(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

DC Circuit: Auditor Negligence Sufficient for Cease-and-Desist Order

A panel of the U.S. Circuit Court of Appeals for the District of Columbia Circuit denied a petition for review of an SEC cease-and-desist order against an accounting firm. The administrative action grew out of alleged auditor independence violations involving the fee arrangements and the performance of non-audit services by a financial services affiliate of the audit firm for one of the firm's audit clients. On appeal, the audit firm asserted that the SEC was seeking to impose strict liability for independence violations and "that such constituted an unwarranted de facto expansion" of the agency's powers to sanction professionals.

In rejecting this assertion, the appellate panel distinguished cease-and-desist proceedings under Exchange Act Section 21C (¶26,419R ) and actions for improper professional conduct under Rule 102(e) of the agency's rules of practice (66,103. The court noted that a 102(e) bar, which requires proof of the requisite mental state, is a disciplinary action which can be punitive while a cease-and-desist order is a law enforcement device designed to ensure future compliance. Additionally, the court observed that the language of the statute, which applies to persons who "knew or should have known " of the violations "virtually compelled" the SEC to adopt a negligence standard for cease-and-desist cases.

¨ KPMG, LLP v. SEC(DC Cir) will be published in a forthcoming REPORT .