roberts5.htm

July 27, 1998

(202) 508-4148

Mr. Jonathan Katz
Secretary
United States Securities and Exchange Commission
Judiciary Plaza
450 5th Street, N.W.
Washington, D.C. 20549

RE: File No. S7-16-98

Dear Mr. Katz:

I. Introduction

This comment letter is submitted individually with respect to the Commission's proposal to amend Rule 102(e) of the Commission's Rules of Practice.

I have been following this issue for several years and have observed with dismay the Commission's insistence upon articulating a standard in this area through the vehicle of an administrative proceeding where the underlying conduct could charitably be described as "long in the tooth." ¹ The results from these Commission efforts speak for themselves – a remand by the United States Court of Appeals for the District of Columbia Circuit("D. C. Circuit") ² in one instance and a blistering opinion by the same court on the second round. ³ I take no pleasure in the Commission's pain.

I do generally support the new proposed amendment to Rule 102(e) of the Commission's Rules of Practice and recognize the Commission's jurisdiction to censure those persons who professionally appear or practice before it. Most of all, I commend the Commission for attempting (finally), through a rulemaking action rather than through an administrative proceeding, to establish the standards applied to determine whether an accountant practicing before the Commission has engaged in "improper professional conduct." Moreover, I strongly believe that since the consequences of a finding of a Rule 102(e) violation are often a suspension or termination of a professional's ability to appear before the Commission, a definition of "improper professional conduct" mandates a requirement of conduct by the professional of more than a mere one-time negligent violation of applicable professional standards.

II. The Promulgation of Rule 102(e) Is Within The Commission's Rule-Making Authority

I generally support the Commission's claim of authority to censure, suspend or bar persons who appear before it. Courts addressing the issue have found that the Commission is granted the authority by Section 23(a)(1) of the Exchange Act to adopt measures which are necessary or appropriate to implement the provisions of such Act. ⁴ Through the implementation of Rule 102(e), the Commission may preserve the integrity of its procedures by assuring the competence and honesty of those persons practicing before it. ⁵

I also recognize that the Commission has the administrative authority under Rule 102(e) to discipline professionals appearing before it, but I am further of the view that such authority is limited to the purpose of protecting "the investing public and the Commission from the future impact on its processes of professional misconduct." ⁶ An overreaching use of the Rule by the Commission would no longer serve the purpose of protecting the trust and competence of the investing public; rather, overuse would breed insecurity and cause an overwhelming sense of incompetence among those professionals whose job requires them to appear before the Commission. Thus, I believe that the Commission's authority in this area is not boundless, and, at a minimum, is questionable so far as negligent conduct is concerned.

While I agree that truly incompetent or unethical professionals can cause great damage to the Commission's processes and to investors and also that the application of Rule 102(e) may prevent many abuses by such professionals, I caution against the arbitrary and inconsistent application of Rule 102(e) to these professionals. Further, I urge the Commission to adopt clear and precise standards in its revision of this Rule.

III. "Improper Professional Conduct" Defined As Intentional, Knowing, or Reckless Conduct

The proposed definition of "improper professional conduct" as "an intentional or knowing violation, including a reckless violation of applicable professional standards" strikes me as suited to protect the integrity of the Commission's processes, as well as, investors. Such a proposed definition clearly articulates a standard which professionals practicing before the Commission should understand.

The Commission should be able to apply this standard in a logical and consistent manner. Therefore, I express no concerns with this aspect of the proposal. ⁷

IV. Negligence Consisting Merely of a Violation of Applicable Professional Standards Should Not Trigger A Violation Of Rule 102(e)

I have always found U.S. accounting standards to be extraordinarily complex. They are difficult to apply and too often require subjective judgments. In sum, they are a breeding ground for litigation and are sorely in need of simplification. I encourage the Commission to give some thought to extending its "Plain English" project to our accounting standards.

With this background in mind, it hardly seems fair for the Commission to reserve the ability to sanction an accountant for merely a violation of applicable standards. In many respects, this category comes close to falling within the concerns expressed by the D.C. Circuit in its second Checkosky decision. The D.C. Circuit was very concerned about the uncertainty of requiring accountants and attorneys to comply with a standard of negligence for which the sole guidelines are that sanctions will be imposed only if one's actions "threaten the integrity of the Commission." ⁸ The court further commented on the unfairness of imposing a negligence standard when "it is simply impossible to know in advance what sort of negligent errors will meet this `standard'; we can imagine both narrow and potentially all-embracing constructions."⁹

I share the concern expressed by the D.C. Circuit that, arguably, the Commission could find violative conduct whenever it chooses to do so in applying a standard consisting merely of a negligent violation of applicable professional standards. If so, such a standard may not withstand judicial challenge. In any event, as a policy matter, even assuming that such authority exists, it remains unclear to me why the Commission desires to reserve the ability to impose sanctions for this type of conduct.

