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BILLING CODES: 4810-33-P, 6714-01-P, 6720-01-P____

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 19

[Docket No. 02-XX]

RIN 1557-AB43

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

12 CFR Part 263

[Docket No. xxxxxx]

RIN

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR 308

RIN 3064-AC57

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 513

[Docket No. xxxxxx]

RIN

Removal, Suspension, and Debarment of
Accountants From Performing Audit Services


AGENCIES: Office of the Comptroller of the Currency (OCC), Treasury; Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); and Office of Thrift Supervision (OTS), Treasury.

ACTION: Joint notice of proposed rulemaking.

SUMMARY: The OCC, Board, FDIC, and OTS (each an Agency, and collectively, the Agencies) propose to revise their respective rules of practice pursuant to section 36 of the Federal Deposit Insurance Act (FDIA) (12 U.S.C. 1831m). Section 36, as implemented by 12 CFR part 363, requires that each insured depository institution with total assets of $500 million or more produce an annual report containing the institution's financial statements and certain management assessments. The depository institution must provide the report to the FDIC, the appropriate Federal banking agency, and any appropriate state bank supervisor. Section 36 also requires that the depository institution obtain an audit of its financial statements and an attestation on management's assertions concerning internal controls over financial reporting by an independent public accountant (accountant) and include the accountant's audit and attestation reports in its annual report.

Congress gave the Agencies authority to remove, suspend, or debar accountants from performing the audit services required by section 36 if there is good cause to do so. This proposal would amend the Agencies' rules to establish rules of practice and procedure for the removal, suspension, and debarment of accountants and their firms from performing section 36 audit services for insured depository institutions. The proposal reflects the Agencies' increasing concern with the quality of audits and internal controls for financial reporting at insured depository institutions. Although there have been few bank and thrift failures in recent years, the circumstances of the failures that have occurred illustrate the importance of maintaining high quality in the audits of the financial position and attestations of management assessments of insured depository institutions. The proposed regulations enhance the Agencies' ability to address misconduct by accountants who perform annual audit and attestation services.

DATES: Comments must be received by [INSERT DATE 60 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].

ADDRESSES:

OCC: Please direct comments to: Public Information Room, Office of the Comptroller of the Currency, 250 E Street, SW, Washington, DC, 20219, Attention Docket No. 02-[ ] . Comments are available for inspection and photocopying at that address. You can make an appointment to inspect the comments by calling (202) 874-5043. In addition, comments may be sent by facsimile transmission to (202) 874-4448, or by electronic mail to Regs.comments@occ.treas.gov. Due to temporary disruptions in the mail service in the Washington, D.C. area, commenters are encouraged to use fax or e-mail delivery if possible.

Board: Comments should refer to Docket No. [ ] and may be mailed to Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551; sent by FAX to (202) 452-3819 or (202) 452-3102; or sent by e-mail to regs.comments@federalreserve.gov. Members of the public may inspect comments in Room MP-500 between 9:00 a.m. and 5:00 p.m. on weekdays pursuant to section 261.12 (except as provided in section 261.14) of the Board's Rules Regarding Availability of Information, 12 CFR 261.12 and 261.14.

FDIC: Written comments should be addressed to Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW, Washington, DC 20429. Commenters are encouraged to submit comments by facsimile transmission to FAX number (202) 898-3838 or by electronic mail to Comments@FDIC.gov. Comments also may be hand delivered to the guard station at the rear of the 550 17th Street Building (located on F Street), on business days between 8:30 am and 5:00 p.m. Comments may be inspected and photocopied in the FDIC Public Information Center, Room 100, 801 17th Street, NW, Washington, DC, between 9:00 am and 4:30 p.m. on business days.

OTS: Mail: Send comments to Regulation Comments, Chief Counsel's Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, Attention Docket No. 2002-__.

Delivery: Hand deliver comments to the Guard's Desk, East Lobby Entrance, 1700 G Street, N.W. from 9:00 a.m. to 4:00 p.m. on business days, Attention: Regulation Comments, Chief Counsel's Office, Attention Docket No. 2002-__.

Facsimiles: Send facsimile transmissions to FAX Number (202) 906-6518, Attention Docket No. 2002-__.

E-Mail: Send e-mails to regs.comments@ots.treas.gov, Attention Docket No. 2001-__and include your name and telephone number. Due to temporary disruptions in mail service in the Washington, D.C. area, commenters are encouraged to send comments by fax or e-mail if possible.

Public Inspection: Interested persons may inspect comments at the Public Reference Room, 1700 G St. N.W., from 10:00 a.m. until 4:00 p.m. on Tuesdays and Thursdays or obtain comments and/or an index of comments by facsimile by telephoning the Public Reference Room at (202) 906-5900 from 9:00 a.m. until 5:00 p.m. on business days. Comments and the related index will also be posted on the OTS Internet Site at www.ots.treas.gov.

FOR FURTHER INFORMATION CONTACT:

OCC: Mitchell Plave, Counsel, Legislative and Regulatory Activities Division, (202) 874-5090; Richard Shack, Senior Accountant, Bank Supervision Policy, (202) 874-4911; and Karen Besser, National Bank Examiner, Special Supervision/Fraud, (202) 874-4464.

