As described by the staff and my fellow Board members, this project involves a series of amendments to PCAOB rules and forms, including certain conforming amendments to amend existing Board rules to reflect the provisions of the Dodd-Frank Act, particularly the Act's grant of authority to the PCAOB to oversee the audits of brokers and dealers.
Many of these amendments follow directly from the Dodd-Frank Act and its grant of authority to the Board over the auditors of brokers and dealers. While largely technical in nature and not based on discretionary policy decisions by the Board, these amendments are intended to reflect the broader investor protection mandate inherent in the Dodd-Frank amendments to the Sarbanes-Oxley Act.
The Board also is proposing a series of amendments to existing PCAOB rules driven by the board's administrative experience, including the clarification of certain areas that may have caused confusion in the past.
However, among the technical and clarifying amendments are several that are more substantive and that require the Board to make policy decisions. Foremost among these is the Board's proposal regarding whether and how to apply its independence rules to the auditors of brokers and dealers. Other amendments that do not follow directly from the Dodd-Frank Act include the proposals to require certain special reports on PCAOB Form 3 that affect auditors of issuers as well as brokers and dealers and to require foreign audit firms to report annually on PCAOB Form 2 whether they have designated an agent in the U.S. for service of process pursuant to Section 106 of the Sarbanes-Oxley Act (as amended by the Dodd-Frank Act). Finally, the proposals include certain amendments to the Board's rules governing disciplinary proceedings that reflect the Board's experience conducting such proceedings in years past.
We welcome comments on all aspects of the proposals, and, in particular, whether they appropriately server our primary goal of protecting investors. In addition, I would be particularly interested in receiving comments in connection with the following issues:
First, has the Board struck the right balance in connection with the determinations regarding the applicability of the Board's independence rules to the auditors of brokers and dealers? We have signaled in the release some concern about the application of Rule 3523 (Tax Services for Persons in a Financial Reporting Oversight Role) to auditors of brokers and dealers and have specifically requested comment on this proposal. I also would be interested in comments addressing whether the application to brokers and dealers of Rules 3521 (Contingent Fees) and Rule 3522 (Tax Transactions) is appropriate in situations where the broker and dealer is a subsidiary or affiliate of other, non-public entities that are not otherwise subject to PCAOB or SEC independence rules. As defined, the scope of the term "audit client" broadly includes various types of affiliates of the actual audit client. The independence requirements therefore would apply to the broker-dealer's affiliates, parent companies, subsidiaries and other types of related entities, limiting the activities of their auditors, even in situations where the broker dealer may represent a small and potentially insignificant portion of a much larger entity or network of affiliates. I would be interested in receiving comment on the potential burdens of this result and on whether this is likely to be a common occurrence. Likewise, I urge investors to provide their views on why application of all three of these rules is important.
Second, the amendments we are proposing today to PCAOB forms are largely intended to require basic information relating to a firm's audits of brokers and dealers, generally tracking the information currently required for issuer audits. It seems reasonable, at this point, to wait to impose any additional reporting requirements on auditors of brokers and dealers until the Board has evaluated its experiences during the interim broker-dealer auditor inspection program and determined the final scope of its oversight program. Do commenters agree that this is the right approach? Are there additional requirements that should be imposed immediately in order to better protect investors? On the other hand, are there any reporting requirements in the proposed amendments that would be imposed on broker-dealer auditors without providing important information or a specific benefit?
As always, I know we will receive thoughtful and thought-provoking comments on our proposals, and I look forward to reading them.
In the meantime, I would like to add my appreciation to that already expressed by my fellow Board members for the hard work on this project by members of the Office of General Counsel, particularly Nancy Doty, Vince Meehan, and Bob Burns. Their work on this project was tedious and unglamorous, but certainly thoughtful and thorough. I would also like to thank the staff of the SEC who took time to provide input.