Document ID: SEC-2019-0381-0001
Agency: sec
Document Type: Rule
Title: Public Company Accounting Oversight Board Hearing Officers
Posted Date: 2019-04-03T04:00Z

[Federal Register Volume 84, Number 64 (Wednesday, April 3, 2019)]
[Rules and Regulations]
[Pages 12906-12908]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06427]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 202

[Release No. 34-85437]

Public Company Accounting Oversight Board Hearing Officers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
revising its regulations with respect to the method by which hearing 
officers of the Public Company Accounting Oversight Board (``Board'' or 
``PCAOB'') are appointed and removed from office. Specifically, the 
Commission is adopting a rule expressly requiring that the appointment 
or removal of a PCAOB hearing officer be subject to Commission 
approval.

[[Page 12907]]

DATES: Effective Date: April 3, 2019.

FOR FURTHER INFORMATION CONTACT: Mark Jacoby, Senior Special Counsel, 
at (202) 551-5337, or Giles Cohen, Acting Chief Counsel, at (202) 551-
2512, in the Office of the Chief Accountant, or Lisa Helvin, Counsel to 
the General Counsel, at (202) 551-5195, or Bryant Morris, Assistant 
General Counsel, at (202) 551-5153, in the Office of the General 
Counsel, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: 

I. Background

    The Sarbanes-Oxley Act of 2002, as amended (the ``Sarbanes-Oxley 
Act'' or the ``Act''),\1\ established the PCAOB to oversee the audits 
of companies that are subject to the securities laws, and related 
matters, in order to protect the interests of investors and further the 
public interest in the preparation of informative, accurate, and 
independent audit reports.\2\ The Act vests the Commission with 
comprehensive oversight and enforcement authority over the PCAOB. It 
grants the Commission authority to, among other things, appoint and 
remove the members of the PCAOB, approve PCAOB rules and professional 
standards, and oversee the PCAOB's exercise of certain assigned powers 
and duties.\3\
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    \1\ 15 U.S.C. 7201 et seq.
    \2\ 15 U.S.C. 7211(a).
    \3\ 15 U.S.C. 7211-7219.
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    Section 105 of the Sarbanes-Oxley Act authorizes the Board to 
investigate and, if necessary, initiate disciplinary action against 
registered public accounting firms and their associated persons.\4\ 
Upon initiating such an action, the Board may hold a hearing to 
determine whether a registered public accounting firm or associated 
person committed, and should be disciplined for, any violation of the 
Sarbanes-Oxley Act, the securities laws, the Commission's rules, the 
Board's rules, or professional standards.\5\
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    \4\ 15 U.S.C. 7215.
    \5\ Id. The Board is authorized to delegate the hearing function 
to an employee, pursuant to Section 101(f)(4) and (g)(2), 15 U.S.C. 
7211(f)(4) & (g)(2).
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    The Sarbanes-Oxley Act directs the Board to promulgate rules 
governing its investigations and adjudications.\6\ The Board has done 
so. As relevant here, those rules provide that once the Board has 
issued an order instituting proceedings, or after a registration 
applicant has requested a hearing, a hearing officer will be assigned 
to preside over the proceeding.\7\ The hearing officer is granted ``the 
authority to do all things necessary and appropriate to discharge his 
or her duties,'' including: Issuing accounting board demands; receiving 
and ruling on the admissibility of evidence; generally ``regulating the 
course of a proceeding and the conduct of the parties and their 
counsel''; holding pre-hearing and other conferences; ruling on 
motions; and preparing an initial decision.\8\ The role of the PCAOB 
hearing officer thus closely resembles that of the Commission's 
administrative law judges (``ALJs'').
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    \6\ 15 U.S.C. 7215.
    \7\ PCAOB Bylaws and Rules, Section 5-Investigations and 
Adjudications, available at https://pcaobus.org//Rules/Documents/Section_5.pdf (effective pursuant to SEC Release No. 34-49704, File 
No. PCAOB-2003-07, 2004 WL 1439833 (May 14, 2004)).
    \8\ PCAOB Rule 5200(b); see also Guide to Proceedings Before a 
