Document ID: SEC-2005-0151-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-10-26T04:00Z

[Federal Register: October 26, 2005 (Volume 70, Number 206)]
[Notices]               
[Page 61864-61866]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26oc05-140]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52645; File No. SR-NASD-2005-116]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Modify 
Nasdaq's Auditor Peer Review Requirement

October 20, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 29, 2005, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1)
    \2\ 17 CFR 240.19b-4
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify NASD Rule 4350(k) to reflect changes to 
the oversight of auditors mandated by the Sarbanes-Oxley Act of 2002 
(the ``Sarbanes-Oxley Act'') \3\ and to make a conforming amendment to 
NASD Rule 4200(a). Nasdaq will implement the proposed rule immediately 
upon

[[Page 61865]]

Commission approval. The text of the proposed rule change is below. 
Proposed new language is in italics; proposed deletions are in 
[brackets].
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    \3\ Pub. L. 107-204, 116 Stat. 745 (2002).
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* * * * *

4200. Definitions

    (a) For purposes of the Rule 4000 Series, unless the context 
requires otherwise:
    (1) No change.
    (2) Reserved. [``AICPA'' means the American Institute of Certified 
Public Accountants.]
    (3)-(38) No change.
    (b) No change.
* * * * *

4350. Qualitative Listing Requirements for Nasdaq National Market and 
Nasdaq SmallCap Market Issuers Except for Limited Partnerships

    (a)-(j) No change.
    (k) [Peer Review] Auditor Registration
    [(1)] Each listed issuer must be audited by an independent 
accountant that[:] Is registered as a public accounting firm with the 
Public Company Accounting Oversight Board, as provided for in Section 
102 of the Sarbanes-Oxley Act of 2002 [15 U.S.C. 7212].
    [(A) has received an external quality control review by an 
independent public accountant (``peer review'') that determines whether 
the auditor's system of quality control is in place and operating 
effectively and whether established policies and procedures and 
applicable auditing standards are being followed; or]
    [(B) is enrolled in a peer review program and within 18 months 
receives a peer review that meets acceptable guidelines.]
    [(2) The following guidelines are acceptable for purposes of this 
paragraph:]
    [(A) The peer review should be comparable to AICPA standards 
included in Standards for Performing on Peer Reviews, codified in the 
AICPA's SEC Practice Section Reference Manual;]
    [(B) The peer review program should be subject to oversight by an 
independent body comparable to the organizational structure of the 
Public Oversight Board as codified in the AICPA's SEC Practice Section 
Reference Manual; and]
    [(C) The administering entity and the independent oversight body of 
the peer review program must, as part of their rules of procedure, 
require the retention of the peer review working papers for 90 days 
after acceptance of the peer review report and allow Nasdaq access to 
those working papers.]
    (l)-(n) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASD Rule 4350(k) currently requires that issuers be audited by an 
independent public accountant that has received an external quality 
control review by another independent public accountant (a ``peer 
review'') or is enrolled in a peer review program. However, as part of 
the Sarbanes-Oxley Act, Congress created the Public Company Accounting 
Oversight Board (the ``PCAOB'') and prohibited accounting firms that 
are not registered with the PCAOB from preparing or issuing audit 
reports on U.S. public companies and from participating in such 
audits.\4\ The Sarbanes-Oxley Act also requires the PCAOB to conduct a 
continuing program of inspections of registered public accounting 
firms.\5\ Pursuant to these requirements, the PCAOB is required to 
conduct inspections annually for firms that provide audit reports for 
more than 100 issuers and at least triennially for firms that provide 
audit reports for fewer issuers.\6\
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    \4\ Section 102 of the Sarbanes-Oxley Act, 15 U.S.C. 7212.
    \5\ Section 104 of the Sarbanes-Oxley Act, 15 U.S.C. 7214.
    \6\ See Section 104 of the Sarbanes-Oxley Act, 15 U.S.C. 
7214(b).
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    In light of these new requirements, the American Institute of 
Certified Public Accountants (``AICPA'') has modified its peer review 
program. The new AICPA peer review program, which succeeds the SEC 
Practice Section Peer Review Program currently referred to in NASD Rule 
4350(k), is designed to review and evaluate only the non-SEC issuer 
practice of the firm.\7\ As a result, this peer review program is no 
longer relevant with respect to the audits of Nasdaq-listed issuers.
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    \7\ See Web site for the AICPA's Center for Public Company Audit 
Firms Peer Review Program at: http://www.aicpa.org/centerprp/index.htm
.

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    Given these changes to the oversight and inspection of auditors, 
the proposed rule change is designed to modify existing NASD Rule 
4350(k) to reflect the new role of the PCAOB and change the existing 
requirement to a requirement that each issuer's auditor be registered 
as a public accounting firm with the PCAOB. As a result, auditors of 
Nasdaq companies will be subject to the PCAOB's program of continuing 
inspections.\8\
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    \8\ See Sections 4000-4012 of the PCAOB Rules. Note that in the 
case of non-U.S. auditors, where the PCAOB determines it 
appropriate, the PCAOB may rely instead on non-U.S. inspections. See 
Section 4012 of the PCAOB Rules.
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    Under the proposed rule change, an issuer seeking to list on Nasdaq 
would be permitted to continue to use historical financial statements 
that were audited by a non-registered firm at a time when the applicant 
was not a public company. Nasdaq believes that this view is consistent 
with an interpretation adopted by the PCAOB, which provides that an 
auditor does not have to register with the PCAOB merely because it 
issues a consent to include an audit report for a prior period, if the 
auditor does not have or expect to have an ongoing role in the auditing 
engagement.\9\ Of course, if the issuer was a public company 
immediately prior to listing on Nasdaq, the company's financial 
statements must have been audited and/or reviewed by a public 
accounting firm that was registered with the PCAOB, as required by the 
Sarbanes-Oxley Act and the rules of the PCAOB.
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    \9\ See PCAOB Rule 2100, Note 2.
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    Finally, Nasdaq proposes to make a conforming amendment to the 
language of NASD Rule 4200(a) to delete the definition of ``AICPA,'' 
which would no longer be necessary.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\10\ in general, and with 
Section 15A(b)(6) of the Act,\11\ in particular, in that the proposal 
is designed to remove impediments to a free and open market and a 
national market system, prevent fraudulent and manipulative acts and 
practices, and, in general, to protect investors and the public 
interest. Specifically, the proposed rule change will remove a 
redundant listing requirement, thereby removing an impediment to a free 
and open market,

[[Page 61866]]

and will align Nasdaq's listing standards with the requirements of the 
Sarbanes-Oxley Act, thereby allowing Nasdaq to further the investor 
protection goals of that Act.
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    \10\ 15 U.S.C. 78o-3.
    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which Nasdaq consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2005-116 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-116. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the NASD. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASD-2005-116 and should be submitted on or before 
November 16, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-5942 Filed 10-25-05; 8:45 am]

BILLING CODE 8010-01-P