standards Applied to Accountants
Accountants auditing Commission registrants perform a critical
gatekeeper role in protecting the financial integrity of the
derivatives markets and the investing public. Accountants appearing
before the Commission in this capacity must understand the business
operations of their clients and conduct financial audits both in
accordance with applicable professional principles and standards and in
satisfaction of all the requirements of the Commission's
regulations.\11\
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\11\ The current professional principles and standards
applicable to accountants appearing before the Commission include
Generally Accepted Accounting Principles, Generally Accepted
Auditing Standards, International Accounting Standards, the Code of
Conduct of the American Institute of Certified Public Accountants,
and the rules and standards of the Public Company Accounting
Oversight Board.
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Rule 14.8 can be an effective remedial tool to ensure that the
accountants appearing before the Commission are competent to do so and
do not pose a threat to the Commission's registration and examination
functions. Accountants who engage in intentional or knowing misconduct,
which includes reckless conduct, clearly pose such a threat, as do
accountants who engage in certain specified types of negligent conduct.
The Commission believes that a single, highly unreasonable error in
judgment or other act made in circumstances warranting heightened
scrutiny conclusively demonstrates a lack of competence to practice
before the Commission. Repeated unreasonable conduct may also indicate
a lack of competence. Therefore, if the Commission finds that an
accountant acted egregiously in a single instance or unreasonably in
more than one instance and that this conduct indicates a lack of
competence, then that accountant engaged in improper professional
conduct under rule 14.8's standard.
The amendment to rule 14.8 is not meant, however, to encompass
every professional misstep. A single judgment error, for example, even
if unreasonable when made, may not indicate a lack of competence to
practice before the Commission sufficient to require Commission action.
The amendment seeks to provide greater clarity with respect to the
Commission's standard for assessing accountant conduct, as developed
to-date through administrative adjudications. At the same time,
however, like the SEC regulation after which the amendment is modeled,
the amendment elaborates standards that are to be applied in
adjudications on a case-by-case basis, a method that promotes equitable
application of the standards as warranted upon full consideration of
the facts of each case.
Similarly, as the SEC noted when it amended its rule of practice in
1998,\12\ the Commission does not seek to use rule 14.8 to establish
new standards for the accounting profession. The rule itself imposes no
new professional standards on accountants. Accountants who appear or
practice before the Commission are already subject to professional
standards, and rule 14.8(c) is intended to apply in a manner consistent
with those existing standards.
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\12\ See 63 FR 33305 (June 18, 1998); 63 FR 57164 (Oct. 26,
1998).
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IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act requires agencies to consider
whether the rules they may adopt will have a significant economic
effect on a substantial number of small entities.\13\ This amendment
simply clarifies the standard by which the Commission determines
whether accountants have engaged in ``improper professional conduct''
and does not impose any additional burdens on small businesses.
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies, pursuant to 5 U.S.C. 605(b), that the amendment will not
have a significant economic impact on a substantial number of small
businesses.
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\13\ 5 U.S.C. 601 et seq.
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B. Paperwork Reduction Act
The amendment to Rule 14.8 does not establish a collection of
information for which the Commission would be obligated to comply with
the Paperwork Reduction Act.\14\
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\14\ 44 U.S.C. 3501 et seq.
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C. Consideration of Costs and Benefits
Section 15(a) of the Commodity Exchange Act (``CEA'') requires the
Commission to ``consider the costs and benefits'' of its actions before
promulgating a regulation under the CEA or issuing certain orders.\15\
Section 15(a) further specifies that the costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
(1) Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) factors.
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\15\ 7 U.S.C. 19(a).
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Reckless accounting practices threaten serious harm to market
participants and, potentially, to the financial system as a whole.\16\
Rule 14.8, which encompasses ``improper professional conduct'' of
accountants that practice before the Commission, is one of the
Commission's tools to guard against such harm. The amendment does not
substantively change the standard that the Commission has employed to
date under rule 14.8(c) in assessing accountant conduct. Rather, as
discussed above, the amendment--which closely tracks language in the
SEC's analogous rule \17\--simply expands upon the pre-existing
language of rule 14.8(c) to articulate the standard more specifically
and in a manner consistent with the standard the Commission has applied
in past administrative adjudications considering accountant
behavior.\18\
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\16\ For example, accounting professionals who prepare or assist
in the preparation of misleading auditing reports or financial
statements--either deliberately or due to their incompetence--may
help cover up fraudulent practices that result in loss of customer
funds. In addition, misleading auditing reports or financial
statements may result in excessive risks being undertaken, because
certain risk measures or decisions regarding risk management are
based on accounting data.
\17\ 17 CFR 201.102(e)(1)(iv).
\18\ See note 2, supra.
