==========================================START OF PAGE 1======
SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210 and 240 

[Release No. 34-38387; IC-22553; FR-49; File No. S7-20-96].

RIN 3235-AG70

IMPLEMENTATION OF SECTION 10A OF THE SECURITIES EXCHANGE ACT OF
1934

AGENCY:   Securities and Exchange Commission

ACTION:   Final Rule

SUMMARY:  The Securities and Exchange Commission ("Commission" or

"SEC") is adopting revisions to its rules to implement the

reporting requirements in section 10A of the Securities Exchange

Act of 1934 (the "Exchange Act").  Section 10A requires, among

other things, that the auditor of an issuer's financial

statements report to the issuer's board of directors certain

uncorrected illegal acts of the issuer, and that the issuer

notify the Commission that it has received such a report.  If the

issuer fails to provide that notice, the auditor is required by

section 10A to furnish directly to the Commission the report

given to the Board.  The amendments to the Commission's Exchange

Act Rules implement those reporting requirements.  The Commission

also is adopting revisions to Regulation S-X to conform the

definition of "audit" in that regulation with the wording in

section 10A.

EFFECTIVE DATE:   The rule revisions are effective [30 days after

publication in the Federal Register].

FOR FURTHER INFORMATION CONTACT:     Robert E. Burns or W. Scott
==========================================START OF PAGE 2======

Bayless, at (202) 942-4400, Office of the Chief Accountant, Mail 

Stop 11-3, or Kathleen Clarke, at (202) 942-0724, Division of

Investment Management, Mail Stop 10-6, Securities and Exchange

Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:     The Commission is adopting

amendments to its Exchange Act Rules, 17 CFR 240, by adding Rule

10A-1, and Regulation S-X, 17 CFR 210, by revising Rule 1-02.

I.   Background

     Title III to the Private Securities Litigation Reform Act of

1995 (the "Reform Act"), Public Law No. 104-67, enacted on

December 22, 1995, added section 10A to the Exchange Act.  As

discussed below, section 10A requires that each audit under the

Exchange Act-[1]- include procedures regarding the detection

of illegal acts, the identification of related party

transactions, and the evaluation of the issuer's ability to

continue as a going concern.  Section 10A also codifies certain

professional auditing standards regarding the detection of

illegal acts-[2]- by issuers and imposes expanded
---------FOOTNOTES----------
     -[1]-     Because section  10A applies  to audits under  the
               Exchange Act, it and Rule 10A-1 apply to audits of
               the  financial  statements   of  foreign   private
               issuers that are required under that Act.

     -[2]-     Section  10A(f) defines  the  term  "illegal  act"
               broadly to mean "an  act or omission that violates
               any  law, or  any  rule or  regulation having  the
               force of  law."   This  definition  is  consistent
               generally with Statement on Auditing Standards No.
               54,  "Illegal Acts  by Clients,"    2  (January 1,
               1989),  AU    317.02,  which  states,  "the  term
               illegal acts  ... refers to violations  of laws or
               governmental regulations."
==========================================START OF PAGE 3======
obligations on auditors-[3]- to report in a timely manner

certain uncorrected illegal acts to an issuer's board of

directors.  It further requires the issuer, or if the issuer

fails to do so then the auditor, to provide information regarding

the illegal act to the Commission.  

     On August 22, 1996, the Commission published for comment

proposed revisions to its rules to implement the reporting

requirements set forth in section 10A and to amend the definition

of "audit" in Regulation S-X to conform with the provisions of

that section.-[4]-  The Proposing Release contains a

discussion of each paragraph of section 10A.  Interested parties

may wish to refer to the Proposing Release for additional

background information.

     More specifically, section 10A(a) provides that each audit

required by the Exchange Act of issuers' financial statements
---------FOOTNOTES----------
     -[3]-     For   the  purpose  of   this  release,  the  term
               "auditor"  refers  to  any  independent  public or
               certified public accountant  who is performing  or
               has performed an audit of a registrant's financial
               statements and  whose audit report has  or will be
               filed with the  Commission in accordance with  the
               federal  securities  laws   or  the   Commission's
               regulations.  See, e.g., sections  12(b)(1)(J) and
               (K), 13(a)(2),  and 17(e) of the  Exchange Act, 15
               U.S.C.  78l(b)(1)(J)  and   (K),  78m(a)(2),   and
               78q(e),  and the  Commission's Regulation  S-X, 17
               CFR   210.  The term  "independent accountant" is
               used  in  the  regulatory  text  in  order  to  be
               consistent with existing provisions  in Regulation
               S-X.

     -[4]-     Securities   Exchange   Act  Release   No.  37594,
               Investment Company Act Release No. 22162, File No.
               S7-20-96  (August  22, 1996)  [61  FR 45730]  (the
               "Proposing Release").
==========================================START OF PAGE 4======
include, "in accordance with generally accepted auditing

standards, as may be modified or supplemented from time to time

by the Commission--"

1.   procedures designed to provide reasonable assurance of

     detecting illegal acts that would have a direct and material

     effect on the determination of financial statement amounts;

2.   procedures designed to identify related party transactions

     that are material to the financial statements or otherwise

     require disclosure therein; and

3.   an evaluation of whether there is substantial doubt about

     the issuer's ability to continue as a going concern during

     the ensuing fiscal year.-[5]- 

     Certain procedures in each of these three areas already are

required by generally accepted auditing standards

("GAAS")-[6]- in the United States and are further codified
---------FOOTNOTES----------
     -[5]-     Section 10A(a)(1), (2), and (3). 

     -[6]-     In February 1941, the Commission amended Rule 2-02
               of Regulation  S-X, 17 CFR   210.2-02, to require
               that the  independent accountant  state in  his or
               her  report  "whether   the  audit  was   made  in
               accordance   with   generally  accepted   auditing
               standards...."   Accounting Series Release  No. 21
               (February   5,  1941).     In  this  release,  the
               Commission  defined  "generally accepted  auditing
               standards" to  mean the application  of "generally
               recognized   normal   auditing  procedures"   with
               professional   competence   by  properly   trained
               persons.    The   Commission  defined   "generally
               recognized normal auditing procedures" to be those
               normally employed by skilled accountants and those
               prescribed  by  authoritative bodies  dealing with
               the  subject  of  auditing,  such   as  accounting
               societies    and   governmental    bodies   having
               jurisdiction  in the  area.   Id.   Following this
                                                   (continued...)
==========================================START OF PAGE 5======
in the Statements on Auditing Standards ("SAS")-[7]- adopted

by the Auditing Standards Board ("ASB"), the senior technical

body for auditing matters of the American Institute of Certified

Public Accountants ("AICPA").-[8]-

     In addition to the requirement in section 10A(a) that

---------FOOTNOTES----------
     -[6]-(...continued)
               addition to the  Commission's rules, the  relevant
               professional committee at  the time, the Committee
               on  Auditing Procedure, began a study to determine
               which auditing standards should be included within
               "GAAS."     In   1948,  the   membership   of  the
               predecessor organization to the American Institute
               of Certified Public Accountants ("AICPA") approved
               ten standards  as constituting GAAS.   See, AICPA,
               Codification of Statements on  Auditing Standards,
               AU   150.02. These ten standards are supplemented
               by   Statements   on  Auditing   Standards,  which
               currently are  issued  by the  Auditing  Standards
               Board of the AICPA.