Board: Richard Ashton, Associate General Counsel, (202) 452-3750; Nina Nichols, Counsel, (202) 452-2961; Arthur Lindo, Project Manager, (202) 452-2695; and Salome Tinker, Senior Financial Analyst, (202) 452-3034, Division of Banking Supervision and Regulation.

FDIC: Richard Bogue, Counsel, Enforcement Unit, (202) 898-3726; Robert F. Storch, Chief, Accounting and Securities Disclosure Section, (202) 898-8906.

OTS: Christine A. Smith, Project Manager, (202) 906-5740, Supervision Policy; Teresa A. Scott, Counsel (Banking & Finance), (202) 906-6478, Regulations and Legislation Division, Office of Thrift Supervision, 1700 G Street, N.W., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

Section 36 of the FDIA, as implemented by FDIC regulations, requires every large insured depository institution to submit an annual report containing its financial statements and certain management assessments to the FDIC, the appropriate Federal banking agency, and any appropriate state bank supervisor.1 Section 36 of the FDIA also requires that an independent public accountant audit such insured depository institution's annual financial statements to determine whether those statements are presented fairly in accordance with generally accepted accounting principles (GAAP) and with the accounting objectives, standards, and requirements described in section 37 of the FDIA.

Under section 37, the accounting principles applicable to financial statements required to be filed with the Agencies must be uniform and consistent with GAAP.2 In addition, the accountant must attest to and report on management's assertions concerning internal controls over financial reporting.3 The institution's annual report also must contain the accountant's audit and attestation reports.4

Section 36 of the FDIA gives the Agencies the authority to remove, suspend, or bar an accountant from performing the audit services required under section 36 for good cause.5 This authority is in addition to the enforcement tools the Agencies have under section 8 of the FDIA, which enable the Agencies to remove or prohibit an institution-affiliated party (IAP), including an accountant, from further participation in the affairs of an insured depository institution for certain types of misconduct.6 Section 36 authority is also distinct from the Agency's capability to remove, suspend, or debar from practice before the Agency parties, such as accountants, who represent others.7

Section 36 does not define good cause, but authorizes the Agencies to implement section 36 through the joint issuance of rules of practice.8 A removal, suspension, or debarment under section 36 would limit an accountant's or accounting firm's eligibility to provide audit services to insured depository institutions with total assets of $500 million or more. A section 36 action would not restrict the ability of accountants and firms to provide audit services to financial institutions with less than $500 million in total assets, however, or to provide other types of services to all financial institutions.

The Agencies have jointly prepared proposed rules of practice to implement the provisions of section 36. The texts of the Agencies' proposed regulations are substantively identical and differ with respect to conforming changes each Agency is making to its existing rules. These proposed rules do not create independent professional standards or obligations for accountants or firms. Rather, they are consistent with an accountant's existing responsibility to adhere to applicable professional standards such as generally accepted auditing standards and generally accepted standards for attestation engagements. The proposed rules are also consistent with the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act),9 which, among other things, provides for significant reforms in the oversight of the accounting industry. The discussion that follows refers more specifically to the provisions of the Sarbanes-Oxley Act that are relevant to this proposal.

II. Discussion of the Proposal and Request for Comment

The proposal would amend the Agencies' rules of practice by adding provisions for removal, suspension, or debarment of accountants or accounting firms from performing the audit services required by section 36 of the FDIA. The proposed rules would define "good cause" to remove, suspend, or debar an accountant or firm from performing audit services and establish procedures for removal, suspension, or debarment of accountants or firms if the "good cause" standards are satisfied.

The first part of the discussion that follows describes the common elements of the proposed rules. The second part explains proposed technical and conforming changes to the existing rules of the OCC, Board, and FDIC. The Agencies invite comment on all aspects of the proposed rules.

A. Proposed Additions to the Rules of All the Agencies

Audit Services

The proposed rules define "audit services" as any service required to be performed under section 36 of the FDIA (12 U.S.C. 1831m) and 12 CFR part 363, including attestation services. 10

Good Cause for Agency Action

The proposed rules define good cause for removal, suspension, or debarment of accountants from providing audit services required by section 36. Under the proposal, the Agencies would have "good cause" if the accountant does not possess the requisite qualifications to perform audit services; engages in knowing or reckless conduct that results in a violation of applicable professional standards, including those standards and conflicts of interest provisions applicable to accountants through the Sarbanes-Oxley Act and developed by the Public Company Accounting Oversight Board (Accounting Oversight Board) and the Securities and Exchange Commission (SEC), as such standards and provisions become effective;11 engages in 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 engages in repeated instances of unreasonable conduct, each resulting in a violation of applicable standards, that indicate a lack of competence to perform annual audit services.

Good cause also includes knowingly or recklessly giving false or misleading information to the Agencies with respect to any matter before the Agency; knowingly or recklessly materially violating any provision of the Federal banking or securities laws or regulations, or any other law, including the Sarbanes-Oxley Act; and removal, suspension, or debarment from practice before any Federal or state agency regulating the banking, insurance, or securities industries on grounds relevant to the provision of audit services, other than those actions that result in automatic removal, suspension, and debarment under the proposed rules.

Conduct giving rise to good cause under the proposed rules does not have to occur in connection with the provision of audit services or in connection with services provided to depository institutions. Any actions or failures to act by an independent public accountant or accounting firm that meet the criteria for good cause set forth in the regulation, whether or not related to the banking industry, could constitute good cause for Agency action. The standards in the proposed rules for removal, suspension, and debarment are drawn principally from the Agencies' existing practice rules and from the practice rules of the SEC.12 The proposal thus promotes consistency with respect to professional standards for accountants.

