Document ID: SEC-2016-0830-0001
Agency: sec
Document Type: Notice
Title: Public Company Accounting Oversight Board; Order Granting Approval of Proposed Rules to Require Disclosure of Certain Audit Participants, etc.
Posted Date: 2016-05-13T04:00Z

[Federal Register Volume 81, Number 93 (Friday, May 13, 2016)]
[Notices]
[Pages 29925-29928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11292]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77787; File No. PCAOB-2016-01]

Public Company Accounting Oversight Board; Order Granting 
Approval of Proposed Rules To Require Disclosure of Certain Audit 
Participants on a New PCAOB Form and Related Amendments to Auditing 
Standards

May 9, 2016.

I. Introduction

    On January 29, 2016, the Public Company Accounting Oversight Board 
(the ``Board'' or the ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 107(b) \1\ of the 
Sarbanes-Oxley Act of 2002 (the ``Sarbanes-Oxley Act'') and Section 
19(b) \2\ of the Securities Exchange Act of 1934 (the ``Exchange 
Act''), a proposal to adopt two new rules, a new form, and amendments 
to auditing standards to improve transparency regarding the engagement 
partner and other accounting firms that participate in issuer audits 
(collectively, the ``Proposed Rules'').\3\ The Proposed Rules were 
published for comment in the Federal Register on February 16, 2016.\4\ 
At the time the notice was issued, the Commission extended to May 16, 
2016 the date by which the Commission should take action on the 
Proposed Rules.\5\ The Commission received four comment letters in 
response to the notice.\6\ This order approves the Proposed Rules.
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    \1\ 15 U.S.C. 7217(b).
    \2\ 15 U.S.C. 78s(b).
    \3\ The Board originally issued a concept release in 2009. See 
Concept Release on Requiring the Engagement Partner to Sign the 
Audit Report, PCAOB Release No. 2009-005 (July 28, 2009) (``Concept 
Release''), available at http://pcaobus.org/Rules/Rulemaking/Docket029/2009-07-28_Release_No_2009-005.pdf. In 2011, the Board 
issued proposed rules. See Improving the Transparency of Audits: 
Proposed Amendments to PCAOB Auditing Standards and Form 2, PCAOB 
Release No. 2011-007 (Oct. 11, 2011) (``Proposal''), available at 
https://www.sec.gov/rules/pcaob/2016/34-77082.pdfhttp://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB_Release_2011-007.pdf. Subsequently, 
the Board issued a re-proposal in 2013. See Improving the 
Transparency of Audits: Proposed Amendments to PCAOB Auditing 
Standards to Provide Disclosure in the Auditor's Report of Certain 
Participants in the Audit, PCAOB Release No. 2013-009 (Dec. 4, 2013) 
(``Reproposal''), available at http://pcaobus.org/Rules/Rulemaking/Docket029/PCAOB%20Release%20No%20%202013-009%20-%20Transparency.pdf. 
In 2015, the Board issued a supplemental request for comment, which 
ultimately formed the framework for these Proposed Rules. See 
Supplemental Request for Comment: Rules to Require Disclosure of 
Certain Audit Participants on a New PCAOB Form, PCAOB Release No. 
2015-004 (June 30, 2015) (``Supplemental Request''), available at 
http://pcaobus.org/Rules/Rulemaking/Docket029/Release_2015_004.pdf.
    \4\ See Release No. 34-77082 (Feb. 8, 2016), 81 FR 7927 (Feb. 
16, 2016).
    \5\ Ibid.
    \6\ See letters to the Commission from CFA Institute, dated 
February 15, 2016 (``CFA Letter''); Tom Quaadman, Senior Vice 
President, Center for Capital Markets Competitiveness, U.S. Chamber 
of Commerce, dated March 3, 2016 (``Chamber Letter''); Deloitte & 
Touche LLP, dated March 4, 2016 (``Deloitte Letter''); and Michael 
R. McMurtry, CPA, dated March 18, 2016 (``McMurtry Letter'').
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II. Description of the Proposed Rules

    On December 15, 2015, the Board adopted two new rules (``Rules 3210 
and 3211'') and Form AP to provide investors and other financial 
statement users with information about engagement partners and 
accounting firms that participate in audits of issuers.

A. Changes to PCAOB Rules and Forms

    Under the Proposed Rules, for each audit report it issues for an 
issuer, a registered public accounting firm must file with the Board a 
report on Form AP that includes the following:
     The name of the engagement partner and Partner ID; \7\
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    \7\ The firm is required to assign a 10-digit Partner ID number, 
beginning with the Firm ID (a unique five-digit number based on the 
number assigned to the firm by the PCAOB at the time of 
registration) followed by a unique series of five digits assigned by 
the firm.