     -[7]-     Currently   effective   Statements   on   Auditing
               Standards  are published by the American Institute
               of   Certified   Public    Accountants   in    the
               Codification of Statements on  Auditing Standards.
               Provisions in the  Codification are designated  as
               "AU     __."   For  standards   addressing  those
               procedures mandated  by section  10A, see  SAS 54,
               "Illegal Acts by Clients"  (January 1, 1989), AU 
               317;  SAS  45,  "Related Parties"  (September  30,
               1983),  AU  334; and SAS 59, 64, and 77 reprinted
               in  "The  Auditor's Consideration  of  an Entity's
               Ability to Continue as  a Going Concern"  (January
               1,  1989),  AU   341.    See  also  SAS 53,  "The
               Auditor's  Responsibility  to  Detect  and  Report
               Errors and Irregularities" (January 1, 1989), AU 
               316. The  ASB recently  adopted a revision  to SAS
               53, which will be entitled "Consideration of Fraud
               in a Financial Statement Audit"  and designated as
               SAS 82.  This new  standard should be published in
               Spring 1997  and will be applicable  to the audits
               of 1997 financial statements.

     -[8]-     The ASB's  15 members  serve on a  part-time basis
               and are appointed  for one year terms  that may be
               extended for up to three years.
==========================================START OF PAGE 6======

auditors perform procedures designed to enhance the detection of

fraudulent financial reporting, section 10A(b) contains

provisions that would require an auditor to report directly to

the Commission certain detected illegal acts if the issuer fails

to do so.  

     Under section 10A(b), if, while conducting the audit of the 

issuer's financial statements, the auditor becomes aware of

information indicating that an illegal act (whether or not

material to the financial statements) has occurred or may have

occurred, then the auditor would be required, in accordance with

GAAS, "as may be modified or supplemented from time to time by

the Commission," to determine whether it is "likely" that an

illegal act has occurred and, if so, its possible effect on the

financial statements (including any contingent monetary effects,

such as fines, penalties, and damages).-[9]-  The auditor

would be required to inform the issuer's management of the

illegal act "as soon as practicable."  In addition, the auditor

must assure him/herself that the issuer's board of directors is

adequately informed, by management or otherwise, of any detected

illegal act.-[10]- 

     Although GAAS contains procedures for similar notification


---------FOOTNOTES----------
     -[9]-     Section 10A(b)(1)(A).  See, SAS 54,    10-15, AU 
               317.10-.15.   Paragraph  11 of  SAS 54  sets forth
               additional   audit   procedures   that  might   be
               necessary  once the  auditor  becomes  aware of  a
               possible illegal act.

     -[10]-    Section 10A(b)(1)(B).   See,  SAS 54,    17,  AU 
               317.17.
==========================================START OF PAGE 7======

of illegal acts to managements and boards of

directors,-[11]- section 10A(b) contains the additional

requirement that these notifications occur "as soon as

practicable."-[12]- 

     After the auditor determines that the audit committee or the

board of directors has been adequately informed of an illegal act

and the auditor reaches three specified conclusions, the auditor 

is required by section 10A(b)(2) to report those conclusions

directly to the board of directors "as soon as practicable."  The

three conclusions set forth in section 10A(b)(2) that trigger the

auditor's obligation to report to the board are that:

1.   the illegal act has a material effect-[13]- on the

---------FOOTNOTES----------
     -[11]-    See, SAS 54,    10 and 17, AU  317.10 and .17.

     -[12]-    The  addition of  this  time period  reflects  the
               original  legislative  efforts  in  this  area  to
               provide   an  earlier   warning  to  the   SEC  of
               registrants' potential illegal acts than may occur
               under the current Form 8-K procedures, see note 20
               infra, and  in audit reports.   See H.R.  Rep. No.
               102-890,  102d Cong.,  2d  Sess.  3 (1992),  which
               contained the predecessor  legislation to  Section
               10A and stated:

          This legislation amends the Securities  Exchange Act of
          1934  (Exchange  Act)  to improve  fraud  detection and
          disclosure   with  respect   to  public   companies  by
          codifying auditing standards in certain specified areas
          and by providing a mechanism for earlier warning to the
          Securities  and Exchange Commission  of certain illegal
          acts by registrants. 

     -[13]-    The auditor should consider both  the quantitative
               and  qualitative materiality of the act, including
               contingent  liabilities that  might be  created by
               the  illegal act.  See,  e.g., SAS 54,    13, AU 
               317.13, and SAS 47, "Audit Risk and Materiality in
               Conducting an  Audit,"   6  (June 30, 1984),  AU 
               312.06.
==========================================START OF PAGE 8======

     issuer's financial statements, 

2.   senior management has not taken, and the board of directors

     has not caused senior management to take, timely and

     appropriate remedial actions with respect to the illegal

     act, and 

3.   the failure to take remedial action is reasonably expected

     to warrant either a departure from the auditor's standard

     audit report,-[14]- when made, or the auditor's

     resignation from the audit engagement.-[15]-

     If the board of directors receives a report that the auditor

has reached these conclusions, then the board has one business

day to notify the Commission that it received such a report.  If

the auditor does not receive a copy of the board's notice to the

Commission within that one business day period, then by the end

of the next business day the auditor is required to furnish

directly to the Commission a copy of the report given to the

board (or the documentation of any oral

report-[16]-).-[17]-  The auditor's resignation from

---------FOOTNOTES----------
     -[14]-    See,  SAS  58,   "Reports  on  Audited   Financial
               Statements,"   10 (January  1, 1989), AU  508.10,
               for a general discussion of the circumstances that
               may  require  the  auditor   to  depart  from  the
               standard report  and the types  of opinions, other
               than the standard report, that may be expressed by
               the auditor in various circumstances. 

