[15964]
April 29, 2003
TO: ACCOUNTING/TREASURERS MEMBERS No. 23-03
CLOSED-END INVESTMENT COMPANY MEMBERS No. 39-03
SEC RULES MEMBERS No. 54-03
SMALL FUNDS MEMBERS No. 20-03
UNIT INVESTMENT TRUST MEMBERS No. 15-03
VARIABLE INSURANCE PRODUCTS ADVISORY COMMITTEE No. 1-03
RE: PCAOB ADOPTS FEE PROPOSAL; SEC RECOGNIZES PCAOB
As we recently informed you, the Public Company Accounting Oversight Board
proposed rules to establish the accounting support fee required under the Sarbanes-Oxley Act
(the “Act”) to fund the Board’s operations.1 The PCAOB recently adopted, and submitted to the
SEC for approval, its accounting support fee rule proposal.2 We are pleased to report that the
final rule adopted by the PCAOB, consistent with recommendations submitted by the Institute,
assesses investment companies at a substantially reduced fee rate. Separately, as required by
the Act, the Commission has issued two orders regarding the PCAOB. The first order
recognizes the PCAOB as having taken actions necessary to fulfill its obligations under the Act.3
The second order recognizes the PCAOB’s adoption of generally accepted auditing standards as
interim auditing standards to be followed by accounting firms in connection with the
preparation or issuance of any audit report.4
A. Accounting Support Fee
1. Issuers Subject to the Fee
Once each year, the Board will compute the accounting support fee. The accounting
support fee will be equal to the Board’s budget for that year, as approved by the SEC, less the
amount of registration fees collected from public accounting firms during the preceding year.
In order to allocate the accounting support fee, issuers will be divided into four classes:
1 See Memorandum No. 15772, dated March 19, 2003.
2 Establishment of Accounting Support Fee, PCAOB Release No. 2003-003 (April 18, 2003) (“Adopting Release”). The
Adopting Release is available at http://www.pcaobus.org/pcaob1/Rules/Release2003-003.pdf.
3 Order Regarding Section 101(d) of the Sarbanes-Oxley Act of 2002, Securities Act of 1933 Release No. 8223 (April, 25,
2003). This release is available at the SEC’s website at http://www.sec.gov/rules/other/33-8223.htm.
4 Order Regarding Section 103(a)(3)(B) of the Sarbanes-Oxley Act of 2002, Securities Act of 1933 Release No. 8222 (April
25, 2003). This release is available at the SEC’s website at http://www.sec.gov/rules/other/33-8222.htm.
2
1. All issuers whose average, monthly U.S. equity market capitalization during the
preceding calendar year, based on all classes of common stock, is greater than $25
million and whose share price on a monthly, or more frequent basis, is publicly available
(“Equity Issuer Class”);
2. Registered investment companies and issuers that have elected to be regulated as
business development companies whose average, monthly market capitalization (or net
asset value), during the preceding calendar year, is greater than $250 million and whose
share price (or net asset value) on a monthly, or more frequent basis, is publicly
available (“Investment Company Issuer Class”);
3. All issuers that (i) have a basis, under a Commission rule or pursuant to other action of
the Commission or its staff, not to file audited financial statements, (ii) are employee
stock purchase, savings and similar plans, interests in which constitute securities
registered under the Securities Act of 1933 or (iii) are subject to the jurisdiction of a
bankruptcy court and satisfy the modified reporting requirements of Commission Staff
Legal Bulletin No. 2 (“Issuers Permitted Not to File Audited Financial Statements”); and
4. All other issuers (i.e., issuers that do not fall in classes one, two or three) (“All Other
Issuers Class”).
In the case of an investment company with multiple series, the net asset value of all
series in the company would be aggregated to determine whether the $250 million threshold
has been exceeded. A company’s status as an issuer within the classes will be determined as of
the date on which the amount of the annual accounting support fee is set. Companies that are
not issuers on that date will not be required to pay any fee during the year.
Unit investment trusts that have not filed or updated a registration statement that
became effective during the preceding year are included in the Issuers Permitted Not to File
Audited Financial Statements class.
The Adopting Release indicates that market capitalization or net asset value data may
not be available for certain issuers, such as unit investment trusts and insurance company
separate accounts. The final rule explicitly excludes from the fee allocation issuers whose
market capitalization or net asset value is not reported on a monthly or more frequent basis.
2. Allocation of the Accounting Support Fee to Issuers
The accounting support fee will be allocated among the issuers in the four classes in the
following manner:
1. Each company in the Equity Issuer Class and the Investment Company Issuer Class will
be allocated an amount equal to the accounting support fee, multiplied by a fraction.
The numerator of the fraction will be the issuer’s average monthly market capitalization
during the preceding calendar year. The denominator will be the sum of the average
monthly market capitalizations of all Equity and Investment Company Issuers. For
purposes of this allocation, however, the market capitalization of an investment company issuer
will be ten percent of the investment company’s net asset value.
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2. All issuers in the other two classes – Issuers Permitted Not to File and All Other Issuers
– will be allocated a share of zero.
Issuers will be required to pay their allocated shares of the accounting support fee, rounded to
the nearest hundred. Accordingly, issuers whose shares of the accounting support fee are less
than $50 will have their shares rounded to zero and will not be assessed a fee. We estimate that
investment company issuers will pay an accounting support fee of $300 or $400 per billion in
fund net assets.
3. Notice of Allocation and Collection of Amount Due
After the annual accounting support fee is determined, the Board will send a notice to
each issuer to which a share of the fee has been allocated. Notices will be sent either
electronically or by first class mail to the address shown on the issuer’s most recent periodic
report filed with the SEC. We understand that the Board plans to send fee notices to issuers in
the next several months. Payment will be due on the 30th day after transmittal, after which
interest will accrue at a rate of six percent per annum. If an issuer has not paid its share of the
accounting support fee by the 60th day after a notice was sent, the Board may send a second
notice by certified mail. If payment has not been made after the 90th day, the Board may report
the issuer’s non-payment to the SEC.
According to the Adopting Release, failure to pay is a violation of Section 13(b)(2) of the
Securities Exchange Act of 1934. In addition, under the final rule no registered public
accounting firm may sign an unqualified opinion (or issue a consent) with respect to an issuer’s
financial statements if that issuer has outstanding any past due share of the accounting support
fee.
B. SEC Order Regarding PCAOB
Section 101(d) of the Act requires the PCAOB to take such actions as necessary or
appropriate to enable the SEC to determine that the Board is organized and has the capacity to
carry out the requirements of the Act and enforce compliance by registered public accounting
firms. The SEC order indicates that the Commission has determined that the PCAOB has
complied with Section 101(d) of the Act.
Under the Act, PCAOB’s duties include establishment of auditing and other standards
relating to public company audits. Section 103(a)(3)(B) of the Act provides the PCAOB may
adopt any portion of existing auditing standards that the Board determines satisfy the
requirements of the Act as initial or transitional standards. The Act also provides that any such
initial or transitional standards shall be approved by the Commission. The SEC order approves
PCAOB’s adoption of existing auditing standards as “interim” auditing standards.
Gregory M. Smith
Director - Operations/Compliance & Fund
Accounting