Proceedings Before the Commodity Futures Trading Commission; Rules Relating to Suspension or Disbarment From Appearance and Practice, 32855-32857 [2015-14159]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 80, Number 111 (Wednesday, June 10, 2015)]
[Rules and Regulations]
[Pages 32855-32857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14159]



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Rules and Regulations
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Federal Register / Vol. 80, No. 111 / Wednesday, June 10, 2015 / 
Rules and Regulations

[[Page 32855]]



COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 14

RIN 3038-AE21


Proceedings Before the Commodity Futures Trading Commission; 
Rules Relating to Suspension or Disbarment From Appearance and Practice

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') amends its regulations to clarify the standard used for 
determining when an accountant has engaged in ``unethical or improper 
professional conduct''--grounds for a temporary or permanent denial of 
the privilege to practice before the Commission. The amendment enhances 
transparency by codifying the standard used in Commission adjudications 
of accountant conduct under the Commission's regulations.

DATES: This rule is effective July 10, 2015.

FOR FURTHER INFORMATION CONTACT: Jason Gizzarelli, Director, Office of 
Proceedings, (202) 418-5395, jgizzarelli@cftc.gov, Office of the 
Executive Director, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    Part 14 of the Commission's regulations addresses the circumstances 
under which the Commission may deny attorneys and accountants, 
temporarily or permanently, the privilege of practicing their 
respective professions before it. Rule 14.8 specifically provides that 
the Commission, after notice and opportunity for a hearing and an 
adverse finding by a preponderance of the evidence, may bar an attorney 
or accountant found: (a) Not to possess the requisite qualifications to 
represent others; or (b) to be lacking in character or integrity; or 
(c) to have engaged in unethical or improper professional conduct 
either in the course of an adjudicatory, investigative, rulemaking, or 
other proceeding before the Commission or otherwise.\1\
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    \1\ 17 CFR 14.8.
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    Prior to this amendment, rule 14.8 did not further articulate what 
constitutes ``unethical or improper professional conduct'' by an 
accountant under paragraph (c). However, since 1996, the Commission has 
filed six administrative actions alleging violations of rule 14.8 
against accountants appearing and practicing before it.\2\ In each 
case, the Commission accepted a settlement banning the defendants from 
practicing before it for a specified time period.
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    \2\ In re Deloitte & Touche and Thomas Lux, CFTC Docket No. 96-
10, 1996 WL 547883 (CFTC September 25, 1996); In re Sherald Griffin, 
CPA & Donna Laubscher, CPA, CFTC Docket No. 98-12, 1998 WL 161709 
(CFTC April 8, 1998); In re Anatoly Osadchy, CPA, CFTC Docket No. 
99-2, 1998 WL 754637 (CFTC October 29, 1998); In re G. Victor 
Johnson and Altschuler, Melvoin & Glasser, LLP, CFTC Docket No. 04-
29, 2005 WL 1398672 (CFTC June 13, 2005); In re G. Victor Johnson 
II, McGladrey & Pullen, LLP and Altshuler, Melvoin & Glasser, LLP, 
CFTC Docket No. 11-01, 2010 WL 3903905 (CFTC October 4 2010; In re 
Jeannie Veraja-Snelling, CFTC Docket No. 13-29, 2013 WL 4647784 
(CFTC filed Aug. 26, 2013).
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    Section 201.102(e) of the Securities and Exchange Commission's 
(``SEC's'') regulations (``SEC rule of practice 102(e)'') \3\ addresses 
the standard of conduct for accountants practicing before that 
commission. Parallel to Commission rule 14.8, SEC rule of practice 
102(e)(1)(ii) sets out ``unethical or improper professional conduct'' 
as grounds for accountant suspension and disbarment from practice 
before the SEC. As amended in 1998,\4\ the SEC regulation further 
provides that with respect to persons licensed to practice as 
accountants, ``improper professional conduct'' under SEC rule of 
practice 102(e)(1)(ii) means intentional or knowing conduct, including 
reckless conduct, that results in a violation of applicable 
professional standards; or either of the following two types of 
negligent conduct: 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 repeated instances of unreasonable 
conduct, each resulting in a violation of applicable professional 
standards, that indicate a lack of competence to practice before the 
Commission.\5\
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    \3\ 17 CFR 201.102(e).
    \4\ See Amendment to Rule 102(e) of the Commission's Rule of 
Practice, 63 FR 57164 (Oct. 26, 1998).
    \5\ 17 CFR 201.102(e)(1)(iv).
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    The standard for accountant ``improper professional conduct'' 
expressed in SEC rule of practice 102(e)(1) is consistent with that 
applied by the Commission in its earlier-referenced adjudications of 
accountant conduct under rule 14.8.