     -[15]-    Section  10A(b)(2)(A),   (B),   and  (C).      See
               generally, SAS 54,    18-22, AU  317.18-.22. 

     -[16]-    For  documentation  requirements under  GAAS, see,
               e.g.,  SAS  54,    17, AU    317.17, and  SAS 61,
               "Communication   with   Audit  Committees,"      3
               (January 1, 1989), AU  380.03. 
==========================================START OF PAGE 9======

the audit engagement does not negate the auditor's obligation to

furnish his or her report to the Commission in these

circumstances.-[18]- 

II.  Discussion of Rule Amendments

A.   Rule 10A-1.

     Rule 10A-1 is based on the premise that the notices and

reports under section 10A are to assist the Commission in

performing its enforcement responsibilities and, therefore, will 

be non-public.  Disclosure to the public of issuers' illegal acts

will continue to be made in modified audit reports-[19]-

or, when the auditor has resigned, been dismissed, or elected not

to stand for re-election, on Form 8-K-[20]- under the

---------FOOTNOTES----------
     -[17]-(...continued)
     -[17]-    Section 10A(b)(3).

     -[18]-    Section 10A(b)(4).

     -[19]-    For  the  effect  of  illegal acts  on  the  audit
               report, see, SAS 53,    26 and 27, AU  316.26 and
               .27, and SAS 54,     18-21, AU  317.18-.21.   See
               generally, SAS 58, 64, and 79 reprinted in Reports
               on Audited Financial Statements (January 1, 1989),
               which  describes  the   standard  report  and  the
               various  opinions  that may  be  reflected in  the
               auditor's report.  SAS  58,    7-10, AU   508.07-
               .10.

     -[20]-    Item 4 of Form 8-K, 17 CFR   249.308, Item 304 of
               Regulation S-K, 17 CFR   229.304, and Item 304 of
               Regulation  S-B, 17  CFR   228.304.   In summary,
               these provisions state that a registrant must file
               a Form 8-K, providing the  information required by
               item 4 of that form,  within five business days of
               the date  that  the registrant's  auditor  (or  an
               independent  accountant  upon  whom   the  auditor
               expressed reliance in its audit report regarding a
               significant subsidiary) resigns, declines to stand
               for  re-election, or is dismissed, and within five
               business  days  of  the  date  a  new  auditor  is
                                                   (continued...)
==========================================START OF PAGE 10======

Exchange Act and on Form N-SAR-[21]- under the Investment

---------FOOTNOTES----------
     -[20]-(...continued)
               engaged.   The  registrant  is to  ask the  former
               auditor to  provide the  registrant with  a letter
               indicating whether the former auditor  agrees with
               the disclosures  in the Form 8-K  that reports the
               termination of the  audit engagement and,  if not,
               the respects in which the auditor disagrees.  This
               letter is to  be filed with  the Commission as  an
               exhibit by amendment to the registrant's  Form 8-K
               within  10 business days of the date that the Form
               8-K was filed.

     The registrant's  Form 8-K  must state, among  other things:
     whether  the  former  auditor  resigned, was  dismissed,  or
     declined  to stand  for  re-election and  the date  thereof;
     whether  the  auditor modified  his  or  her report  on  the
     registrant's financial statements for either of the last two
     fiscal years  and, if so,  the nature  of the  modification;
     whether the  decision to change auditors  was recommended or
     approved  by  the audit  committee  or  board of  directors;
     whether,  in connection  with  the audits  of the  financial
     statements  for the two  most recent  fiscal years,  and any
     subsequent  interim period,  there  were  any  disagreements
     between the  auditor and  the registrant  on  any matter  of
     accounting  principles  or  practices,  auditing   scope  or
     procedure, or financial statement  disclosure.  The Form 8-K
     also  must provide  disclosure  of any  instance within  the
     applicable time period where  the former auditor advised the
     registrant that (1) the  internal controls necessary for the
     registrant to develop reliable financial statements  did not
     exist, (2)  information had come to  the auditor's attention
     that  led  him or  her  no  longer to  be  able  to rely  on
     management's  representations,  or  that  made  the  auditor
     unwilling to be  associated with the  registrant's financial
     statements, (3) there was a need to expand significantly the
     scope  of the audit and, due to the auditor's resignation or
     for any other  reason, the  scope was not  expanded, or  (4)
     information had  come to  the auditor's  attention affecting
     the  reliability   of  past  audit   reports  or   financial
     statements  and  the  issue  had not  been  resolved  to the
     auditor's satisfaction prior  to the auditor's  resignation,
     dismissal, or declination to stand for re-election.

     -[21]-    Sub-item  77K of  Form  N-SAR, 17  CFR   274.101,
               requires investment companies filing Form N-SAR to
               provide the information required by item 4 of Form
               8-K.    Sub-item  77K  of Form  N-SAR  notes  that
               notwithstanding  the requirements  in Form  8-K to
                                                   (continued...)
==========================================START OF PAGE 11======

Company Act of 1940 (the "Investment Company Act"), among others.

     In testifying on prior bills that contained the same

reporting requirements, the Commission stated, "[W]e anticipate

that reports filed under section 10A would be confidential and

exempt from disclosure under the Freedom of Information

Act."-[22]-  The Commission further noted,

     Premature disclosure of the issuer and auditor reports
     could, among other things, interfere with the Commission's
     investigation, deprive the issuer or other persons of the
     right to a fair trial or impartial adjudication, constitute 
     an unwarranted invasion of privacy, or disclose a
     confidential source.  In addition, issuer and auditor
     reports under Section 10A might contain confidential
     commercial or financial information exempt from disclosure
     under FOIA Exemption 4, 5 U.S.C. 552(b)(4).-[23]-

     The Commission's testimony also states that the direct

reporting provisions in the bill might provide an earlier warning

of certain illegal acts that could allow the Commission to begin 

enforcement investigations at an earlier date.-[24]-  

     Accordingly, Rule 10A-1 provides that section 10A notices

provided by the board and reports submitted by the auditor will


---------FOOTNOTES----------
     -[21]-(...continued)
               file more frequently,  registrants need only  file
               such information semi-annually in  accordance with
               the requirements of Form N-SAR. 

     -[22]-    Testimony  of Richard  C. Breeden,  Chairman, U.S.
               Securities  and  Exchange  Commission,  Concerning
               H.R.   574,  The  Financial  Fraud  Detection  and
               Disclosure   Act,   Before  the   Subcommittee  on
               Telecommunications  and  Finance   of  the   House
               Committee on Energy and Commerce, 103d  Cong., 1st
               Sess., 32 (February 18, 1993). 

