(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.)

ABA Comments on PCAOB's Proposed Investigatory Rules

While generally supporting the Public Company Accounting Oversight Board's proposed rules on the conduct of investigations and hearings, two American Bar Association committees sought changes in 1) the use of "Wells submissions, " an informal procedure currently used by the SEC to allow persons under investigation to present their views to the Commission before an enforcement proceeding is authorized, 2) a clarification of the status of supervisory personnel and 3) the employment of SEC-type administrative law judges. The comments were submitted by the committees on Law and Accounting and Federal Regulation of Securities.

The proposed rules afford respondents in an investigation the opportunity to submit a statement of position to the board in defense of their actions that are the subject of a possible request by the staff to initiate a disciplinary proceeding. While this corresponds to a "Wells submission" in an SEC investigation, the proposal provides the staff with discretion as to whether it wishes to advise the respondent of the nature of the allegations.

The committees believe that the proposed staff discretion defeats the purpose of a procedure that in SEC administrative practice has proven helpful in focusing the issues in dispute. Thus, the board is urged to require that respondents be given information concerning the proposed charges identifying all professional and regulatory provisions alleged to have been violated, as well as the specific acts forming the basis for the allegations.

The committees are troubled by a provision authorizing the staff to recommend to the board that a disciplinary proceeding be instituted when a firm or associated person may have given false or misleading testimony or testimony that omits material information. The ABA members believe that the burden should be on the board to establish that the question that was not properly addressed specifically requested the omitted information and that the omission was not inadvertent.

The committees also questioned a provision empowering the board to commence a disciplinary proceeding against supervisory personnel for having failed to supervise an associated person. The term "supervisory personnel "is not defined in either the Sarbanes-Oxley Act or in PCAOB rules. The members fear that the term could conceivably cover a senior accountant performing field work with junior accountants.

Obviously, there is a chain of command in any audit engagement, the members conceded, but not all the persons within the chain are properly viewed as supervisory personnel. The members recommend limiting supervisory responsibility to the partner in charge of the audit and the audit manager. Concurring partners, engagement partners and review partners, while fulfilling important roles, should not be burdened with supervisory responsibility.

The ABA members also questioned the wisdom of including board members within the definition of hearing officer. In the members' view, serving as a hearing officer would disqualify a board member from reviewing the findings of the hearing officer, which in turn poses the problem of obtaining a quorum of board members to consider an appeal from a ruling of the hearing officer.

The committees urged the board to establish hearing officer positions within the board staff, much like the role served by the SEC's administrative law judges. The members reasoned that these professional hearing officers would have the necessary attributes so that the public and the profession can have full confidence in the integrity of the administrative process.