Mandatory deemed repatriation under Sec. 965

When the SEC a couple of weeks ago approved the PCAOB’s streamlined auditor independence rules that were criticized by investor protection advocates, casual observers would have assumed that former commission chairman Jay Clayton would not have voted.

After all, Clayton stepped down on Dec. 23, 2020, and the order approving the board’s rule is dated Jan. 14, 2021. However, according to the SEC’s final commission votes, Clayton voted to approve it. So did Republican Commissioners Hester Peirce and Elad Roisman.

Democratic Commissioner Caroline Crenshaw did not approve it while then-Commissioner Allison Herren Lee recused herself because her husband, Jay Brown, was a PCAOB member at the time. Brown has since stepped down because without Lee’s vote, the SEC will not have a Democratic majority when a Democratic Chairman takes office. President Joseph Biden tapped former Commodity Futures Trading Commission (CFTC) chairman Gary Gensler to head up the securities regulator. His appointment is pending Senate confirmation.

As part of its oversight activities, the commission must sign off on the PCAOB’s major decisions, including changes to its standards and annual budget. The SEC makes the vote tally public pursuant to the Freedom of Information Act (FOIA).

While it is unclear why the SEC waited three weeks before issuing the approval, the commission also issued other orders related to administrative proceeding matters that have dates beyond Dec. 23 with Clayton’s votes.

It could have simply been a backlog in publication. Nonetheless, Clayton’s vote seems to show that the commission was eager to vote on the PCAOB’s rule as soon as possible. It also fits the frenetic rulemaking pace pursued under Clayton’s leadership in the past year, especially on rules that responded to business complaints as being onerous.

The SEC did not respond to a request for comment.

The auditor independence rules were backed by accounting firms, but investor protection advocates had opposed them, fearing erosion of auditor independence as a result and putting investors at a greater risk. The market regulator on Nov. 20 published the PCAOB’s rule changes for public comment, and comments were due by Dec. 18.

The SEC has 45 days to act after publishing the board’s rule for public comment under Section 19(b)(2)(A) of the Securities Exchange Act of 1934. The provision allows the SEC to extend the period by an additional 45 days if the agency determines that a longer period is appropriate.

It is unclear when the SEC voted, but given Clayton’s departure on Dec. 23, the commission had only at most three days to review the comment letters, since a couple of days between the 18th and 23rd were the weekend. And the vast majority of comment letters were submitted from the 16th to the 18th.

Observers said the SEC likely wanted to get it done quickly as the firms were pushing hard to get it done before Clayton left. This has been the case with many rules the commission has adopted as part of a larger deregulatory plan under the Donald Trump administration. Clayton pursued rules that were business-friendly, but investors criticized that such move puts their investments at a greater risk.

The SEC in the past has typically taken at least a couple of years or more for controversial rules from start to finish. However, under Clayton, the time frame has been drastically shortened.

For example, the commission proposed to give exemption from the requirement that auditors attest to management’s evaluation of financial controls in May 2019. The rule was approved less than a year in March 2020. Business groups have been pushing for more exemptions for several years, and they finally got their wish. But investor protection advocates had been vehemently opposed, saying they have more confidence in the financials when auditors closely scrutinize management’s internal controls over financial reporting.

In another example, the SEC in November 2019 proposed a rule that would make it much more difficult for shareholders to bring resolutions up for vote during annual meetings, and the commission finalized the rule in September 2020. Almost 14,000 comment letters filed, the vast majority of them from investors who said they opposed the rule because it is making it more difficult to make companies accountable, among other things.

PCAOB’s mission

In the meantime, Sarbanes-Oxley Act of 2002 created the PCAOB to try to prevent a repeat of accounting scandals that toppled companies like Enron and WorldCom.

The board said it was adopting changes to its auditor independence rules so they better align with the SEC’s recent revisions to Rule 2-01, Qualifications of Accountants, in Regulation S-X.

The agency said it amended the auditor independence rule so that auditor and client relationships and services that would not threaten an auditor’s objectivity do not trigger compliance violations. Auditors and audit committees will not have to spend time analyzing non-substantive rule breaches.

However, investor protection advocates disagreed. A coalition of several investor groups spearheaded by Barbara Roper, director of investor protection with the Consumer Federation of America, wrote in a Dec. 17 comment letter that “like the SEC rules on which they are based, these changes would weaken auditor independence standards, further undermining investors’ faith in the reliability of financial disclosures and putting the integrity of our capital markets at risk.”

They were also unhappy that the PCAOB skipped due process when adopting its rules. Then-board member Brown voted against the rules because, among other things, the PCAOB did not first issue them for public comment.

For more information on this topic, or to learn how Baker Tilly SEC accounting specialists can help, contact our team.

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