     -[23]-    Id., at 32 n. 36. 

     -[24]-    Id., at 31. 
==========================================START OF PAGE 12======

be non-public and exempt from disclosure under the Freedom of

Information Act ("FOIA") to the same extent as the Commission's

investigative records.-[25]-  

     Commentators responding to the Proposing Release supported

the position that reports and notices under section 10A should be

non-public.  Some suggested, however, that proposed Rule 10A-1

was unclear as to the availability of FOIA exemptions, in

addition to the exemptions for investigative records, for the

information contained in these notices and reports.  An

instruction has been added to Rule 10A-1(c), therefore,

specifically to notify issuers and auditors that they may apply

for confidential treatment under additional FOIA exemptions in

accordance with the Commission's normal procedures.-[26]-

     Despite the confidential nature of the reports under section

10A, these reporting requirements should improve the quality of

public disclosures in Forms 8-K and N-SAR and in audit reports on

issuers' financial statements, because it is unlikely that

issuers and auditors will make public disclosures that are

incompatible with the confidential reports made to the

Commission.  Also, the direct reporting requirements in section

10A should give auditors additional leverage to prompt management

to correct illegal acts and to make appropriate adjustments in


---------FOOTNOTES----------
     -[25]-    Rule 10A-1(c).  See also 5 U.S.C. 552(b)(7), which
               exempts  from  disclosure   certain  "records   or
               information    compiled   for    law   enforcement
               purposes."

     -[26]-    See 17 CFR  200.83.
==========================================START OF PAGE 13======

their financial statements.

     Rule 10A-1 designates the Commission's Office of the Chief

Accountant ("OCA") as the appropriate office to receive the

notice provided by any issuer under section 10A(b)(3)-[27]-

and any reports provided by auditors under section 10A(b)(3) or

10A(b)(4).-[28]-  No commentators objected to OCA as the

designated party to receive these notices and reports.  OCA

expeditiously will forward copies of the notice or report to all

appropriate offices and divisions within the Commission.  The

notice or report may be provided to other authorities, as

appropriate.-[29]-

     Delivery of the notice or report to OCA may occur under Rule

10A-1 in any manner, provided the notice or report is received by

OCA within the statutory time period.-[30]-  Currently, the

most timely manner of delivery may be through submission of a

facsimile,-[31]- telegraph, or personal delivery.  Issuers

should be aware that providing such information on the Edgar

filing system, however, may result in the information becoming

available to the public.  In the future, procedures may be

---------FOOTNOTES----------
     -[27]-    Rule 10A-1(a).

     -[28]-    Rule 10A-1(b).

     -[29]-    See 17 CFR  240.24c-1.

     -[30]-    Rule 10A-1(a) and (b).

     -[31]-    The  phone  number  for  OCA s  facsimile  machine
               currently is (202) 942-9656.  Such phone  numbers,
               however, are subject to  change without notice and
               registrants   and   auditors  should   verify  the
               accuracy of the number before use. 
==========================================START OF PAGE 14======

developed for issuers and auditors to deliver confidential

information directly to OCA via electronic mail.  Rule 10A-1

would permit use of such means of delivery.-[32]-

     Rule 10A-1(a) also sets forth the required contents for a

issuer's notice to the Commission.  This notice must be in

writing and identify the issuer and the auditor, and state the

date the auditor made its report to the board.  Under the rule

proposal, the issuer also would provide a summary of the report. 

The summary would describe the act and the potential impact of

that act on the issuer's financial statements.  This information

is consistent with the requirement under GAAS that the auditor's

communication with the issuer's audit committee "should describe

the act, the circumstances of its occurrence, and the effect on

the financial statements."-[33]-  One commentator suggested


---------FOOTNOTES----------
     -[32]-    A similar provision applies to auditors of broker-
               dealers.   See Rule 17a-5(h)(2) under the Exchange
               Act,  17 CFR   240.17a-5(h)(2), which states that
               if, during  the course  of audit or  interim work,
               the   auditor   determines   that   any   material
               inadequacies  exist  in  the   accounting  system,
               internal   accounting   control,  procedures   for
               safeguarding   securities,    or   certain   other
               practices and  procedures, then the  auditor shall
               call  those inadequacies to  the attention  of the
               chief  financial officer of the broker-dealer, who
               has the  obligation to notify  the Commission  and
               the designated examining authority within 24 hours
               thereafter.   If  the auditor  does not  receive a
               copy of that notice within that 24 hour period, or
               if the  auditor disagrees  with the statements  in
               the  notice,  then  the  auditor  must inform  the
               Commission and the designated  examining authority
               of  the material  inadequacy  within the  next  24
               hours.

     -[33]-    SAS 54,   17, AU  317.17.
==========================================START OF PAGE 15======

that issuers have the option of providing either the summary of

the independent accountant's report, as proposed, or directly

providing that report to OCA.  This commentator noted, however,

that if an issuer submits the independent accountant's report to

OCA a question may arise regarding the availability to the

independent auditor of the section 10A(c) protection against

civil liability for the findings, conclusions, or statements in

his or her report.-[34]-  As adopted, Rule 10A-1

incorporates the commentator's suggestion and permits issuers the

option of providing either a summary of the independent

accountant's report or a copy of that report.  To clarify the

application of the section 10A(c) safe harbor, Rule 10A-1 now

provides that the safe harbor available to auditors shall apply

not only when the report is furnished to OCA by the auditor but

also when it is provided by the issuer.

     As had been proposed, Rule 10A-1(a) also specifically

permits an issuer to include additional information with the

required notice to the Commission regarding the issuer's view of,

and response to, the section 10A report it has received from the

auditor.

     Regarding reports filed by auditors, Rule 10A-1(b) specifies


---------FOOTNOTES----------
     -[34]-    Section  10A(c)  limits  auditors'   liability  in
               private   rights  of  action   for  "any  finding,
               conclusion,  or  statement expressed  in  a report
               made  pursuant   to  paragraph   (3)  or   (4)  of
               subsection  (b),  including  any rule  promulgated
               pursuant  thereto";  paragraphs  (3)  and  (4)  of
               subsection  (b) set  forth the issuer  and auditor
               reporting obligations.
==========================================START OF PAGE 16======

that if the report does not identify clearly both the issuer and

the auditor, then the auditor must attach that information to the

report submitted to OCA.

