The Securities Exchange Commission has published a notice to solicit comments on the proposed funding rules of the Public Company Accounting Oversight Board (the “Board” or the “PCAOB”). Comments are due by July 18, 2003.

The PCAOB has adopted five proposed rules relating to public company funding of the Board's operations. Section 109 of the Sarbanes Oxley Act provides that funds to cover the Board's annual budget (less registration and annual fees paid by public accounting firms) are to be collected from public companies (i.e., "issuers," as defined in the Sarbanes-Oxley Act). The amount due from such companies is referred to in the Sarbanes-Oxley Act as the Board's "accounting support fee." The five proposed rules provide for allocation, assessment and collection of the Board's accounting support fee.

The PCAOB’s proposed rules divide issuers into four classes:

(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 Issuers 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 Issuers class) As discussed below, the allocation formula scales market capitalization (or, for investment companies whose securities are not traded on an exchange or quoted on NASDAQ, net asset value) of investment companies down by 90%, such that a $250 million investment company would be allocated a share equal to that of a $25 million operating company.

(3) All issuers that, as of the date the accounting support fee is calculated (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, as amended (the "Securities Act"), or (iii) are subject to the jurisdiction of a bankruptcy court and satisfy the modified reporting requirements of Commission Staff Legal Bulletin No. 2.

(4) All other issuers (i.e., issuers that do not fall in classes (1), (2), or (3)). (All Other Issuers class)

A company's status as an issuer (or as an investment company, business development company, issuer excused from filing audited financial statements, or bankrupt issuer) 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 that year.

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 and Investment Company Issuer classes 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 market capitalization or net asset value.

(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.

The proposed rules provide that, after the annual allocation of the accounting support fee is determined, the Board will send a notice to each issuer to which a share of the fee has been allocated. These notices will be sent either electronically or by first-class mail. Payment will be due on the 30th day after transmittal, after which interest will accrue at a rate of 6% per annum.

If an issuer has not paid its share of the accounting support fee by the 60th day after a notice was sent, and the issuer does not have a petition pursuant to Rule 7102(c) pending, the Board may send a second notice by certified mail. If the Board has sent a second notice and payment has still not been made by the 90th day after the original notice was sent, the Board may report the issuer's non-payment to the Commission. An issuer's failure to pay its share of the accounting support fee is a violation of Section 13(b)(2) of the Securities Exchange Act of 1934 ("Exchange Act") and could, like any other Exchange Act violation, result in administrative, civil, or criminal sanctions.

In addition, the Board's proposed rules require that no registered public accounting firm may sign an unqualified audit 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 and the issuer has not filed a petition for a correction to its share of the accounting support fee. The Board's proposed rules would permit a qualified, adverse or disclaimed opinion irrespective of whether the issuer's share had been paid.

For a copy of the full release, see Release No. 34-48075 dated June 23, 2003, available from the SEC’s web site www.sec.gov.

Paul F. Wessell is a partner in Rhoads & Sinon’s Banking and Securities/Financial Institutions Practice Group. Rhoads & Sinon offers a full range of banking and securities counseling and representation. If you have any questions about this issue, or if you need legal assistance in any area of banking and securities law, you can contact Mr. Wessell via email at pwessell@rhoads-sinon.com or by telephone at 717-233-5731. Feel free to contact Mr. Wessell or any of our attorneys, Charles J. Ferry or Dean H. Dusinberre directly for more information about our firm and its available service.