V. The Negligence Standard May Be Unconstitutionally Vague

Further, I believe that the part of the definition of "improper professional conduct" proscribing negligent conduct under circumstances including "an unreasonable violation of applicable professional standards that present 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" ¹⁰ may be determined by the courts to be unconstitutionally vague. It is my understanding that a regulation is considered unconstitutionally vague when "men of common intelligence must necessarily guess at its meaning."¹¹ A vague regulation denies a person due process by imposing a standard of conduct so indeterminate that it is impossible for them to ascertain whether actions they take will result in sanctions.¹² A regulation must give fair warning to a reasonably prudent person who is familiar with the objectives the regulation is meant to achieve in order to satisfy the requirements of due process.¹³ The danger of an unconstitutionally vague regulation is that a person will inadvertently violate the regulation because he/she was unable to fully comprehend its meaning and applicability.

I regret to say that I am at a loss to comprehend the meaning of this section of the proposed regulation or of its implications for those practicing before the Commission. Moreover, I assume that there would be those professionals to whom this section is applicable who would also be unable to ascertain a clear standard of conduct with which to acquiesce. Therefore, I am concerned that the definition the Commission has proposed of "improper professional conduct" in Rule 102(e)(1)(ii)(B)(1) may be unconstitutionally vague. A more appropriate course of action may be just to drop this aspect of the proposal.¹⁴

VI. Negligence Consisting of Repeated, Unreasonable Violations Of Professional Standards May Be Adequate To Sustain an Allegation of a Rule 102(e) Violation

On the other hand, assuming the Commission has the authority to do so (which is not free from doubt), I have no disagreement with the application of a negligence standard to those professionals who have consistently and repeatedly, in an unreasonable manner, violated the professional standards applicable to them. A professional who has repeatedly failed to undertake his/her responsibility before the Commission, whether deliberately or inadvertently, with a degree of care and inquiry demanded of such profession should be subject to discipline for his/her behavior. Therefore, I have no problem holding such a "repeat offender" to a standard of negligence.

With respect to this category, the Commission may wish to consider clarifying that a "repeat offense" involves multiple instances of negligence in more than one fact pattern which generally would preclude alleging a 102(e) violation as a result of one audit and usually would preclude alleging a 102(e) violation as a result of multiple audits involving only one client. Moreover, I wonder whether this degree of negligence is essentially the same conduct as a "reckless violation of applicable professional standards." If so, then why is a separate negligence category necessary at all?¹⁵

VII. Conclusion

With this rulemaking effort, the Commission has an opportunity to bury some rather embarrassing history. The adoption of standards which lean toward the conservative side maximizes the ability of the Commission to capitalize on this opportunity. I encourage the Commission to follow such a prudent approach.

Thank you for your consideration.

Sincerely,

Richard Y. Roberts

cc: Honorable Arthur Levitt, Jr.
Chairman

Honorable Norman Johnson
Commissioner

Honorable Isaac C. Hunt, Jr.
Commissioner

Honorable Laura S. Unger
Commissioner

Honorable Paul R. Carey
Commissioner

¹ David J. Checkosky, 50 S.E.C. 1180,1198 (1992) (Commissioner Roberts, Concurring/dissenting); David J. Checkosky, 7 Fed.Sec.L.Rep. (CCH) ¶74,386, at 63,421 (Jan. 21, 1997)(Commissioner Johnson, dissenting).

² Checkosky v. SEC, 23 F.3d 452 (D.C. Cir. 1994).

³ Checkosky v. SEC, 139 F.3d 221 (D.C. Cir. 1998).

⁴ David J. Checkosky, 50 S.E.C. 1180, 1198 (1992) (Commissioner Roberts, concurring/dissenting).

⁵ Touche Ross & Co. v. SEC, 609 F.2d 570 (2nd Cir. 1979). In Touche, the court agreed with the Commission's attestation that the promulgation of Rule 102(e) was intended only to assure that a professional was fit to appear before the Commission and not as an additional weapon of enforcement.

⁶ William R. Carter, 47 S.E.C. 471(1981).

⁷

⁸ Checkosky, 139 F.3d at 224.

⁹ Id.

¹⁰ .Rule 102(e)(1)(ii)(B)(1) Commission's Rules of Practice, 63 Fed. Reg. 33305(1998) (proposed June 12, 1998).

¹¹ Timpinaro v. SEC, 2 F.3d 453 (D.C. Cir 1993) (holding that although it was possible that the Commission had used the most precise terms available, their definition of a professional trading account, as amended by the Professional Trader Rule, was unconstitutionally vague).

¹² SeeHastings v. Judicial Conference of United States, 829 F.2d 91 (D.C. Cir. 1987).

