2014-25194
Federal Register, Volume 79 Issue 205 (Thursday, October 23, 2014)
[Federal Register Volume 79, Number 205 (Thursday, October 23, 2014)]
[Proposed Rules]
[Pages 63343-63346]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-25194]
=======================================================================
-----------------------------------------------------------------------
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: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing to amend part 14 of its regulations, under which the
Commission may deny, temporarily or permanently, the privilege of
certain persons to appear or practice before it. The amendment
clarifies the Commission's standard for determining when an accountant
has engaged in
[[Page 63344]]
``unethical or improper professional conduct'' which has been
established as a basis for denying the accountant the privilege of
appearing or practicing before the Commission.
DATES: Comments must be received on or before November 24, 2014.
ADDRESSES: You may submit comments, identified by RIN number 3038-AE21,
by any of the following methods:
Agency Web site, via the Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581.
Hand delivery/courier: Same as Mail, above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow instructions for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
www.cftc.gov. You should submit only information that you wish to make
available publicly. If you wish the Commission to consider information
that you believe is exempt from disclosure under the Freedom of
Information Act, a petition for confidential treatment of the exempt
information may be submitted according to the procedures established in
Sec. 145.9 of the Commission's regulations, 17 CFR 145.9.
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under the Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT: Jason Gizzarelli, Director, Office of
Proceedings, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC 20581. Telephone: (202)
418-5395.
SUPPLEMENTARY INFORMATION:
I. Background
The Commission proposes to amend Sec. 14.8 of its regulations to
provide additional guidance with respect to the circumstances in which
the Commission, after notice and opportunity for hearing, may deny,
temporarily or permanently, the privilege of appearing or practicing
before it to any accountant who is found by a preponderance of the
evidence to have violated Sec. 14.8 of the regulations. Specifically,
the Commission can impose a sanction upon any persons, most notably
attorneys and accountants, after notice and opportunity for a hearing,
who it finds do not possess the requisite qualifications to represent
others; to be lacking in character or integrity; or 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\
---------------------------------------------------------------------------
\1\ 17 CFR 14.8.
---------------------------------------------------------------------------
The Commission has filed six administrative actions alleging
violations of Rule 14.8 since 1996 against accountants appearing and
practicing before the Commission.\2\ In each of those six cases, the
Commission accepted a settlement in which the defendants were banned
from practicing before the Commission for a variety of time periods.
The amendments to Sec. 14.8 relate to the practice of accountants
before the Commission and are intended to expand upon the language of
current Sec. 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.
---------------------------------------------------------------------------
\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 (CFTC filed Aug. 26,
2013).
---------------------------------------------------------------------------
The proposed amendment of Sec. 14.8 generally tracks Securities
and Exchange Commission (``SEC'') Rule 102(e), in which the SEC has
elaborated its standard for determining when an accountant engages in
``improper professional conduct'' by specifying three types of
violative conduct. The SEC rule states that, with respect to persons
licensed to practice as accountants, ``improper professional conduct''
under SEC Rule 201.102(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
SEC.\3\
---------------------------------------------------------------------------
\3\ 17 CFR 201.102(e)(1)(iv).
---------------------------------------------------------------------------
In subparagraph (A) of its amended rule, the SEC defines ``improper
professional conduct'' to include the most egregious violations of
applicable professional standards--those done intentionally or
knowingly. In subparagraph (B) of Rule 102(e), the SEC specifies what
types of negligent conduct rise to the level of ``improper professional
conduct.'' These standards are being added to the proposed Sec. 14.8
of the Commission's regulations to provide further definition to the
fitness criteria established in Sec. 14.8.
II. Role of, and Standards Applied to, Accountants
Accountants auditing Commission registrants perform a critical
gatekeeper role in protecting the financial integrity of the futures
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.\4\
---------------------------------------------------------------------------
\4\ 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.
---------------------------------------------------------------------------
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.
[[Page 63345]]
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, in each case resulting in a violation of
applicable professional standards, and that this conduct indicates a
lack of competence, then that accountant engaged in improper
professional conduct under the standard elaborated today.
The proposed amendment to Sec. 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 proposed amendment is crafted to provide greater
clarity with respect to the Commission's standard, as developed to-date
through administrative adjudications, for assessing accountant conduct.
At the same time, however, like the SEC regulations 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.
Just as the SEC noted when it amended its rule in 1998, the
Commission does not seek to use Sec. 14.8 to establish new standards
for the accounting profession.\5\ 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 Sec. 14.8(c) is intended to apply consistent with those
existing standards.
---------------------------------------------------------------------------
\5\ See 63 FR 33305, June 18, 1998 and 63 FR 57164, Oct. 26,
1998.
---------------------------------------------------------------------------
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires agencies to
consider whether the rules they may adopt will have a significant
economic effect on a substantial number of small entities.\6\ The
proposed 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
amendments will not have a significant economic impact on a substantial
number of small businesses.
---------------------------------------------------------------------------
\6\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
B. Paperwork Reduction Act
The proposed 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.\7\
---------------------------------------------------------------------------
\7\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
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.\8\
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.
---------------------------------------------------------------------------
\8\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
Reckless accounting practices threaten serious harm to market
participants and, potentially, to the financial system as a whole.\9\
Section 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. This proposed amendment
is not designed to substantively change the standard that the
Commission now employs under Sec. 14.8(c) in assessing accountant
conduct. Rather, as discussed above, the proposed amendment--which
closely tracks language in the SEC's analogous rule \10\--would simply
expand upon the language of current Sec. 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.\11\
---------------------------------------------------------------------------
\9\ 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.
\10\ 17 CFR 201.102(e)(1)(iv).
\11\ See footnote 2 of section I of this Preamble.
---------------------------------------------------------------------------
Accordingly, the proposed amendment's chief benefit derives from
clarifying the specific contours of the Commission's existing Sec.
14.8(c) standard as applied to accountant behavior, and by codifying
this refined approach in the Commission's regulations. Through this
codification the more well-defined 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 accountant inclined to test the
bounds of professional conduct perceives loopholes or ambiguity for
exploitation in the more general standard now stated in Sec. 14.8(c),
the proposed 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 proposed amendment for market participants or accounting
professionals to whom the amendment is addressed. Again, this proposed
rule amendment merely articulates with more precision the contours of
the existing, but now more generally-stated, standard in current Sec.
14.8(c), which incorporates the standards to which accountants must
already conform under the rules governing that profession. Accountants
practicing before the Commission are currently expected to be in
compliance with this standard, so there should be no cost to them to
change behavior to meet it.
In the following, the Commission considers the proposed 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
[[Page 63346]]
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 proposed
amendment promotes the integrity of financial markets.
(3) Price Discovery
The Commission does not foresee that the proposed 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 proposed
amendment improves accountants' understanding of the Commission's
standards, thereby deterring improper conduct that potentially could
result in unnecessary risks being undertaken, the proposed amendment
promotes sound risk management practices.
(5) Other Public Interest Considerations
By harmonizing the CFTC Rule 14.8(c) standard for accountants with
that of SEC Rule 102(e), the proposed amendment helps to ensure
consistency and reduces potential for confusion.
The Commission requests comment on all aspects of this
consideration of costs and benefits, including whether any alternative
is perceived as more beneficial, less costly, or otherwise better
suited to serve the public interests articulated in CEA section 15(a)
than the amendment herein proposed.
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 proposes to amend 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 continues to read as follows:
Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391, 7
U.S.C. 4a(j), unless otherwise noted.
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 October 17, 2014, 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. 2014-25194 Filed 10-22-14; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: October 23, 2014