Removal, Suspension, or Debarment of Accounting Firms or Offices of Firms

The proposed rules provide for the removal, suspension, or debarment of accounting firms as a whole and identify factors the Agencies may consider in determining the appropriate remedy. Under current regulations governing practice before the Agencies, the Agencies generally can remove, suspend, or debar a firm by naming each member of the firm or office in the order of suspension or debarment. The proposal retains this flexibility and provides guidance on conduct that may result in a firm-wide sanction.

The proposed rules provide that, in considering whether to take action against a firm and the severity of the sanction against a firm, the Agencies may assess the gravity, scope, or repetition of the act or failure to act; the adequacy of and adherence to applicable policies, practices, or procedures for the firm's conduct of its business and the performance of audit services; the selection, training, supervision, and conduct of members or employees of the firm involved in the performance of audit services; the extent to which managing partners or senior officers of the firm participated, directly or indirectly through oversight or review, in the act or failure to act; and the extent to which the firm has, since the occurrence of the act or failure to act, implemented corrective internal controls to prevent its recurrence. This is not an exclusive list of factors the Agencies may consider, and circumstances may present other facts that the Agencies will take into account in determining whether to take an action against a firm.

The Agencies anticipate that there may be circumstances in which it will not be appropriate to remove, suspend, or debar an entire firm, but that action should be taken against a particular office or offices of a firm. The proposed rules permit that more limited action.

Removal, Suspension, and Debarment Procedures

Under the proposed rules, the Agencies would hold hearings on removals, suspensions, and debarments under rules that are consistent with the Agencies' Uniform Rules of Practice and Procedure (Uniform Rules). 13 The Uniform Rules provide, among other things, for written notice to the respondent of the intended Agency action and the opportunity for a public hearing before an administrative law judge. The administrative law judge would refer a recommended decision to the Agency, which would issue a final decision and order. Each Agency would have the discretion to limit an order of removal, suspension, or debarment from providing audit services to a limited number of insured depository institutions, rather than to all insured depository institutions supervised by the issuing Agency. This is referred to in the proposed regulations as a "limited scope order."14

The Agencies do not intend the proposed rules to create any new or different procedural mechanisms for Agency removal, suspension, or debarment of accountants. Rather, the Agencies generally intend to apply to these proceedings established rules and practices.

Immediate Suspensions

Section 36 of the FDIA provides that the appropriate Federal banking agency may "remove, suspend, or bar" an independent public accountant from performing audit services.15 The proposed rules would implement the authority to suspend by providing that an Agency may issue a notice of immediate suspension when an Agency has a reasonable basis to believe that an accountant or accounting firm is engaged in conduct that would constitute grounds for an order of removal, suspension, or debarment and if immediate suspension is necessary for the protection of an insured depository institution, its depositors, or the depository system as a whole. The discretion to impose immediate suspensions can be critical to the safety and soundness of one or more insured depository institutions. For example, once misconduct is identified, immediate suspensions would prevent additional or escalating instances of misconduct.

Under the proposed rules, a notice of immediate suspension would remain in effect until the Agency dismisses the charges in the notice or issues a final order of removal, suspension, or debarment. The proposals establish a system for expedited review of a notice of immediate suspension. The accountant or accounting firm has the right to petition for a stay of a notice of immediate suspension within 10 calendar days after receiving service of the notice. A presiding officer appointed by the Agency would hold a hearing on the stay petition not more than 30 days after receipt of the petition. The presiding officer would be required to issue a decision within 30 days of the hearing. The presiding officer could grant a stay of an immediate suspension upon a demonstration that a substantial likelihood exists of the accountant's or firm's success on the issues raised by the notice and that, absent such relief, the accountant or firm would suffer immediate and irreparable injury, loss, or damage. Any party may appeal the presiding officer's decision to the Agency.

The Agencies modeled the procedures set out in the proposed rules for imposing an immediate suspension of an accountant or accounting firm pending completion of a formal removal, suspension, or debarment administrative hearing after the procedures that apply to other types of temporary suspensions by regulatory agencies. In particular, the proposed immediate suspension procedures are substantially the same as those in section 8(g) of the FDIA governing the suspension by a Federal banking agency of an institution-affiliated party who has been charged with a felony.16 The courts have upheld the procedures established in section 8(g) as meeting constitutional due process requirements.17 Nevertheless, the Agencies invite comment on whether additional procedures should be provided to ensure that parties have adequate due process protections when they are suspended prior to a hearing on the charges made by an Agency.

Automatic Removal, Suspension, and Debarment

Under the proposed rules, an accountant or accounting firm that is subject to a final order of removal, suspension, or debarment issued by one Agency, would be automatically precluded from performing audit services for insured depository institutions regulated by the other Agencies. In addition, automatic removal, suspension, and debarment would result from a final order of suspension or denial of the privilege of appearing or practicing before the Securities and Exchange Commission, a currently effective disciplinary sanction by the Accounting Oversight Board under sections 105(c)(4)(A) or (B) of the Sarbanes-Oxley Act,18 or a suspension or debarment from practice for cause by a state, possession, commonwealth, or District of Columbia licensing authority.