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[[Page 29926]]

     For other accounting firms \8\ participating in the audit 
for which the responsibility for the audit is not divided:
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    \8\ The Board defines ``other accounting firm'' as (i) a 
registered public accounting firm other than the firm filing Form 
AP; or (ii) any other person or entity that opines on the compliance 
of any entity's financial statements with an applicable financial 
reporting framework.
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    [cir] 5% or greater participation: The name, city and state (or, if 
outside the United States, the city and country) of the headquarters' 
office, and, when applicable, the Firm ID, and the percentage of total 
audit hours attributable to each other accounting firm whose 
participation in the audit was at least 5% of total audit hours; \9\
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    \9\ Actual hours should be used if available. If actual audit 
hours are unavailable, the auditor may use a reasonable method to 
estimate the components of this calculation.
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    [cir] Less than 5% participation: The number of other accounting 
firms that participated in the audit whose individual participation was 
less than 5% of total audit hours, and the aggregate percentage of 
total audit hours of such firms; and
     For other accounting firms participating in the audit for 
which the responsibility for the audit is divided:
    [cir] The name, and when applicable, the Firm ID; city and state 
(or if outside the United States, the city and country) of the office 
of the other accounting firm that issued the other auditor's report; 
and the magnitude of the portion of the financial statements audited by 
the other accounting firm.
    Form AP has a basic filing deadline of 35 days after the date the 
auditor's report is first included in a document filed with the 
Commission, with a shorter deadline of 10 days after the auditor's 
report is first included in a registration statement under the 
Securities Act of 1933 (the ``Securities Act'') filed with the 
Commission, such as for an initial public offering. Firms will file 
Form AP through the PCAOB's existing web-based Registration, Annual, 
and Special Reporting system.

B. Changes to PCAOB Standards

    In addition to disclosing the required information on Form AP, the 
Proposed Rules allow an audit firm to voluntarily provide information 
about the engagement partner, other accounting firms, or both in the 
auditor's report. As a result, the Proposed Rules include amendments to 
PCAOB auditing standards AS 3101 (currently AU sec. 508), Reports on 
Audited Financial Statements, and AS 1205 (currently AU sec. 543), Part 
of the Audit Performed by Other Independent Auditors \10\ to allow for 
voluntary reporting.
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    \10\ On March 31, 2015, the PCAOB adopted the reorganization of 
its auditing standards using a topical structure and a single, 
integrated numbering system that was approved by the Commission on 
September 17, 2015. The reorganized amendments will be effective as 
of December 31, 2016, and nothing precludes auditors and others from 
using and referencing the reorganized standards before the effective 
date.
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C. Applicability and Effective Date

    The PCAOB has proposed application of the Proposed Rules to audits 
of all issuers, including audits of emerging growth companies 
(``EGCs''),\11\ as discussed in Section IV. below. The Proposed Rules 
would not apply to audits of brokers and dealers under Exchange Act 
Rule 17a-5.\12\ The Proposed Rules would be effective as follows:
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    \11\ The term ``emerging growth company'' is defined in Section 
3(a)(80) of the Exchange Act. 15 U.S.C. 78c(a)(80).
    \12\ If the broker or dealer is an issuer, the Proposed Rules 
would apply.
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    (a) Disclosure of the engagement partner: auditors' reports issued 
on or after January 31, 2017; and
    (b) Disclosure of other accounting firms: auditors' reports issued 
on or after June 30, 2017.

