Vedder Thinking | Articles Examining Sanctions for Accountants under SEC Rule of Practice 102(e)(1)
On August 5, 2016, Commissioner Michael S. Piwowar of the U.S. Securities and Exchange Commission (SEC) delivered a heated dissent in an appeal from an administrative law judge's ruling in an enforcement action against two certified public accountants. Commissioner Piwowar dissented from the opinion of Chair Mary Jo White and Commissioner Kara M. Stein. Specifically, Commissioner Piwowar accused Chair White and Commissioner Stein of "destr[oying] . . . the Respondents' professional careers" by levying an impermissible "punitive sanction" under Rule 102(e)(1) of the SEC's Rules of Practice and Rules on Fair Fund and Disgorgement Plans.
Rule 102 governs "Appearance and Practice Before the Commission" by professionals such as accountants and attorneys. 17 CFR § 201.102. Rule 102(e), in particular, governs the "suspension and disbarment" of persons appearing and practicing before the SEC. This article focuses specifically on the SEC’s suspension and disbarment authority under Rule 102(e)(1), which applies when a professional is deemed "not to possess the requisite qualification to represent others," "to be lacking in character or integrity or to have engaged in unethical or improper professional conduct," or "to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder." 17 CFR § 201.102(e)(1).
In addition to containing conspicuously sharp language, and publicly demonstrating a rift between SEC commissioners, the dissent provided candid and practical guidance on the sanctions available to the SEC under Rule 102(e)(1), as well as the impact of each such sanction. For purposes of the dissent, Commissioner Piwowar used the terms "suspension" and "bar" as distinct punishments in which a "suspension" indicates a denial of right to practice before the SEC for a certain amount of time, after which a respondent is reinstated,1 whereas a "bar" indicates either an outright denial of right to practice without temporal limitation,2 or a denial of right to practice with the right to apply for reinstatement after a fixed amount of time.3 In short, the dissent discussed three possible sanctions under Rule 102(3): (1) a temporary suspension; (2) an outright bar; and (3) a bar with the ability to apply for reinstatement after passage of a certain amount of time.4
On June 27, 2014, Administrative Law Judge (ALJ) Carol Fox Foelak entered an Initial Decision in an administrative proceeding captioned In the Matter of John J. Aesoph, CPA and Darren M. Bennett, CPA. In that case, Aesoph and Bennett (Respondents) had been accused of improper professional conduct under Rule 102(e)(1) and Section 4C of the Securities Exchange Act of 1934 for failing to comply with PCAOB standards when, in connection with a year-end audit of a bank's financial statements, they "failed to subject . . . loan loss estimates—one of the highest risk areas of the audit—to appropriate scrutiny."5 The SEC's Division of Enforcement sought suspensions of Aesoph and Bennett for three years and two years, respectively. After a nine-day hearing, the ALJ found that Respondents had engaged in improper professional conduct and suspended Aesoph for one year and Bennett for six months. Respondents appealed the Initial Decision. The SEC's Division of Enforcement cross-appealed the Initial Decision, arguing that the sanctions imposed by the ALJ were too lenient.
On appeal, the SEC—through Chair White, Commissioner Stein and Commissioner Piwowar—issued a Corrected Opinion, affirming the ALJ's finding of improper professional conduct. As to sanctions, Chair White and Commissioner Stein enhanced Respondents' penalty, finding that it was "in the public interest to deny Respondents the privilege of appearing or practicing before us with a right for Aesoph to apply for reinstatement after three years and for Bennett to apply for reinstatement after two years."6 In short, the Division of Enforcement had originally sought suspensions of three years and two years for Aesoph and Bennett, respectively, and the ALJ ordered suspensions of one year and six months, respectively. On appeal, the SEC ordered that Aesoph and Bennet be barred with a right to apply for reinstatement after three years and two years, respectively.
This appeal and the dissent provide—directly and implicitly—several key takeaways for accountants facing enforcement actions under Rule 102(e)(1), as well as their respective counsel:
1. Sanctions under Rule 102(e) are for remedial—not punitive—purposes.
As an initial matter, Commissioner Piwowar noted that "'the [SEC] may impose sanctions for a remedial purpose, but not for punishment' under Rule 102(e)."7 Remedial sanctions are assessed by the SEC by using the "Steadman factors," which are: (1) egregiousness of respondent's actions; (2) isolated or recurrent nature of the infraction; (3) degree of scienter involved; (4) sincerity of respondent's assurances against future violations; (5) respondent's recognition that his or her conduct was wrong; and (6) the likelihood of opportunities for future violations based on the respondent's occupation.8 In addition to the Steadman factors, the SEC also considers deterrence and "consisten[cy] with Commission precedent" when assessing sanctions under Rule 102(e)(1).9 Commissioner Piwowar found the imposition of three-year and two-year bars against Respondents—a more onerous sanction than the ALJ originally ordered and more onerous than even the sanction sought by the Division of Enforcement—to be excessive to the point of being punitive.
