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FDIC Federal Register Citations

[Federal Register: January 8, 2003 (Volume 68, Number 5)]

[Proposed Rules]

[Page 1115-1130]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr08ja03-20]

[[Page 1115]]

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Part III

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Part 19

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Board of Governors of the Federal Reserve System

12 CFR Part 263

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Federal Deposit Insurance Corporation

12 CFR Part 308

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Department of the Treasury

Office of Thrift Supervision

12 CFR Part 513

Removal, Suspension, and Debarment of Accountants From Performing Audit Services; Proposed Rule

[[Page 1116]]

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 19

[Docket No. 02-15]

RIN 1557-AB43

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

12 CFR Part 263

[Docket No. R-1139]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 308

RIN 3064-AC57

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 513

[No. 2002-58]

RIN 1550-AB53

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.

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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 March 10, 2003.

ADDRESSES:

OCC: Please direct comments to: Public Information Room, Office of

the Comptroller of the Currency, 250 E Street, SW, Mailstop 1-5,

Washington, DC 20219, Attention Docket No. 02-15. 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

delays in paper mail delivery in the Washington area, commenters are

encouraged to use fax or e-mail delivery, if possible.

Board: Comments should refer to Docket No. R-1139 and may be mailed

to Secretary, Board of Governors of the Federal Reserve System, 20th

Street and Constitution Avenue, NW., Washington, DC 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 a.m. and 5 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 p.m. Comments may be inspected and photocopied in the

FDIC Public Information Center, Room 100, 801 17th Street, NW,

Washington, DC, between 9 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 No. 2002-58.

Delivery: Hand deliver comments to the Guard's Desk, East Lobby

Entrance, 1700 G Street, N.W. from 9 a.m. to 4 p.m. on business days,

Attention: Regulation Comments, Chief Counsel's Office, Attention No.

2002-58.

Facsimiles: Send facsimile transmissions to FAX Number (202) 906-

6518, Attention Docket No. 2002-58.

E-mail: Send e-mails to <regs.comments@ots.treas.gov,

Attention Docket No. 2002-58 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 Reading Room, 1700 G St. NW., from 10 a.m. until 4 p.m. on

business days by appointment or obtain comments and/or an index of

comments by facsimile by telephoning the Public Reading Room at (202)

906-5922 from 9 a.m. until 5 p.m. on business days. Comments and the

related index will also be posted on the OTS Internet site at http://www.ots.treas.gov

FOR FURTHER INFORMATION CONTACT:

OCC: Mitchell Plave, Counsel, Legislative and Regulatory Activities

Division, (202) 874-5090; Richard Shack, Senior Accountant, Office of

the Chief Accountant, (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)

[[Page 1117]]

452-2695; and Salome Tinker, Senior Financial Analyst, (202) 452-3034,

Division of Banking Supervision and Regulation; for users of

Telecommunication Devices for the Deaf (TDD) only, contact (202) 263-

4869.

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, NW., 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.

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\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 part 363 App. A

(Introduction).

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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\

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\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.

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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.

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

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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.

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\9\ The Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat

745 (2002).

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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

1. 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\

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\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.

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2. 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\

[[Page 1118]]

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.

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\11\ The FDIC's Guidelines and Interpretations concerning annual

independent audits and reporting requirements, see 12 CFR part 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 indepdence 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 accounts under the Sarbanes-Oxley Act.

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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.

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\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.

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3. 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.

4. 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\

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\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,

supart 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.

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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.

5. 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.

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

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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

[[Page 1119]]

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.

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\16\ Id. 1818(g).

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

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6. 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, or 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.

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\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.

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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.

7. 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\

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

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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.

8. 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

1. 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.

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

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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

[[Page 1120]]

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.

2. 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.

3. 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.''

C. 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:

[sbull] Have we organized the material to suit your needs? If not,

how could this material be better organized?

[sbull] Are the requirements in the proposed regulation clearly

stated? If not, how could the regulation be more clearly stated?

[sbull] Does the proposed regulation contain language or jargon

that is not clear? If so, which language requires clarification?

[sbull] 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?

[sbull] What else could we do to make the regulation easier to

understand?

D. 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.

E. 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 (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

[[Page 1121]]

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.

F. Executive Order 12866

The OCC and OTS have determined that this proposal is not a

significant regulatory action under Executive Order 12866.

G. 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.

H. 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, Penalties.

12 CFR Part 308

Administrative practice and procedure, Bank deposit insurance,

Banks, banking, Claims, Crime, Equal access to justice, investigations,

Lawyers, Penalties, State nonmember banks.

12 CFR Part 513

Accountants, Administrative practice and procedure, Lawyers.