III. Comment Letters

    As noted above, the Commission received four comment letters 
concerning the Proposed Rules. Two commenters expressed support for the 
Proposed Rules.\13\ One commenter provided comments that were generally 
consistent with those provided by others throughout the PCAOB's 
rulemaking process and addressed by the PCAOB.\14\
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    \13\ See CFA Letter and Deloitte Letter.
    \14\ See McMurtry Letter. The Commission believes that the Board 
has reasonably responded to these comments in its rulemaking 
process.
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    In addition, one commenter raised concerns that it had previously 
raised in comment letters to the Board that: (a) The Proposed Rules 
were not liability neutral; and b) the substance of the economic 
analysis was insufficient to justify applying the Proposed Rules to 
audits of EGCs.\15\ In addition, this commenter raised two additional 
issues, including that the 10-digit partner identifying number was not 
subject to a notice and comment period and a suggestion that the 
Proposed Rules should sunset after five years, unless a post 
implementation review finds that the Proposed Rules promote investor 
protection, capital formation and competition. The commenter stated 
that it expressed similar concerns in previous comment letters to the 
PCAOB, and in its opinion, those concerns have not been resolved by the 
PCAOB. We discuss each of these concerns below.
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    \15\ See Chamber Letter.
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(a) Liability Neutrality
    In the release accompanying the Proposed Rules (``Final Rule 
Release''), the Board noted that this commenter asserted that the Board 
should not pursue disclosure requirements for the engagement partner 
and other participants in the audit unless it can be done in a 
``liability neutral'' way.\16\ The Board explained that its purpose 
with the Proposed Rules is not to expose auditors to additional 
liability, and consistent with that purpose, it has endeavored to 
mitigate any additional liability consequences that may stem from the 
Proposed Rules. However, the Board also stated in the Final Rule 
Release that it does not agree with the premise that it should not seek 
to achieve the anticipated benefits of a new rule--here, increased 
transparency and accountability for key participants in the audit--
unless it can be certain that its actions will not affect liability in 
any way. On the whole, the Board believes it has appropriately 
addressed concerns regarding liability consequences of its proposal in 
a manner compatible with the objectives of this rulemaking, and in view 
of the rulemaking's anticipated benefits.
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    \16\ See comment letter of U.S. Chamber of Commerce's Center for 
Capital Markets Competitiveness, August 31, 2015 available at http://pcaobus.org/Rules/Rulemaking/Docket029/031d_Chamber.pdf. This 
letter was also referenced in the Chamber Letter.
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    Since the Concept Release, the Board has sought and considered 
commenters' views on the liability effect of its proposed amendments, 
has taken steps with the intent not to increase auditors' liability 
risk, and has tried to mitigate this possibility to the extent it would 
be consistent with its policy objectives. In the Reproposal, the Board 
included a detailed discussion on potential liability considerations of 
its proposed amendments, including liability under Section 11 of the 
Securities Act of 1933 (``Securities Act'') and Section 10(b) of the 
Exchange Act and Rule 10b-5 thereunder. The Board has also indicated 
that it takes seriously commenters' concerns about the potential 
effects on auditor liability, has engaged in its own review of the 
relevant statutory provisions and case law and has kept the Commission 
staff advised of its thoughts on these issues, as commenters suggested.
    The Board has specifically tailored the Proposed Rules to address, 
in part,

[[Page 29927]]

