SARBANES OXLEY ACT OF 2002Page 1
116 STAT. 745
PUBLIC
LAW 107-204-JULY 30, 2002
Public
Law 107-204
107th
Congress
An Act
To
protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities laws, and for other purposes.
Be it enacted
by the Senate and House of Representatives of
the
United States of America in Congress assembled,
SECTION
1. SHORT TITLE; TABLE OF CONTENTS.
(a) SHORT TITLE
.-This
Act may be cited as the
''Sarbanes-Oxley Act of 2002''.
(b) TABLE OF CONTENTS
.-The table of contents for this Act is as
follows:
Sec. 1. Short title; table of contents. Find Below On This Page
Sec. 2. Definitions. Find Below On This Page
Sec. 3. Commission rules and enforcement.
TITLE I-PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
Sec. 101. Establishment; administrative provisions.
Sec. 102. Registration with the Board.
Sec. 103. Auditing, quality control, and independence standards and rules.
Sec. 104. Inspections of registered public accounting firms.
Sec. 105. Investigations and disciplinary proceedings.
Sec. 106. Foreign public accounting firms.
Sec. 107. Commission oversight of the Board.
Sec. 108. Accounting standards.
Sec. 109. Funding.
Sec. 201. Services outside the scope of practice of auditors.
Sec. 202. Preapproval requirements.
Sec. 203. Audit partner rotation.
Sec. 204. Auditor reports to audit committees.
Sec. 205. Conforming amendments.
Sec. 206. Conflicts of interest.
Sec. 207. Study of mandatory rotation of registered public accounting firms.
Sec. 208. Commission authority.
Sec. 209. Considerations by appropriate State regulatory authorities.
TITLE III-CORPORATE RESPONSIBILITY
Sec. 301. Public company audit committees.
Sec. 302. Corporate responsibility for financial reports.
Sec. 303. Improper influence on conduct of audits.
Sec. 304. Forfeiture of certain bonuses and profits.
Sec. 305. Officer and director bars and penalties.
Sec. 306. Insider trades during pension fund blackout periods.
Sec. 307. Rules of professional responsibility for attorneys.
Sec. 308. Fair funds for investors.
TITLE IV-ENHANCED FINANCIAL DISCLOSURES
Sec. 401. Disclosures in periodic reports.
Sec. 402. Enhanced conflict of interest provisions.
Sec. 403. Disclosures of transactions involving management and principal stock- holders. 15 USC 7201 note. Sarbanes-Oxley Act of 2002. Corporate responsibility. July 30, 2002 [H.R. 3763] VerDate 11-MAY-2000 15:33 Aug 15, 2002 Jkt 099139 PO 00204 Frm 00001 Fmt 6580 Sfmt 6582 E:\PUBLAW\PUBL204.107 APPS31
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Page 2 116 STAT. 746 PUBLIC LAW 107-204-JULY 30, 2002
Sec. 404. Management assessment of internal controls.
Sec. 405. Exemption.
Sec. 406.
Sec.
407. Disclosure of audit committee financial expert.
Sec.
408. Enhanced review of periodic disclosures by issuers.
Sec. 409.
Real time issuer disclosures.
TITLE V-ANALYST CONFLICTS OF INTEREST
Sec.
501. Treatment of securities analysts by registered securities associations and
national
securities exchanges.
TITLE VI-COMMISSION RESOURCES AND AUTHORITY
Sec.
601. Authorization of appropriations.
Sec.
602. Appearance and practice before the Commission.
Sec.
603. Federal court authority to impose penny stock bars.
Sec.
604. Qualifications of associated persons of brokers and dealers.
Sec.
701. GAO study and report regarding consolidation of public accounting firms.
Sec.
702. Commission study and report regarding credit rating agencies.
Sec.
703. Study and report on violators and violations
Sec.
704. Study of enforcement actions.
Sec.
705. Study of investment banks.
TITLE VIII-CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY
Sec.
801. Short title.
Sec.
802. Criminal penalties for altering documents.
Sec.
803. Debts nondischargeable if incurred in violation of securities fraud laws.
Sec.
804. Statute of limitations for securities fraud.
Sec.
805. Review of Federal Sentencing Guidelines for obstruction of justice and ex-
tensive criminal fraud.
Sec. 806.
Sec.
807. Criminal penalties for defrauding shareholders of publicly traded compa-
nies.
TITLE IX-WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
Sec.
901. Short title.
Sec.
902. Attempts and conspiracies to commit criminal fraud offenses.
Sec. 903.
Criminal penalties for mail and wire fraud.
Sec.
904. Criminal penalties for violations of the Employee Retirement Income Se-
curity
Act of 1974.
Sec.
905. Amendment to sentencing guidelines relating to certain white-collar of-
fenses.
Sec.
906. Corporate responsibility for financial reports.
Sec.
1001. Sense of the Senate regarding the signing of corporate tax returns by
chief
executive officers.
TITLE XI-CORPORATE FRAUD AND ACCOUNTABILITY
Sec.
1101. Short title.
Sec.
1102. Tampering with a record or otherwise impeding an official proceeding.
Sec.
1103. Temporary freeze authority for the Securities and Exchange Commis-
sion.
Sec.
1104. Amendment to the Federal Sentencing Guidelines.
Sec.
1105. Authority of the Commission to prohibit persons from serving as officers
or
directors.
Sec.
1106. Increased criminal penalties under Securities Exchange Act of 1934.
Sec. 2.
DEFINITIONS.
(a) I
N
G
ENERAL
.-In
this Act, the following definitions shall
apply:
(1) A
PPROPRIATE
STATE REGULATORY AUTHORITY
.-The
term
''appropriate
State regulatory authority'' means the State
agency
or other authority responsible for the licensure or other
regulation
of the practice of accounting in the State or States
15 USC
7201.
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STAT. 748
PUBLIC
LAW 107-204-JULY 30, 2002
(i)
shares in the profits of, or receives compensation
in any
other form from, that firm; or
(ii)
participates as agent or otherwise on behalf
of such
accounting firm in any activity of that firm.
(B) E
XEMPTION
AUTHORITY
.-The
Board may, by rule,
exempt
persons engaged only in ministerial tasks from
the
definition in subparagraph (A), to the extent that the
Board
determines that any such exemption is consistent
with the
purposes of this Act, the public interest, or the
protection
of investors.
(10) P
ROFESSIONAL
STANDARDS
.-The
term ''professional
standards''
means-
(A)
accounting principles that are-
(i)
established by the standard setting body
described
in section 19(b) of the Securities Act of 1933,
as
amended by this Act, or prescribed by the Commis-
sion
under section 19(a) of that Act (15 U.S.C. 17a(s))
or
section 13(b) of the Securities Exchange Act of 1934
(15
U.S.C. 78a(m)); and
(ii)
relevant to audit reports for particular issuers,
or
dealt with in the quality control system of a par-
ticular
registered public accounting firm; and
(B)
auditing standards, standards for attestation
engagements,
quality control policies and procedures, eth-
ical
and competency standards, and independence stand-
ards
(including rules implementing
TITLE II) that the Board
or the
Commission determines-
(i)
relate to the preparation or issuance of audit
reports
for issuers; and
(ii)
are established or adopted by the Board under
section
103(a), or are promulgated as rules of the
Commission.
(11) P
UBLIC
ACCOUNTING
FIRM
.-The
term ''public
accounting
firm'' means-
(A) a
proprietorship, partnership, incorporated associa-
tion,
corporation, limited liability company, limited liability
partnership,
or other legal entity that is engaged in the
practice
of public accounting or preparing or issuing audit
reports;
and
(B) to
the extent so designated by the rules of the
Board,
any associated person of any entity described in
subparagraph
(A).
(12) R
EGISTERED
PUBLIC ACCOUNTING FIRM
.-The
term ''reg-
istered
public accounting firm'' means a public accounting firm
registered
with the Board in accordance with this Act.
(13) R
ULES OF
THE BOARD
.-The
term ''rules of the Board''
means
the bylaws and rules of the Board (as submitted to,
and
approved, modified, or amended by the Commission, in
accordance
with section 107), and those stated policies, prac-
tices,
and interpretations of the Board that the Commission,
by
rule, may deem to be rules of the Board, as necessary
or
appropriate in the public interest or for the protection of
investors.
(14) S
ECURITY
.-The
term ''security'' has the same meaning
as in
section 3(a) of the Securities Exchange Act of 1934 (15
U.S.C.
78c(a)).
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STAT. 749
PUBLIC
LAW 107-204-JULY 30, 2002
(15) S
ECURITIES
LAWS
.-The
term ''securities laws'' means
the
provisions of law referred to in section 3(a)(47) of the
Securities
Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), as
amended
by this Act, and includes the rules, regulations, and
orders
issued by the Commission thereunder.
(16) S
TATE
.-The
term ''State'' means any State of the
United
States, the District of Columbia, Puerto Rico, the Virgin
Islands,
or any other territory or possession of the United
States.
(b) C
ONFORMING
A
MENDMENT
.-Section
3(a)(47) of the Securi-
ties
Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) is amended by
inserting
''the Sarbanes-Oxley Act of 2002,'' before ''the Public''.
Sec. 3.
COMMISSION RULES AND ENFORCEMENT.
(a) R
EGULATORY
A
CTION
.-The
Commission shall promulgate
such
rules and regulations, as may be necessary or appropriate
in the
public interest or for the protection of investors, and in
furtherance
of this Act.
(b) E
NFORCEMENT
.-
(1) I
N
GENERAL
.-A
violation by any person of this Act,
any
rule or regulation of the Commission issued under this
Act, or
any rule of the Board shall be treated for all purposes
in the
same manner as a violation of the Securities Exchange
Act of
1934 (15 U.S.C. 78a et seq.) or the rules and regulations
issued
thereunder, consistent with the provisions of this Act,
and any
such person shall be subject to the same penalties,
and to
the same extent, as for a violation of that Act or
such
rules or regulations.
(2) I
NVESTIGATIONS
,
INJUNCTIONS
,
AND
PROSECUTION OF
OFFENSES
.-Section
21 of the Securities Exchange Act of 1934
(15
U.S.C. 78u) is amended-
(A) in
subsection (a)(1), by inserting ''the rules of the
Public
Company Accounting Oversight Board, of which such
person
is a registered public accounting firm or a person
associated
with such a firm,'' after ''is a participant,'';
(B) in
subsection (d)(1), by inserting ''the rules of the
Public
Company Accounting Oversight Board, of which such
person
is a registered public accounting firm or a person
associated
with such a firm,'' after ''is a participant,'';
(C) in
subsection (e), by inserting ''the rules of the
Public
Company Accounting Oversight Board, of which such
person
is a registered public accounting firm or a person
associated
with such a firm,'' after ''is a participant,''; and
(D) in
subsection (f), by inserting ''or the Public Com-
pany
Accounting Oversight Board'' after ''self-regulatory
organization''
each place that term appears.
(3) C
EASE
-
AND
-
DESIST
PROCEEDINGS
.-Section
21C(c)(2) of
the
Securities Exchange Act of 1934 (15 U.S.C. 78u-3(c)(2))
is
amended by inserting ''registered public accounting firm (as
defined
in section 2 of the Sarbanes-Oxley Act of 2002),'' after
''government
securities dealer,''.
(4) E
NFORCEMENT
BY FEDERAL BANKING AGENCIES
.-Section
12(i)
of the Securities Exchange Act of 1934 (15 U.S.C. 78l(i))
is
amended by-
(A)
striking ''sections 12,'' each place it appears and
inserting
''sections 10A(m), 12,''; and
15 USC
7202.
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STAT. 750
PUBLIC LAW
107-204-JULY 30, 2002
(B)
striking ''and 16,'' each place it appears and
inserting
''and 16 of this Act, and sections 302, 303, 304,
306,
401(b), 404, 406, and 407 of the Sarbanes-Oxley Act
of
2002,''.