2. A bar—either indefinite in nature or with a right to apply for reinstatement after a fixed period of time—is harsher than a suspension.
Commissioner Piwowar posited that the sanction ordered in the Corrected Opinion was harsher than the sanction sought by the Division of Enforcement because "[t]here is a significant difference between a three-year and two-year suspension as compared to a bar with the right to apply for reinstatement after three years and two years."10 Specifically, while Respondents "would be free to resume practicing or appearing before the [SEC] when [a] suspension ends," a bar with a right to apply for reinstatement only provides that "once the requisite time period has passed, Respondents will only be no longer prohibited from seeking reinstatement from the [SEC]."11
The distinction between the automatic resumption of practice before the SEC associated with a suspension and the end to a prohibition from seeing reinstatement after a certain amount of time is critical. The dissent identifies two additional hurdles faced by respondents who are barred from practice as opposed to those who are suspended. First, the dissent noted the significance of "[t]he amount of . . . resources (e.g., retention of counsel) needed to navigate the process," concluding that costs "may deter some individuals from even attempting to petition for reinstatement."12 Second, the reinstatement process itself is onerous. Commissioner Piwowar noted that "[p]etitions for accountant reinstatements are first evaluated by [the SEC's] Office of the Chief Accountant and, if satisfactory, are then recommended to the Commission for approval."13 Importantly, "[t]here are no deadlines for the Commission or its staff to complete this process."14 Consequently, in Commissioner Piwowar's experience, "the reinstatement process, even if successful, can take years to complete after the requisite time period has expired."15 Importantly, reinstatement is permissive, not mandatory, so the arduous reinstatement process could end in defeat for a respondent.16
3. A bar with a right to apply for reinstatement after a set period of time is harsher than an outright bar.
Commissioner Piwowar also posits that a bar with the right to apply for reinstatement after a set amount of time is actually harsher than an outright bar. Specifically, he cautions that "to the extent that providing a right to apply for reinstatement after a certain period of time creates the appearance of moderation to an otherwise permanent bar, that perception is false."17 His reasoning is straightforward: with an outright bar, a respondent may apply for reinstatement "at any time," while a respondent who is barred for a certain amount of time "must wait until the stated time period has elapsed before filing [for reinstatement]."18 Moreover, because there is no guarantee that a respondent will be reinstated after a temporal bar, "the right to apply for reinstatement can be illusory."19 Finally, Commissioner Piwowar notes that the existence of a specific period of time before a respondent can apply for reinstatement does not necessarily impact the "good cause" analysis that governs whether reinstatement will be granted.20 For example, while the sanction of a bar with the right to apply for reinstatement after two years seems facially less harsh than an outright bar, the respondent with the right to apply for reinstatement after two years is in no better position than the respondent with an outright bar when it comes to a "good cause" analysis, because the SEC's rules "do not address whether the presence, or absence, of a period before which a respondent has a right to apply for reinstatement . . . should affect the 'good cause' analysis."21 In light of this, Commissioner Piwowar warns that "any respondent in [an SEC] enforcement action (including a settlement with the [SEC]) should be on notice of the possibility that, in consideration of a reinstatement petition, the inclusion of a right to apply for reinstatement period may have no effect on a future [SEC] decision as [to] whether to grant reinstatement."22
4. On appeal from an ALJ's initial decision, the SEC is willing to enhance the original sanctions.
As demonstrated by Chair White and Commissioner Stein, the SEC will order sanctions on administrative appeal that go beyond those originally entered by an ALJ. Here, as noted above, the ALJ ordered that Respondents be suspended (i.e., reinstated at the conclusion of the suspension period) for periods of one year and six months, respectively. Respondents appealed the Initial Decision (as did the SEC) and on appeal received substantially heightened sanctions.
5. The SEC is willing to order sanctions beyond those sought by the Division of Enforcement.
In this case, the Division of Enforcement was seeking to have Respondents suspended (i.e., reinstated at the conclusion of the suspension period) for three years and two years, respectively. Commissioner Piwowar pointed out that there was no confusion regarding what exactly the Division of Enforcement was seeking:
At oral argument, I specifically asked counsel for the Division to clarify whether the Division was seeking a three-year and two-year suspension for [Respondents], respectively, or whether he was seeking a bar with the right to apply for reinstatement after three years and two years. Counsel for the Division responded the former.23
Yet Chair White and Commissioner Stein ordered that Respondents be barred from practicing before the SEC for three years and two years, respectively, with the right to seek reinstatement at the conclusion of those periods. As pointed out by Commissioner Piwowar, this type of sanction is significantly harsher than what the Division of Enforcement sought (and, in fact, as harsh as possible under Rule 102(e)(1)).