Each Agency would have the discretion to waive the automatic suspension on a case-by-case basis with respect to an institution it supervises by issuing written permission to the accountant or accounting firm. The Agencies intend that neither a limited scope order nor a notice of immediate suspension would bar an accountant or accounting firm from performing audit services for insured depository institutions outside the scope of that order or notice.

Notice

The proposed rules would require the Agencies to make public any final order of removal, suspension, or debarment against an accountant or accounting firm and notify the other Agencies of such orders. This is consistent with the presumption in favor of public notice for enforcement actions in the FDIA.19

The rules also contain notification provisions for accountants and firms. The proposal would require that an accountant or accounting firm that performs section 36 audit services for any insured depository institution provide the Agencies with written notice of any currently effective disciplinary sanction against the accountant or firm issued by the Accounting Oversight Board under sections 105(c)(4)(A) or (B) of the Sarbanes-Oxley Act, relating to revocation of registration and association with a public accounting firm or issuer; any current suspension or denial of the privilege of appearing or practicing before the SEC; or any suspensions or debarments for cause from practice as an accountant by any duly constituted licensing authority of any state, possession, commonwealth, or the District of Columbia. Written notice is also required respecting any removal, suspension, or debarment from practice before any Federal or state agency regulating the banking, insurance, or securities industries on grounds relevant to the provision of audit services; and any action by the Accounting Oversight Board under sections 105(c)(4)(C) or (G) of the Sarbanes-Oxley Act, relating to limitations on the activities of accountants and accounting firms and any other appropriate sanction provided in the rules of the Accounting Oversight Board. Written notice must be given no later than 15 calendar days following the effective date of an order or action, or 15 calendar days before an accountant or accounting firm accepts an engagement to provide audit services, whichever date is earlier.

Reinstatement

The Agencies would have the discretion to grant an accountant's or accounting firm's request for reinstatement. Under the proposals, a removed, suspended, or debarred individual or firm would be able to request reinstatement by the Agency that issued the order. The individual or firm would be able to request reinstatement at any time more than one year after the effective date of the order and, thereafter, at any time more than one year after the most recent request for reinstatement.

B. Conforming and Technical Changes to the Rules of the Agencies

OCC

The OCC proposes to add "recklessness" to its description of "disreputable conduct" that may lead to removal, suspension, or debarment of parties or their representatives who practice or appear before the OCC.20 This change would conform the OCC's general rules of practice with the standards in the proposal for removal, suspension, or debarment of accountants from performance of section 36-required audit services, which in turn reflects the addition of the recklessness standard to the SEC's rules of practice by the Sarbanes-Oxley Act. The purpose of adding the recklessness standard is to clarify that conduct more culpable than incompetence, but less culpable than willful or knowing action, may form the basis for a suspension or debarment.

The OCC also proposes to broaden the scope of "disreputable conduct" to allow the OCC to consider suspensions or debarments of accountants -- for any reason -- by the other Agencies, the SEC, the Commodity Futures Trading Commission, or any other Federal agency. This change would remove the requirement in the current section 19.196(g) that suspensions by other agencies concern "matters relating to the supervisory responsibilities of the OCC." This change takes into account the possibility that a suspension of an accountant by another agency, relating to the professional conduct of an accountant, could be grounds for removal, suspension, or debarment by the OCC, even if the suspension by the other agency did not relate to a banking matter.

Unlike the other amendments in the proposal, which would address an accountant's or firm's ability to perform section 36-required audits, this part of the proposal concerns who may practice before the OCC in other capacities, such as in adjudications, or through preparation of documents for submission to the OCC.

The OCC would also revise a number of sections within part 19 to make conforming and technical changes to implement section 36 of the FDIA and bring procedural aspects of part 19 up to date.

Board

The Board proposes to amend its Rules of Practice Before the Board (12 CFR part 263, subpart F) to expand the type of conduct for which an individual may be censured, debarred, or suspended from practice before the Agency. In particular, the Board proposes to revise the description of the conduct that would warrant sanctions to include reckless violations, or reckless aiding and abetting violations, of specified laws and the reckless provision of false or misleading information, or reckless participation in the provision of false or misleading information, to the Board. The regulation currently provides for sanctions only for willful misconduct. The purpose of this proposed amendment is to clarify that conduct more culpable than incompetence, but less culpable than willful or knowing action, may form the basis for a suspension or debarment from practice before the Agency. This change also reflects the modification made to the SEC's rules of practice by the Sarbanes-Oxley Act.

FDIC

The FDIC proposes to make a clarifying and conforming amendment to 12 CFR 308.109, which deals with the suspension and disbarment of the right of any counsel to appear or practice before the FDIC, to specify that an application for reinstatement must comply with the general filing procedures established by part 303. The amendment would add a new sentence before the current last sentence of section 308.109(b)(3) to read as follows: "The application shall comply with the requirements of 12 CFR 303.3."

Comment Solicitation

The Agencies ask for comment on all aspects of the proposed rules. Section 722 of the Gramm-Leach-Bliley Act, Pub. L. 106-102, sec. 722, 113 Stat. 1338, 1471 (Nov. 12. 1999), requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. We invite your comments on how to make this proposal easier to understand. For example:

Have we organized the material to suit your needs? If not, how could this material be better organized?

Are the requirements in the proposed regulation clearly stated? If not, how could the regulation be more clearly stated?