Deparment of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

For reasons set out in the joint preamble, the OCC proposes to

amend part 19 of chapter I of title 12 of the Code of Federal

Regulations to read as follows:

PART 19--RULES OF PRACTICE AND PROCEDURE

1. The authority citation for part 19 is amended to read as

follows:

Authority: 5 U.S.C. 504, 554-557; 12 U.S.C. 93(b), 93a, 164,

505, 1817, 1818, 1820, 1831m, 1831o, 1972, 3102, 3108(a), 3909 and

4717; 15 U.S.C. 78(h) and (i), 78o-4(c), 78o-5, 78q-1, 78s, 78u,

78u-2, 78u-3, and 78w; 28 U.S.C. 2461 note; 31 U.S.C. 330, 5321; and

42 U.S.C. 4012a.

2. Section 19.100 of subpart B is revised to read as follows:

Sec. 19.100 Filing documents.

All materials required to be filed with or referred to the

Comptroller or the administrative law judge in any proceeding under

this part must be filed with the Hearing Clerk, Office of the

Comptroller of the Currency, 250 E Street, SW, Washington, DC 20219.

Filings to be made with the Hearing Clerk include the notice and

answer; motions and responses to motions; briefs; the record filed by

the administrative law judge after the issuance of a recommended

decision; the recommended decision filed by the administrative law

judge following a motion for summary disposition (except that in

removal and prohibition cases instituted pursuant to 12 U.S.C. 1818,

the administrative law judge will file the record and the recommended

decision with the Board of Governors of the Federal Reserve System);

referrals by the administrative law judge of motions for interlocutory

review; exceptions and requests for oral argument; and any other papers

required to be filed with the Comptroller or the administrative law

judge under this part.

3. In Sec. 19.111 of subpart C, the section heading and the fourth

and fifth sentences are revised to read as follows:

Sec. 19.111 Suspension, removal, or prohibition.

* * * The written request must be sent by certified mail to, or

served personally with a signed receipt on, the District Deputy

Comptroller in the OCC district in which the bank, accountant, or

accounting firm in question is located, or, if the bank is supervised

by the Large Bank Supervision Department, to the appropriate Deputy

Comptroller for Large Bank Supervision for the Office of the

Comptroller of the Currency, or if the bank is supervised by the Mid-

Size/Community Banks Department, to the Deputy Comptroller for Mid-

Size/Community Banks for Office of the Comptroller of the Currency,

Washington, DC 20219. The request must state specifically the relief

desired and the grounds on which that relief is based.

4. In Sec. 19.196 of subpart K, the introductory text and

paragraphs (a), (b), and (g) are revised to read as follows:

Sec. 19.196 Disreputable conduct.

Disreputable conduct for which an individual may be censured,

debarred, or suspended from practice before the OCC includes:

(a) Willfully or recklessly violating or willfully or recklessly

aiding and abetting the violation of any provision of the Federal

banking or applicable securities laws or the rules and regulations

thereunder or conviction of any offense involving dishonesty or breach

of trust;

(b) Knowingly or recklessly giving false or misleading information,

or participating in any way in the giving of false information to the

OCC or any officer or employee thereof, or to any tribunal authorized

to pass upon matters administered by the OCC in connection with any

matter pending or likely to be pending before it. The term

``information'' includes facts or other statements contained in

testimony, financial statements, applications for enrollment,

affidavits, declarations, or any other document or written or oral

statement;

* * * * *

(g) Suspension, debarment or removal from practice before the Board

of Governors, the FDIC, the OTS, the Securities and Exchange

Commission, the Commodity Futures Trading Commission, or any other

Federal or state agency; and

* * * * *

5. A new subpart P is added to read as follows:

[[Page 1122]]

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

Performing Audit Services

Sec.

19.241 Scope.

19.242 Definitions.

19.243 Removal, suspension, or debarment.

19.244 Automatic removal, suspension, or debarment.

19.245 Notice of removal, suspension, or debarment.

19.246 Petition for reinstatement.

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

Performing Audit Services

Sec. 19.241 Scope.

This subpart, which implements section 36(g)(4) of the Federal

Deposit Insurance Act (FDIA) (12 U.S.C. 1831m(g)(4)), provides rules

and procedures for the removal, suspension, or debarment of independent

public accountants and their accounting firms from performing

independent audit and attestation services required by section 36 of

the FDIA (12 U.S.C. 1831m) for insured national banks, District of

Columbia banks, and Federal branches and agencies of foreign banks.

Sec. 19.242 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.

who performs or participates in providing audit services.

Sec. 19.243 Removal, suspension, or debarment.

(a) Good cause for removal, suspension, or debarment--(1)

Individuals. The Comptroller may remove, suspend, or debar an

independent public accountant from performing audit services for

insured national banks that are subject to section 36 of the FDIA if,

after service of a notice of intention and opportunity for hearing in

the matter, the Comptroller 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 OCC or any officer or

employee of the OCC;

(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;

(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 Sec. 19.244,

on grounds relevant to the provision of audit services.