     Rule 10A-1 makes clear that providing the notice or report

in accordance with section 10A and Rule 10A-1 does not, in any

way, affect the obligations of the issuer and the auditor to file

and make all applicable public disclosures required by the

Commission's rules, including, without limitation, Forms 8-K and

N-SAR, and of the auditor to comply with GAAS reporting

requirements.-[35]-  Similarly, Rule 10A-1 states that the

confidential nature of the notice and the report to the

Commission does not diminish an issuer's or auditor's obligations

to make full disclosures required by the Commission's rules,

forms, reports, or disclosure items, or by applicable

professional standards.

     In response to the Proposing Release, the Commission

received additional comments requesting it to interpret or amend

certain additional provisions of section 10A.  For example, some

commentators suggested that the Commission amend the statutory

definition of "illegal act" to follow more closely the definition

---------FOOTNOTES----------
     -[35]-    In addition, one of the membership requirements of
               the  SEC Practice  Section  of the  AICPA is  that
               members  notify  registrants  in  writing  of  the
               cessation of an auditor-client relationship.   The
               member also  is required  to send  a copy of  that
               notification  to the  Commission s  Office of  the
               Chief Accountant. 
==========================================START OF PAGE 17======

in the auditing literature.-[36]-  Another commentator

recommended that auditors be required to report all illegal acts

to the board of directors (as opposed to management), not merely

those acts that are material to the financial statements.  One

commentator suggested that the Commission extend the protection

for auditors against civil liability found in section 10A(c) for

statements in reports submitted to the Commission under section

10A(b), to statements made by the auditor in additional documents

and in other contexts.  Commentators also requested that the

Commission extend the one-business-day reporting periods in the

statute to five business days.  Such comments, however, are

beyond the scope of this rulemaking proceeding and, in some

cases, request that the Commission promulgate rules contrary to

the statutory mandate of section 10A.

B.   Rule 1-02(d).

     The Commission is adopting the proposed amendment to conform

the definition of "Audit (or examination)" in Rule 1-02(d) of

Regulation S-X with section 10A.  The amendment notes that audits

of the financial statements of Commission issuers should be

performed "in accordance with generally accepted auditing

standards, as may be modified or supplemented by the Commission." 

The purpose of this amendment is to alert auditors and issuers to

the possibility that additional audit procedures, beyond those

required by GAAS, may be required by the Commission in certain


---------FOOTNOTES----------
     -[36]-    See SAS 54,   2, AU  317.02, discussed supra note
               2.
==========================================START OF PAGE 18======

circumstances.

     Some commentators objected to the proposed revision of Rule

1-02(d) on the ground that the Commission's statutory authority

to modify or supplement GAAS is limited to the three

circumstances expressly set forth in section 10A; i.e., illegal

acts, related party transactions, and going concern evaluations.

     On the contrary, it has long been recognized by Congress and

the Commission, that the Commission has broad authority to

establish auditing requirements for public companies and their

independent audit firms.-[37]-  This implied authority is

---------FOOTNOTES----------
     -[37]-    See Report  by the  Subcommittee on  Oversight and
               Investigations   of   the   House   Committee   on
               Interstate    and   Foreign    Commerce,   Federal
               Regulation  and Regulatory Reform,  94th Cong., 2d
               Sess.,  38 (October 1976),  which states, in part,
               that the Commission had  not then "exercised fully
               its statutory authority to remedy  deficiencies in
               generally accepted auditing standards";  Report on
               the  Activity  of  the  Committee  on  Energy  and
               Commerce for the 100th Congress, House Report 100-
               1114, 100th Cong., 2d  Sess., 364 (Dec. 23, 1988),
               which states,  "As the primary  Agency responsible
               for  administering  the  Federal  securities  laws
               disclosure   requirements,   the  SEC   has  broad
               authority  to  establish  auditing and  accounting
               requirements for public companies  and independent
               audit firms"; and Testimony of Richard C. Breeden,
               Chairman, U.S. Securities and Exchange Commission,
               Concerning H.R. 547, The Financial Fraud Detection
               and  Disclosure  Act, Before  the  Subcommittee on
               Telecommunications  and  Finance   of  the   House
               Committee on Energy and Commerce, 103rd Cong., 1st
               Sess., 26-27  (Feb. 18,  1993),  which states,  in
               part,  "The Commission  [is]  prepared, should  it
               prove necessary to fulfill its  statutory mandate,
               to  establish  separate  auditing  standards  that
               supplement  or  supplant  ASB  standards  for  SEC
               registrants.  . . . In the same way the Commission
               has final authority over  the establishment of new
               financial  standards  by  the  FASB,  so  too  the
                                                   (continued...)
==========================================START OF PAGE 19======

based on, among other things, (1) the Commission's authority to

prescribe the reports to be filed with it,-[38]- (2) the

provisions in the securities laws that require, or grant the

Commission the authority to require, that certain financial

statements be "certified ... by independent public

accountants"-[39]- and the Commission's authority to define

technical and trade terms such as "certified,"-[40]- and

(3) the Commission's authority to ensure that the representations

in audit reports and the procedures behind those reports fulfill

---------FOOTNOTES----------
     -[37]-(...continued)
               Commission   has   final   authority    over   the
               establishment of auditing standards to protect the
               public interest."

     -[38]-    See,  e.g.,   13(b)(1)  of the  Exchange Act,  15
               U.S.C.  78m(b)(1),  which states,  "The Commission
               may prescribe,  in regard to reports made pursuant
               to  this title,  the form  or forms  in which  the
               required information shall be set forth...." 

     -[39]-    Items  25,  26,  and  27  of  Schedule  A  to  the
               Securities Act of  1933, 15 U.S.C.  77aa(25), (26)
               and  (27),  and   17(e) of  the Exchange  Act, 15
               U.S.C.   78q,   expressly  require   that  audited
               financial statements be filed with the Commission.
               Sections 12(b)(1)(J)  and (K) and 13(a)(2)  of the
               Exchange Act, 15 U.S.C. 78l and 78m, among others,
               authorize the Commission to  require the filing of
               financial  statements  that have  been  audited by
               independent accountants.  The  Commission requires
               that  certain  financial  statements  be  audited.
               See, e.g., Article 3  of Regulation S-X, 17  CFR 
               210-3-01 et seq.

     -[40]-    See, e.g.,   19(a) of the Securities Act of 1933,
               15 U.S.C. 77s(a), and   3(b) of the Exchange Act,
               15 U.S.C. 78c(b).
==========================================START OF PAGE 20======

their statutory function.-[41]-  In enacting the Reform

Act, Congress clearly intended to preserve the Commission's

existing implied authority regarding auditing standards, as

evidenced by both the preservation clause in section 10A(e) and

the Conference Committee Report.-[42]- 

     In any event, the revision to Rule 1-02(d) is not intended

to change the substantive scope of the Commission's authority to

set auditing standards, or to resolve any dispute that may arise

over the scope of that authority in particular circumstances. 