(c) E
FFECT
ON
C
OMMISSION
A
UTHORITY
.-Nothing
in this Act
or the
rules of the Board shall be construed to impair or limit-
(1) the
authority of the Commission to regulate the
accounting
profession, accounting firms, or persons associated
with
such firms for purposes of enforcement of the securities
laws;
(2) the
authority of the Commission to set standards for
accounting
or auditing practices or auditor independence,
derived
from other provisions of the securities laws or the
rules
or regulations thereunder, for purposes of the preparation
and
issuance of any audit report, or otherwise under applicable
law; or
(3) the
ability of the Commission to take, on the initiative
of the
Commission, legal, administrative, or disciplinary action
against
any registered public accounting firm or any associated
person thereof.
TITLE I-PUBLIC COMPANY
ACCOUNTING
OVERSIGHT BOARD
Sec.
101. ESTABLISHMENT; ADMINISTRATIVE PROVISIONS.
(a) E
STABLISHMENT
OF
B
OARD
.-There
is established the Public
Company
Accounting Oversight Board, to oversee the audit of public
companies
that are subject to the securities laws, and related mat-
ters,
in order to protect the interests of investors and further
the
public interest in the preparation of informative, accurate,
and
independent audit reports for companies the securities of which
are sold
to, and held by and for, public investors. The Board shall
be a
body corporate, operate as a nonprofit corporation, and have
succession
until dissolved by an Act of Congress.
(b) S
TATUS
.-The
Board shall not be an agency or establishment
of the
United States Government, and, except as otherwise provided
in this
Act, shall be subject to, and have all the powers conferred
upon a
nonprofit corporation by, the District of Columbia Nonprofit
Corporation
Act. No member or person employed by, or agent for,
the
Board shall be deemed to be an officer or employee of or
agent
for the Federal Government by reason of such service.
(c) D
UTIES
OF THE
B
OARD
.-The
Board shall, subject to action
by the
Commission under section 107, and once a determination
is made
by the Commission under subsection (d) of this section-
(1)
register public accounting firms that prepare audit
reports
for issuers, in accordance with section 102;
(2)
establish or adopt, or both, by rule, auditing, quality
control,
ethics, independence, and other standards relating to
the
preparation of audit reports for issuers, in accordance with
section
103;
(3)
conduct inspections of registered public accounting
firms,
in accordance with section 104 and the rules of the
Board;
(4)
conduct investigations and disciplinary proceedings con-
cerning,
and impose appropriate sanctions where justified upon,
15 USC
7211.
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116 STAT.
751
PUBLIC
LAW 107-204-JULY 30, 2002
registered
public accounting firms and associated persons of
such
firms, in accordance with section 105;
(5)
perform such other duties or functions as the Board
(or the
Commission, by rule or order) determines are necessary
or
appropriate to promote high professional standards among,
and
improve the quality of audit services offered by, registered
public
accounting firms and associated persons thereof, or other-
wise to
carry out this Act, in order to protect investors, or
to
further the public interest;
(6)
enforce compliance with this Act, the rules of the Board,
professional
standards, and the securities laws relating to the
preparation
and issuance of audit reports and the obligations
and
liabilities of accountants with respect thereto, by registered
public
accounting firms and associated persons thereof; and
(7) set
the budget and manage the operations of the Board
and the
staff of the Board.
OMMISSION
D
ETERMINATION
.-The
members of the Board
shall
take such action (including hiring of staff, proposal of rules,
and
adoption of initial and transitional auditing and other profes-
sional
standards) as may be necessary or appropriate to enable
the
Commission to determine, not later than 270 days after the
date of
enactment of this Act, that the Board is so organized
and has
the capacity to carry out the requirements of this title,
and to
enforce compliance with this title by registered public
accounting
firms and associated persons thereof. The Commission
shall
be responsible, prior to the appointment of the Board, for
the
planning for the establishment and administrative transition
to the
Board's operation.
(e) B
OARD
M
EMBERSHIP
.-
(1) C
OMPOSITION
.-The
Board shall have 5 members,
appointed
from among prominent individuals of integrity and
reputation
who have a demonstrated commitment to the
interests
of investors and the public, and an understanding
of the
responsibilities for and nature of the financial disclosures
required
of issuers under the securities laws and the obligations
of
accountants with respect to the preparation and issuance
of
audit reports with respect to such disclosures.
(2) L
IMITATION
.-Two
members, and only 2 members, of
the
Board shall be or have been certified public accountants
pursuant
to the laws of 1 or more States, provided that, if
1 of
those 2 members is the chairperson, he or she may not
have
been a practicing certified public accountant for at least
5 years
prior to his or her appointment to the Board.
(3) F
ULL
-
TIME INDEPENDENT
SERVICE
.-Each
member of the
Board
shall serve on a full-time basis, and may not, concurrent
with
service on the Board, be employed by any other person
or
engage in any other professional or business activity. No
member
of the Board may share in any of the profits of,
or
receive payments from, a public accounting firm (or any
other
person, as determined by rule of the Commission), other
than
fixed continuing payments, subject to such conditions as
the
Commission may impose, under standard arrangements
for the
retirement of members of public accounting firms.
(4) A
PPOINTMENT
OF BOARD MEMBERS
.-
(A) I
NITIAL
BOARD
.-Not
later than 90 days after the
date of
enactment of this Act, the Commission, after con-
sultation
with the Chairman of the Board of Governors
Deadline.
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STAT. 752
PUBLIC
LAW 107-204-JULY 30, 2002
of the Federal
Reserve System and the Secretary of the
Treasury,
shall appoint the chairperson and other initial
members
of the Board, and shall designate a term of service
for
each.
(B) V
ACANCIES
.-A
vacancy on the Board shall not
affect
the powers of the Board, but shall be filled in the
same
manner as provided for appointments under this
section.
(5) T
ERM OF
SERVICE
.-
(A) I
N
GENERAL
.-The
term of service of each Board
member
shall be 5 years, and until a successor is appointed,
except
that-
(i) the
terms of office of the initial Board members
(other
than the chairperson) shall expire in annual
increments,
1 on each of the first 4 anniversaries of
the
initial date of appointment; and
(ii)
any Board member appointed to fill a vacancy
occurring
before the expiration of the term for which
the
predecessor was appointed shall be appointed only
for the
remainder of that term.
(B) T
ERM LIMITATION
.-No
person may serve as a
member
of the Board, or as chairperson of the Board,
for
more than 2 terms, whether or not such terms of
service
are consecutive.
(6) R
EMOVAL
FROM OFFICE
.-A
member of the Board may
be
removed by the Commission from office, in accordance with
section
107(d)(3), for good cause shown before the expiration
of the
term of that member.
(f) P
OWERS
OF
THE
B
OARD
.-In
addition to any authority
granted
to the Board otherwise in this Act, the Board shall have
the
power, subject to section 107-
(1) to
sue and be sued, complain and defend, in its corporate
name
and through its own counsel, with the approval of the
Commission,
in any Federal, State, or other court;
(2) to
conduct its operations and maintain offices, and
to
exercise all other rights and powers authorized by this Act,
in any
State, without regard to any qualification, licensing,
or
other provision of law in effect in such State (or a political
subdivision
thereof);
(3) to
lease, purchase, accept gifts or donations of or other-
wise
acquire, improve, use, sell, exchange, or convey, all of
or an
interest in any property, wherever situated;
(4) to
appoint such employees, accountants, attorneys, and
other
agents as may be necessary or appropriate, and to deter-
mine
their qualifications, define their duties, and fix their
salaries
or other compensation (at a level that is comparable
to
private sector self-regulatory, accounting, technical, super-
visory,
or other staff or management positions);
(5) to
allocate, assess, and collect accounting support fees
established
pursuant to section 109, for the Board, and other
fees
and charges imposed under this title; and
(6) to
enter into contracts, execute instruments, incur liabil-
ities,
and do any and all other acts and things necessary,
appropriate,
or incidental to the conduct of its operations and
the
exercise of its obligations, rights, and powers imposed or
granted
by this title.
Contracts.
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STAT. 753
PUBLIC
LAW 107-204-JULY 30, 2002
(g) R
ULES OF
THE
B
OARD
.-The
rules of the Board shall, subject
to the
approval of the Commission-
(1)
provide for the operation and administration of the
Board,
the exercise of its authority, and the performance of
its
responsibilities under this Act;
(2)
permit, as the Board determines necessary or appro-
priate,
delegation by the Board of any of its functions to an
individual
member or employee of the Board, or to a division
of the
Board, including functions with respect to hearing, deter-
mining,
ordering, certifying, reporting, or otherwise acting as
to any
matter, except that-
(A) the
Board shall retain a discretionary right to
review
any action pursuant to any such delegated function,
upon
its own motion;
(B) a
person shall be entitled to a review by the Board
with respect
to any matter so delegated, and the decision
of the
Board upon such review shall be deemed to be
the
action of the Board for all purposes (including appeal
or
review thereof); and
(C) if
the right to exercise a review described in
subparagraph
(A) is declined, or if no such review is sought
within
the time stated in the rules of the Board, then
the
action taken by the holder of such delegation shall
for all
purposes, including appeal or review thereof, be
deemed
to be the action of the Board;
(3)
establish ethics rules and standards of conduct for Board
members
and staff, including a bar on practice before the
Board
(and the Commission, with respect to Board-related mat-
ters)
of 1 year for former members of the Board, and appropriate
periods
(not to exceed 1 year) for former staff of the Board;
and
(4)
provide as otherwise required by this Act.
(h) A
NNUAL
R
EPORT
TO THE
C
OMMISSION
.-The
Board shall
submit
an annual report (including its audited financial statements)
to the
Commission, and the Commission shall transmit a copy
of that
report to the Committee on Banking, Housing, and Urban
Affairs
of the Senate, and the Committee on Financial Services
of the
House of Representatives, not later than 30 days after the
date of
receipt of that report by the Commission.
Sec.
102. REGISTRATION WITH THE BOARD.
(a) M
ANDATORY
R
EGISTRATION
.-Beginning
180 days after the
date of
the determination of the Commission under section 101(d),
it
shall be unlawful for any person that is not a registered public
accounting
firm to prepare or issue, or to participate in the prepara-
tion or
issuance of, any audit report with respect to any issuer.
(b) A
PPLICATIONS
FOR
R
EGISTRATION
.-
(1) F
ORM OF
APPLICATION
.-A
public accounting firm shall
use
such form as the Board may prescribe, by rule, to apply
for
registration under this section.
(2) C
ONTENTS
OF APPLICATIONS
.-Each
public accounting
firm
shall submit, as part of its application for registration,
in such
detail as the Board shall specify-
(A) the
names of all issuers for which the firm prepared
or
issued audit reports during the immediately preceding
calendar
year, and for which the firm expects to prepare
or
issue audit reports during the current calendar year;
15 USC
7212.
Deadline.
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STAT. 754
PUBLIC
LAW 107-204-JULY 30, 2002
(B) the
annual fees received by the firm from each
such
issuer for audit services, other accounting services,
and
non-audit services, respectively;
(C)
such other current financial information for the
most
recently completed fiscal year of the firm as the
Board
may reasonably request;
(D) a
statement of the quality control policies of the
firm for
its accounting and auditing practices;
(E) a
list of all accountants associated with the firm
who
participate in or contribute to the preparation of audit
reports,
stating the license or certification number of each
such
person, as well as the State license numbers of the
firm
itself;
(F)
information relating to criminal, civil, or adminis-
trative
actions or disciplinary proceedings pending against
the
firm or any associated person of the firm in connection
with
any audit report;
(G) copies
of any periodic or annual disclosure filed
by an
issuer with the Commission during the immediately
preceding
calendar year which discloses accounting dis-
agreements
between such issuer and the firm in connection
with an
audit report furnished or prepared by the firm
for
such issuer; and
(H)
such other information as the rules of the Board
or the
Commission shall specify as necessary or appropriate
in the
public interest or for the protection of investors.