PCAOB Hearing Office, available at https://pcaobus.org/Enforcement/Adjudicated/Pages/guide-to-proceedings-before-PCAOB-hearing-officer.aspx (``A hearing on the merits before a PCAOB Hearing 
Officer is, in many respects, similar to a trial before a judge in 
state or federal court.'').
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    On June 21, 2018, the United States Supreme Court in Lucia v. SEC 
considered a challenge to the method by which the Commission's ALJs 
were appointed, holding that because the ALJs exercise ``significant 
authority pursuant to the laws of the United States,'' they are 
``Officers of the United States'' who must be appointed in the manner 
prescribed by the Constitution's Appointments Clause--by the President, 
a court of law, or head of a department, such as the Commission.\9\ In 
so holding, the Court followed its earlier decision in Freytag v. 
Commissioner, in which it determined that, given the powers they 
exercise, special trial judges of the United States Tax Court are also 
constitutional officers.\10\
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    \9\ 138 S. Ct. 2044, 2050-51 (2018); Art. II, Sec.  2, cl.2.
    \10\ Lucia, 138 S. Ct. at 2053-54 (citing Freytag v. Comm'r, 501 
U.S. 868 (1991)).
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    While PCAOB hearing officers are similarly vested with ``the 
authority needed to ensure fair and orderly adversarial hearings,'' 
\11\ there are notable differences between the powers they exercise and 
those exercised by Commission ALJs and Tax Court special trial judges. 
Unlike the other adjudicators, for example, PCAOB hearing officers are 
not authorized to administer oaths or punish contemptuous conduct.\12\ 
Moreover, to date, no court has held that PCAOB hearing officers must 
be appointed as inferior officers under the Appointments Clause.\13\ 
Nevertheless, to remove any doubt about the constitutional status of 
PCAOB hearing officers, the Commission hereby amends 17 CFR part 202, 
subpart A (Regulation P) to require that the Commission, acting as head 
of a department, must approve both the appointment and the removal from 
office of any PCAOB hearing officer before any such action may take 
effect.\14\
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    \11\ Lucia, 138 S. Ct. at 2053.
    \12\ Compare, e.g., PCAOB Rules 5103, 5105, 5200(b)(1), 5424 
(PCAOB hearing officers) with 17 CFR 200.14(a)(1) & (2), 200.111(b), 
180(a), 232(e), 322 (Commission ALJs) and Freytag v. Comm'r, 501 
U.S. at 881-82 (Tax Court special trial judges).
    \13\ While the Board is not a governmental entity for statutory 
purposes, it is ``` part of the Government' for constitutional 
purposes.'' Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 
561 U.S. 477, 485-86 (2010).
    \14\ On December 20, 2018, the Board adopted amendments to its 
bylaws and rules (collectively, the ``proposed amendments'') to 
provide that the PCAOB's appointment and removal of hearing officers 
are subject to Commission approval. The PCOAB filed the proposed 
amendments with the Commission on January 29, 2019, and on February 
11, 2019, the Commission published notice of this filing. See 
https://www.sec.gov/rules/pcaob/2019/34-85090.pdf.
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    We believe this requirement is consistent with both the 
Constitution and the oversight and appointment authority Congress has 
granted the Commission. The Commission has the constitutional authority 
to both appoint and remove from office the inferior officers under its 
supervision.\15\ Congress has also authorized the Commission to appoint 
inferior officers ``necessary for carrying out its functions under the 
securities laws,'' including those specified in the Sarbanes-Oxley 
Act.\16\ Further, pursuant to the Sarbanes-Oxley Act, Congress has 
granted the Commission comprehensive oversight and enforcement 
authority over the PCAOB, and it has specified that the Board's 
appointment of employees and its delegation of functions to such 
employees are subject to the Commission's oversight.\17\
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    \15\ See Lucia, 138 S. Ct. 2044, 2051 & n.3; Edmond v. United 
States, 520 U.S. 651, 663 (1997); see also Free Enter. Fund, 561 
U.S. at 513-14.
    \16\ 5 U.S.C. 4802(b) (citing 15 U.S.C. 78c(a)(47)); 15 U.S.C. 
78d(b).
    \17\ 15 U.S.C. 7217(a); 15 U.S.C. 7211(f), (g).