Instead, this amendment is intended to provide adequate and fair

notice to all parties concerned that the Commission, as well as

appropriate professional authorities, may issue guidance to be


---------FOOTNOTES----------
     -[41]-    See generally James F. Strother, The Establishment
               of  Generally  Accepted Accounting  Principles and
               Generally Accepted Auditing Standards, 28 Vand. L.
               Rev.   201,  225   (1975),   which  states,   "The
               Commission's  powers with  regard to  auditing are
               considerable,  even  though it  lacks  the express
               authority  to  prescribe  auditing  standards  and
               procedures that  it has in the  case of accounting
               principles."

     In  the past,  the  Commission has  not  found it  necessary
     formally  to  exercise its  implied  power  to set  auditing
     standards.    In  the  mid-1970s,  however,  the  Commission
     proposed certain procedures for auditors' reviews of interim
     financial statements.   See Securities Act  Release No. 5579
     (April  17,   1975),  Accounting  Series   Release  No.  177
     (September  10,  1975),  Securities  Act  Release  No.  5612
     (September 10, 1975).   This rulemaking  did not go  forward
     when the predecessor to  the ASB acted to establish  similar
     review procedures, and Commission action became unnecessary.

     -[42]-    See  H.R. Conf.  Rep.  No. 369,  104th Cong.,  1st
               Sess., 47 (Nov. 28,  1995), which states, in part,
               "The  Conference  Committee  does  not  intend  to
               affect  the Commission's  authority  in areas  not
               specifically addressed by this provision." 
==========================================START OF PAGE 21======

considered and adhered to in the performance of audits under the

Exchange Act.

     As a general matter, the Commission plans to continue its

practice of looking to the private sector standard setting bodies

designated by the accounting profession to provide leadership in

establishing and improving GAAS.  Currently, the Commission staff

works closely with the ASB.  The staff, among other things,

attends ASB meetings, reviews and provides the ASB with comments

on draft Statements on Auditing Standards, and has periodic

meetings with ASB representatives to discuss items on the ASB

agenda and other matters of mutual concern.

     The Commission has no present intention to write any new

auditing standards unless it determines that the ASB, or any

subsequently established standard setting organization, is unable

or unwilling to address a significant auditing issue in an

appropriate and timely manner.  The Commission will exercise its

discretion in determining the appropriateness and timeliness of

the private sector response, considering the nature of the issue

and other factors.  Should Commission action be deemed necessary,

the Commission will act promptly when required by the public

interest or for the protection of investors.-[43]-


---------FOOTNOTES----------
     -[43]-    The Statement of  Managers, The Private Securities
               Litigation Reform Act of 1995, states, at 22, "The
               Conference  Committee intends for  the SEC to have
               discretion,    however,     to    determine    the
               appropriateness  and  timeliness  of  the  private
               sector response.   The SEC should  act promptly if
               required   by  the  public  interest  or  for  the
               protection of investors."
==========================================START OF PAGE 22======

III.      Investment Companies

     Section 10A and Rule 10A-1 apply to all audits required

pursuant to the Exchange Act, including those prepared on behalf

of investment companies, which, among others, have reporting

obligations under the Exchange Act.-[44]-

     In the proposing release, the Commission requested comment

regarding whether the reporting requirements under Rule 10A-1

should be modified to reflect the specific operations of

investment companies.  No commentators, however, addressed this

topic.  Accordingly, the Commission has determined that Rule 10A-

1 will be adopted as proposed.

IV.       Required Findings Regarding Impact on Competition

     In the Proposing Release, the Commission requested comments

on whether the proposed amendments, if adopted, would have an

adverse impact on competition or would impose a burden on

competition that is neither necessary nor appropriate in

furthering the purposes of the Securities Act of 1933 and the

Exchange Act.  One commentator addressed this issue, indicating

that the reporting provisions of proposed Rule 10A-1 would not

---------FOOTNOTES----------
     -[44]-    See sections 13(a) and  15(d) of the Exchange Act,
               15 U.S.C. 78m(a) and  78o(d), and section 30(a) of
               the Investment  Company Act, 15  U.S.C. 80a-29(a).
               Form  N-SAR requires investment  companies to file
               information  with  the   Commission  about   their
               operations,     including    audited     financial
               information.    Rule  30a-1  under  the Investment
               Company Act,  17  CFR   270.30a-1, provides  that
               investment companies filing annual reports on Form
               N-SAR are  deemed to have  satisfied the reporting
               requirements of sections 13(a) and 15(d) under the
               Exchange   Act  and   section   30(a)  under   the
               Investment Company Act.
==========================================START OF PAGE 23======

add to any such burden that might be imposed by section 10A,

especially in light of the non-public nature of the reports to be

filed under the Rule.  

     The Commission has considered the proposed amendments in

light of its responsibilities under section 23(a) of the Exchange

Act-[45]- and concluded that the burdens on competition, if

any, are necessary and appropriate in furtherance of the purposes

of the Exchange Act, particularly section 10A.

V.        Cost/Benefit Analysis

     The costs of complying with Rule 10A-1, which is intended to

carry out the purposes of new section 10A of the Exchange Act,

are expected to be de minimis.  Such costs for an issuer may

include converting the information in the auditor's report to the

board into a notice that conforms to the rule and delivering that

notice, via facsimile or otherwise, to OCA.  Costs for the

auditor may include assuring that the report to the board

identifies the issuer, as required by the proposed rule, and the

cost of delivering that report, via facsimile or otherwise, to

OCA.  

     Benefits of compliance with Rule 10A-1 include an earlier

warning to the Commission of possible illegal acts by issuers and

potential improvements in public disclosures in Forms 8-K and N-

SAR regarding changes in issuers' auditors and in audit reports

that are modified due to issuers' illegal acts.

     Commentators specifically addressing the issue indicated

---------FOOTNOTES----------
     -[45]-    15 U.S.C. 78w(a).
==========================================START OF PAGE 24======

either that the anticipated benefits of Rule 10A-1 outweigh the

associated costs, or that the minimal reporting requirements

under Rule 10A-1 would not add to any burdens imposed by section

10A of the Exchange Act.

VI.       Summary of Final Regulatory Flexibility Analysis

     A Final Regulatory Flexibility Analysis ("FRFA") concerning

Rule 10A-1 has been prepared in accordance with 5 U.S.C.  604. 