(3) C
ONSENTS
.-Each
application for registration under this
subsection
shall include-
(A) a
consent executed by the public accounting firm
to
cooperation in and compliance with any request for
testimony
or the production of documents made by the
Board
in the furtherance of its authority and responsibil-
ities
under this title (and an agreement to secure and
enforce
similar consents from each of the associated persons
of the
public accounting firm as a condition of their contin-
ued
employment by or other association with such firm);
and
(B) a
statement that such firm understands and agrees
that
cooperation and compliance, as described in the con-
sent
required by subparagraph (A), and the securing and
enforcement
of such consents from its associated persons,
in
accordance with the rules of the Board, shall be a
condition
to the continuing effectiveness of the registration
of the
firm with the Board.
(c) A
CTION
ON
A
PPLICATIONS
.-
(1) T
IMING
.-The
Board shall approve a completed applica-
tion
for registration not later than 45 days after the date
of receipt
of the application, in accordance with the rules of
the
Board, unless the Board, prior to such date, issues a written
notice
of disapproval to, or requests more information from,
the
prospective registrant.
(2) T
REATMENT
.-A
written notice of disapproval of a com-
pleted
application under paragraph (1) for registration shall
be
treated as a disciplinary sanction for purposes of sections
105(d)
and 107(c).
(d) P
ERIODIC
R
EPORTS
.-Each
registered public accounting firm
shall
submit an annual report to the Board, and may be required
Deadline.
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PUBLIC
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to report
more frequently, as necessary to update the information
contained
in its application for registration under this section, and
to
provide to the Board such additional information as the Board
or the
Commission may specify, in accordance with subsection (b)(2).
(e) P
UBLIC
A
VAILABILITY
.-Registration
applications and annual
reports
required by this subsection, or such portions of such applica-
tions
or reports as may be designated under rules of the Board,
shall
be made available for public inspection, subject to rules of
the
Board or the Commission, and to applicable laws relating to
the
confidentiality of proprietary, personal, or other information
contained
in such applications or reports, provided that, in all
events,
the Board shall protect from public disclosure information
reasonably
identified by the subject accounting firm as proprietary
information.
(f) R
EGISTRATION
AND
A
NNUAL
F
EES
.-The
Board shall assess
and
collect a registration fee and an annual fee from each registered
public accounting
firm, in amounts that are sufficient to recover
the
costs of processing and reviewing applications and annual
reports.
Sec.
103. AUDITING, QUALITY CONTROL, AND INDEPENDENCE STAND-
ARDS
AND RULES.
(a) A
UDITING
, Q
UALITY
C
ONTROL
,
AND
E
THICS
S
TANDARDS
.-
(1) I
N
GENERAL
.-The
Board shall, by rule, establish,
including,
to the extent it determines appropriate, through
adoption
of standards proposed by 1 or more professional groups
of
accountants designated pursuant to paragraph (3)(A) or
advisory
groups convened pursuant to paragraph (4), and
amend
or otherwise modify or alter, such auditing and related
attestation
standards, such quality control standards, and such
ethics
standards to be used by registered public accounting
firms
in the preparation and issuance of audit reports, as
required
by this Act or the rules of the Commission, or as
may be
necessary or appropriate in the public interest or for
the
protection of investors.
(2) R
ULE
REQUIREMENTS
.-In
carrying out paragraph (1),
the Board-
(A)
shall include in the auditing standards that it
adopts,
requirements that each registered public accounting
firm
shall-
(i)
prepare, and maintain for a period of not less
than 7
years, audit work papers, and other information
related
to any audit report, in sufficient detail to sup-
port
the conclusions reached in such report;
(ii)
provide a concurring or second partner review
and
approval of such audit report (and other related
information),
and concurring approval in its issuance,
by a
qualified person (as prescribed by the Board)
associated
with the public accounting firm, other than
the
person in charge of the audit, or by an independent
reviewer
(as prescribed by the Board); and
(iii)
describe in each audit report the scope of
the auditor's
testing of the internal control structure
and
procedures of the issuer, required by section
404(b),
and present (in such report or in a separate
report)-
15 USC
7213.
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STAT. 756
PUBLIC
LAW 107-204-JULY 30, 2002
(I) the
findings of the auditor from such
testing;
(II) an
evaluation of whether such internal
control
structure and procedures-
(aa)
include maintenance of records that
in
reasonable detail accurately and fairly
reflect
the transactions and dispositions of the
assets
of the issuer;
(bb)
provide reasonable assurance that
transactions
are recorded as necessary to
permit preparation
of financial statements in
accordance
with generally accepted accounting
principles,
and that receipts and expenditures
of the
issuer are being made only in accord-
ance
with authorizations of management and
directors
of the issuer; and
(III) a
description, at a minimum, of material
weaknesses
in such internal controls, and of any
material
noncompliance found on the basis of such
testing.
(B)
shall include, in the quality control standards that
it
adopts with respect to the issuance of audit reports,
requirements
for every registered public accounting firm
relating
to-
(i)
monitoring of professional ethics and independ-
ence
from issuers on behalf of which the firm issues
audit
reports;
(ii)
consultation within such firm on accounting
and
auditing questions;
(iii)
supervision of audit work;
(iv)
hiring, professional development, and advance-
ment of
personnel;
(v) the
acceptance and continuation of engage-
ments;
(vi)
internal inspection; and
(vii)
such other requirements as the Board may
prescribe,
subject to subsection (a)(1).
(3) A
UTHORITY
TO ADOPT OTHER STANDARDS
.-
(A) I
N
GENERAL
.-In
carrying out this subsection, the
Board-
(i) may
adopt as its rules, subject to the terms
of
section 107, any portion of any statement of auditing
standards
or other professional standards that the
Board
determines satisfy the requirements of para-
graph
(1), and that were proposed by 1 or more profes-
sional
groups of accountants that shall be designated
or
recognized by the Board, by rule, for such purpose,
pursuant
to this paragraph or 1 or more advisory
groups
convened pursuant to paragraph (4); and
(ii)
notwithstanding clause (i), shall retain full
authority
to modify, supplement, revise, or subse-
quently
amend, modify, or repeal, in whole or in part,
any
portion of any statement described in clause (i).
(B) I
NITIAL
AND TRANSITIONAL STANDARDS
.-The
Board
shall
adopt standards described in subparagraph (A)(i) as
initial
or transitional standards, to the extent the Board
determines
necessary, prior to a determination of the
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STAT. 757
PUBLIC
LAW 107-204-JULY 30, 2002
Commission
under section 101(d), and such standards shall
be
separately approved by the Commission at the time
of that
determination, without regard to the procedures
required
by section 107 that otherwise would apply to
the
approval of rules of the Board.
(4) A
DVISORY
GROUPS
.-The
Board shall convene, or
authorize
its staff to convene, such expert advisory groups
as may
be appropriate, which may include practicing account-
ants
and other experts, as well as representatives of other
interested
groups, subject to such rules as the Board may
prescribe
to prevent conflicts of interest, to make recommenda-
tions
concerning the content (including proposed drafts) of
auditing,
quality control, ethics, independence, or other stand-
ards required
to be established under this section.
(b) I
NDEPENDENCE
S
TANDARDS
AND
R
ULES
.-The
Board shall
establish
such rules as may be necessary or appropriate in the
public
interest or for the protection of investors, to implement,
or as
authorized under,
TITLE II of this Act.
(c) C
OOPERATION
W
ITH
D
ESIGNATED
P
ROFESSIONAL
G
ROUPS
OF
A
CCOUNTANTS
AND
A
DVISORY
G
ROUPS
.-
(1) I
N
GENERAL
.-The
Board shall cooperate on an ongoing
basis
with professional groups of accountants designated under
subsection
(a)(3)(A) and advisory groups convened under sub-
section
(a)(4) in the examination of the need for changes in
any
standards subject to its authority under subsection (a),
recommend
issues for inclusion on the agendas of such des-
ignated
professional groups of accountants or advisory groups,
and
take such other steps as it deems appropriate to increase
the
effectiveness of the standard setting process.
(2) B
OARD
RESPONSES
.-The
Board shall respond in a timely
fashion
to requests from designated professional groups of
accountants
and advisory groups referred to in paragraph (1)
for any
changes in standards over which the Board has
authority.
(d) E
VALUATION
OF
S
TANDARD
S
ETTING
P
ROCESS
.-The
Board
shall
include in the annual report required by section 101(h) the
results
of its standard setting responsibilities during the period
to
which the report relates, including a discussion of the work
of the
Board with any designated professional groups of accountants
and advisory
groups described in paragraphs (3)(A) and (4) of sub-
section
(a), and its pending issues agenda for future standard setting
projects.
Sec.
104. INSPECTIONS OF REGISTERED PUBLIC ACCOUNTING FIRMS.
(a) I
N
G
ENERAL
.-The
Board shall conduct a continuing pro-
gram of
inspections to assess the degree of compliance of each
registered
public accounting firm and associated persons of that
firm
with this Act, the rules of the Board, the rules of the Commis-
sion,
or professional standards, in connection with its performance
of
audits, issuance of audit reports, and related matters involving
issuers.
(b) I
NSPECTION
F
REQUENCY
.-
(1) I
N
GENERAL
.-Subject
to paragraph (2), inspections
required
by this section shall be conducted-
(A)
annually with respect to each registered public
accounting
firm that regularly provides audit reports for
more
than 100 issuers; and
15 USC
7214.
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STAT. 758
PUBLIC
LAW 107-204-JULY 30, 2002
(B) not
less frequently than once every 3 years with
respect
to each registered public accounting firm that regu-
larly
provides audit reports for 100 or fewer issuers.
(2) A
DJUSTMENTS
TO SCHEDULES
.-The
Board may, by rule,
adjust
the inspection schedules set under paragraph (1) if the
Board
finds that different inspection schedules are consistent
with
the purposes of this Act, the public interest, and the
protection
of investors. The Board may conduct special inspec-
tions
at the request of the Commission or upon its own motion.
(c) P
ROCEDURES
.-The
Board shall, in each inspection under
this
section, and in accordance with its rules for such inspections-
(1) identify
any act or practice or omission to act by the
registered
public accounting firm, or by any associated person
thereof,
revealed by such inspection that may be in violation
of this
Act, the rules of the Board, the rules of the Commission,
the
firm's own quality control policies, or professional stand-
ards;
(2)
report any such act, practice, or omission, if appropriate,
to the
Commission and each appropriate State regulatory
authority;
and
(3)
begin a formal investigation or take disciplinary action,
if
appropriate, with respect to any such violation, in accordance
with
this Act and the rules of the Board.
(d) C
ONDUCT
OF
I
NSPECTIONS
.-In
conducting an inspection
of a
registered public accounting firm under this section, the Board
shall-
(1)
inspect and review selected audit and review engage-
ments
of the firm (which may include audit engagements that
are the
subject of ongoing litigation or other controversy
between
the firm and 1 or more third parties), performed at
various
offices and by various associated persons of the firm,
as
selected by the Board;
(2)
evaluate the sufficiency of the quality control system
of the
firm, and the manner of the documentation and commu-
nication
of that system by the firm; and
(3)
perform such other testing of the audit, supervisory,
and
quality control procedures of the firm as are necessary
or
appropriate in light of the purpose of the inspection and
the
responsibilities of the Board.
(e) R
ECORD
R
ETENTION
.-The
rules of the Board may require
the retention
by registered public accounting firms for inspection
purposes
of records whose retention is not otherwise required by
section
103 or the rules issued thereunder.
(f) P
ROCEDURES
FOR
R
EVIEW
.-The
rules of the Board shall
provide
a procedure for the review of and response to a draft
inspection
report by the registered public accounting firm under
inspection.
The Board shall take such action with respect to such
response
as it considers appropriate (including revising the draft
report
or continuing or supplementing its inspection activities before
issuing
a final report), but the text of any such response, appro-
priately
redacted to protect information reasonably identified by
the
accounting firm as confidential, shall be attached to and made
part of
the inspection report.