(2) Accounting firms. If the Comptroller 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 Comptroller also may remove, suspend, or debar such firm or one or

more offices of such firm. In considering whether to remove, suspend,

or debar a firm or an office thereof, and the term of any sanction

against a firm under this section, the Comptroller 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; and

(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 Comptroller, be made applicable to a particular

national bank or class of national banks.

(4) Remedies not exclusive. The remedies provided in this subpart

are in addition to any other remedies the OCC may have under any other

applicable provisions of law, rule, or regulation.

(b) Proceedings to remove, suspend, or debar--(1) Initiation of

formal removal, suspension, or debarment proceedings. The Comptroller

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 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 CFR part 19, subpart A.)

general. If the Comptroller serves a written notice of intention to

remove, suspend, or debar an accountant or accounting firm from

performing audit services, the Comptroller 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

national banks, if the Comptroller:

(i) Has a reasonable basis to believe that the accountant or firm

has engaged in conduct (specified in the notice served on the

accountant or firm under paragraph (b) 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

[[Page 1123]]

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 Comptroller 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 Comptroller to

the respondent.

(3) Petition for stay. Any accountant or 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 with the Office of the Comptroller of the

Currency, Washington, DC 20219 for a stay of such immediate suspension.

If no petition is filed within 10 calendar days, the immediate

suspension shall remain in effect.

(4) Hearing on petition. Upon receipt of a stay petition, the

Comptroller will designate a presiding officer who shall 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 may also be presented. In hearings held pursuant

to this paragraph there shall be no discovery and the provisions of

Sec. Sec. 19.6 through 19.12, 19.16, and 19.21 of this part shall

apply.

(5) Decision on petition. Within 30 calendar days after the

hearing, the presiding officer shall 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.

(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 presiding officer 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 presiding officer shall promptly certify the entire record

to the Comptroller. Within 60 calendar days of the presiding officer's

certification, the Comptroller shall issue an order notifying the

affected party whether or not the immediate suspension should be

continued or reinstated. The order shall state the basis of the

Comptroller's decision.

Sec. 19.244 Automatic removal, suspension, and debarment.

(a) An independent public accountant or accounting firm may not

perform audit services for insured national banks if the accountant or

firm:

(1) 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 Federal Deposit Insurance

Corporation, or the Office of Thrift Supervision under section 36 of

the FDIA.

(2) 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));

(3) Is subject to an order of suspension or denial of the privilege

of appearing or practicing before the Securities and Exchange

Commission; or

(4) 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.

(b) Upon written request, the Comptroller, for good cause shown,

may grant written permission to such accountant or firm to perform

audit services for national banks. The request shall contain a concise

statement of the action requested. The Comptroller may require the

applicant to submit additional information.

Sec. 19.245 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 Comptroller shall

make the order publicly available and provide notice of the order to

the other Federal banking agencies.

(b) Notice to the Comptroller by accountants and firms. An

accountant or accounting firm that provides audit services to a

national bank must provide the Comptroller with written notice of:

(1) Any currently effective order or other action described in

Sec. 19.243(a)(1)(vi) or Sec. Sec. 19.244(a)(2) through (a)(4); 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)).

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

firm accepts an engagement to provide audit services, whichever date is

earlier.

Sec. 19.246 Petition for reinstatement.

(a) Form of petition. Unless otherwise ordered by the Comptroller,

a petition for reinstatement by an independent public accountant or

accounting firm removed, suspended, or debarred under Sec. 19.243 may

be made in writing at any time one year after the effective date of the

order of removal, suspension, or debarment and, thereafter, at any time

more than one year after the accountant's or firm's most recent

petition for reinstatement. The request shall contain a concise

statement of the action requested. The Comptroller may require the

applicant to submit additional information.

(b) Procedure. A petitioner for reinstatement under this section

may, in the sole discretion of the Comptroller, be afforded a hearing.

The accountant or firm shall bear the burden of going forward with a

petition and proving the grounds asserted in support of the petition.

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. The Comptroller may, in

his sole discretion, direct that any reinstatement proceeding be

limited to written submissions. The removal, suspension, or debarment

shall continue until the Comptroller, for good cause shown, has

reinstated the petitioner or until the suspension period has expired.

The filing of a petition for reinstatement shall not stay the

effectiveness of the removal, suspension, or debarment of an accountant

or firm.

[[Page 1124]]

Dated: November 27, 2002.

John D. Hawke, Jr.,

Comptroller of the Currency.

