August 8, 2003

Agencies Issue Final Rules on Disciplinary Actions Against Accountants and Accounting Firms Performing Certain Audit Services

The federal bank and thrift regulatory agencies today issued final rules governing their authority to take disciplinary actions against independent public accountants and accounting firms that perform audit and attestation services required by section 36 of the Federal Deposit Insurance Act. Proposed rules were published for comment in the Federal Register in January 2003.

The final rules, which take effect on October 1, 2003, establish procedures under which the agencies can, for good cause, remove, suspend, or bar an accountant or firm from performing audit and attestation services for insured depository institutions with assets of $500 million or more. The rules permit immediate suspensions in limited circumstances.

The rules provide that certain violations of law, negligent conduct, reckless violations of professional standards or lack of qualifications to perform auditing services may be considered good cause to remove, suspend or bar an accountant or firm from providing audit services for banking organizations subject to section 36. Also, the rules prohibit an accountant or accounting firm from performing audit services if the accountant or firm has been removed, suspended, or debarred by one of the agencies, or if the U.S. Securities and Exchange Commission or the Public Company Accounting Oversight Board has taken certain disciplinary action against the accountant or firm.

The rules are being issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. The rules amend each agency's rules of practice separately, but are substantively identical.

August 4 , 2003

A hearing Thursday of the Senate Banking Committee gave the clearest clues to date on the direction of the bill renewing a key provision of the Fair Credit Reporting Act, and the signs are not good for the financial services industry.

Panel Chairman Richard Shelby strongly indicated that he does not support a critical industry demand: a permanent extension of a provision of the act that blocks states from enacting laws on a host of credit-related issues.

Instead, the powerful Alabama Republican appeared to lean toward only a temporary reauthorization, arguing that the need to revisit the issue in several years would keep the pressure on lenders and credit bureaus to protect consumers. The lawmaker said progress on matters such as identity theft had been made only recently as industry leaders sought to renew the preemption provision, which expires Jan. 1.

"We have been told that many, if not most, of the positive developments ... have come just in recent months as we've been holding these hearings and the shadow of reauthorization loomed large," Sen. Shelby said. "Do you think that at a minimum the process of reauthorization tends to serve the force that motivates interested parties to take this to a higher level, both here and in the marketplace?"

The question was directed to Treasury Secretary John Snow, who acknowledged that the reauthorization process had served "a useful purpose."

Sen. Shelby noted that the Federal Trade Commission announced Wednesday that Equifax Credit Information Services, one of the three largest credit bureaus, had agreed to pay $250,000 in fines for FCRA violations.

"With that in mind, will the necessary incentive remain if reauthorization is permanently taken off the table, or should we make sure that we provide some type of legislation to keep people on their toes?" Sen. Shelby asked Mr. Snow, who testified at Thursday's sixth and final Senate hearing on the subject.

Observers took the senator's questions as a clear sign that he favors only a temporary extension of the preemption provision. Asked by reporters after the hearing what tack he would take in his bill, which is expected to be introduced in September, the chairman would not elaborate but said that staff and other lawmakers were still looking at the issue.

Asked if he personally has a leaning, Sen. Shelby paused for several seconds before smiling and saying, "I have a lot of ideas."

If he moves for a temporary reauthorization, it would put Sen. Shelby at odds with the industry, which has been avid in lobbing for a permanent extension. The House Financial Services Committee overwhelmingly approved a bill last week that would make the provision permanent, after defeating a Democratic attempt to sunset it after nine years.

It was unclear how most other Senate Banking members view the matter.

Mr. Snow, who favors a permanent provision, sometimes offered confusing responses to panel members. At one point he said he "strongly" supported " the sunset," which prompted Sen. Tim Johnson, D-S.D., to ask him to clarify his position.

The secretary corrected himself: "We want the sunset removed. We think it would be really devastating if the business community couldn't plan on the preemption staying in place."

Lawmakers also revealed other proposals that might end up in the Senate bill. Several expressed support for providing a free credit report annually to any consumer who requests it. Treasury backs that provision, which is also in the House version.

Lawmakers also condemned a practice by some credit card companies - most notably Capital One Financial Corp. - of not reporting consumers' credit limits to the credit bureaus. Sen. Shelby accused companies of " gaming the system" by trying to protect that data to prevent other firms from identifying their best customers. He said the practice hurt consumers' credit scores. The harsh words, which followed Tuesday's sharp questioning of a Capital One witness, indicate that the Senate bill will probably require a disclosure on the issue.

The committee also expressed interest in broadening the definition of an "adverse action" to include customers' not getting the most favorable interest rate available. It is currently limited to their being denied credit. Lawmakers said the expansion would encourage consumers to pay more attention to credit reports.

"There is a growing recognition that adverse-action notices provide an important mechanism to encourage consumer policing of their credit files," Sen. Johnson said.