II. The Proposed Amendment to Rule 14.8; Consideration of Comments

    On October 23, 2014, the Commission published a proposed amendment 
to rule 14.8 (``the Proposal'') for public comment.\6\ As proposed, the 
amendment sought to add language to rule 14.8(c) to clarify the meaning 
of accountant ``improper professional conduct.'' As explained in the 
Proposal, the proposed amendment mirrors in substance the standard 
prescribed in SEC rule of practice 102(e)(1)(iv), and comports with the 
standard historically applied by the Commission in adjudications of 
accountant conduct.
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    \6\ Proceedings before the Commodity Futures Trading Commission; 
Rules Relating to Suspension or Disbarment from Appearance and 
Practice, 79 FR 63343 (Oct. 23, 2014).
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    The Commission received three comments on the Proposal.\7\ Each 
commenter supported the amended rule as proposed without raising 
substantive issues. For example Deloitte LLP stated that it 
``support[s] the CFTC's decision to seek regulatory consistency by 
adopting a definition that is identical to the definition provided 
under Rule 102(e) of the Rules of Practice of the U.S. Securities and 
Exchange Commission.'' \8\ Ernst & Young LLP wrote that ``[a]dopting a 
rule that is modeled after SEC Rule 102(e), which would be the case 
with respect to the proposed amendment, strikes us as a reasonable 
approach given the lengthy

[[Page 32856]]

history and background of the SEC's rule.'' \9\ A third commenter wrote 
that the proposed rule ``requires the accountant to act with integrity 
and perform its duties with competence and care and will promote market 
integrity, ensure regulators consistency (with the SEC), enhance 
customer protection and improve risk management.'' \10\ Accordingly, 
the Commission is adopting the amendment to rule 14.8, as proposed.
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    \7\ The three commenters on the proposed rule amendment were 
Ernst & Young LLP, Deloitte LLP and Chris Barnard.
    \8\ Deloitte LLP Comment Letter at 1 (November 24, 2014).
    \9\ Ernst & Young LLP Comment Letter at 1 (November 24, 2014).
    \10\ Chris Barnard Comment Letter at 2 (November 4, 2014).
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III. Role of and Standards Applied to Accountants