The SEC has been transparent in its efforts to pursue "gatekeepers," who the SEC deems to have violated federal securities laws, rules and/or regulations.24 Importantly, the SEC has stated that its gatekeeper liability enforcement actions have been brought "increasingly against . . . individuals."25 In these cases, the SEC has sought to go "beyond the standard disgorgement, civil money penalties and injunctions," and has placed an emphasis on obtaining "additional forward-looking . . . remedies for associated persons, including suspensions [and] bars."26
Statistics show that the SEC has been making good on its promises. As of early October 2016, the SEC had issued 32 enforcement releases regarding individual CPA respondents since the beginning of the calendar year.27 Of those 32 releases, 14 involved sanctions under Rule 102(e)(1).28 Of those 14 releases, the SEC ordered a bar with a right to apply after a certain period of time—what Commissioner Piwowar deemed to be the harshest sanction, equivalent to the "destruction of [a respondent's] professional career"—over 64 percent of the time. The SEC ordered the least harsh sanction—a suspension resulting in reinstatement after a certain period of time—only once. As the incoming administration of President-Elect Donald Trump begins to install new appointees and implement its enforcement priorities, it remains to be seen how, if at all, the sanctions landscape may change under Rule 102(e)(1). Vedder Price will continue to monitor developments in future enforcement actions against "gatekeepers" and in particular, the sanctions sought in those cases.
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1 See, e.g., In the Matter of Halpern & Associates LLC and Barbara Halpern, CPA, No. 3-16399 (Feb. 26, 2016) (Respondent "denied the privilege of appearing or practicing before the Commission as an accountant for one year").
2 See, e.g., In the Matter of Reid A. Hackney, CPA, No. 3-17047 (Jan. 12, 2016) (Respondent "denied the privilege of appearing or practicing before the Commission as an accountant").
3 See, e.g., In the Matter of David S. Krueger, CPA, No. 3-17165 (Mar. 10, 2016) (Respondent "denied the privilege of appearing or practicing before the Commission as an accountant . . . [but] [a]fter one year from the date of this order, Respondent may request that the Commission consider his reinstatement").
4 For the sake of consistency and clarity, this article adopts Commissioner Piwowar's use of the terms "suspension" and "bar."
5 In the Matter of John J. Aesoph, CPA and Darren M. Bennett, CPA, No. 3-15168 (June 27, 2014), at 2.
6 In the Matter of John J. Aesoph, CPA and Darren M. Bennett, CPA, No. 3-15168 (Aug. 5, 2016), at 1.
7 In the Matter of John J. Aesoph, CPA and Darren M. Bennett, CPA, No. 3-15168 (Aug. 5, 2016), at Dissent p. 1 (quoting McCurdy v. SEC, 396 F.3d 1258, 1264 (D.C. Cir. 2005)).
8 In the Matter of John J. Aesoph, CPA and Darren M. Bennett, CPA, No. 3-15168 (June 27, 2014), at 36.
9 Id. at 36–37, n.40.
10 In the Matter of John J. Aesoph, CPA and Darren M. Bennett, CPA, No. 3-15168 (Aug. 5, 2016), at Dissent p. 2.
12 Id. at 2, n.9.
13 Id. at 2.
16 Id. (noting that the SEC "may, but is not obligated [to], reinstate a person 'for good cause shown'"); In the Matter of James M. Schneider, CPA, No. 3-14171 (July 22, 2016) ("the Commission may reinstate the privilege to appear and practice before the Commission 'for good cause shown'" (emphasis added)).
17 In the Matter of John J. Aesoph, CPA and Darren M. Bennett, CPA, No. 3-15168 (Aug. 5, 2016), at Dissent p. 2, n.9.
19 Id. at 2.
21 Id. at n. 12.
23 Id. at 1–2.
24 See, e.g., Highlights from SEC Speaks 2016: Enforcement and Litigation Trends, VEDDER PRICE P.C., Feb. 22, 2016, available at http://www.vedderprice.com/highlights-from-sec-speaks-2016/#Gatekeepers.
27 The source for these allegations is the SEC's "Accounting and Auditing Enforcement Releases" page.
28 An additional ten releases involved suspensions under Rules 102(e)(2) and 102(e)(3), which deal with, inter alia, accountants whose license "has been revoked or suspended in any State," who have "been convicted of a felony or a misdemeanor involving moral turpitude," or who have been enjoined from committing, or found liable for committing or aiding and abetting a violation of the federal securities laws based on actions before the SEC or in a case brought by the SEC. These Rules, and related releases, fall outside the scope of this article.