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[[Page 12908]]

    This power to appoint--or approve the appointment of--inferior 
officers carries with it the power to remove those individuals from 
office. As the Supreme Court has explained, ``the power of removal from 
office is incident to the power of appointment,'' and thus statutes 
vesting heads of department with appointment authority are presumed to 
carry with them removal authority, absent language to the contrary.\18\ 
Here, the relevant statutes provide no such restrictions.\19\ 
Accordingly, the Commission may require that it approve both the 
appointment and the removal from office of any PCAOB hearing officer 
before any such action may take effect.
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    \18\ See Keim v. United States, 177 U.S. 290, 293-94 (1900); Ex 
parte Hennen, 38 U.S. (13 Pet.) 230, 259-60 (1839); Power of the 
Secretary of the Treasury to Remove Inspectors of Hulls and Bollers, 
10 Op. Att'y Gen. 204, 207-09 (1862); Tenure of Office of Inspectors 
of Customs, 1 Op. Att'y Gen. 459, 459 (1821).
    \19\ See 5 U.S.C. 4802(b); 15 U.S.C. 78d(b); 15 U.S.C. 7217(a); 
15 U.S.C. 7211(f), (g); see also Free Enter. Fund, 561 U.S. at 510 
(Commission may remove members of the Board ``at will'').
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II. Administrative Law Matters

    The Commission finds, in accordance with the Administrative 
Procedure Act (``APA''),\20\ that these revisions relate solely to 
agency organization, procedures, or practice and do not constitute a 
substantive rule. Accordingly, the APA's provisions regarding notice of 
rulemaking, opportunity for public comment, and advance publication of 
the amendments prior to their effective date are not applicable. These 
changes are therefore effective on April 3, 2019. For the same reason, 
and because these amendments do not affect the rights or obligations of 
non-agency parties, the provisions of the Small Business Regulatory 
Enforcement Fairness Act \21\ are not applicable. Additionally, the 
provisions of the Regulatory Flexibility Act,\22\ which apply only when 
notice and comment are required by the APA or other law, are not 
applicable. These amendments do not contain any collection of 
information requirements as defined by the Paperwork Reduction Act of 
1995.\23\ Further, because the amendments impose no new burdens on 
private parties, the Commission does not believe that the amendments 
will have any impact on competition for purposes of Section 23(a)(2) of 
the Exchange Act.
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    \20\ 5 U.S.C. 553(b)(3)(A).
    \21\ 5 U.S.C. 804(3)(C).
    \22\ 5 U.S.C. 601 et seq.
    \23\ See 44 U.S.C. 3518(c)(1)(B)(ii); 5 CFR 1320.4.
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III. Statutory Authority

    This rule is adopted pursuant to statutory authority granted to the 
Commission, including 5 U.S.C. 4802(b), Sections 4(b) and 23(a) of the 
Exchange Act, 15 U.S.C. 78d(b), and Sections 101 and 107 of the 
Sarbanes-Oxley Act of 2002, 15 U.S.C. 7211, 7217.

List of Subjects in 17 CFR Part 202

    Administrative practice and procedure, Securities.

Text of Rule

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is amended as *COM007*follows:

PART 202--INFORMAL AND OTHER PROCEDURES

0
 1. The authority citation for part 202 continues to read in part as 
follows:

     Authority: 15 U.S.C. 77s, 77t, 77sss, 77uuu, 78d-1, 78u, 78w, 
78ll(d), 80a-37, 80a-41, 80b-9, 80b-11, 7201 et seq., unless 
otherwise noted.
* * * * *

Subpart A--Public Company Accounting Oversight Board (Regulation P)

0
2. Section 202.150 is added to read as follows:

Sec.  202.150  Commission approval of appointment or removal from 
office of Public Company Accounting Oversight Board hearing officers.

    The Commission shall approve both the appointment and removal from 
office of any hearing officer employed by the Public Company Accounting 
Oversight Board. No action by the Board proposing to appoint or remove 
from office a hearing officer shall be final absent Commission 
approval.

    By the Commission.

    Dated: March 28, 2019.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06427 Filed 4-2-19; 8:45 am]
 BILLING CODE 8011-01-P