potential liability considerations raised by commenters. In the 
Supplemental Request, the Board acknowledged that some commenters on 
the Reproposal expressed concern that identifying the engagement 
partner and other participants in the audit in the auditor's report 
could create both legal and practical issues under the federal 
securities laws by increasing the named parties' potential liability 
and by requiring their consent if the auditors' reports naming them 
were included in, or incorporated by reference into, registration 
statements under the Securities Act. The Board also acknowledged that 
some commenters expressed concerns about the possible litigation risk 
under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder of 
the engagement partner's name appearing in the auditor's report. The 
Board further noted that many commenters urged the Board to proceed 
with the new disclosure requirements, if it determined to do so, by 
mandating disclosure on a newly created PCAOB form (or consider other 
alternative locations) as a means of responding to liability concerns. 
In response to these concerns, the Supplemental Request proposed 
disclosure on new Form AP, an alternative location outside the 
auditor's report, and specifically sought comment on whether disclosure 
on Form AP would mitigate commenters' concerns about liability-related 
consequences.
    In the Final Rule Release, the Board further acknowledged 
commenters' concerns that public identification of key audit 
participants, particularly in the auditor's report, could impact the 
potential liability or litigation risks of those identified. In 
particular, the Board noted that it sought comment throughout the 
rulemaking process on various means of disclosure--from an engagement 
partner's signature on the auditor's report, to disclosure in the 
auditor's report, to disclosure on Form AP--in part to respond to those 
concerns. The Board stated that it believes the final rules accomplish 
its disclosure goals while appropriately addressing concerns raised by 
commenters about liability. The Board also observed that disclosure on 
Form AP should not raise potential liability concerns under Section 11 
of the Securities Act or trigger the consent requirements of Section 7 
of the Act because the engagement partner and other accounting firms 
would not be named in a registration statement or in any document 
incorporated by reference into one.\17\ While the Board recognized that 
commenters expressed mixed views on the potential for liability under 
Exchange Act Section 10(b) and Rule 10b-5 and the ultimate resolution 
of Section 10(b) liability is outside its control, the Board stated 
that it does not believe any such risks warrant not proceeding with the 
Form AP approach.
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    \17\ This assumes the auditor does not voluntarily choose to do 
so by including relevant disclosures in the auditor's report.
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    The Commission believes that the Board has provided sufficient 
notice of potential liability consequences of the Proposed Rules, has 
provided sufficient opportunity for public comment on these issues, and 
has reasonably responded to such concerns. Specifically, the Commission 
believes the Board has appropriately considered concerns related to 
liability neutrality as part of the Final Rule Release and taken 
reasonable steps to address the comments raised with respect to 
liability considerations in the Proposed Rules.
(b) Economic Analysis
    The Chamber Letter also suggested that the Board's economic 
analysis was insufficient to justify applying the Proposed Rules to 
audits of EGCs. This commenter, however, did not indicate why the 
economic analysis was insufficient, other than to say that the analysis 
and the application of the Proposed Rules to EGCs are ``contrary to the 
intent of Congress [in passing the Jumpstart Our Business Startups 
Act].'' The Board presented, and sought comment on, an economic 
analysis in the Reproposal. Further, in response to comments on the 
economic analysis provided in connection with the Reproposal, the Board 
revised its analysis, and sought comment on, an economic analysis as 
presented in the Supplemental Request. The economic analysis in the 
Supplemental Request set forth: (1) A description of the need for the 
standard-setting and how the Proposed Rules address that need; (2) the 
baseline to consider the economic impacts of the Proposed Rules; (3) 
the economic impacts of the Proposed Rules including benefits, costs, 
effects on different categories of audit firms and smaller companies, 
and responses to comments received on the economic analysis included 
with the Reproposal; and (4) economic considerations pertaining to 
audits of EGCs, including efficiency, competition and capital 
formation. In its Final Rule Release, the Board further discussed the 
economic considerations of the Proposed Rules and included a separate 
discussion within the economic analysis devoted to potential liability 
consequences.
    The Commission notes that the Board provided a qualitative analysis 
that took into account the views of commenters. As the Board explained, 
there was limited research and data available regarding economic costs 
and benefits of the Proposed Rules for U.S. companies, making reliable 
quantification difficult. As the Board further explained, as part of 
its rulemaking process through the issuance of the Proposed Rules, the 
Board requested input from commenters. While commenters provided views 
on issues pertinent to economic considerations, including potential 
benefits and costs, they did not provide empirical data. The Commission 
believes that the Board's economic analysis reasonably addresses the 
comments raised and, as further discussed below, is sufficient to make 
a determination to apply the Proposed Rules to the audits of EGCs.
(c) 10-Digit Partner Identifying Number
    The Chamber Letter also noted that the Board added the 10-digit 
partner identifying number as part of the Final Rule Release without 
subjecting it to notice and comment. The Board added the 10-digit 
partner identifying number to the Proposed Rules in response to 
suggestions made by two commenters on the Supplemental Request.\18\ 
These commenters suggested that a unique partner identifier would help 
unambiguously identify partners and provide clear identification of 
auditors with the same or similar names. The Commission's own notice 
and comment period on the Proposed Rules provided an opportunity for 
commenters to address concerns they may have had with the partner 
identifying number. No commenter identified any substantive concerns 
with the application of the identifying number. The Commission believes 
that the feedback received by the Board on the Supplemental Request and 
the opportunity for public comment on the Commission's notice of the 
Proposed Rules provide sufficient basis for the Board to include the 
10-digit partner identifying number in the Proposed Rules.
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    \18\ See letters from the Auditing Standards Committee of the 
Auditing Section of the American Accounting Association, dated 
August 30, 2015, available at http://pcaobus.org/Rules/Rulemaking/Docket029/024d_AAA.pdf and Maureen McNichols, dated August 31, 2015, 
available at http://pcaobus.org/Rules/Rulemaking/Docket029/037d_McNichols.pdf.
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(d) Sunset Provision
    Finally, the Chamber Letter also suggested that the Proposed Rules

[[Page 29928]]

should sunset after five years, unless a post implementation review 
finds that the Proposed Rules promote investor protection, capital 
formation and competition. The Board stated in the Final Rule Release 
that it has considered feedback received on the concept release issued 
by the Commission on Possible Revisions to Audit Committee Disclosures 
(``SEC Concept Release'') \19\ in developing the Proposed Rules. It 
also stated that it will continue to monitor the provisions included in 
the Proposed Rules to determine if revisions should be made in the 
future. In addition, the Board has a process in place to perform post-
implementation reviews for its standards and rules.\20\ Therefore, the 
Commission does not believe a specific sunset provision is necessary in 
the Proposed Rules.
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    \19\ See Possible Revisions to Audit Committee Disclosures, 
Release No. 33-9862 (July 1, 2015), available at: http://www.sec.gov/rules/concept/2015/33-9862.pdf.
    \20\ See PCAOB Requests Comment on Engagement Quality Review 
Standard Under New Post-Implementation Review Program, PCAOB News 
Release (Apr. 6, 2016), available at http://pcaobus.org/News/Releases/Pages/2016-request-for-comment-AS7-center-post-implementation-review.aspx.
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IV. The PCAOB's EGC Request