    Accountants auditing Commission registrants perform a critical 
gatekeeper role in protecting the financial integrity of the 
derivatives markets and the investing public. Accountants appearing 
before the Commission in this capacity must understand the business 
operations of their clients and conduct financial audits both in 
accordance with applicable professional principles and standards and in 
satisfaction of all the requirements of the Commission's 
regulations.\11\
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    \11\ The current professional principles and standards 
applicable to accountants appearing before the Commission include 
Generally Accepted Accounting Principles, Generally Accepted 
Auditing Standards, International Accounting Standards, the Code of 
Conduct of the American Institute of Certified Public Accountants, 
and the rules and standards of the Public Company Accounting 
Oversight Board.
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    Rule 14.8 can be an effective remedial tool to ensure that the 
accountants appearing before the Commission are competent to do so and 
do not pose a threat to the Commission's registration and examination 
functions. Accountants who engage in intentional or knowing misconduct, 
which includes reckless conduct, clearly pose such a threat, as do 
accountants who engage in certain specified types of negligent conduct.
    The Commission believes that a single, highly unreasonable error in 
judgment or other act made in circumstances warranting heightened 
scrutiny conclusively demonstrates a lack of competence to practice 
before the Commission. Repeated unreasonable conduct may also indicate 
a lack of competence. Therefore, if the Commission finds that an 
accountant acted egregiously in a single instance or unreasonably in 
more than one instance and that this conduct indicates a lack of 
competence, then that accountant engaged in improper professional 
conduct under rule 14.8's standard.
    The amendment to rule 14.8 is not meant, however, to encompass 
every professional misstep. A single judgment error, for example, even 
if unreasonable when made, may not indicate a lack of competence to 
practice before the Commission sufficient to require Commission action. 
The amendment seeks to provide greater clarity with respect to the 
Commission's standard for assessing accountant conduct, as developed 
to-date through administrative adjudications. At the same time, 
however, like the SEC regulation after which the amendment is modeled, 
the amendment elaborates standards that are to be applied in 
adjudications on a case-by-case basis, a method that promotes equitable 
application of the standards as warranted upon full consideration of 
the facts of each case.
    Similarly, as the SEC noted when it amended its rule of practice in 
1998,\12\ the Commission does not seek to use rule 14.8 to establish 
new standards for the accounting profession. The rule itself imposes no 
new professional standards on accountants. Accountants who appear or 
practice before the Commission are already subject to professional 
standards, and rule 14.8(c) is intended to apply in a manner consistent 
with those existing standards.
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    \12\ See 63 FR 33305 (June 18, 1998); 63 FR 57164 (Oct. 26, 
1998).
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IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires agencies to consider 
whether the rules they may adopt will have a significant economic 
effect on a substantial number of small entities.\13\ This amendment 
simply clarifies the standard by which the Commission determines 
whether accountants have engaged in ``improper professional conduct'' 
and does not impose any additional burdens on small businesses. 
Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies, pursuant to 5 U.S.C. 605(b), that the amendment will not 
have a significant economic impact on a substantial number of small 
businesses.
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    \13\ 5 U.S.C. 601 et seq.
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B. Paperwork Reduction Act

    The amendment to Rule 14.8 does not establish a collection of 
information for which the Commission would be obligated to comply with 
the Paperwork Reduction Act.\14\
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    \14\ 44 U.S.C. 3501 et seq.
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C. Consideration of Costs and Benefits

    Section 15(a) of the Commodity Exchange Act (``CEA'') requires the 
Commission to ``consider the costs and benefits'' of its actions before 
promulgating a regulation under the CEA or issuing certain orders.\15\ 
Section 15(a) further specifies that the costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission considers the costs and 
benefits resulting from its discretionary determinations with respect 
to the section 15(a) factors.
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    \15\ 7 U.S.C. 19(a).
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    Reckless accounting practices threaten serious harm to market 
participants and, potentially, to the financial system as a whole.\16\ 
Rule 14.8, which encompasses ``improper professional conduct'' of 
accountants that practice before the Commission, is one of the 
Commission's tools to guard against such harm. The amendment does not 
substantively change the standard that the Commission has employed to 
date under rule 14.8(c) in assessing accountant conduct. Rather, as 
discussed above, the amendment--which closely tracks language in the 
SEC's analogous rule \17\--simply expands upon the pre-existing 
language of rule 14.8(c) to articulate the standard more specifically 
and in a manner consistent with the standard the Commission has applied 
in past administrative adjudications considering accountant 
behavior.\18\
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    \16\ For example, accounting professionals who prepare or assist 
in the preparation of misleading auditing reports or financial 
statements--either deliberately or due to their incompetence--may 
help cover up fraudulent practices that result in loss of customer 
funds. In addition, misleading auditing reports or financial 
statements may result in excessive risks being undertaken, because 
certain risk measures or decisions regarding risk management are 
based on accounting data.
    \17\ 17 CFR 201.102(e)(1)(iv).
    \18\ See note 2, supra.
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    Accordingly, the amendment's chief benefit derives from clarifying 
the specific contours of the Commission's existing rule 14.8(c) 
standard as applied to accountant behavior and by codifying this 
refined approach in the Commission's regulations. Through this 
codification, the standard will be more transparent and accessible to 
professional practitioners, market participants, and the public 
generally. As a result, accountants appearing before the Commission 
will have the benefit of prominent notice of the specific standards of 
conduct to which they are held, and the consequences of failing to meet 
them. To the extent an