The FRFA notes that the rule is intended to implement the

reporting requirements of section 10A of the Exchange Act as

mandated by Congress.  The rule will not impose any reporting

requirements additional to those imposed by section 10A.

     As discussed more fully in the FRFA, the rule will affect

small entities, as defined by the Commission's rules, but only in

the same manner as other entities.  By statute, most issuers that

fit the Commission's definitions of small entities are subject to

a one-year delay in the effective date of section 10A, which

makes section 10A (and accordingly Rule 10A-1) applicable to

annual reports for any period beginning on or after January 1,

1997 (instead of January 1, 1996).

     Regarding issuers, approximately 1,100 Exchange Act

reporting companies satisfy the Commission's definition of "small

business;" as of December 1995, approximately 5,200 broker-

dealers were classified as small entities; and as of August 1995,

approximately 1,770 active registered investment companies were

considered small entities.  Although some small auditors may be

subject to the Rule 10A-1 reporting requirements, there is no
==========================================START OF PAGE 25======

specific definition of the term "small auditor" and information

regarding auditors' revenues, earnings, and similar data is not

publicly available.  

     There is no reliable way of determining how many small

issuers or auditors will be required to file section 10A reports

or notices each year concerning illegal acts so as to become

subject to Rule 10A-1.  It is expected, however, that OCA will

receive very few issuer notices each year and even fewer auditor

reports (which are filed only if an issuer fails to fulfill its

reporting obligation).

     The FRFA notes that alternatives for providing different

means of compliance for small entities or for exempting small

entities from the rule would be inconsistent with the statutory

requirements of section 10A.  The cost of complying with the rule

should be de minimus, even for small entities, because the

reporting requirements under section 10A and the rule are based

on existing GAAS requirements.  Moreover, the statute essentially

requires only an earlier warning regarding matters that would

otherwise be disclosed in Forms 8-K and N-SAR and in audit

reports on issuers' financial statements.

     The Commission received no comments on the Initial

Regulatory Flexibility Analysis ("IRFA") prepared in connection

with the proposing release, and no comment letters specifically

addressed to the IRFA.  Two commentators indicated that the

anticipated benefits of Rule 10A-1 outweigh the associated costs,

and that the minimal reporting requirements of Rule 10A-1 would
==========================================START OF PAGE 26======

not materially add to the burdens Congress chose to impose by

enacting section 10A.

     A copy of the analysis may be obtained by contacting Robert

E. Burns, Chief Counsel, Office of the Chief Accountant, U.S.

Securities and Exchange Commission, Mail Stop 11-3, 450 Fifth

Street, N.W., Washington, D.C. 20549.

VII.      Paperwork Reduction Act  

     As set forth in the Proposing Release, proposed Rule 10A-1

contains "collection of information" requirements within the

meaning of the Paperwork Reduction Act of 1995 [44 U.S.C. 3501 et

seq.].  An agency may not conduct or sponsor, and a person is not

required to respond to, a collection of information unless it

displays a valid OMB control number.  Accordingly, the Commission

submitted the proposed rules to the Office of Management and

Budget ("OMB") for review in accordance with 44 U.S.C. 3507(d),

and OMB approved that collection and assigned it control number

3235-0468.  This is the final notice regarding the collection of

information under Rule 10A-1.

     The Supporting Statement to the Paperwork Reduction Act

submission noted that Rule 10A-1 is intended to implement the

reporting requirements found in recently enacted section 10A of

the Exchange Act, and that the rule is expected to have a

negligible effect on the annual reporting and cost burden of

Commission registrants.  As discussed above, the notice to be

provided by the issuer would contain the minimum amount of

information necessary to identify the issuer and the auditor,
==========================================START OF PAGE 27======

indicate the date the auditor provided the report to the board of

directors as specified in section 10A, and summarize the report

given to the board.  The summary would be based on information

required to be given to the board of directors under GAAS.  The

auditor's report, furnished only in the event that the issuer

does not fulfill its reporting responsibilities, would consist

only of the report given to the board of directors and, if

necessary, additional information to identify clearly the issuer

and the auditor.

     Potential respondents are entities with reporting

obligations under the Exchange Act and their auditors, although

it is anticipated that the reporting requirements under section

10A rarely will be triggered.  On those rare occasions when the

reporting requirement is triggered, it is estimated that the

total recordkeeping and reporting burden, beyond that directly

required by the statute, would not exceed one hour per

respondent.

     As notices must be filed by an issuer within one day of

receiving a report from its auditor, and the auditor must file

its report (if necessary) the next day, there are essentially no

recordkeeping or retention requirements.

     Filing the notices and reports, when necessary, is required

by section 10A of the Exchange Act and therefore is mandatory. 

As explained above, however, the notices and reports will be kept

confidential while the Commission has an enforcement interest in

the information contained in those notices and reports.  In
==========================================START OF PAGE 28======

addition, requests for confidential treatment of such information

may be made under 17 CFR 200.83.

     The Commission received no comments in response to its

request for comments, pursuant to 44 U.S.C.  3506(c)(2)(B),

concerning: whether the proposed collection of information is

necessary for the proper performance of the function of the

Commission, including whether the information shall have

practical utility; the accuracy of the Commission's estimate of

the burden of the proposed collection of information; the

quality, utility, and clarity of the information to be collected;

and whether the burden of collection of information on those who

are to respond, including through the use of automated collection

techniques or other forms of information technology, may be

minimized.



List of Subjects

17 CFR Part 210

Accounting, Reporting and recordkeeping requirements, Securities.

17 CFR Part 240

Reporting and recordkeeping requirements, Securities.



     TEXT OF AMENDMENTS

     In accordance with the foregoing, Title 17, Chapter II of

the Code of Federal Regulations is amended as follows:

PART 210- FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
          STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE
          ACT OF 1934, PUBLIC UTILITY HOLDING COMPANY ACT OF
          1935, INVESTMENT COMPANY ACT OF 1940, AND ENERGY POLICY
==========================================START OF PAGE 29======

          AND CONSERVATION ACT OF 1975

     1.   The authority citation for Part 210 is revised to read

as follows:

     Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2,

77aa(25), 77aa(26), 78j-1, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a),

78ll(d), 79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-

30, 80a-37(a), unless otherwise noted.

     2.   By revising  210.1-02(d) to read as follows:

 210.1-02  Definitions of terms used in Regulation S-X (17 CFR
part 210). 

