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D.C. Circuit: Rule 102(e) Not Effective Retroactively

Two accountants were not subject to sanctions under SEC Rule 102(e) (¶66,103) for improper professional conduct, concluded a panel of the U.S. Circuit Court of Appeals for the District of Columbia Circuit. According to the appellate court, the 1998 rule amendments that defined the mental state required to support a finding of improper professional conduct did not apply retroactively to alleged misconduct that occurred in 1994. The accountants could also not be disciplined under the rule as in effect in 1994 because "the Commission's recklessness standard was unclear " prior to the 1998 changes.

As alleged, the individuals, the manager and the engagement partner on an audit conducted by a major accounting firm, failed to properly review an audit client's write-offs of accounts receivable. In an opinion issued in July 2003, the SEC, stating that the individuals "failed to exercise due care and appropriate professional skepticism and failed to collect sufficient competent evidential matter," barred the accountants from practicing before the agency under Rule 102(e).

The court found that the SEC was not required to show an actual intent to aid in the fraud committed by the audited company, and concluded that the current version of the rule was not arbitrary and capricious or unconstitutionally vague. However, the court did conclude that the 1998 amendments "imposed new legal consequences and new legal duties" on professionals practicing before the Commission. Accordingly, "the application of the amended rule, which changed the legal landscape with respect to the standard for finding 'improper professional conduct' to conduct in 1994 was impermissibly retroactive."

The 1998 rulemaking was prompted in part by two decisions of the District of Columbia Circuit in Checkosky v. SEC (1993-1994 CCH Dec. ¶98,229 and 1998 CCH Dec. ¶90,299). In these cases, the court found that the SEC "failed to articulate an intelligible standard for 'improper professional conduct." The appellate court held that the Checkosky decisions precluded disciplinary action under the earlier version of the rule that was in effect in 1994.

¨ Marrie v. SEC (DCCir) will be published in a forthcoming REPORT