This is the first in our 2024 Year in Preview series examining important trends in white collar law and investigations in the coming year. We will be posting further installments in the series throughout the next several weeks.
Last week the Supreme Court heard arguments over whether federal courts should continue to apply Chevron deference to federal agency rulemaking. While the fate of Chevron is unknown, one thing (as our colleague Beth Neitzel has noted) seems clear - federal agencies will face an increasingly uphill battle in defending rules that lack an express statutory basis. Enter the Public Company Accounting Oversight Board (the "PCAOB" or the "Board"), which has recently proposed a revision to its Rules that would significantly expand the reach of its enforcement power for contributory (or secondary) liability'i.e., where an accountant's actions do not themselves amount to a violation of the applicable securities laws, rules or professional standards, but contribute to the violation of an associated accounting firm. The PCAOB's current rule creates liability for those who recklessly or knowingly contribute to a firm's violation. The new proposal would expand that liability to those that act with negligence. However, an analysis of the relevant statutory language and existing common law suggests that not only is this proposed expansion contrary to fundamental principles of secondary liability, but also that the PCAOB may lack congressional authority to pursue any contributory liability cases, regardless of the required mental state. Given the judiciary's increasing hostility towards expansive administrative rulemaking, if passed and approved by the Securities and Exchange Commission ("SEC"), the PCAOB's proposed rule will likely face withering judicial skepticism.
As part of a proposed amendment to PCAOB Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations, the Board seeks to expand the scope of potential contributory liability by reducing the requisite mental state from recklessness to negligence. PCAOB Release No. 2023-007 (September 19, 2023). Current Rule 3502 provides that a "person associated with a registered public accounting firm shall not take or omit to take an action knowing, or recklessly not knowing, that the act or omission would directly and substantially contribute to a violation by that registered public accounting firm" of applicable provisions of the securities laws and regulations, as well as PCAOB Rules and professional standards. (emphasis added). If adopted, the proposed rule would remove the "knowing, or recklessly not knowing" standard and replace it with a negligence standard, creating secondary liability...