(g) R
EPORT
.-A
written report of the findings of the Board
for
each inspection under this section, subject to subsection (h),
shall
be-
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STAT. 759
PUBLIC
LAW 107-204-JULY 30, 2002
(1)
transmitted, in appropriate detail, to the Commission
and
each appropriate State regulatory authority, accompanied
by any
letter or comments by the Board or the inspector,
and any
letter of response from the registered public accounting
firm;
and
(2)
made available in appropriate detail to the public (sub-
ject to
section 105(b)(5)(A), and to the protection of such con-
fidential
and proprietary information as the Board may deter-
mine to
be appropriate, or as may be required by law), except
that no
portions of the inspection report that deal with criti-
cisms
of or potential defects in the quality control systems
of the
firm under inspection shall be made public if those
criticisms
or defects are addressed by the firm, to the satisfac-
tion of
the Board, not later than 12 months after the date
of the
inspection report.
(h) I
NTERIM
C
OMMISSION
R
EVIEW
.-
(1) R
EVIEWABLE
MATTERS
.-A registered
public accounting
firm
may seek review by the Commission, pursuant to such
rules
as the Commission shall promulgate, if the firm-
(A) has
provided the Board with a response, pursuant
to
rules issued by the Board under subsection (f), to the
substance
of particular items in a draft inspection report,
and
disagrees with the assessments contained in any final
report
prepared by the Board following such response; or
(B)
disagrees with the determination of the Board that
criticisms
or defects identified in an inspection report have
not
been addressed to the satisfaction of the Board within
12
months of the date of the inspection report, for purposes
of
subsection (g)(2).
(2) T
REATMENT
OF REVIEW
.-Any
decision of the Commis-
sion
with respect to a review under paragraph (1) shall not
be
reviewable under section 25 of the Securities Exchange
Act of
1934 (15 U.S.C. 78y), or deemed to be ''final agency
action''
for purposes of section 704 of title 5, United States
Code.
(3) T
IMING
.-Review
under paragraph (1) may be sought
during
the 30-day period following the date of the event giving
rise to
the review under subparagraph (A) or (B) of paragraph
(1).
Sec.
105. INVESTIGATIONS AND DISCIPLINARY PROCEEDINGS.
(a) I
N
G
ENERAL
.-The
Board shall establish, by rule, subject
to the
requirements of this section, fair procedures for the investiga-
tion
and disciplining of registered public accounting firms and asso-
ciated
persons of such firms.
(b) I
NVESTIGATIONS
.-
(1) A
UTHORITY
.-In
accordance with the rules of the Board,
the
Board may conduct an investigation of any act or practice,
or
omission to act, by a registered public accounting firm,
any
associated person of such firm, or both, that may violate
any
provision of this Act, the rules of the Board, the provisions
of the
securities laws relating to the preparation and issuance
of
audit reports and the obligations and liabilities of account-
ants
with respect thereto, including the rules of the Commission
issued under
this Act, or professional standards, regardless
of how
the act, practice, or omission is brought to the attention
of the
Board.
Establishment.
15 USC
7215.
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STAT. 760
PUBLIC
LAW 107-204-JULY 30, 2002
(2) T
ESTIMONY
AND DOCUMENT PRODUCTION
.-In
addition
to such
other actions as the Board determines to be necessary
or
appropriate, the rules of the Board may-
(A) require
the testimony of the firm or of any person
associated
with a registered public accounting firm, with
respect
to any matter that the Board considers relevant
or
material to an investigation;
(B)
require the production of audit work papers and
any other
document or information in the possession of
a
registered public accounting firm or any associated person
thereof,
wherever domiciled, that the Board considers rel-
evant
or material to the investigation, and may inspect
the
books and records of such firm or associated person
to
verify the accuracy of any documents or information
supplied;
(C)
request the testimony of, and production of any
document
in the possession of, any other person, including
any
client of a registered public accounting firm that the
Board
considers relevant or material to an investigation
under
this section, with appropriate notice, subject to the
needs
of the investigation, as permitted under the rules
of the
Board; and
(D)
provide for procedures to seek issuance by the
Commission,
in a manner established by the Commission,
of a
subpoena to require the testimony of, and production
of any
document in the possession of, any person, including
any
client of a registered public accounting firm, that the
Board
considers relevant or material to an investigation
under
this section.
(3) N
ONCOOPERATION
WITH INVESTIGATIONS
.-
(A) I
N
GENERAL
.-If a
registered public accounting firm
or any
associated person thereof refuses to testify, produce
documents,
or otherwise cooperate with the Board in
connection
with an investigation under this section, the
Board
may-
(i)
suspend or bar such person from being associ-
ated
with a registered public accounting firm, or
require
the registered public accounting firm to end
such
association;
(ii)
suspend or revoke the registration of the public
accounting
firm; and
(iii)
invoke such other lesser sanctions as the Board
considers
appropriate, and as specified by rule of the
Board.
(B) P
ROCEDURE
.-Any
action taken by the Board under
this
paragraph shall be subject to the terms of section
107(c).
(4) C
OORDINATION
AND REFERRAL OF INVESTIGATIONS
.-
(A) C
OORDINATION
.-The
Board shall notify the
Commission
of any pending Board investigation involving
a
potential violation of the securities laws, and thereafter
coordinate
its work with the work of the Commission's
Division
of Enforcement, as necessary to protect an ongoing
Commission
investigation.
(B) R
EFERRAL
.-The
Board may refer an investigation
under
this section-
(i) to the
Commission;
Notification.
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STAT. 761
PUBLIC
LAW 107-204-JULY 30, 2002
(ii) to
any other Federal functional regulator (as
defined
in section 509 of the Gramm-Leach-Bliley Act
(15
U.S.C. 6809)), in the case of an investigation that
concerns
an audit report for an institution that is
subject
to the jurisdiction of such regulator; and
(iii)
at the direction of the Commission, to-
(I) the
Attorney General of the United States;
(II)
the attorney general of 1 or more States;
and
(III)
the appropriate State regulatory
authority.
(5) U
SE OF
DOCUMENTS
.-
(A) C
ONFIDENTIALITY
.-Except
as provided in subpara-
graph (B),
all documents and information prepared or
received
by or specifically for the Board, and deliberations
of the
Board and its employees and agents, in connection
with an
inspection under section 104 or with an investiga-
tion
under this section, shall be confidential and privileged
as an
evidentiary matter (and shall not be subject to civil
discovery
or other legal process) in any proceeding in any
Federal
or State court or administrative agency, and shall
be
exempt from disclosure, in the hands of an agency
or
establishment of the Federal Government, under the
Freedom
of Information Act (5 U.S.C. 552a), or otherwise,
unless
and until presented in connection with a public
proceeding
or released in accordance with subsection (c).
(B) A
VAILABILITY
TO GOVERNMENT AGENCIES
.-Without
the
loss of its status as confidential and privileged in
the
hands of the Board, all information referred to in
subparagraph
(A) may-
(i) be
made available to the Commission; and
(ii) in
the discretion of the Board, when determined
by the
Board to be necessary to accomplish the pur-
poses
of this Act or to protect investors, be made avail-
able
to-
(I) the
Attorney General of the United States;
(II)
the appropriate Federal functional regu-
lator (as
defined in section 509 of the Gramm-
Leach-Bliley
Act (15 U.S.C. 6809)), other than the
Commission,
with respect to an audit report for
an
institution subject to the jurisdiction of such
regulator;
(III)
State attorneys general in connection with
any criminal
investigation; and
(IV)
any appropriate State regulatory
authority,
each of
which shall maintain such information as confiden-
tial
and privileged.
(6) I
MMUNITY
.-Any
employee of the Board engaged in
carrying
out an investigation under this Act shall be immune
from
any civil liability arising out of such investigation in
the
same manner and to the same extent as an employee
of the
Federal Government in similar circumstances.
(c) D
ISCIPLINARY
P
ROCEDURES
.-
(1) N
OTIFICATION
;
RECORDKEEPING
.-The rules
of the Board
shall
provide that in any proceeding by the Board to determine
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STAT. 762
PUBLIC
LAW 107-204-JULY 30, 2002
whether
a registered public accounting firm, or an associated
person
thereof, should be disciplined, the Board shall-
(A)
bring specific charges with respect to the firm
or
associated person;
(B)
notify such firm or associated person of, and provide
to the
firm or associated person an opportunity to defend
against,
such charges; and
(C)
keep a record of the proceedings.
(2) P
UBLIC
HEARINGS
.-Hearings
under this section shall
not be
public, unless otherwise ordered by the Board for good
cause shown,
with the consent of the parties to such hearing.
(3) S
UPPORTING
STATEMENT
.-A
determination by the Board
to
impose a sanction under this subsection shall be supported
by a
statement setting forth-
(A)
each act or practice in which the registered public
accounting
firm, or associated person, has engaged (or
omitted
to engage), or that forms a basis for all or a
part of
such sanction;
(B) the
specific provision of this Act, the securities
laws,
the rules of the Board, or professional standards
which the
Board determines has been violated; and
(C) the
sanction imposed, including a justification for
that
sanction.
(4) S
ANCTIONS
.-If
the Board finds, based on all of the
facts
and circumstances, that a registered public accounting
firm or
associated person thereof has engaged in any act or
practice,
or omitted to act, in violation of this Act, the rules
of the
Board, the provisions of the securities laws relating
to the
preparation and issuance of audit reports and the obliga-
tions
and liabilities of accountants with respect thereto,
including
the rules of the Commission issued under this Act,
or
professional standards, the Board may impose such discipli-
nary or
remedial sanctions as it determines appropriate, subject
to
applicable limitations under paragraph (5), including-
(A)
temporary suspension or permanent revocation of
registration
under this title;
(B)
temporary or permanent suspension or bar of a
person
from further association with any registered public
accounting
firm;
(C) temporary
or permanent limitation on the activi-
ties,
functions, or operations of such firm or person (other
than in
connection with required additional professional
education
or training);
(D) a
civil money penalty for each such violation, in
an
amount equal to-
(i) not
more than $100,000 for a natural person
or
$2,000,000 for any other person; and
(ii) in
any case to which paragraph (5) applies,
not
more than $750,000 for a natural person or
$15,000,000
for any other person;
(E)
censure;
(F)
required additional professional education or
training;
or
(G) any
other appropriate sanction provided for in the
rules
of the Board.
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(5) I
NTENTIONAL
OR OTHER KNOWING CONDUCT
.-The
sanc-
tions
and penalties described in subparagraphs (A) through
(C) and
(D)(ii) of paragraph (4) shall only apply to-
(A)
intentional or knowing conduct, including reckless
conduct,
that results in violation of the applicable statutory,
regulatory,
or professional standard; or
(B)
repeated instances of negligent conduct, each
resulting
in a violation of the applicable statutory, regu-
latory,
or professional standard.
(6) F
AILURE
TO SUPERVISE
.-
(A) I
N
GENERAL
.-The
Board may impose sanctions
under
this section on a registered accounting firm or upon
the
supervisory personnel of such firm, if the Board finds
that-
(i) the
firm has failed reasonably to supervise an
associated
person, either as required by the rules of
the
Board relating to auditing or quality control stand-
ards,
or otherwise, with a view to preventing violations
of this
Act, the rules of the Board, the provisions
of the securities
laws relating to the preparation and
issuance
of audit reports and the obligations and liabil-
ities
of accountants with respect thereto, including the
rules
of the Commission under this Act, or professional
standards;
and
(ii)
such associated person commits a violation of
this
Act, or any of such rules, laws, or standards.
(B) R
ULE OF
CONSTRUCTION
.-No
associated person of
a
registered public accounting firm shall be deemed to
have
failed reasonably to supervise any other person for
purposes
of subparagraph (A), if-
(i)
there have been established in and for that
firm
procedures, and a system for applying such proce-
dures,
that comply with applicable rules of the Board
and
that would reasonably be expected to prevent and
detect
any such violation by such associated person;
and
(ii)
such person has reasonably discharged the
duties
and obligations incumbent upon that person
by
reason of such procedures and system, and had
no
reasonable cause to believe that such procedures
and
system were not being complied with.
