The SEC has approved the PCAOB’s temporary rule for an interim inspection program for the audits of brokers and dealers (Rel. Nos. 34-65163, PCAOB-2011-01, August 18, 2011). The interim program will allow the Board to begin inspections and provide a source of information to help guide its decisions about the scope and elements of a permanent program. The Board plans to take a careful and informed approach to establishing a permanent program, which will include consideration of the costs and regulatory burdens that may be imposed on different categories of registered public accounting firms and classes of brokers and dealers.

The Dodd-Frank Act amended the Sarbanes-Oxley Act to give the Board explicit oversight authority with respect to the audits of brokers and dealers that are registered with the SEC. The Board is authorized to establish an inspection program by rule and to differentiate among classes of brokers and dealers. The Board must consider whether differing inspections schedules are appropriate for auditors that issue audit reports only for brokers or dealers that do not receive, handle or hold customers securities or cash, or are not members of the Securities Investor Protection Corporation.

If the Board exempts any public accounting firm from its inspection program, the auditor would not be required to register with the Board.

In adopting the interim inspection program, the Board advised that it did not intend to make any judgments without first gathering and assessing the relevant information, but it also did not intend to postpone inspections until after those judgments were made. The Board plans to report on the interim program at least once a year until a permanent program is in effect. The reports will describe the progress of the interim program and any significant observations that may affect the permanent program. The reports also may highlight information that could protect investors or further the public interest.

The SEC received one comment on the rule change. The small New York firm Farkouh, Furman & Faccio LLP, wrote in support of the interim program without differentiation among the types of brokers and dealers and without an exemption for categories of accounting firms. The firm explained that differentiating among the types of broker-dealers of the categories of accounting firms could adversely affect its ability to compete with larger firms that are inspected by the PCAOB.

No firm welcomes regulatory inspections, according to FF&F, but the lack of PCAOB-inspected credentials would have a negative impact on its ability to attract new clients, or may eliminate the firm from consideration for new or existing engagements if clients limit their searches to firms with these credentials, the firm explained.

The SEC, in approving the PCAOB’s rule, found it consistent with the Sarbanes-Oxley Act and the securities laws. The SEC’s order said the rule change is necessary or appropriate in the public interest of for the protection of investors.

Final Funding Rules

The SEC also approved a proposed rule change relating to the funding of the Board’s operations and amendments to certain definitions (Rel. Nos. 34-65162, PCAOB-2011-02, August 18, 2011). No comment letters were submitted.

The Dodd-Frank Act amended the Sarbanes-Oxley Act to require that the Board adopt rules for the equitable allocation, assessment and collection of an accounting support fee among issuers, brokers and dealers, and to allow for the differentiation among classes of issuers, brokers and dealers as appropriate.

The rule change allocates a portion of the accounting support fee among brokers and dealers, establishes classes of brokers and dealers for funding purposes and describes the methods for allocating the portion of the fee to each broker and dealer within each class. The rule change also amended the Board’s funding rules for issuers. It revised the basis for calculating an issuer’s market capitalization to include all classes of voting and non-voting common equity. The rule change also increased the average monthly market capitalization thresholds for classes of equity issuers and investment companies. The amendments are effective in 2011 for the broker-dealer accounting support fee and in 2012 for the issuer fees.