                        *   *   *   *   *

     (d)  Audit (or examination).  The term audit (or

examination), when used in regard to financial statements, means

an examination of the financial statements by an independent

accountant in accordance with generally accepted auditing

standards, as may be modified or supplemented by the Commission,

for the purpose of expressing an opinion thereon.

                        *   *   *   *   *



PART 240- GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT
          OF 1934


     3.   The authority citation for Part 240 is revised to read

in part as follows:

     Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,

77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,

78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x,

78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
==========================================START OF PAGE 30======

and 80b-11, unless otherwise noted.

                        *   *   *   *   *

     4.   By adding  240.10A-1 to read as follows:

 240.10A-1   Notice to the Commission Pursuant to Section 10A of
the Act.

     (a)(1)  If any issuer with a reporting obligation under the

Act receives a report requiring a notice to the Commission in

accordance with section 10A(b)(3) of the Act, 15 U.S.C. 78j-

1(b)(3), the issuer shall submit such notice to the Commission's

Office of the Chief Accountant within the time period prescribed

in that section.  The notice may be provided by facsimile,

telegraph, personal delivery, or any other means, provided it is

received by the Office of the Chief Accountant within the

required time period.

     (2)  The notice specified in paragraph (a)(1) of this

section shall be in writing and: 

     (i)  Shall identify the issuer (including the issuer's name,

address, phone number, and file number assigned to the issuer's

filings by the Commission) and the independent accountant

(including the independent accountant's name and phone number,

and the address of the independent accountant's principal

office);

     (ii)    Shall state the date that the issuer received from

the independent accountant the report specified in section

10A(b)(2) of the Act, 15 U.S.C. 78j-1(b)(2);

     (iii)   Shall provide, at the election of the issuer,

either: 
==========================================START OF PAGE 31======

     (A) A summary of the independent accountant's report,

including a description of the act that the independent

accountant has identified as a likely illegal act and the

possible effect of that act on all affected financial statements

of the issuer or those related to the most current three-year

period, whichever is shorter; or 

     (B) A copy of the independent accountant's report; and

     (iv) May provide additional information regarding the

issuer's views of and response to the independent accountant's

report.

     (3)  Reports of the independent accountant submitted by the

issuer to the Commission's Office of the Chief Accountant in

accordance with paragraph (a)(2)(iii)(B) of this section shall be

deemed to have been made pursuant to section 10A(b)(3) or section

10A(b)(4) of the Act, 15 U.S.C. 78j-1(b)(3) or 78j-1(b)(4), for

purposes of the safe harbor provided by section 10A(c) of the

Act, 15 U.S.C. 78j-1(c).

     (4)  Submission of the notice in paragraphs (a)(1) and

(a)(2) of this section shall not relieve the issuer from its

obligations to comply fully with all other reporting

requirements, including, without limitation: 

     (i) The filing requirements of Form 8-K,  249.308 of this

chapter, and Form N-SAR,  274.101 of this chapter, regarding a

change in the issuer's certifying accountant and 

     (ii) The disclosure requirements of item 304 of Regulation

S-B or item 304 of Regulation S-K,  228.304 or 229.304 of this
==========================================START OF PAGE 32======

chapter.

     (b)(1)  Any independent accountant furnishing to the

Commission a copy of a report (or the documentation of any oral

report) in accordance with section 10A(b)(3) or section 10A(b)(4)

of the Act, 15 U.S.C. 78j-1(b)(3) or 78j-1(b)(4), shall submit

that report (or documentation) to the Commission's Office of the

Chief Accountant within the time period prescribed by the

appropriate section of the Act.  The report (or documentation)

may be submitted to the Commission's Office of the Chief

Accountant by facsimile, telegraph, personal delivery, or any

other means, provided it is received by the Office of the Chief

Accountant within the time period set forth in section 10A(b)(3)

or 10A(b)(4) of the Act, 15 U.S.C. 78j-1(b)(3) or 78j-1(b)(4),

whichever is applicable in the circumstances.

     (2)  If the report (or documentation) submitted to the

Office of the Chief Accountant in accordance with paragraph

(b)(1) of this section does not clearly identify both the issuer

(including the issuer's name, address, phone number, and file

number assigned to the issuer's filings with the Commission) and

the independent accountant (including the independent

accountant's name and phone number, and the address of the

independent accountant's principal office), then the independent

accountant shall place that information in a prominent attachment

to the report (or documentation) and shall submit that attachment

to the Office of the Chief Accountant at the same time and in the

same manner as the report (or documentation) is submitted to that
==========================================START OF PAGE 33======

Office.

     (3)  Submission of the report (or documentation) by the

independent accountant as described in paragraphs (b)(1) and

(b)(2) of this section shall not replace, or otherwise satisfy

the need for, the newly engaged and former accountants' letters

under items 304(a)(2)(D) and 304(a)(3) of Regulation S-K, 

229.304(a)(2)(D) and 229.304(a)(3) of this chapter, respectively,

and under items 304(a)(2)(D) and 304(a)(3) of Regulation S-B, 

228.304(a)(2)(D) and 228.304(a)(3) of this chapter, respectively,

and shall not limit, reduce, or affect in any way the independent

accountant's obligations to comply fully with all other legal and

professional responsibilities, including, without limitation,

those under generally accepted auditing standards and the rules

or interpretations of the Commission that modify or supplement

those auditing standards.

     (c)  A notice or report submitted to the Office of the Chief

Accountant in accordance with paragraphs (a) and (b) of this

section shall be deemed to be an investigative record and shall

be non-public and exempt from disclosure pursuant to the Freedom

of Information Act to the same extent and for the same periods of

time that the Commission's investigative records are non-public

and exempt from disclosure under, among other applicable

provisions, 5 U.S.C. 552(b)(7) and  200.80(b)(7) of this

chapter.  Nothing in this paragraph, however, shall relieve,

limit, delay, or affect in any way, the obligation of any issuer

or any independent accountant to make all public disclosures
==========================================START OF PAGE 34======

required by law, by any Commission disclosure item, rule, report,

or form, or by any applicable accounting, auditing, or

professional standard.

     Instruction to paragraph (c).  

     Issuers and independent accountants may apply for additional

bases for confidential treatment for a notice, report, or part

thereof, in accordance with  200.83 of this chapter.  That

section indicates, in part, that any person who, pursuant to any

requirement of law, submits any information or causes or permits

any information to be submitted to the Commission, may request

that the Commission afford it confidential treatment by reason of

personal privacy or business confidentiality, or for any other

reason permitted by Federal law.  



By the Commission.



                              Jonathan G. Katz
                              Secretary

March 12, 1997