United States of America
In the Matter of
Ernst & Young LLP
On May 20, 2002, the Commission authorized the institution of this administrative proceeding against respondent Ernst & Young LLP ("E&Y") pursuant to Section 21C of the Securities Exchange Act of 1934 1 and Rule 102(e) of the Commission's Rules of Practice. 2 In the Order Instituting Proceedings ("OIP") the Division of Enforcement and the Office of the Chief Accountant ("the Staff") alleged that, by auditing the financial statements of PeopleSoft, Inc. ("PeopleSoft") in fiscal years 1994 through 1999 while E&Y and PeopleSoft engaged in joint business relationships, E&Y violated auditor independence requirements, was a cause of PeopleSoft's alleged violations of the Exchange Act, and engaged in improper professional conduct. 3 The Staff sought a cease and desist order, disgorgement of audit fees, and Rule 102(e) sanctions.
The decision to authorize the institution of this proceeding was made by then-Commissioner Isaac C. Hunt, Jr. 4 Commissioner Hunt acted as Duty Officer pursuant to the provisions of 17 C.F.R. § 200.43 ("Rule 43"). 5 E&Y knew that only one Commissioner authorized the institution, 6 and responded with a motion for summary disposition filed on June 12, 2002 pursuant to Rule 250 of the Commission's Rules of Practice, challenging Commissioner Hunt's exercise of duty officer authority. 7
On July 2, 2002, the law judge granted E&Y's motion for summary disposition on the ground that this proceeding was not lawfully authorized. The Order concluded that Commissioner Hunt's use of Rule 43 authority to authorize the institution of this proceeding "was plainly erroneous and inconsistent with the plain language of the Rule."
On July 23, 2002, the Staff filed a Petition for Review of the Order. On July 29, 2002, E&Y filed an application for leave to file an opposition to the Staff's petition, and on August 5, 2002, the Staff filed an application for leave to file a reply. On September 5, 2002, the Staff filed a Notice of Withdrawal of its petition for review, requesting that we make immediately effective the law judge's decision, which dismissed the proceeding without prejudice, allowing the Staff to seek authorization for the filing of a new OIP.
We have reviewed this matter in the exercise of our supervisory power to direct and control administrative proceedings before us. That review has led us to conclude that the Commission, not an administrative law judge, has the authority to review action taken by a Commissioner as Duty Officer. The appropriate course, therefore, is to vacate the law judge's Order.
The issue posed by E&Y's motion was a question of law -- Commissioner Hunt's authority to authorize the institution of the proceeding as Duty Officer. Rule 43(c) provides that the Commission may, in its discretion, at any time review any unaffirmed action taken by a duty officer. 8 Rule 43(c) does not give a Commission administrative law judge authority to review such action.
The law judge concluded that the Rules of Practice afforded her a vehicle to review Commissioner Hunt's action. However, the first of these rules, Rule 100, states that the Rules of Practice do not apply to "[a]ctions taken by the duty officer pursuant to delegated authority under 17 C.F.R. 200.43." 9 The comment to Rule 100 amplifies this, specifying that "[c]ertain agency processes are specifically excluded from the scope of the Rules. . . . [T]hese Rules do not cover an appeal from a decision of the duty officer. Rules governing appeals of such decisions are contained in 17 C.F.R. 200.43(c)." 10 Reading Rule 43 and Rule 100 together leads to the conclusion, which we underscore here, that the exclusive means for a party to seek Commission review of a decision made by a duty officer is to request review by the Commission under Rule 43.
In its application for leave to file a reply regarding E&Y's petition for review, the Staff requested that the law judge's Order be vacated. We have construed that request, together with the Staff's Notice of Withdrawal, as a request that we vacate the Order and dismiss the proceeding without prejudice. We have determined to grant that request.
Finally, this matter has provided us an opportunity to consider the operation of Rule 43, including our notice procedures. We intend to revisit those procedures and adopt mechanisms to increase the transparency of the duty officer's exercise of authority under Rule 43.
Accordingly, it is ORDERED that the Order issued by the administrative law judge in this proceeding on July 2, 2002 be, and it hereby is, VACATED; and it is further
ORDERED that this administrative proceeding be, and it hereby is, DISMISSED without prejudice.
By the Commission.
Jonathan G. Katz
1 15 U.S.C. § 78u-3.
2 17 C.F.R. § 201.102(e) (2002).
3 The OIP alleged that E&Y directly violated Rule 2-02(b) of Regulation S-X, was a cause of PeopleSoft's alleged violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, and engaged in improper professional conduct within the meaning of Rule 102(e).
4 Commissioner Hunt resigned his position on August 2, 2002.
5 This fact is established by the declaration of the Commission's Secretary, Jonathan G. Katz, which is part of the record of this proceeding.
6 A Los Angeles Times article that appeared the day after the OIP issued attributed to a Commission spokesperson the statement that "the charges were approved by a single SEC member, Isaac Hunt, because Chairman Harvey Pitt and Commissioner Cynthia Glassman recused themselves."
7 17 C.F.R. § 201.250 (2002). E&Y attached a copy of the Los Angeles Times article to its summary disposition motion. The Katz declaration, discussed supra note 5, was filed by the Staff in response to E&Y's motion.
8 Rule 43(c)(2)(i), 17 C.F.R. § 200.43(c)(2)(i) (2002).
9 Rule 100(b)(2), 17 C.F.R. § 201.100(b)(2) (2002).
10 Comment to Rule of Practice 100, 60 Fed. Reg. 32738, 32745 (June 23, 1995). The comment to Rule 430 of the Rules of Practice, which governs appeal of actions made by Commission staff pursuant to delegated authority, likewise specifies that, "[d]ue to the different nature of matters delegated to hearing officers, senior staff or the duty officer, the Commission's rules provide different mechanisms for review of such actions. See Rules 410 and 411 (procedures relating to initial decisions by a hearing officer); 17 C.F.R. 200.43 (procedures relating to duty officer). Rule 430 relates to certain delegations made to staff." 60 Fed. Reg. at 32777.
|Home | Previous Page||