¹³ Freeman United Coal Mining Co. v. Fed. Mine Safety and Health Review Comm'n, 108 F.3d 358 (D.C. Cir. 1997).

¹⁴ Another alternative course of action which has been suggested is to insert the word "highly" before the words "unreasonable violation" in this part of the proposal. Although this is not my preferred option, it does craft a standard which is more precise and would be an improvement over the current proposal. See Memorandum to Commission File No. S7-16-98, dated July 17, 1998, from Harvey J. Goldschmid, General Counsel, SEC ("Memo"), concerning a meeting with Katherine A. Oberly of Ernst & Young in connection with the Commission's proposal to amend Rule 102(e).
This Memo contained another suggestion that included a subcategory requiring a finding of a highly unreasonable violation of applicable standards, as compared to merely an unreasonable violation, "where the accountant consulted with designated national technical personnel within his or her firm about the matter which presents the risk, or the accountant reasonably believed it appropriate under the circumstances not to consult with such experts . . ." I understand that the reasoning behind this alterative is to incorporate into the standard something akin to the concept of a business judgment rule with the result being a more precise standard. However, I am more confused by the language in this alternative than I was by the original proposal. It contains too many words for me.

¹⁵ A strong argument in support of a separate negligence category is that an accounting professional sanctioned under such a category would not then be saddled with a finding of scienter which may carry significant private litigation baggage. In this manner, a negligence category may provide both the sanctioner and sanctionee with flexibility that could prove useful during the course of settlement negotiations. While I recognize the merit in such an approach, I am not persuaded by it.

¹	David J. Checkosky, 50 S.E.C. 1180,1198 (1992) (Commissioner Roberts, Concurring/dissenting); David J. Checkosky, 7 Fed.Sec.L.Rep. (CCH) ¶74,386, at 63,421 (Jan. 21, 1997)(Commissioner Johnson, dissenting).
²	Checkosky v. SEC, 23 F.3d 452 (D.C. Cir. 1994).
³	Checkosky v. SEC, 139 F.3d 221 (D.C. Cir. 1998).
⁴	David J. Checkosky, 50 S.E.C. 1180, 1198 (1992) (Commissioner Roberts, concurring/dissenting).
⁵	Touche Ross & Co. v. SEC, 609 F.2d 570 (2nd Cir. 1979). In Touche, the court agreed with the Commission's attestation that the promulgation of Rule 102(e) was intended only to assure that a professional was fit to appear before the Commission and not as an additional weapon of enforcement.
⁶	William R. Carter, 47 S.E.C. 471(1981).
⁷
⁸	Checkosky, 139 F.3d at 224.
⁹	Id.
¹⁰	.Rule 102(e)(1)(ii)(B)(1) Commission's Rules of Practice, 63 Fed. Reg. 33305(1998) (proposed June 12, 1998).
¹¹	Timpinaro v. SEC, 2 F.3d 453 (D.C. Cir 1993) (holding that although it was possible that the Commission had used the most precise terms available, their definition of a professional trading account, as amended by the Professional Trader Rule, was unconstitutionally vague).
¹²	SeeHastings v. Judicial Conference of United States, 829 F.2d 91 (D.C. Cir. 1987).
¹³	Freeman United Coal Mining Co. v. Fed. Mine Safety and Health Review Comm'n, 108 F.3d 358 (D.C. Cir. 1997).
¹⁴	Another alternative course of action which has been suggested is to insert the word "highly" before the words "unreasonable violation" in this part of the proposal. Although this is not my preferred option, it does craft a standard which is more precise and would be an improvement over the current proposal. See Memorandum to Commission File No. S7-16-98, dated July 17, 1998, from Harvey J. Goldschmid, General Counsel, SEC ("Memo"), concerning a meeting with Katherine A. Oberly of Ernst & Young in connection with the Commission's proposal to amend Rule 102(e). This Memo contained another suggestion that included a subcategory requiring a finding of a highly unreasonable violation of applicable standards, as compared to merely an unreasonable violation, "where the accountant consulted with designated national technical personnel within his or her firm about the matter which presents the risk, or the accountant reasonably believed it appropriate under the circumstances not to consult with such experts . . ." I understand that the reasoning behind this alterative is to incorporate into the standard something akin to the concept of a business judgment rule with the result being a more precise standard. However, I am more confused by the language in this alternative than I was by the original proposal. It contains too many words for me.
¹⁵	A strong argument in support of a separate negligence category is that an accounting professional sanctioned under such a category would not then be saddled with a finding of scienter which may carry significant private litigation baggage. In this manner, a negligence category may provide both the sanctioner and sanctionee with flexibility that could prove useful during the course of settlement negotiations. While I recognize the merit in such an approach, I am not persuaded by it.