Does the proposed regulation contain language or jargon that is not clear? If so, which language requires clarification?

Would a different format (grouping and order of sections, use of headings, paragraphing) make the regulation easier to understand? If so, what changes to the format would make the regulation easier to understand?

What else could we do to make the regulation easier to understand?

Community Bank Comment Request

The Agencies invite comment on the impact of this proposal on community banks. The Agencies recognize that community banks operate with more limited resources than larger institutions and may present a different risk profile. Thus, we specifically request comments on the impact of this proposal on community banks' current resources and available personnel with the requisite expertise, and whether the goals of the proposed regulation could be achieved, for community banks, through an alternative approach.

Regulatory Flexibility Act

OCC: Under section 605(b) of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), the appropriate Federal banking agencies must either provide an Initial Regulatory Flexibility Analysis (IRFA) with a proposed rule or certify that the rule would not have a significant economic impact on a substantial number of small entities. For purposes of this Regulatory Flexibility Analysis and proposed regulation, the OCC defines "small entities" to be those national banks with less than $150 million in total assets. For other entities that could be affected by this rule, such as accountants and accounting firms, a small entity is defined as an accounting office with $7 million or less in annual receipts.

We have reviewed the impact this proposed rule will have on small banks. Based on that review, we certify that the proposed rule will not have a significant economic impact on a substantial number of small entities. The basis for the certification is that the requirement for audits does not apply to national banks with less than $500 million in total assets. In addition, only a limited number of small accounting firms provide section 36 audit services to national banks. For these reasons, the OCC does not anticipate that the proposal will affect a substantial number of small entities.

Board: Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 605(b)), the Board certifies that the suspension and debarment amendments proposed in this rulemaking will not have a significant adverse economic impact on a substantial number of small entities. For purposes of this Regulatory Flexibility Analysis, the Board defines "small entity" as (1) any insured state member bank with less than $150 million in total assets, or (2) any bank holding company with a subsidiary insured state member bank with less than $150 million in total assets. For other entities that could be affected by this rule, such as accountants and accounting firms, a small entity is defined as an accounting office with $7 million or less in annual receipts. The basis for the Board's certification is that the rule will not apply to state member banks that have less than $500 million in total assets. In addition, only a limited number of small accounting firms provide section 36 audit services to institutions that are regulated by the Federal Reserve.

FDIC: The rule proposes and requests comment on amendments to the FDIC's Rules of Practice and Procedure (12 CFR part 308). These amendments would add rules of practice and standards of conduct with regard to accountants and accounting firms engaged by State nonmember banks. The FDIC hereby certifies, pursuant to section 605(b) of the RFA, 5 U.S.C. 605(b), that the proposed suspension and debarment amendments will not, if promulgated through a final rule, have a significant economic impact on a substantial number of small entities. The basis for the certification is that the rule will not apply to insured depository institutions that have less than $150 million in total assets. Furthermore, only a limited number of small accounting firms provide section 36 audit services to insured depository institutions for which the FDIC is the appropriate Federal banking agency.

OTS: Under the RFA, OTS must either provide an IRFA with this proposed rule, or certify that the rule would not have a significant economic impact on a substantial number of small entities. For purposes of this RFA analysis and proposed regulation, the OTS defines "small banks" to be those savings associations with less than $150 million in total assets.

Pursuant to section 605(b) of the RFA, OTS certifies that this proposed rule would not have a significant economic impact on a substantial number of small entities. The basis of this certification is that this rule does not apply to savings associations with less than $500 million in assets.

Executive Order 12866

The OCC and OTS have determined that this proposal is not a significant regulatory action under Executive Order 12866.

Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 104-4 (2 U.S.C. 1532) (Unfunded Mandates Act), requires that an agency prepare a budgetary impact statement before promulgating any rule likely to result in a Federal mandate that may result in the expenditure by state, local, and tribal governments, in the aggregate, or by the private sector of $100 million or more in any one year. If a budgetary impact statement is required, section 205 of the Unfunded Mandates Act also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. The OCC and OTS have determined that the proposed rule will not result in expenditures by state, local, and tribal governments, or by the private sector, of $100 million or more in any one year. Accordingly, this rulemaking requires no further analysis under the Unfunded Mandates Act.

Paperwork Reduction Act

The Agencies have determined that this proposed rule does not involve a collection of information pursuant to the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et seq.).

List of Subjects

12 CFR Part 19

Administrative practice and procedure, crime, equal access to justice, investigations, national banks, penalties, securities.

12 CFR Part 263

Administrative practice and procedure, Claims, Crime, Equal access to justice, Federal Reserve System, Lawyers, and Penalties

12 CFR Part 308

Administrative practice and procedure, Banks, banking, Claims, Crime, Equal access to justice, Lawyers, Penalties, State nonmember banks.

12 CFR Part 513

Accountants, Administrative practice and procedure, Lawyers

FEDERAL DEPOSIT INSURANCE CORPORATION

PART 308 -- RULES OF PRACTICE AND PROCEDURE

1. The authority citation for part 308 is revised to read as follows:

Authority: 5 U.S.C. 504, 554-557; 12 U.S.C. 93(b), 164, 505, 1815(e), 1817, 1818, 1820, 1828, 1829, 1829b, 1831i, 1831m(g)(4), 1831o, 1831p-1, 1832(c), 1884(b), 1972, 3102, 3108(a), 3349, 3909, 4717; 15 U.S.C. 78(h) and (i), 78o-4(c), 78o-5, 78q-1, 78s, 78u, 78u-2, 78u-3 and 78w, 6801(b), 6805(b)(1); 28 U.S.C. 2461 note; 31 U.S.C. 330, 5321; 42 U.S.C. 4012a; Sec. 3100(s), Pub. L. 104-134, 110 Stat. 1321-358.