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Accordingly, the amendment's chief benefit derives from clarifying
the specific contours of the Commission's existing rule 14.8(c)
standard as applied to accountant behavior and by codifying this
refined approach in the Commission's regulations. Through this
codification, the standard will be more transparent and accessible to
professional practitioners, market participants, and the public
generally. As a result, accountants appearing before the Commission
will have the benefit of prominent notice of the specific standards of
conduct to which they are held, and the consequences of failing to meet
them. To the extent an
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accountant inclined to test the bounds of professional conduct may have
previously perceived loopholes or ambiguity for exploitation under the
generally-stated standard of rule 14.8(c), the clarifying amendment
provides a deterrent against such potentially damaging conduct--a
benefit for market participants and the public. Further, such clear,
specific notice forecloses to a great degree potential for an offending
accounting practitioner, in defense of improper conduct, to argue
confusion or uncertainty about what specifically the Commission's
standard requires, thus supporting Commission enforcement efficiency.
The Commission anticipates no material cost burden attributable to
the amendment for market participants or accounting professionals to
whom the amendment is addressed. Again, this amendment merely
articulates with more precision the contours of the more generally-
stated standard of rule 14.8(c) as it has existed prior to this
amendment; further, this pre-existing standard has encompassed
standards governing the accounting profession generally and with which
accounting professionals have needed to comply. Since the clarifying
amendment effects no substantive change to the rule 14.8 standard,
accountants practicing before the Commission should already be in
compliance. Consequently, they should experience no cost to change
their behavior to comply with the rule as amended.
In the following, the Commission considers the amendment relative
to the CEA section 15(a) factors.
(1) Protection of Market Participants and the Public
As noted, improper accounting practices may help to cover up
financial frauds or foster improper managerial decisions and may pose a
threat to the safety of customer funds. By articulating the
Commission's standards in more specific, codified, and readily
accessible form, the amendment safeguards against accountants
professing lack of knowledge of the applicable standards--or exploiting
perceived ambiguities in them--to the detriment of market participants
and the public.
(2) Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
Threats to the safety of customer funds generate public distrust in
financial market integrity. To the extent this rule amendment better
informs accountants and fosters their understanding of the Commission's
standards and the consequences of improper actions--actions that
potentially could threaten the safety of customer funds--the amendment
promotes the integrity of financial markets.
(3) Price Discovery
The Commission does not foresee that the amendment will directly
impact price discovery.
(4) Sound Risk Management Practices
As noted, improper accounting practices may lead to unnecessary
risks being undertaken, as certain risk measures or managerial
decisions are based on accounting data. To the extent the amendment
improves accountants' understanding of the Commission's standards,
thereby deterring improper conduct that potentially could result in
unnecessary risks being undertaken, the amendment promotes sound risk
management practices.
(5) Other Public Interest Considerations
By harmonizing the rule 14.8(c) standard for accountants with that
of SEC rule of practice 102(e), the amendment helps to ensure
consistency and reduces potential for confusion.
List of Subjects in 17 CFR Part 14
Administrative practice and procedure, Professional conduct and
competency standards, Ethical conduct, Penalties.
For the reasons discussed in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 14 as set forth below:
PART 14--RULES RELATING TO SUSPENSION OR DISBARMENT FROM APPEARANCE
AND PRACTICE
0
1. The authority citation for part 14 is revised to read as follows:
Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391, 7
U.S.C. 4a(j).
0
2. Amend Sec. 14.8 by revising paragraph (c) to read as follows:
Sec. 14.8 Lack of requisite qualifications, character and integrity.
* * * * *
(c) To have engaged in unethical or improper professional conduct
either in the course of any adjudicatory, investigative or rulemaking
or other proceeding before the Commission or otherwise. With respect to
the professional conduct of persons licensed to practice as
accountants, ``unethical or improper professional conduct'' means:
(1) Intentional or knowing conduct, including reckless conduct,
that results in a violation of applicable professional principles or
standards; or
(2) Either of the following two types of negligent conduct:
(i) A single instance of highly unreasonable conduct that results
in a violation of applicable professional principles or standards in
circumstances in which an accountant knows, or should know, that
heightened scrutiny is warranted.
(ii) Repeated instances of unreasonable conduct, each resulting in
a violation of applicable professional principles or standards, which
indicate a lack of competence to practice before the Commission.
Issued in Washington, DC, on June 5, 2015, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix to Proceedings Before the Commodity Futures Trading
Commission; Rules Relating to Suspension or Disbarment From Appearance
and Practice--Commission Voting Summary
On this matter, Chairman Massad and Commissioners Wetjen, Bowen,
and Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2015-14159 Filed 6-9-15; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: June 10, 2015