PRA10A-1 Supporting Statement 2017

SUPPORTING STATEMENT
for the Paperwork Reduction Act
Information Collection Submission
“Rule 10A-1”

A.

Justification
1.

Necessity of Information Collection

Title III of the Private Securities Litigation Reform Act of 1995, Public Law No. 104-67,
enacted on December 22, 1995, amended the Securities Exchange Act of 1934 (the “Exchange
Act”) to add section 10A, 15 U.S.C. § 78j-1. This section requires, among other things, that a
registrant notify the Commission within one business day after the board of directors of the
registrant is informed by the auditor of its financial statements that the auditor reasonably
expects to resign the audit engagement or to modify its audit report due to an unremediated
illegal act, 1 committed by the registrant, that has a material effect on the registrant’s financial
statements. If the registrant does not notify the Commission within that period, then the auditor,
within the next business day, must resign the engagement or furnish a copy of the “illegal acts
report” that it gave to the board (or documentation of any oral report) directly to the
Commission.
Rule 10A-1 under the Exchange Act implements the reporting requirements in
section 10A. If Rule 10A-1 is not extended, registrants and auditors will not know whether to
file the notice or report on a public disclosure form or in a confidential letter, which office should
receive the notice or report, what type of communication, if any, should accompany the notice or
report, or how the notice or report affects other reporting obligations of the registrant and the
auditor.
Reporting, recordkeeping, and other compliance requirements imposed by the rule,
beyond those mandated by section 10A of the Exchange Act, Regulation S-X 2 and current
auditing standards of the Public Company Accounting Oversight Board, are de minimis.
The notice filed by the registrant under Rule 10A-1 is based on the report the board of
directors receives from its auditor. The notice is relatively short, consisting of an identification
of the registrant and the auditor, the date that the auditor made its report to the board of directors,
and a summary of the auditor’s report. This information is readily available to the registrant
without additional information gathering or recordkeeping.
The report to be filed by the auditor under Rule 10A-1 consists only of the report it made
to the board of directors in accordance with section 10A and any necessary identifying
information. The rule, therefore, adds little, if any, reporting or recordkeeping burden. Further,
the auditor may deliver the report to the Commission’s Office of the Chief Accountant (“OCA”)
in the means most cost-effective to the auditor, provided only that the report is received within
the time period prescribed in the statute.
2.

1

2

Purposes and Use of the Information Collection

Section 10A(f) defines the term “illegal act” to mean “an act or omission that violates any law, or any rule
or regulation having the force of law.”
17 CFR 210.

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Rule 10A-1 is based on the premise that the notice and reports under section 10A of the
Exchange Act provide the Commission with an early warning of illegal acts by registrants,
thereby assisting the Commission in performing its enforcement responsibilities. The failure to
collect this information would deprive the Commission of this valuable source of information. 3
Section 10A notices and reports also improve the quality of public disclosures. Although
the section 10A notices and reports are nonpublic, it is unlikely that registrants or auditors will
make public disclosures that are inconsistent with the nonpublic reports. Moreover, the reporting
requirements in section 10A give auditors additional leverage to prompt management to correct
illegal acts and make appropriate adjustments to their public financial statements.
3.

Consideration Given to Information Technology

Rule 10A-1 permits delivery to OCA of the notice or report required by section 10A in
any manner. The staff has provided guidance indicating that it prefers any notice submitted
pursuant to Rule 10A-1 be delivered by email to the address 10Aletters@sec.gov. 4
4.

Efforts to Identify Duplication

As noted above, the rule is based on the premise that the notices and reports under section
10A are to assist the Commission in performing its enforcement responsibilities. Similar
information may be included in subsequent public disclosures (e.g., under Item 4.01 or 4.02 of
Form 8-K).
The Commission’s public disclosure requirements existed before section 10A was
enacted. Congress adopted section 10A, in part, to expedite notice to the Commission of
information that subsequently would be included in the more deliberately crafted public
disclosures. This in turn facilitates more expeditious Commission investigations of registrants’
illegal acts. Thus, section 10A reports can be seen as not duplicative of public disclosure
requirements.
To the extent that section 10A reports are duplicative of later, public reports, it is
important to note that the information contained in confidential section 10A reports and notices
forms the basis for, and is consistent with, the information provided in the registrant’s later
public disclosures. Accordingly, any duplication should not result in significant additional
recordkeeping or reporting burdens on registrants.
5.

Effect on Small Entities

Rule 10A-1 impacts small entities in the same manner as other registrants. The rule,
however, requires the minimum amount of additional information that is necessary to implement
3

4

In this sense, the section 10A notices and reports differ from most other SEC forms and rules, the principal
purpose of which is to make information available to the securities markets. Whereas the SEC generally
uses very little of the collected information itself, which differs significantly from most other federal
information collections that are primarily for the use and benefit of the collecting agency, the section 10A
notices and reports are provided primarily for the benefit of the SEC and its enforcement function.
See Guidance on Submission of Notices to the Office of the Chief Accountant
(http://www.sec.gov/about/offices/oca/10a1notices.htm).

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the statutory reporting requirement. It would be difficult to further simplify, consolidate, or
adjust compliance standards and continue to fulfill the statutory purpose for section 10A notices
and reports. Such attempts would not yield significant, if any, resource savings for small
entities.
6.