Federal Reserve System

12 CFR Chapter II

Authority and Issuance

For the reasons set out in the joint preamble, the Board proposes

to amend part 263, chapter II, title 12 of the Code of Federal

Regulations as follows:

PART 263--RULES OF PRACTICE FOR HEARINGS

1. The authority citation for part 263 is revised to read as

follows:

Authority: 5 U.S.C. 504; 12 U.S.C. 248, 324, 504, 506, 1817(j),

1818, 1828(c), 1831m, 1831o, 1831p-1, 1847(b), 1847(d), 1884(b),

1972(2)(F), 3105, 3107, 3108, 3907, 3909; 15 U.S.C. 21, 78o-4, 78o-

5, 78u-2, 6801, 6805; and 28 U.S.C. 2461 note.

2. In Sec. 263.94, paragraphs (a) and (b) are revised to read as

follows:

Sec. 263.94 Conduct warranting sanctions.

* * * * *

(a) Willfully or recklessly violating or willfully or recklessly

aiding and abetting the violation of any provision of the Federal

banking or applicable securities laws or the rules and regulations

thereunder or conviction of any offense involving dishonesty or breach

of trust;

(b) Knowingly or recklessly giving false or misleading information,

or participating in any way in the giving of false information to the

Board or to any Board officer or employee, or to any tribunal

authorized to pass upon matters administered by the Board in connection

with any matter pending or likely to be pending before it. The term

``information'' includes facts or other statements contained in

testimony, financial statements, applications, affidavits,

declarations, or any other document or written or oral statement;

* * * * *

3. A new subpart J is added as follows:

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

Performing Audit Services

Sec.

263.400 Scope.

263.401 Definitions.

263.402 Removal, suspension, or debarment.

263.403 Automatic removal, suspension, and debarment

263.404 Notice of removal, suspension, or debarment.

263.405 Petition for reinstatement.

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

Performing Audit Services

Sec. 263.400 Scope.

This subpart, which implements section 36(g)(4) of the Federal

Deposit Insurance Act (FDIA) (12 U.S.C. 1831m(g)(4)), provides rules

and procedures for the removal, suspension, or debarment of independent

public accountants and their accounting firms from performing

independent audit and attestation services for insured state member

banks and for bank holding companies required by section 36 of the FDIA

(12 U.S.C. 1831m).

Sec. 263.401 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. Audit services include any service

performed with respect to the holding company of an insured bank that

is used to satisfy requirements imposed by section 36 or part 363 on

that bank.

bank holding company that obtains audit services that are used to

satisfy requirements imposed by section 36 or part 363 on an insured

subsidiary bank of that holding company.

(d) Independent public accountant (accountant) means any individual

who performs or participates in providing audit services.

Sec. 263.402 Removal, suspension, or debarment.

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

(1) Individuals. The Board may remove, suspend, or debar an

independent public accountant from performing audit services for

banking organizations that are subject to section 36 of the FDIA, if,

after notice of and opportunity for hearing in the matter, the Board

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 conflict of interest provisions applicable to accountants

through the Sarbanes-Oxley Act of 2002, Pub. L. No. 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 Board or any officer

or employee of the Board;

(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 Sec. 263.403,

on grounds relevant to the provision of audit services.

(2) Accounting firms. If the Board 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

also may remove, suspend, or debar such firm or one or more offices of

such firm. In considering whether to remove, suspend or debar a firm or

an office thereof, and the term of any sanction against a firm under

this section, the Board may consider, for example:

(i) The gravity, scope, or repetition of the act or failure to act

that constitutes good cause for 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

[[Page 1125]]

or review, in the act or failure to act; and

(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, be made applicable to a particular banking

organization or class of banking organizations.

(4) Remedies not exclusive. The remedies provided in this subpart

are in addition to any other remedies the Board may have under any

other applicable provisions of law, rule, or regulation.

(b) Proceedings to remove, suspend, or debar--(1) Initiation of

formal removal, suspension, or debarment proceedings. The Board 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) Hearing under paragraph (b) of this section. An accountant or

firm named as a respondent in the notice issued under paragraph (b)(2)

of this section may request a hearing on the allegations 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 CFR part 263, subpart A).

general. If the Board serves a written notice of intention to remove,

suspend, or debar an accountant or accounting firm from performing

audit services, the Board may, with due regard for the public interest

and without a preliminary hearing, immediately suspend such accountant

or firm from performing audit services for banking organizations, if

the Board:

(i) Has a reasonable basis to believe that the accountant or firm

has engaged in conduct (specified in the notice served on the

accountant or firm under paragraph (b) 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 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 to the

respondent.

(3) Petition to stay. Any accountant or 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 with the Secretary, Board of Governors of

the Federal Reserve System, Washington, DC 20551 for a stay of such

immediate suspension. If no petition is filed within 10 calendar days,

the immediate suspension shall remain in effect.

(4) Hearing on petition. Upon receipt of a stay petition, the

Secretary will designate a presiding officer who shall 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 may also be presented. In hearings held pursuant

to this paragraph there shall be no discovery and the provisions of

Sec. Sec. 263.6 through 263.12, 263.16, and 263.21 of this part shall