2. Section 308.109(b)(3) is amended to add a new sentence before the last sentence to read as follows:

308.109 Suspension and disbarment

*    *    *    *    *

    (b)   *    *    *

    (3)   *    *    *     The application must comply with the requirements of 303.3 of this chapter.  *    *     *

*    *    *     *     *

3. A new Subpart U is added to read as follows:

Subpart U -- Removal, Suspension, and Debarment of Accountants From

Performing Audit Service

Sec.

308.600 Scope.

308.601 Definitions.

308.602 Removal, suspension, or debarment.

308.603 Automatic removal, suspension, and debarment.

308.604 Notice of removal, suspension, or debarment.

308.605 Application for reinstatement.

308.600 Scope.

This subpart, which implements section 36(g)(4) of the FDIA (12 U.S.C. 1831m(g)(4)), provides rules and procedures for the removal, suspension, or debarment of independent public accountants and accounting firms from performing independent audit and attestation services required by section 36 of the FDIA (12 U.S.C. 1831m) for insured depository institutions for which the FDIC is the appropriate Federal banking agency.

308.601 Definitions.

As used in this subpart, the following terms shall have the meaning given below unless the context requires otherwise:

(a) Accounting firm means a corporation, proprietorship, partnership, or other business firm providing audit services.

(b) Audit services means any service required to be performed by an independent public accountant by section 36 of the FDIA and 12 CFR part 363, including attestation services.

(c) Independent public accountant (accountant) means any individual who performs or participates in providing audit services.

308.602 Removal, suspension, or debarment.

(a) Good cause for removal, suspension, or debarment.

(1) Individuals. The Board of Directors may remove, suspend, or debar an independent public accountant from performing audit services for insured depository institutions for which the FDIC is the appropriate Federal banking agency under section 36 of the FDIA if, after service of a notice of intention and opportunity for hearing in the matter, the Board of Directors finds that the accountant:

(i) Lacks the requisite qualifications to perform audit services;

(ii) Has knowingly or recklessly engaged in conduct that results in a violation of applicable professional standards, including those standards and conflicts of interest provisions applicable to accountants through the Sarbanes-Oxley Act of 2002 (Pub. L. 107-204, 116 Stat. 745 (2002)) (Sarbanes-Oxley Act) and developed by the Public Company Accounting Oversight Board and the Securities and Exchange Commission;

(iii) Has engaged in negligent conduct in the form of:

(A) 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

(B) Repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to perform audit services;

(iv) Has knowingly or recklessly given false or misleading information, or knowingly or recklessly participated in any way in the giving of false or misleading information, to the FDIC or any officer or employee of the FDIC;

(v) Has engaged in, or aided and abetted, a material and knowing or reckless violation of any provision of the Federal banking or securities laws or the rules and regulations thereunder, or any other law; or

(vi) Has been removed, suspended, or debarred from practice before any Federal or state agency regulating the banking, insurance, or securities industries, other than by an action listed in 308.603, on grounds relevant to the provision of audit services.

(2) Accounting firms. If the Board of Directors determines that there is good cause for the removal, suspension, or debarment of a member or employee of an accounting firm under paragraph (a)(1) of this section, the Board of Directors also may remove, suspend, or debar such firm or one or more offices of such firm. In considering whether to remove, suspend, or debar an accounting firm or an office thereof, and the term of any sanction against an accounting firm under this section, the Board of Directors may consider, for example:

(i) The gravity, scope, or repetition of the act or failure to act that constitutes good cause for the removal, suspension, or debarment;

(ii) The adequacy of, and adherence to, applicable policies, practices, or procedures for the accounting firm's conduct of its business and the performance of audit services;

(iii) The selection, training, supervision, and conduct of members or employees of the accounting firm involved in the performance of audit services;

(iv) The extent to which managing partners or senior officers of the accounting firm have participated, directly, or indirectly through oversight or review, in the act or failure to act; or

(v) The extent to which the accounting firm has, since the occurrence of the act or failure to act, implemented corrective internal controls to prevent its recurrence.

(3) Limited scope orders. An order of removal, suspension (including an immediate suspension), or debarment may, at the discretion of the Board of Directors, be made applicable to a limited number of insured depository institutions for which the FDIC is the appropriate Federal banking agency.

(4) Remedies not exclusive. The remedies provided in this subpart are in addition to any other remedies the FDIC may have under any other applicable provision of law, rule, or regulation.

(b) Proceedings to remove, suspend or debar.

(1) Initiation of formal removal, suspension, or debarment proceedings. The Board of Directors may initiate a proceeding to remove, suspend, or debar an accountant or accounting firm from performing audit services by issuing a written notice of intention to take such action that names the individual or firm as a respondent and describes the nature of the conduct that constitutes good cause for such action.