(7) E
FFECT
OF SUSPENSION
.-
(A) A
SSOCIATION
WITH A PUBLIC ACCOUNTING FIRM
.-
It
shall be unlawful for any person that is suspended
or
barred from being associated with a registered public
accounting
firm under this subsection willfully to become
or
remain associated with any registered public accounting
firm,
or for any registered public accounting firm that
knew,
or, in the exercise of reasonable care should have
known,
of the suspension or bar, to permit such an associa-
tion,
without the consent of the Board or the Commission.
(B) A
SSOCIATION
WITH AN ISSUER
.-It
shall be unlawful
for any
person that is suspended or barred from being
associated
with an issuer under this subsection willfully
to
become or remain associated with any issuer in an
accountancy
or a financial management capacity, and for
any
issuer that knew, or in the exercise of reasonable
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care
should have known, of such suspension or bar, to
permit
such an association, without the consent of the
Board
or the Commission.
(d) R
EPORTING
OF
S
ANCTIONS
.-
(1) R
ECIPIENTS
.-If
the Board imposes a disciplinary sanc-
tion,
in accordance with this section, the Board shall report
the
sanction to-
(A) the
Commission;
(B) any
appropriate State regulatory authority or any
foreign
accountancy licensing board with which such firm
or
person is licensed or certified; and
(C) the
public (once any stay on the imposition of
such
sanction has been lifted).
(2) C
ONTENTS
.-The
information reported under paragraph
(1)
shall include-
(A) the
name of the sanctioned person;
(B) a
description of the sanction and the basis for
its
imposition; and
(C)
such other information as the Board deems appro-
priate.
(e) S
TAY OF
S
ANCTIONS
.-
(1) I
N
GENERAL
.-Application
to the Commission for review,
or the institution
by the Commission of review, of any discipli-
nary
action of the Board shall operate as a stay of any such
disciplinary
action, unless and until the Commission orders
(summarily
or after notice and opportunity for hearing on the
question
of a stay, which hearing may consist solely of the
submission
of affidavits or presentation of oral arguments) that
no such
stay shall continue to operate.
(2) E
XPEDITED
PROCEDURES
.-The
Commission shall estab-
lish
for appropriate cases an expedited procedure for consider-
ation
and determination of the question of the duration of
a stay
pending review of any disciplinary action of the Board
under
this subsection.
Sec.
106. FOREIGN PUBLIC ACCOUNTING FIRMS.
(a) A
PPLICABILITY
TO
C
ERTAIN
F
OREIGN
F
IRMS
.-
(1) I
N
GENERAL
.-Any
foreign public accounting firm that
prepares
or furnishes an audit report with respect to any issuer,
shall
be subject to this Act and the rules of the Board and
the
Commission issued under this Act, in the same manner
and to
the same extent as a public accounting firm that is
organized
and operates under the laws of the United States
or any
State, except that registration pursuant to section 102
shall
not by itself provide a basis for subjecting such a foreign
public
accounting firm to the jurisdiction of the Federal or
State
courts, other than with respect to controversies between
such
firms and the Board.
(2) B
OARD
AUTHORITY
.-The
Board may, by rule, determine
that a
foreign public accounting firm (or a class of such firms)
that
does not issue audit reports nonetheless plays such a
substantial
role in the preparation and furnishing of such
reports
for particular issuers, that it is necessary or appro-
priate,
in light of the purposes of this Act and in the public
interest
or for the protection of investors, that such firm (or
class
of firms) should be treated as a public accounting firm
15 USC
7216.
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STAT. 765
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(or
firms) for purposes of registration under, and oversight
by the
Board in accordance with, this title.
(b) P
RODUCTION
OF
A
UDIT
W
ORKPAPERS
.-
(1) C
ONSENT
BY
FOREIGN
FIRMS
.-If a
foreign public
accounting
firm issues an opinion or otherwise performs mate-
rial
services upon which a registered public accounting firm
relies
in issuing all or part of any audit report or any opinion
contained
in an audit report, that foreign public accounting
firm
shall be deemed to have consented-
(A) to
produce its audit workpapers for the Board
or the
Commission in connection with any investigation
by
either body with respect to that audit report; and
(B) to
be subject to the jurisdiction of the courts of
the
United States for purposes of enforcement of any
request
for production of such workpapers.
(2) C
ONSENT
BY
DOMESTIC
FIRMS
.-A
registered public
accounting
firm that relies upon the opinion of a foreign public
accounting
firm, as described in paragraph (1), shall be
deemed-
(A) to
have consented to supplying the audit
workpapers
of that foreign public accounting firm in
response
to a request for production by the Board or the
Commission;
and
(B) to
have secured the agreement of that foreign public
accounting
firm to such production, as a condition of its
reliance
on the opinion of that foreign public accounting
firm.
(c) E
XEMPTION
A
UTHORITY
.-The
Commission, and the Board,
subject
to the approval of the Commission, may, by rule, regulation,
or order,
and as the Commission (or Board) determines necessary
or
appropriate in the public interest or for the protection of inves-
tors,
either unconditionally or upon specified terms and conditions
exempt
any foreign public accounting firm, or any class of such
firms,
from any provision of this Act or the rules of the Board
or the
Commission issued under this Act.
(d) D
EFINITION
.-In
this section, the term ''foreign public
accounting
firm'' means a public accounting firm that is organized
and
operates under the laws of a foreign government or political
subdivision
thereof.
Sec.
107. COMMISSION OVERSIGHT OF THE BOARD.
(a) G
ENERAL
O
VERSIGHT
R
ESPONSIBILITY
.-The
Commission
shall
have oversight and enforcement authority over the Board,
as
provided in this Act. The provisions of section 17(a)(1) of the
Securities
Exchange Act of 1934 (15 U.S.C. 78q(a)(1)), and of section
17(b)(1)
of the Securities Exchange Act of 1934 (15 U.S.C. 78q(b)(1))
shall
apply to the Board as fully as if the Board were a ''registered
securities
association'' for purposes of those sections 17(a)(1) and
17(b)(1).
(b) R
ULES OF
THE
B
OARD
.-
(1) D
EFINITION
.-In
this section, the term ''proposed rule''
means
any proposed rule of the Board, and any modification
of any
such rule.
(2) P
RIOR
APPROVAL REQUIRED
.-No
rule of the Board shall
become
effective without prior approval of the Commission in
accordance
with this section, other than as provided in section
103(a)(3)(B)
with respect to initial or transitional standards.
15 USC
7217.
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PUBLIC
LAW 107-204-JULY 30, 2002
(3) A
PPROVAL
CRITERIA
.-The
Commission shall approve
a proposed
rule, if it finds that the rule is consistent with
the
requirements of this Act and the securities laws, or is
necessary
or appropriate in the public interest or for the protec-
tion of
investors.
(4) P
ROPOSED
RULE PROCEDURES
.-The
provisions of para-
graphs
(1) through (3) of section 19(b) of the Securities
Exchange
Act of 1934 (15 U.S.C. 78s(b)) shall govern the pro-
posed
rules of the Board, as fully as if the Board were a
''registered
securities association'' for purposes of that section
19(b),
except that, for purposes of this paragraph-
(A) the
phrase ''consistent with the requirements of
this
title and the rules and regulations thereunder
applicable
to such organization'' in section 19(b)(2) of that
Act
shall be deemed to read ''consistent with the require-
ments
of
TITLE I of the Sarbanes-Oxley Act of 2002, and
the
rules and regulations issued thereunder applicable to
such
organization, or as necessary or appropriate in the
public
interest or for the protection of investors''; and
(B) the
phrase ''otherwise in furtherance of the pur-
poses
of this title'' in section 19(b)(3)(C) of that Act shall
be
deemed to read ''otherwise in furtherance of the purposes
of
TITLE I of the Sarbanes-Oxley Act of 2002''.
(5) C
OMMISSION
AUTHORITY
TO
AMEND
RULES
OF
THE
BOARD
.-The
provisions of section 19(c) of the Securities
Exchange
Act of 1934 (15 U.S.C. 78s(c)) shall govern the abroga-
tion,
deletion, or addition to portions of the rules of the Board
by the
Commission as fully as if the Board were a ''registered
securities
association'' for purposes of that section 19(c), except
that
the phrase ''to conform its rules to the requirements of
this
title and the rules and regulations thereunder applicable
to such
organization, or otherwise in furtherance of the pur-
poses
of this title'' in section 19(c) of that Act shall, for purposes
of this
paragraph, be deemed to read ''to assure the fair
administration
of the Public Company Accounting Oversight
Board,
conform the rules promulgated by that Board to the
requirements
of
TITLE I of the Sarbanes-Oxley Act of 2002,
or
otherwise further the purposes of that Act, the securities
laws,
and the rules and regulations thereunder applicable to
that
Board''.
(c) C
OMMISSION
R
EVIEW
OF
D
ISCIPLINARY
A
CTION
T
AKEN BY
THE
B
OARD
.-
(1) N
OTICE
OF SANCTION
.-The
Board shall promptly file
notice
with the Commission of any final sanction on any reg-
istered
public accounting firm or on any associated person
thereof,
in such form and containing such information as the
Commission,
by rule, may prescribe.
(2) R
EVIEW
OF
SANCTIONS
.-The
provisions of sections
19(d)(2)
and 19(e)(1) of the Securities Exchange Act of 1934
(15
U.S.C. 78s (d)(2) and (e)(1)) shall govern the review by
the
Commission of final disciplinary sanctions imposed by the
Board
(including sanctions imposed under section 105(b)(3) of
this
Act for noncooperation in an investigation of the Board),
as
fully as if the Board were a self-regulatory organization
and the
Commission were the appropriate regulatory agency
for such
organization for purposes of those sections 19(d)(2)
and
19(e)(1), except that, for purposes of this paragraph-
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STAT. 767
PUBLIC
LAW 107-204-JULY 30, 2002
(A)
section 105(e) of this Act (rather than that section
19(d)(2))
shall govern the extent to which application for,
or
institution by the Commission on its own motion of,
review
of any disciplinary action of the Board operates
as a
stay of such action;
(B)
references in that section 19(e)(1) to ''members''
of such
an organization shall be deemed to be references
to
registered public accounting firms;
(C) the
phrase ''consistent with the purposes of this
title''
in that section 19(e)(1) shall be deemed to read ''con-
sistent
with the purposes of this title and
TITLE I of the
Sarbanes-Oxley
Act of 2002'';
(D)
references to rules of the Municipal Securities Rule-
making
Board in that section 19(e)(1) shall not apply; and
(E) the
reference to section 19(e)(2) of the Securities
Exchange
Act of 1934 shall refer instead to section 107(c)(3)
of this
Act.
(3) C
OMMISSION
MODIFICATION AUTHORITY
.-The
Commis-
sion
may enhance, modify, cancel, reduce, or require the remis-
sion of
a sanction imposed by the Board upon a registered
public
accounting firm or associated person thereof, if the
Commission,
having due regard for the public interest and
the
protection of investors, finds, after a proceeding in accord-
ance
with this subsection, that the sanction-
(A) is
not necessary or appropriate in furtherance of
this
Act or the securities laws; or
(B) is
excessive, oppressive, inadequate, or otherwise
not
appropriate to the finding or the basis on which the
sanction
was imposed.
(d) C
ENSURE
OF THE
B
OARD
; O
THER
S
ANCTIONS
.-
(1) R
ESCISSION
OF BOARD AUTHORITY
.-The
Commission,
by
rule, consistent with the public interest, the protection of
investors,
and the other purposes of this Act and the securities
laws, may
relieve the Board of any responsibility to enforce
compliance
with any provision of this Act, the securities laws,
the
rules of the Board, or professional standards.
