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]

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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.

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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

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“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

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1 17 CFR 14.8.

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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.

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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 (CFTC filed Aug. 26,

2013).

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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

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3 17 CFR 201.102(e)(1)(iv).

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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

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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.

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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.

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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.

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5 See 63 FR 33305, June 18, 1998 and 63 FR 57164, Oct. 26,

1998.

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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.

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6 5 U.S.C. 601 et seq.

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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

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7 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.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.

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8 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.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

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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.

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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

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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