(2) Hearings under paragraph (b) of this section. An accountant or firm named as a respondent in the notice issued under paragraph (b)(1) of this section may request a hearing on the allegations contained in the notice. Hearings conducted under this paragraph shall be conducted in the same manner as other hearings under the Uniform Rules of Practice and Procedure (12 C.F.R. part 308, subpart A) (Uniform Rules).

(c) Immediate suspension from performing audit services.

(1) In general. If the Board of Directors serves a written notice of intention to remove, suspend, or debar an accountant or accounting firm from performing audit services, the Board of Directors may, with due regard for the public interest and without a preliminary hearing, immediately suspend such accountant or firm from performing audit services for insured depository institutions for which the FDIC is the appropriate Federal banking agency if the Board of Directors:

(i) Has a reasonable basis to believe that the accountant or accounting firm has engaged in conduct (specified in the notice served upon the accountant or accounting firm under paragraph (b)(1) of this section) that would constitute grounds for removal, suspension, or debarment under paragraph (a) of this section;

(ii) Determines that immediate suspension is necessary for the protection of an insured depository institution or its depositors or for the protection of the depository system as a whole; and

(iii) Serves such respondent with written notice of the immediate suspension.

(2) Procedures. An immediate suspension notice issued under this paragraph will become effective upon service. Such suspension will remain in effect until the date the Board of Directors dismisses the charges contained in the notice of intention, or the effective date of a final order of removal, suspension, or debarment issued by the Board of Directors to the respondent.

(3) Petition to stay. Any accountant or accounting firm immediately suspended from performing audit services in accordance with paragraph (c)(1) of this section may, within 10 calendar days after service of the notice of immediate suspension, file a petition with the Executive Secretary for a stay of such immediate suspension. If no petition is filed within 10 calendar days, the immediate suspension will remain in effect.

(4) Hearing on petition. Upon receipt of a stay petition, the Executive Secretary will designate a presiding officer who will fix a place and time (not more than 30 calendar days after receipt of the petition, unless extended at the request of petitioner) at which the immediately suspended party may appear, personally or through counsel, to submit written materials and oral argument. In the sole discretion of the presiding officer, upon a specific showing of compelling need, oral testimony of witnesses also may be presented. Enforcement counsel may represent the agency at the hearing. In hearings held pursuant to this paragraph there shall be no discovery, and the provisions of 308.6 through 308.12, 308.16, and 308.21 of the Uniform Rules will apply.

(5) Decision on petition. Within 30 calendar days after the hearing, the presiding officer will issue a decision. The presiding officer will grant a stay upon a demonstration that a substantial likelihood exists of the respondent's success on the issues raised by the notice of intention and that, absent such relief, the respondent will suffer immediate and irreparable injury, loss, or damage. In the absence of such a demonstration, the presiding officer will notify the parties that the immediate suspension will be continued pending the completion of the administrative proceedings pursuant to the notice of intention. The presiding officer will serve a copy of the decision on, and simultaneously certify the record to, the Executive Secretary.

(6) Review of presiding officer's decision. The parties may seek review of the presiding officer's decision by filing a petition for review with the Executive Secretary within 10 calendar days after service of the decision. Replies must be filed within 10 calendar days after the petition filing date. Upon receipt of a petition for review and any reply, the Executive Secretary will promptly certify the entire record to the Board of Directors. Within 60 calendar days of the Executive Secretary's certification, the Board of Directors will issue an order notifying the affected party whether or not the immediate suspension should be continued or reinstated. The order will state the basis of the Board's decision.

308.603 Automatic removal, suspension, and debarment.

An independent public accountant or accounting firm may not perform audit services for insured depository institutions for which the FDIC is the appropriate Federal banking agency if the accountant or firm:

(a) Is subject to a final order of removal, suspension, or debarment (other than a limited scope order) issued by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, or the Office of Thrift Supervision under section 36 of the FDIA;

(b) Is subject to a temporary suspension or permanent revocation of registration or a temporary or permanent suspension or bar from further association with any registered public accounting firm issued by the Public Company Accounting Oversight Board under sections 105(c)(4)(A) or (B) of the Sarbanes-Oxley Act (15 U.S.C. 7215(c)(4)(A) or (B));

(c) Is subject to an order of suspension or denial of the privilege of appearing or practicing before the Securities and Exchange Commission; or

(d) Is suspended or debarred for cause from practice as an accountant by any duly constituted licensing authority of any state, possession, commonwealth, or the District of Columbia;

Upon written request, the FDIC, for good cause shown, may grant written permission to such accountant or firm to perform audit services for insured depository institutions for which the FDIC is the appropriate Federal banking agency. The written request must comply with the requirements of 303.3 of this chapter.

308.604 Notice of removal, suspension, or debarment.

(a) Notice to the public. Upon the issuance of a final order for removal, suspension, or debarment of an independent public accountant or accounting firm from providing audit services, the FDIC will make the order publicly available and provide notice of the order to the other Federal banking agencies.

(b) Notice to the FDIC by accountants and firms. An accountant or accounting firm that provides audit services to any insured depository institution for which the FDIC is the appropriate Federal banking agency must provide the FDIC with written notice of:

(1) any currently effective order or other action described in 308.602(a)(1)(vi) or 308.603(b) through (d); or

(2) any currently effective action by the Public Company Accounting Oversight Board under sections 105(c)(4)(C) or (G) of the Sarbanes-Oxley Act (15 U.S.C. 7215(c)(4)(C) or (G)). Written notice required by this paragraph shall be given no later than 15 calendar days following the effective date of an order or action, or 15 calendar days before an accountant or accounting firm accepts an engagement to provide audit services, whichever date is earlier.