(2) C
ENSURE
OF THE BOARD
;
LIMITATIONS
.-The
Commission
may, by
order, as it determines necessary or appropriate in
the
public interest, for the protection of investors, or otherwise
in
furtherance of the purposes of this Act or the securities
laws,
censure or impose limitations upon the activities, func-
tions,
and operations of the Board, if the Commission finds,
on the
record, after notice and opportunity for a hearing, that
the
Board-
(A) has
violated or is unable to comply with any provi-
sion of
this Act, the rules of the Board, or the securities
laws;
or
(B)
without reasonable justification or excuse, has
failed
to enforce compliance with any such provision or
rule,
or any professional standard by a registered public
accounting
firm or an associated person thereof.
(3) C
ENSURE
OF BOARD MEMBERS
;
REMOVAL
FROM OFFICE
.-
The Commission
may, as necessary or appropriate in the public
interest,
for the protection of investors, or otherwise in further-
ance of
the purposes of this Act or the securities laws, remove
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from
office or censure any member of the Board, if the Commis-
sion
finds, on the record, after notice and opportunity for a
hearing,
that such member-
(A) has
willfully violated any provision of this Act,
the
rules of the Board, or the securities laws;
(B) has
willfully abused the authority of that member;
or
(C)
without reasonable justification or excuse, has
failed to
enforce compliance with any such provision or
rule,
or any professional standard by any registered public
accounting
firm or any associated person thereof.
Sec.
108. ACCOUNTING STANDARDS.
(a) A
MENDMENT
TO
S
ECURITIES
A
CT OF
1933.-Section
19 of
the Securities
Act of 1933 (15 U.S.C. 77s) is amended-
(1) by
redesignating subsections (b) and (c) as subsections
(c) and
(d), respectively; and
(2) by
inserting after subsection (a) the following:
''(b) R
ECOGNITION
OF
A
CCOUNTING
S
TANDARDS
.-
''(1) I
N
GENERAL
.-In
carrying out its authority under sub-
section
(a) and under section 13(b) of the Securities Exchange
Act of
1934, the Commission may recognize, as 'generally
accepted'
for purposes of the securities laws, any accounting
principles
established by a standard setting body-
''(A)
that-
''(i)
is organized as a private entity;
''(ii)
has, for administrative and operational pur-
poses,
a board of trustees (or equivalent body) serving
in the
public interest, the majority of whom are not,
concurrent
with their service on such board, and have
not
been during the 2-year period preceding such
service,
associated persons of any registered public
accounting
firm;
''(iii)
is funded as provided in section 109 of the
Sarbanes-Oxley
Act of 2002;
''(iv)
has adopted procedures to ensure prompt
consideration,
by majority vote of its members, of
changes
to accounting principles necessary to reflect
emerging
accounting issues and changing business
practices;
and
''(v)
considers, in adopting accounting principles,
the
need to keep standards current in order to reflect
changes
in the business environment, the extent to
which
international convergence on high quality
accounting
standards is necessary or appropriate in
the
public interest and for the protection of investors;
and
''(B)
that the Commission determines has the capacity
to
assist the Commission in fulfilling the requirements
of
subsection (a) and section 13(b) of the Securities
Exchange
Act of 1934, because, at a minimum, the standard
setting
body is capable of improving the accuracy and
effectiveness
of financial reporting and the protection of
investors
under the securities laws.
15 USC
7218.
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STAT. 769
PUBLIC
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''(2) A
NNUAL
REPORT
.-A
standard setting body described
in
paragraph (1) shall submit an annual report to the Commis-
sion
and the public, containing audited financial statements
of that
standard setting body.''.
(b) C
OMMISSION
A
UTHORITY
.-The
Commission shall promul-
gate
such rules and regulations to carry out section 19(b) of the
Securities
Act of 1933, as added by this section, as it deems nec-
essary or
appropriate in the public interest or for the protection
of
investors.
(c) N
O
E
FFECT
ON
C
OMMISSION
P
OWERS
.-Nothing
in this Act,
including
this section and the amendment made by this section,
shall
be construed to impair or limit the authority of the Commis-
sion to
establish accounting principles or standards for purposes
of
enforcement of the securities laws.
(d) S
TUDY
AND
R
EPORT
ON
A
DOPTING
P
RINCIPLES
-B
ASED
A
CCOUNTING
.-
(1) S
TUDY
.-
(A) I
N
GENERAL
.-The
Commission shall conduct a
study on
the adoption by the United States financial
reporting
system of a principles-based accounting system.
(B) S
TUDY
TOPICS
.-The
study required by subpara-
graph
(A) shall include an examination of-
(i) the
extent to which principles-based accounting
and financial
reporting exists in the United States;
(ii)
the length of time required for change from
a
rules-based to a principles-based financial reporting
system;
(iii)
the feasibility of and proposed methods by
which a
principles-based system may be implemented;
and
(iv) a
thorough economic analysis of the
implementation
of a principles-based system.
(2) R
EPORT
.-Not
later than 1 year after the date of enact-
ment of
this Act, the Commission shall submit a report on
the
results of the study required by paragraph (1) to the Com-
mittee
on Banking, Housing, and Urban Affairs of the Senate
and the
Committee on Financial Services of the House of Rep-
resentatives.
Sec.
109. FUNDING.
(a) I
N
G
ENERAL
.-The
Board, and the standard setting body
designated
pursuant to section 19(b) of the Securities Act of 1933,
as
amended by section 108, shall be funded as provided in this
section.
(b) A
NNUAL
B
UDGETS
.-The
Board and the standard setting
body
referred to in subsection (a) shall each establish a budget
for each
fiscal year, which shall be reviewed and approved according
to
their respective internal procedures not less than 1 month prior
to the
commencement of the fiscal year to which the budget pertains
(or at
the beginning of the Board's first fiscal year, which may
be a
short fiscal year). The budget of the Board shall be subject
to
approval by the Commission. The budget for the first fiscal
year of
the Board shall be prepared and approved promptly fol-
lowing
the appointment of the initial five Board members, to permit
action
by the Board of the organizational tasks contemplated by
section
101(d).
(c) S
OURCES
AND
U
SES OF
F
UNDS
.-
15 USC
7219.
Regulations.
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STAT. 770
PUBLIC
LAW 107-204-JULY 30, 2002
(1) R
ECOVERABLE
BUDGET EXPENSES
.-The
budget of the
Board
(reduced by any registration or annual fees received
under
section 102(e) for the year preceding the year for which
the
budget is being computed), and all of the budget of the
standard
setting body referred to in subsection (a), for each
fiscal
year of each of those 2 entities, shall be payable from
annual accounting
support fees, in accordance with subsections
(d) and
(e). Accounting support fees and other receipts of the
Board
and of such standard-setting body shall not be considered
public
monies of the United States.
(2) F
UNDS
GENERATED FROM THE COLLECTION OF MONETARY
PENALTIES
.-Subject
to the availability in advance in an appro-
priations
Act, and notwithstanding subsection (i), all funds
collected
by the Board as a result of the assessment of monetary
penalties
shall be used to fund a merit scholarship program
for
undergraduate and graduate students enrolled in accredited
accounting
degree programs, which program is to be adminis-
tered
by the Board or by an entity or agent identified by
the
Board.
(d) A
NNUAL
A
CCOUNTING
S
UPPORT
F
EE FOR
THE
B
OARD
.-
(1) E
STABLISHMENT
OF FEE
.-The
Board shall establish,
with
the approval of the Commission, a reasonable annual
accounting
support fee (or a formula for the computation
thereof),
as may be necessary or appropriate to establish and
maintain
the Board. Such fee may also cover costs incurred
in the
Board's first fiscal year (which may be a short fiscal
year),
or may be levied separately with respect to such short
fiscal
year.
(2) A
SSESSMENTS
.-The
rules of the Board under paragraph
(1)
shall provide for the equitable allocation, assessment, and
collection
by the Board (or an agent appointed by the Board)
of the
fee established under paragraph (1), among issuers,
in
accordance with subsection (g), allowing for differentiation
among
classes of issuers, as appropriate.
(e) A
NNUAL
A
CCOUNTING
S
UPPORT
F
EE FOR
S
TANDARD
S
ETTING
B
ODY
.-The
annual accounting support fee for the standard setting
body
referred to in subsection (a)-
(1)
shall be allocated in accordance with subsection (g),
and assessed
and collected against each issuer, on behalf of
the
standard setting body, by 1 or more appropriate designated
collection
agents, as may be necessary or appropriate to pay
for the
budget and provide for the expenses of that standard
setting
body, and to provide for an independent, stable source
of
funding for such body, subject to review by the Commission;
and
(2) may
differentiate among different classes of issuers.
(f) L
IMITATION
ON
F
EE
.-The
amount of fees collected under
this
section for a fiscal year on behalf of the Board or the standards
setting
body, as the case may be, shall not exceed the recoverable
budget
expenses of the Board or body, respectively (which may
include
operating, capital, and accrued items), referred to in sub-
section
(c)(1).
(g) A
LLOCATION
OF
A
CCOUNTING
S
UPPORT
F
EES
A
MONG
I
SSUERS
.-Any
amount due from issuers (or a particular class of
issuers)
under this section to fund the budget of the Board or
the
standard setting body referred to in subsection (a) shall be
allocated
among and payable by each issuer (or each issuer in
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a
particular class, as applicable) in an amount equal to the total
of such
amount, multiplied by a fraction-
(1) the
numerator of which is the average monthly equity
market
capitalization of the issuer for the 12-month period
immediately
preceding the beginning of the fiscal year to which
such
budget relates; and
(2) the
denominator of which is the average monthly equity
market
capitalization of all such issuers for such 12-month
period.
(h) C
ONFORMING
A
MENDMENTS
.-Section
13(b)(2) of the Securi-
ties Exchange
Act of 1934 (15 U.S.C. 78m(b)(2)) is amended-
(1) in
subparagraph (A), by striking ''and'' at the end;
and
(2) in
subparagraph (B), by striking the period at the
end and
inserting the following: ''; and
''(C)
notwithstanding any other provision of law, pay the
allocable
share of such issuer of a reasonable annual accounting
support
fee or fees, determined in accordance with section 109
of the
Sarbanes-Oxley Act of 2002.''.
(i) R
ULE OF
C
ONSTRUCTION
.-Nothing
in this section shall be
construed
to render either the Board, the standard setting body
referred
to in subsection (a), or both, subject to procedures in
Congress
to authorize or appropriate public funds, or to prevent
such
organization from utilizing additional sources of revenue for
its
activities, such as earnings from publication sales, provided
that
each additional source of revenue shall not jeopardize, in
the
judgment of the Commission, the actual and perceived independ-
ence of
such organization.
(j) S
TART
-U
P
E
XPENSES
OF THE
B
OARD
.-From
the unexpended
balances
of the appropriations to the Commission for fiscal year
2003,
the Secretary of the Treasury is authorized to advance to
the
Board not to exceed the amount necessary to cover the expenses
of the
Board during its first fiscal year (which may be a short
fiscal
year).
TITLE II-AUDITOR INDEPENDENCE
Sec.
201. SERVICES OUTSIDE THE SCOPE OF PRACTICE OF AUDITORS.
(a) P
ROHIBITED
A
CTIVITIES
.-Section
10A of the Securities
Exchange
Act of 1934 (15 U.S.C. 78j-1) is amended by adding
at the
end the following:
''(g) P
ROHIBITED
A
CTIVITIES
.-Except
as provided in subsection
(h), it
shall be unlawful for a registered public accounting firm
(and
any associated person of that firm, to the extent determined
appropriate
by the Commission) that performs for any issuer any
audit
required by this title or the rules of the Commission under
this
title or, beginning 180 days after the date of commencement
of the
operations of the Public Company Accounting Oversight
Board
established under section 101 of the Sarbanes-Oxley Act
of 2002
(in this section referred to as the 'Board'), the rules of
the
Board, to provide to that issuer, contemporaneously with the
audit,
any non-audit service, including-
''(1)
bookkeeping or other services related to the accounting
records
or financial statements of the audit client;
''(2)
financial information systems design and implementa-
tion;
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''(3)
appraisal or valuation services, fairness opinions, or
contribution-in-kind
reports;
''(4)
actuarial services;
''(5)
internal audit outsourcing services;
''(6) management
functions or human resources;
''(7)
broker or dealer, investment adviser, or investment
banking
services;
''(8)
legal services and expert services unrelated to the
audit;
and
''(9)
any other service that the Board determines, by regula-
tion,
is impermissible.