Consequences of Less Frequent Collection

Not applicable.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

Rule 10A-1 provides that the section 10A notices and reports delivered to OCA are
deemed to be non-public to the same extent and for the same period of time as the Commission’s
investigative records used for law enforcement purposes. Such treatment does not impede
unnecessarily the sharing of this information with other law enforcement agencies in appropriate
circumstances.
8.

Consultations Outside the Agency

Prior to submission for OMB review, Rule 10A-1 was proposed for public comment.
[No comments were received on this request during the 60-day period prior to OMB’s review.]
The basic provisions in section 10A were included in several bills introduced in Congress
before their ultimate adoption as Title III to the Private Securities Litigation Reform Act of 1995.
Congressional hearings regarding these bills elicited information regarding the costs and benefits
of the reporting provisions in those bills, as well as the availability of the data, the time frame for
delivering the information to the Commission, and so forth. As noted above, the provisions and
procedures in Rule 10A-1 are considered to be the minimum necessary to implement the statute.
In addition, the Commission staff meets periodically with the staffs of the Financial
Accounting Standards Board, various committees of the American Institute of Certified Public
Accountants, and the Public Company Accounting Oversight Board to discuss matters of mutual
interest, including financial reporting matters. The Commission staff also periodically meets
with representatives of the public, including investors, registrants, auditors, and members of the
business community, to discuss, among other things, the Commission's reporting and disclosure
requirements.
9.

Payment or Gift to Respondents

Not applicable.

10.

Confidentiality

Rule 10A-1(c) provides that notices and reports furnished to OCA in accordance with
section 10A of the Exchange Act and Rule 10A-1 are non-public and exempt from disclosure
pursuant to the Freedom of Information Act to the same extent and for the same period of time

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that the Commission’s investigative records are non-public and exempt from disclosure under,
among other provisions, 5 U.S.C. 552(b)(7).
The basis for this treatment stems from the fact that the notices and reports are provided
to the Commission staff for law enforcement purposes and, accordingly, are treated the same as
any other document the Commission may receive during an enforcement investigation.
11.

Sensitive Questions

Not applicable.
12.

Burden of Information Collection

As noted above, the section 10A reporting requirements are applicable to each registrant
under the Exchange Act that receives a report from the auditor of its financial statements that (1)
there is an illegal act material to the registrant’s financial statements, (2) senior management and
the board have not taken timely and appropriate remedial action, and (3) the failure to take such
action is reasonably expected to warrant the auditor’s modification of the audit report or
resignation from the audit engagement. The report is filed by the registrant, or by the registrant’s
auditor if the registrant fails to fulfill its reporting obligation. Satisfaction of these conditions
precedent to the reporting requirement in section 10A historically has been rare. On average,
over the 22 years the reporting requirement has been in place, approximately five reports per
year have been filed.
When the reporting requirements in the statute are triggered, additional recordkeeping or
reporting burdens for registrants and auditors under Rule 10A-1 are de minimis. Costs to
registrants may include converting the information in the auditor’s report to the board of
directors into a notice that conforms to Rule 10A-1 and delivering that notice to OCA. Costs for
the auditor may include assuring that the report to the board of directors identifies the registrant
and delivering that report to OCA.
As a result of the high reporting threshold in section 10A, it is estimated that five notices
and reports will be filed in accordance with Rule 10A-1 each year. It also is estimated that no
registrant will provide such a notice, and that no auditor will deliver such a report regarding a
particular registrant, more than once. Due to the minimum information required by Rule 10A-1
beyond that mandated by the statute, and the limited time that registrants and auditors have under
section 10A to furnish their notices and reports to OCA, no more than one hour burden should
result from compliance with Rule 10A-1 for each response. It is estimated, therefore, that the
aggregate annual burden from compliance with Rule 10A-1 should be five hours.
13.

Costs to Respondents

Because the statute (not Rule 10A-1) requires performance of the procedures that
generate the information that is included in any notice or report provided to OCA, the fact that
the statute (not Rule 10A-1) requires the placement of that information into a written report (or
documentation of an oral report) by the auditor, the fact that the statute (not Rule 10A-1) requires
that the notices and reports are to be provided to the Commission, the respective statutory one

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day time periods for delivering the notices and reports to the Commission, and the minimal
additional information requirements imposed by Rule 10A-1, it results in neither registrants nor
auditors incurring any additional capital, start-up, operation, or maintenance costs.
14.

Cost to the Federal Government

Annualized cost to the federal government is negligible.
15.

Changes in Burden

Not applicable.
16.

Information Collections Planned for Statistical Purposes

Not applicable.
17.

Explanation as to Why the Expiration Date Will Not be Displayed

The Commission seeks approval not to display the expiration date for OMB approval of
the information collection. Because Rule 10A-1 implements the specific reporting requirements
in section 10A of the Exchange Act, the collection of information under Rule 10A-1 is a
continuous and permanent one, and assigning an expiration date would confuse registrants and
their auditors. It may mislead registrants or auditors into believing that the reporting requirement
mandated by the statute, rather than the procedures for providing that information to the
Commission as set forth in the rule, may expire.
Since the reporting requirement will be continuous and permanent, display of the
expiration date would be an inefficient use of agency resources given that the Commission would
have to reprint the General Rules and Regulations under the Securities Exchange Act of 1934
each time it receives reauthorization of the control number.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.
B.

Collection of Information Employing Statistical Methods
This collection does not involve statistical methods.