August 18, 1998
Mr. Jonathan G. Katz
File No. S7-16-98
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-6009
Dear Mr. Katz:
MBNA America Bank, N.A. ("MBNA"), a national bank and the principal subsidiary of MBNA Corporation, appreciates the opportunity to comment on the United States Securities and Exchange Commissions (the "SEC") proposed amendment of Rule 102(e) of the Commissions Rules of Practice (the "Proposal"), File No. S7-16-98. MBNA Corporation, through its subsidiary MBNA, is a major bank credit card lender and has total assets of approximately $22.9 billion and total managed loans of $52.7 billion as of June 30, 1998.
MBNA welcomes the SECs decision to seek public input prior to revising its disciplinary rules for accountants who practice before the SEC. Also, the Commission is to be applauded for attempting to create greater certainty and consistency regarding the application of Rule 102(e). However, in our view, the language of the proposed amendment is unclear and could be read to allow the SEC to sanction even a single error in judgment by an accountant. Specifically, the SECs proposed definition of "improper professional conduct" is:
(A) An intentional or knowing violation, including a reckless violation, of applicable professional standards; or
(B) Negligent conduct in the following circumstances:
(1) An unreasonable violation of applicable professional standards that
presents a substantial risk, which is either known or should have been known, of making a document prepared pursuant to the federal securities laws materially misleading; or
(2) Repeated, unreasonable violations of applicable professional
standards that demonstrate that the accountant lacks competence.
The investing public benefits when accountants are allowed to exercise their best independent judgment. Significant subjective judgment is required on the part of both preparers of financial statements as well as by those who audit the financial statements. The proposed rule gives the SEC license to, with the benefit of hindsight, disagree with any one of the myriad of judgments made by accountants during these processes. Judgment exercised by accountants is necessarily based upon particular sets of circumstances and assumptions. Actual events and results may prove some of those assumptions, made in good faith, to be in error. Hindsight may be used to validate whether a particular negligent action was undertaken knowingly but, in our view, should not be used to question reasonable judgments and conclusions. Such an environment obviously restricts accountants in the free exercise of their judgment to the detriment of our financial reporting system.
We believe that sanctioning accountants for single acts of simple negligence is inconsistent with the purposes of Rule 102(e). The Commission promulgated the rule to protect the integrity of its processes, not to add an additional punitive methodology. The rule is intended to serve a remedial, not punitive, purpose. Because a single act of simple negligence or error in judgment cannot give rise to a reasonable expectation concerning future behavior, or misbehavior, such an act should not be viewed as posing a threat to the Commissions processes. As a result, Rule 102(e) provides no basis for sanctioning such conduct.
Moreover, the proposed rule does not directly further the SECs purpose of ensuring accurate and complete disclosure insofar as the proposal would only require the presence of a "substantial risk" that a document might be materially misstated. The proposal thus adopts a standard that could result in an enforcement proceeding against an accounting professional even where no misstatement has occurred.
For these reasons, MBNA believes that a Rule 102(e) negligence standard with respect to accountants contravenes public policy, treats accountants in a discriminatory manner, and would actually diminish the vital role of accountants as guardians of the financial reporting system. It would be far better, for investors and accountants alike, if the Commission instead were to sanction accountants only in the event of a knowing or conscious and deliberate violation of applicable professional standards or a pattern of misconduct that can be shown to create the required level of risk to the Commissions processes or the financial reporting system.
MBNA urges you to consider these comments in the proposal to amend Rule 102(e) of the Rules of Practice, which govern the conduct of accountants and other professionals who perform audits or otherwise practice before the Commission. If you have any questions on any of these items, please contact either myself or Victor P. Manning, Senior Executive Vice President and Chief Accounting Officer at (302) 453-6707.
M. Scot Kaufman
Senior Vice Chairman and Chief Financial Officer