''(h) P
REAPPROVAL
R
EQUIRED
FOR
N
ON
-A
UDIT
S
ERVICES
.-A
reg-
istered
public accounting firm may engage in any non-audit service,
including
tax services, that is not described in any of paragraphs
(1)
through (9) of subsection (g) for an audit client, only if the
activity
is approved in advance by the audit committee of the
issuer,
in accordance with subsection (i).''.
(b) E
XEMPTION
A
UTHORITY
.-The
Board may, on a case by
case
basis, exempt any person, issuer, public accounting firm, or
transaction
from the prohibition on the provision of services under
section
10A(g) of the Securities Exchange Act of 1934 (as added
by this
section), to the extent that such exemption is necessary
or
appropriate in the public interest and is consistent with the
protection
of investors, and subject to review by the Commission
in the
same manner as for rules of the Board under section 107.
Sec.
202. PREAPPROVAL REQUIREMENTS.
Section
10A of the Securities Exchange Act of 1934 (15 U.S.C.
78j-1),
as amended by this Act, is amended by adding at the
end the
following:
''(i) P
REAPPROVAL
R
EQUIREMENTS
.-
''(1) I
N
GENERAL
.-
''(A) A
UDIT
COMMITTEE ACTION
.-All
auditing services
(which
may entail providing comfort letters in connection
with
securities underwritings or statutory audits required
for
insurance companies for purposes of State law) and
non-audit
services, other than as provided in subparagraph
(B),
provided to an issuer by the auditor of the issuer
shall be
preapproved by the audit committee of the issuer.
''(B) D
E
MINIMUS EXCEPTION
.-The
preapproval require-
ment
under subparagraph (A) is waived with respect to
the
provision of non-audit services for an issuer, if-
''(i)
the aggregate amount of all such non-audit
services
provided to the issuer constitutes not more
than 5
percent of the total amount of revenues paid
by the
issuer to its auditor during the fiscal year
in
which the nonaudit services are provided;
''(ii)
such services were not recognized by the issuer
at the
time of the engagement to be non-audit services;
and
''(iii)
such services are promptly brought to the
attention
of the audit committee of the issuer and
approved
prior to the completion of the audit by the
audit
committee or by 1 or more members of the audit
committee
who are members of the board of directors
to whom
authority to grant such approvals has been
delegated
by the audit committee.
15 USC
7231.
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''(2) D
ISCLOSURE
TO INVESTORS
.-Approval
by an audit com-
mittee
of an issuer under this subsection of a non-audit service
to be
performed by the auditor of the issuer shall be disclosed
to
investors in periodic reports required by section 13(a).
''(3) D
ELEGATION
AUTHORITY
.-The
audit committee of an
issuer
may delegate to 1 or more designated members of the
audit
committee who are independent directors of the board
of
directors, the authority to grant preapprovals required by
this
subsection. The decisions of any member to whom authority
is
delegated under this paragraph to preapprove an activity
under
this subsection shall be presented to the full audit com-
mittee
at each of its scheduled meetings.
''(4) A
PPROVAL
OF AUDIT SERVICES FOR OTHER PURPOSES
.-
In
carrying out its duties under subsection (m)(2), if the audit
committee
of an issuer approves an audit service within the
scope of
the engagement of the auditor, such audit service
shall
be deemed to have been preapproved for purposes of
this
subsection.''.
Sec.
203. AUDIT PARTNER ROTATION.
Section
10A of the Securities Exchange Act of 1934 (15 U.S.C.
78j-1),
as amended by this Act, is amended by adding at the
end the
following:
''(j) A
UDIT
P
ARTNER
R
OTATION
.-It
shall be unlawful for a reg-
istered
public accounting firm to provide audit services to an issuer
if the
lead (or coordinating) audit partner (having primary responsi-
bility
for the audit), or the audit partner responsible for reviewing
the
audit, has performed audit services for that issuer in each
of the
5 previous fiscal years of that issuer.''.
Sec.
204. AUDITOR REPORTS TO AUDIT COMMITTEES.
Section
10A of the Securities Exchange Act of 1934 (15 U.S.C.
78j-1),
as amended by this Act, is amended by adding at the
end the
following:
''(k) R
EPORTS
TO
A
UDIT
C
OMMITTEES
.-Each
registered public
accounting
firm that performs for any issuer any audit required
by this
title shall timely report to the audit committee of the
issuer-
''(1)
all critical accounting policies and practices to be used;
''(2)
all alternative treatments of financial information
within
generally accepted accounting principles that have been
discussed
with management officials of the issuer, ramifications
of the
use of such alternative disclosures and treatments, and
the
treatment preferred by the registered public accounting
firm;
and
''(3)
other material written communications between the
registered
public accounting firm and the management of the
issuer,
such as any management letter or schedule of
unadjusted
differences.''.
Sec.
205. CONFORMING AMENDMENTS.
(a) D
EFINITIONS
.-Section
3(a) of the Securities Exchange Act
of 1934
(15 U.S.C. 78c(a)) is amended by adding at the end the
following:
''(58)
A
UDIT
COMMITTEE
.-The
term 'audit committee'
means-
''(A) a
committee (or equivalent body) established by
and
amongst the board of directors of an issuer for the
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purpose
of overseeing the accounting and financial
reporting
processes of the issuer and audits of the financial
statements
of the issuer; and
''(B)
if no such committee exists with respect to an
issuer,
the entire board of directors of the issuer.
''(59)
R
EGISTERED
PUBLIC ACCOUNTING FIRM
.-The
term
'registered
public accounting firm' has the same meaning as
in section
2 of the Sarbanes-Oxley Act of 2002.''.
(b) A
UDITOR
R
EQUIREMENTS
.-Section
10A of the Securities
Exchange
Act of 1934 (15 U.S.C. 78j-1) is amended-
(1) by
striking ''an independent public accountant'' each
place that
term appears and inserting ''a registered public
accounting
firm'';
(2) by
striking ''the independent public accountant'' each
place
that term appears and inserting ''the registered public
accounting
firm'';
(3) in
subsection (c), by striking ''No independent public
accountant''
and inserting ''No registered public accounting
firm'';
and
(4) in
subsection (b)-
(A) by
striking ''the accountant'' each place that term
appears
and inserting ''the firm'';
(B) by
striking ''such accountant'' each place that term
appears
and inserting ''such firm''; and
(C) in
paragraph (4), by striking ''the accountant's
report''
and inserting ''the report of the firm''.
(c) O
THER
R
EFERENCES
.-The
Securities Exchange Act of 1934
(15
U.S.C. 78a et seq.) is amended-
(1) in
section 12(b)(1) (15 U.S.C. 78l(b)(1)), by striking
''independent
public accountants'' each place that term appears
and
inserting ''a registered public accounting firm''; and
(2) in
subsections (e) and (i) of section 17 (15 U.S.C. 78q),
by
striking ''an independent public accountant'' each place that
term
appears and inserting ''a registered public accounting
firm''.
(d) C
ONFORMING
A
MENDMENT
.-Section
10A(f) of the Securities
Exchange
Act of 1934 (15 U.S.C. 78k(f)) is amended-
(1) by
striking ''D
EFINITION
'' and
inserting ''D
EFINITIONS
'';
and
(2) by
adding at the end the following: ''As used in this
section,
the term 'issuer' means an issuer (as defined in section
3), the
securities of which are registered under section 12,
or that
is required to file reports pursuant to section 15(d),
or that
files or has filed a registration statement that has
not yet
become effective under the Securities Act of 1933 (15
U.S.C.
77a et seq.), and that it has not withdrawn.''.
Sec.
206. CONFLICTS OF INTEREST.
Section
10A of the Securities Exchange Act of 1934 (15 U.S.C.
78j-1),
as amended by this Act, is amended by adding at the
end the
following:
''(l) C
ONFLICTS
OF
I
NTEREST
.-It
shall be unlawful for a reg-
istered
public accounting firm to perform for an issuer any audit
service
required by this title, if a chief executive officer, controller,
chief
financial officer, chief accounting officer, or any person serving
in an
equivalent position for the issuer, was employed by that
registered
independent public accounting firm and participated in
15 USC
78j-1.
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any
capacity in the audit of that issuer during the 1-year period
preceding
the date of the initiation of the audit.''.
Sec.
207. STUDY OF MANDATORY ROTATION OF REGISTERED PUBLIC
ACCOUNTING
FIRMS.
(a) S
TUDY
AND
R
EVIEW
R
EQUIRED
.-The
Comptroller General
of the
United States shall conduct a study and review of the
potential
effects of requiring the mandatory rotation of registered
public
accounting firms.
(b) R
EPORT
R
EQUIRED
.-Not
later than 1 year after the date
of
enactment of this Act, the Comptroller General shall submit
a
report to the Committee on Banking, Housing, and Urban Affairs
of the
Senate and the Committee on Financial Services of the
House
of Representatives on the results of the study and review
required
by this section.
(c) D
EFINITION
.-For
purposes of this section, the term ''manda-
tory
rotation'' refers to the imposition of a limit on the period
of
years in which a particular registered public accounting firm
may be
the auditor of record for a particular issuer.
Sec.
208. COMMISSION AUTHORITY.
(a) C
OMMISSION
R
EGULATIONS
.-Not
later than 180 days after
the
date of enactment of this Act, the Commission shall issue
final
regulations to carry out each of subsections (g) through (l)
of
section 10A of the Securities Exchange Act of 1934, as added
by this
title.
(b) A
UDITOR
I
NDEPENDENCE
.-It
shall be unlawful for any reg-
istered
public accounting firm (or an associated person thereof,
as
applicable) to prepare or issue any audit report with respect
to any issuer,
if the firm or associated person engages in any
activity
with respect to that issuer prohibited by any of subsections
(g)
through (l) of section 10A of the Securities Exchange Act of
1934,
as added by this title, or any rule or regulation of the
Commission
or of the Board issued thereunder.
Sec.
209. CONSIDERATIONS BY APPROPRIATE STATE REGULATORY
AUTHORITIES.
In
supervising nonregistered public accounting firms and their
associated
persons, appropriate State regulatory authorities should
make an
independent determination of the proper standards
applicable,
particularly taking into consideration the size and
nature
of the business of the accounting firms they supervise and
the
size and nature of the business of the clients of those firms.
The
standards applied by the Board under this Act should not
be
presumed to be applicable for purposes of this section for small
and
medium sized nonregistered public accounting firms.
TITLE III-CORPORATE
RESPONSIBILITY
Sec.
301. PUBLIC COMPANY AUDIT COMMITTEES.
Section
10A of the Securities Exchange Act of 1934 (15 U.S.C.
78f) is
amended by adding at the end the following:
''(m) S
TANDARDS
R
ELATING
TO
A
UDIT
C
OMMITTEES
.-
''(1) C
OMMISSION
RULES
.-
15 USC
78j-1.
15 USC
7234.
Deadline.
15 USC
7233.
Deadline.
15 USC 7232.
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''(A) I
N
GENERAL
.-Effective
not later than 270 days
after the
date of enactment of this subsection, the Commis-
sion
shall, by rule, direct the national securities exchanges
and
national securities associations to prohibit the listing
of any
security of an issuer that is not in compliance
with
the requirements of any portion of paragraphs (2)
through
(6).
''(B) O
PPORTUNITY
TO CURE DEFECTS
.-The
rules of the
Commission
under subparagraph (A) shall provide for
appropriate
procedures for an issuer to have an opportunity
to cure
any defects that would be the basis for a prohibition
under
subparagraph (A), before the imposition of such
prohibition.
