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[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

[[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\
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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.

[[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.
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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

[[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
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