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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This section of the FEDERAL REGISTER contains regulatory documents

having general applicability and legal effect, most of which are keyed

to and codified in the Code of Federal Regulations, which is published

under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents.

Prices of new books are listed in the first FEDERAL REGISTER issue of each

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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