''(2) R
ESPONSIBILITIES
RELATING
TO
REGISTERED
PUBLIC
ACCOUNTING
FIRMS
.-The
audit committee of each issuer, in
its
capacity as a committee of the board of directors, shall
be
directly responsible for the appointment, compensation, and
oversight
of the work of any registered public accounting firm
employed
by that issuer (including resolution of disagreements
between
management and the auditor regarding financial
reporting)
for the purpose of preparing or issuing an audit
report
or related work, and each such registered public
accounting
firm shall report directly to the audit committee.
''(3) I
NDEPENDENCE
.-
''(A) I
N
GENERAL
.-Each
member of the audit com-
mittee
of the issuer shall be a member of the board of
directors
of the issuer, and shall otherwise be independent.
''(B) C
RITERIA
.-In
order to be considered to be inde-
pendent
for purposes of this paragraph, a member of an
audit
committee of an issuer may not, other than in his
or her
capacity as a member of the audit committee, the
board
of directors, or any other board committee-
''(i)
accept any consulting, advisory, or other
compensatory
fee from the issuer; or
''(ii)
be an affiliated person of the issuer or any
subsidiary
thereof.
''(C) E
XEMPTION
AUTHORITY
.-The
Commission may
exempt
from the requirements of subparagraph (B) a par-
ticular
relationship with respect to audit committee mem-
bers,
as the Commission determines appropriate in light
of the
circumstances.
''(4) C
OMPLAINTS
.-Each
audit committee shall establish
procedures
for-
''(A)
the receipt, retention, and treatment of complaints
received
by the issuer regarding accounting, internal
accounting
controls, or auditing matters; and
''(B)
the confidential, anonymous submission by
employees
of the issuer of concerns regarding questionable
accounting
or auditing matters.
''(5) A
UTHORITY
TO ENGAGE ADVISERS
.-Each
audit com-
mittee
shall have the authority to engage independent counsel
and
other advisers, as it determines necessary to carry out
its
duties.
''(6) F
UNDING
.-Each
issuer shall provide for appropriate
funding,
as determined by the audit committee, in its capacity
as a
committee of the board of directors, for payment of
compensation-
Deadline.
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''(A)
to the registered public accounting firm employed
by the issuer
for the purpose of rendering or issuing an
audit
report; and
''(B)
to any advisers employed by the audit committee
under
paragraph (5).''.
Sec.
302. CORPORATE RESPONSIBILITY FOR FINANCIAL REPORTS.
(a) R
EGULATIONS
R
EQUIRED
.-The
Commission shall, by rule,
require,
for each company filing periodic reports under section 13(a)
or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m,
78o(d)),
that the principal executive officer or officers and the prin-
cipal
financial officer or officers, or persons performing similar
functions,
certify in each annual or quarterly report filed or sub-
mitted
under either such section of such Act that-
(1) the
signing officer has reviewed the report;
(2)
based on the officer's knowledge, the report does not
contain
any untrue statement of a material fact or omit to
state a
material fact necessary in order to make the statements
made,
in light of the circumstances under which such state-
ments
were made, not misleading;
(3)
based on such officer's knowledge, the financial state-
ments,
and other financial information included in the report,
fairly
present in all material respects the financial condition
and
results of operations of the issuer as of, and for, the
periods
presented in the report;
(4) the
signing officers-
(A) are
responsible for establishing and maintaining
internal
controls;
(B)
have designed such internal controls to ensure
that
material information relating to the issuer and its
consolidated
subsidiaries is made known to such officers
by
others within those entities, particularly during the
period
in which the periodic reports are being prepared;
(C)
have evaluated the effectiveness of the issuer's
internal
controls as of a date within 90 days prior to
the
report; and
(D)
have presented in the report their conclusions
about
the effectiveness of their internal controls based on
their
evaluation as of that date;
(5) the
signing officers have disclosed to the issuer's audi-
tors
and the audit committee of the board of directors (or
persons
fulfilling the equivalent function)-
(A) all
significant deficiencies in the design or operation
of
internal controls which could adversely affect the issuer's
ability
to record, process, summarize, and report financial
data and
have identified for the issuer's auditors any mate-
rial
weaknesses in internal controls; and
(B) any
fraud, whether or not material, that involves
management
or other employees who have a significant
role in
the issuer's internal controls; and
(6) the
signing officers have indicated in the report whether
or not
there were significant changes in internal controls or
in
other factors that could significantly affect internal controls
subsequent
to the date of their evaluation, including any correc-
tive actions
with regard to significant deficiencies and material
weaknesses.
15 USC
7241.
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STAT. 778
PUBLIC
LAW 107-204-JULY 30, 2002
(b) F
OREIGN
R
EINCORPORATIONS
H
AVE
N
O
E
FFECT
.-Nothing
in this
section 302 shall be interpreted or applied in any way
to
allow any issuer to lessen the legal force of the statement
required
under this section 302, by an issuer having reincorporated
or
having engaged in any other transaction that resulted in the
transfer
of the corporate domicile or offices of the issuer from
inside
the United States to outside of the United States.
(c) D
EADLINE
.-The
rules required by subsection (a) shall be
effective
not later than 30 days after the date of enactment of
this
Act.
Sec.
303. IMPROPER INFLUENCE ON CONDUCT OF AUDITS.
(a) R
ULES
T
O
P
ROHIBIT
.-It
shall be unlawful, in contravention
of such
rules or regulations as the Commission shall prescribe
as
necessary and appropriate in the public interest or for the
protection
of investors, for any officer or director of an issuer,
or any
other person acting under the direction thereof, to take
any action
to fraudulently influence, coerce, manipulate, or mislead
any
independent public or certified accountant engaged in the
performance
of an audit of the financial statements of that issuer
for the
purpose of rendering such financial statements materially
misleading.
(b) E
NFORCEMENT
.-In
any civil proceeding, the Commission
shall
have exclusive authority to enforce this section and any rule
or
regulation issued under this section.
(c) N
O
P
REEMPTION
OF
O
THER
L
AW
.-The
provisions of sub-
section
(a) shall be in addition to, and shall not supersede or
preempt,
any other provision of law or any rule or regulation
issued
thereunder.
(d) D
EADLINE
FOR
R
ULEMAKING
.-The
Commission shall-
(1)
propose the rules or regulations required by this section,
not later
than 90 days after the date of enactment of this
Act;
and
(2)
issue final rules or regulations required by this section,
not
later than 270 days after that date of enactment.
Sec.
304. FORFEITURE OF CERTAIN BONUSES AND PROFITS.
(a) A
DDITIONAL
C
OMPENSATION
P
RIOR TO
N
ONCOMPLIANCE
W
ITH
C
OMMISSION
F
INANCIAL
R
EPORTING
R
EQUIREMENTS
.-If an
issuer
is
required to prepare an accounting restatement due to the material
noncompliance
of the issuer, as a result of misconduct, with any
financial
reporting requirement under the securities laws, the chief
executive
officer and chief financial officer of the issuer shall
reimburse
the issuer for-
(1) any
bonus or other incentive-based or equity-based com-
pensation
received by that person from the issuer during the
12-month
period following the first public issuance or filing
with
the Commission (whichever first occurs) of the financial
document
embodying such financial reporting requirement; and
(2) any
profits realized from the sale of securities of the
issuer
during that 12-month period.
(b) C
OMMISSION
E
XEMPTION
A
UTHORITY
.-The
Commission may
exempt
any person from the application of subsection (a), as it
deems
necessary and appropriate.
Sec.
305. OFFICER AND DIRECTOR BARS AND PENALTIES.
(a) U
NFITNESS
S
TANDARD
.-
15 USC
7243.
15 USC
7242.
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STAT. 779
PUBLIC
LAW 107-204-JULY 30, 2002
(1) S
ECURITIES
EXCHANGE ACT OF 1934
.-Section
21(d)(2)
of the
Securities Exchange Act of 1934 (15 U.S.C. 78u(d)(2))
is
amended by striking ''substantial unfitness'' and inserting
''unfitness''.
(2) S
ECURITIES
ACT OF 1933
.-Section
20(e) of the Securities
Act of
1933 (15 U.S.C. 77t(e)) is amended by striking ''substan-
tial
unfitness'' and inserting ''unfitness''.
(b) E
QUITABLE
R
ELIEF
.-Section
21(d) of the Securities
Exchange
Act of 1934 (15 U.S.C. 78u(d)) is amended by adding
at the
end the following:
''(5) E
QUITABLE
R
ELIEF
.-In
any action or proceeding brought
or
instituted by the Commission under any provision of the securi-
ties
laws, the Commission may seek, and any Federal court may
grant,
any equitable relief that may be appropriate or necessary
for the
benefit of investors.''.
Sec.
306. INSIDER TRADES DURING PENSION FUND BLACKOUT
PERIODS.
(a) P
ROHIBITION
OF
I
NSIDER
T
RADING
D
URING
P
ENSION
F
UND
B
LACKOUT
P
ERIODS
.-
(1) I
N
GENERAL
.-Except
to the extent otherwise provided
by rule
of the Commission pursuant to paragraph (3), it shall
be
unlawful for any director or executive officer of an issuer
of any
equity security (other than an exempted security),
directly
or indirectly, to purchase, sell, or otherwise acquire
or
transSec. 2. Definitions. Find Below On This Page
Page 3
116
STAT. 747
PUBLIC
LAW 107-204-JULY 30, 2002
having
jurisdiction over a registered public accounting firm
or
associated person thereof, with respect to the matter in
question.
(2) A
UDIT
.-The
term ''audit'' means an examination of
the
financial statements of any issuer by an independent public
accounting
firm in accordance with the rules of the Board
or the
Commission (or, for the period preceding the adoption
of
applicable rules of the Board under section 103, in accordance
with
then-applicable generally accepted auditing and related
standards
for such purposes), for the purpose of expressing
an opinion
on such statements.
(3) A
UDIT
COMMITTEE
.-The
term ''audit committee''
means-
(A) a
committee (or equivalent body) established by
and
amongst the board of directors of an issuer for the
purpose
of overseeing the accounting and financial
reporting
processes of the issuer and audits of the financial
statements
of the issuer; and
(B) if
no such committee exists with respect to an
issuer,
the entire board of directors of the issuer.
(4) A
UDIT
REPORT
.-The
term ''audit report'' means a docu-
ment or
other record-
(A)
prepared following an audit performed for purposes
of
compliance by an issuer with the requirements of the
securities
laws; and
(B) in
which a public accounting firm either-
(i)
sets forth the opinion of that firm regarding
a
financial statement, report, or other document; or
(ii)
asserts that no such opinion can be expressed.
(5) B
OARD
.-The
term ''Board'' means the Public Company
Accounting
Oversight Board established under section 101.
(6) C
OMMISSION
.-The term
''Commission'' means the Secu-
rities
and Exchange Commission.
(7) I
SSUER
.-The
term ''issuer'' means an issuer (as defined
in
section 3 of the Securities Exchange Act of 1934 (15 U.S.C.
78c)),
the securities of which are registered under section 12
of that
Act (15 U.S.C. 78l), or that is required to file reports
under
section 15(d) (15 U.S.C. 78o(d)), or that files or has
filed a
registration statement that has not yet become effective
under
the Securities Act of 1933 (15 U.S.C. 77a et seq.), and
that it
has not withdrawn.
(8) N
ON
-
AUDIT
SERVICES
.-The
term ''non-audit services''
means
any professional services provided to an issuer by a
registered
public accounting firm, other than those provided
to an
issuer in connection with an audit or a review of the
financial
statements of an issuer.
(9) P
ERSON
ASSOCIATED WITH A PUBLIC ACCOUNTING FIRM
.-
(A) I
N
GENERAL
.-The
terms ''person associated with
a
public accounting firm'' (or with a ''registered public
accounting
firm'') and ''associated person of a public
accounting
firm'' (or of a ''registered public accounting
firm'')
mean any individual proprietor, partner, share-
holder,
principal, accountant, or other professional
employee
of a public accounting firm, or any other inde-
pendent
contractor or entity that, in connection with the
preparation
or issuance of any audit report-
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