308.605 Application for reinstatement.

(a) Form of petition. Unless otherwise ordered by the Board of Directors, an application for reinstatement by an independent public accountant or accounting firm removed, suspended, or debarred under 308.602 may be made in writing at any time more than one year after the effective date of the removal, suspension, or debarment and, thereafter, at any time more than one year after the accountant's or accounting firm's most recent application for reinstatement. The application must comply with the requirements of 303.3 of this chapter.

(b) Procedure. An applicant for reinstatement under this section may, in the sole discretion of the Board of Directors, be afforded a hearing. In reinstatement proceedings, the person seeking reinstatement shall bear the burden of going forward with an application and proving the grounds asserted in support of the application, and the Board of Directors may, in its sole discretion, direct that any reinstatement proceeding be limited to written submissions. The removal, suspension, or debarment shall continue until the Board of Directors, for good cause shown, has reinstated the applicant or until the suspension period has expired. The filing of an application for reinstatement will not stay the effectiveness of the removal, suspension, or debarment of an accountant or firm.

THIS SIGNATURE PAGE PERTAINS TO THE JOINT PROPOSED RULE REGARDING THE REMOVAL, SUSPENSION, AND DEBARMENT OF ACCOUNTANTS FROM PERFORMING ANNUAL AUDIT SERVICES.

Dated: ____________________________

By order of the Board of Directors of the Federal Deposit Insurance Corporation.

_________________________________
Robert Feldman
Executive Secretary.



1. 12 U.S.C. 1831m, 1831m(j)(2); see also 12 CFR part 363 (describing the requirements for independent audits and reporting for all insured depository institutions). The statute gives the FDIC Board of Directors the discretion to establish the threshold asset size at which a section 36 annual report is required. That amount is currently set at $500 million. See 12 CFR 363.1(a). While a section 36 audit is not required of financial institutions with less than $500 million in total assets, the Agencies encourage every insured depository institution, regardless of its size or character, to have an annual audit of its financial statements performed by an independent public accountant. See 12 CFR 363 App. A (Introduction).

2. 12 U.S.C. 1831m(d), 1831n.

3. Id. 1831m(c); see also 12 CFR part 363 (independent audit and reporting requirements).

4. 12 U.S.C. 1831m(a)(1) and (2).

5. Id. 1831m(g)(4)(A).

6. Id. 1813 (u)(4), 1818(e)(1).

7. See 12 CFR part 19, subpart K; 12 CFR part 263, subpart F; and 12 CFR part 513.

8. 12 U.S.C. 1831m(g)(4)(B).

9. The Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat 745 (2002).

10 For the Board and OTS, "audit services" also includes services provided to a bank holding company or thrift holding company that satisfy the audit requirements under section 36 of a subsidiary bank or thrift of that holding company.

11. The FDIC's Guidelines and Interpretations concerning annual independent audits and reporting requirements, see 12 CFR 363 app. A, at para. 14, call for accountants who perform audit and attestation services to comply with the American Institute of Certified Public Accountants' Code of Professional Conduct and meet the independence requirements and interpretations of the SEC and its staff. Title II of the Sarbanes-Oxley Act amended the Securities and Exchange Act of 1934 by adding new auditor independence provisions. Title II also requires that the SEC promulgate regulations, within 180 days after enactment of the Act, or by January 23, 2003, to implement these provisions. See Sarbanes-Oxley Act, section 208. Most of the provisions, however, are not effective until after an accountant is required to register with the Accounting Oversight Board created by this legislation. This requirement will not be effective until later in 2003. Therefore, accountants who perform section 36 annual audits and attestation services for insured depository institutions, regardless of whether the institution or its holding company is an issuer directly subject to the Sarbanes-Oxley Act, must comply with the SEC's upcoming regulations on auditor independence, once those regulations become effective for registered public accountants under the Sarbanes-Oxley Act.

12. See 17 CFR 201.102(e) (SEC's rules on suspension and debarment of those who practice before the Commission, including accountants). Congress recently codified the SEC's suspension and debarment rules in section 602 of the Sarbanes-Oxley Act.

13. See 12 CFR part 19, subpart A (OCC); 12 CFR part 263, subpart A (Board); 12 CFR part 308, subpart A (FDIC); 12 CFR 509, subpart A (OTS).

14. The Agencies will also have the discretion to issue suspension orders where the duration of the suspension would be dependent on the satisfactory completion of remedial action.

15. 12 U.S.C. 1831m(g)(4)(A).

16. Id. 1818(g).

17. See FDIC v. Mallen, 486 U.S. 230 (1988).

18. Section 105(c)(4)(A) of the Sarbanes-Oxley Act allows the Accounting Oversight Board to revoke the registration of an accounting firm for violation of the Act or other laws or regulations cited. Section 105(c)(4)(B) gives the Accounting Oversight Board authority to suspend or bar a person from further association with any registered public accounting firm.

19. 12 U.S.C. 1818(u)(1).

20. See 12 CFR 19.196 (describing disreputable conduct).

Last Updated 12/16/2002 communications@fdic.gov