    Section 103(a)(3)(C) of the Sarbanes-Oxley Act requires that any 
rules of the Board ``requiring mandatory audit firm rotation or a 
supplement to the auditor's report in which the auditor would be 
required to provide additional information about the audit and the 
financial statements (auditor discussion and analysis)'' shall not 
apply to an audit of an EGC. The Board's Proposed Rules do not fall 
into this category of rules.\21\ Section 103(a)(3)(C) further provides 
that ``[a]ny additional rules'' adopted by the PCAOB after April 5, 
2012 do not apply to EGCs ``unless the Commission determines that the 
application of such additional requirements is necessary or appropriate 
in the public interest, after considering the protection of investors 
and whether the action will promote efficiency, competition, and 
capital formation.'' The Proposed Rules fall within this category of 
additional rules and thus the Commission must make a determination 
under the statute about the applicability of the Proposed Rules to 
EGCs. Having considered those statutory factors, and as explained 
further herein, the Commission finds that applying the Proposed Rules 
to audits of EGCs is necessary or appropriate in the public interest.
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    \21\ While the precise scope of this category of rules under 
Section 103(a)(3)(C) is not entirely clear, we do not interpret this 
statutory language as precluding the application of Board rules 
requiring additional factual information about the engagement 
partner and certain audit participants to the audits of EGCs. In our 
view, this approach reflects an appropriate interpretation of the 
statutory language and is consistent with our understanding of the 
Congressional purpose underlying this provision.
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    In proposing application of the Proposed Rules to audits of all 
issuers, including EGCs, the PCAOB requested that the Commission make 
the determination required by Section 103(a)(3)(C). To assist the 
Commission in making its determination, the PCAOB prepared and 
submitted to the Commission its own EGC analysis. The PCAOB's EGC 
analysis includes discussions of characteristics of self-identified 
EGCs and economic considerations pertaining to audits of EGCs, 
including efficiency, competition, and capital formation.
    In its analysis, the Board states, with support from commenters, 
that requiring the same disclosures for audits of EGCs as for all 
issuers would provide the same general benefits to investors in EGCs as 
would be applicable to investors in non-EGCs. On the cost side, the 
Board does not believe that compliance costs for auditors will be 
significant. Rather, based on the overall characteristics of EGCs, the 
Board believes it is unlikely that the cost of collecting data to 
comply with the Proposed Rules will be disproportionately high for EGCs 
as a group. Further, the Board's analysis notes that commenters 
generally indicated they were not aware of any significant costs that 
would be specific to audits of EGCs when compared to the costs of non-
EGC audits.
    The PCAOB's EGC analysis was included in the Commission's public 
notice soliciting comment on the Proposed Rules. Based on the analysis 
submitted, we believe the information in the record is sufficient for 
the Commission to make the requested EGC determination in relation to 
the Proposed Rules. The Commission also takes note, in particular, of 
the PCAOB's approach to the Proposed Rules, which are not intended to 
substantively change auditor performance requirements; should reduce 
investors' search costs since the information will be provided in one 
place in a searchable database; and have been developed in a way to 
mitigate potential increases in auditor liability. In addition, the 
auditor's requirements under the new standard are focused on 
communicating the characteristics of the auditor, of which the auditor 
is already aware or can readily obtain.

V. Conclusion

    The Commission has carefully reviewed and considered the Proposed 
Rules and the information submitted therewith by the PCAOB, including 
the PCAOB's EGC analysis, and the comment letters received. In 
connection with the PCAOB's filing and the Commission's review,
    A. The Commission finds that the Proposed Rules are consistent with 
the requirements of the Sarbanes-Oxley Act and the securities laws and 
are necessary or appropriate in the public interest or for the 
protection of investors; and
    B. Separately, the Commission finds that the application of the 
Proposed Rules to EGC audits is necessary or appropriate in the public 
interest, after considering the protection of investors and whether the 
action will promote efficiency, competition, and capital formation.
    It is therefore ordered, pursuant to Section 107 of the Sarbanes-
Oxley Act and Section 19(b)(2) of the Exchange Act, that the Proposed 
Rules (File No. PCAOB-2016-01) be and hereby are approved.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-11292 Filed 5-12-16; 8:45 am]
 BILLING CODE 8011-01-P