[[Page 32857]]

accountant inclined to test the bounds of professional conduct may have 
previously perceived loopholes or ambiguity for exploitation under the 
generally-stated standard of rule 14.8(c), the clarifying amendment 
provides a deterrent against such potentially damaging conduct--a 
benefit for market participants and the public. Further, such clear, 
specific notice forecloses to a great degree potential for an offending 
accounting practitioner, in defense of improper conduct, to argue 
confusion or uncertainty about what specifically the Commission's 
standard requires, thus supporting Commission enforcement efficiency.
    The Commission anticipates no material cost burden attributable to 
the amendment for market participants or accounting professionals to 
whom the amendment is addressed. Again, this amendment merely 
articulates with more precision the contours of the more generally-
stated standard of rule 14.8(c) as it has existed prior to this 
amendment; further, this pre-existing standard has encompassed 
standards governing the accounting profession generally and with which 
accounting professionals have needed to comply. Since the clarifying 
amendment effects no substantive change to the rule 14.8 standard, 
accountants practicing before the Commission should already be in 
compliance. Consequently, they should experience no cost to change 
their behavior to comply with the rule as amended.
    In the following, the Commission considers the amendment relative 
to the CEA section 15(a) factors.
(1) Protection of Market Participants and the Public
    As noted, improper accounting practices may help to cover up 
financial frauds or foster improper managerial decisions and may pose a 
threat to the safety of customer funds. By articulating the 
Commission's standards in more specific, codified, and readily 
accessible form, the amendment safeguards against accountants 
professing lack of knowledge of the applicable standards--or exploiting 
perceived ambiguities in them--to the detriment of market participants 
and the public.
(2) Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    Threats to the safety of customer funds generate public distrust in 
financial market integrity. To the extent this rule amendment better 
informs accountants and fosters their understanding of the Commission's 
standards and the consequences of improper actions--actions that 
potentially could threaten the safety of customer funds--the amendment 
promotes the integrity of financial markets.
(3) Price Discovery
    The Commission does not foresee that the amendment will directly 
impact price discovery.
(4) Sound Risk Management Practices
    As noted, improper accounting practices may lead to unnecessary 
risks being undertaken, as certain risk measures or managerial 
decisions are based on accounting data. To the extent the amendment 
improves accountants' understanding of the Commission's standards, 
thereby deterring improper conduct that potentially could result in 
unnecessary risks being undertaken, the amendment promotes sound risk 
management practices.
(5) Other Public Interest Considerations
    By harmonizing the rule 14.8(c) standard for accountants with that 
of SEC rule of practice 102(e), the amendment helps to ensure 
consistency and reduces potential for confusion.

List of Subjects in 17 CFR Part 14

    Administrative practice and procedure, Professional conduct and 
competency standards, Ethical conduct, Penalties.

    For the reasons discussed in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR part 14 as set forth below:

PART 14--RULES RELATING TO SUSPENSION OR DISBARMENT FROM APPEARANCE 
AND PRACTICE

0
1. The authority citation for part 14 is revised to read as follows:

    Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391, 7 
U.S.C. 4a(j).

0
2. Amend Sec.  14.8 by revising paragraph (c) to read as follows:


Sec.  14.8  Lack of requisite qualifications, character and integrity.

* * * * *
    (c) To have engaged in unethical or improper professional conduct 
either in the course of any adjudicatory, investigative or rulemaking 
or other proceeding before the Commission or otherwise. With respect to 
the professional conduct of persons licensed to practice as 
accountants, ``unethical or improper professional conduct'' means:
    (1) Intentional or knowing conduct, including reckless conduct, 
that results in a violation of applicable professional principles or 
standards; or
    (2) Either of the following two types of negligent conduct:
    (i) A single instance of highly unreasonable conduct that results 
in a violation of applicable professional principles or standards in 
circumstances in which an accountant knows, or should know, that 
heightened scrutiny is warranted.
    (ii) Repeated instances of unreasonable conduct, each resulting in 
a violation of applicable professional principles or standards, which 
indicate a lack of competence to practice before the Commission.

    Issued in Washington, DC, on June 5, 2015, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix to Proceedings Before the Commodity Futures Trading 
Commission; Rules Relating to Suspension or Disbarment From Appearance 
and Practice--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Wetjen, Bowen, 
and Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

[FR Doc. 2015-14159 Filed 6-9-15; 8:45 am]
BILLING CODE 6351-01-P