Board Funding - Final Rules for Allocation of the Board's Accounting Support Fee among Issuers, Brokers, and Dealers, and Other Amendments to the Board's Funding Rules 

DATE: June 14, 2011 
SPEAKER: Daniel L. Goelzer, Board Member
EVENT: PCAOB Open Board Meeting 
LOCATION: Washington, DC

The funding rules that are before the Board create a framework for obtaining the resources to support the Board's new responsibilities to oversee the auditors of securities brokers and dealers. The rules will also raise the threshold so that public companies with market capitalizations below $75 million will no longer pay PCAOB fees. In both cases, the result is that the largest public companies and brokerages — that is, those whose financial reporting has the greatest potential impact on the investing public — will bear the lion's share of Board costs.

When Congress created the PCAOB in 2002, it charged the Board with oversight of the auditors of all U.S. public companies and provided that the Board's work would be funded by those public companies, in proportion to each issuer's market capitalization. Last summer, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress expanded the Board's responsibilities to include the auditors of all SEC-registered brokers and dealers. Building on the 2002 self-funding approach, Dodd-Frank requires broker-dealers to contribute to Board funding in proportion to net capital.

Broker-dealer net capital is highly concentrated. Of the 4,656 brokers that are FINRA members, or for which FINRA is the examining or financial review authority, less than one percent — just 33 firms — hold 80 percent of all broker-dealer tentative net capital. The great majority of brokerage firms are small. In fact, under any allocation methodology, several thousand broker-dealers would pay nothing simply because of the Board's practice of rounding fee allocations to the nearest $100.

The new funding rules provide that only broker-dealers with tentative net capital in excess of $5 million will pay a share of the Board's accounting support fee. About 640 firms — round 14 percent — exceed the $5 million threshold. Last year, the Board estimated that about 7.1 percent of its 2011 budget, or about $14.4 million, will be devoted to the oversight of broker-dealer auditors. As a result, in 2011, brokerage firm support fees are estimated to range from a low of $400 to a high of $1.1 million per firm. About 100 of the 640 firms will pay $500 or less, while three will pay over $1 million.

The Board has the authority to exempt the auditors of classes of broker-dealers from Board oversight. As we already have discussed today, the Board will make decisions on any exemptions after it has gathered more information through its interim inspection program. However, in my view, few, if any, of the larger broker-dealers that will be paying the support fee are likely to find that their auditors will ultimately be exempt from PCAOB oversight.

The staff has also recommended changes to the rules related to public company support fees. The aspect of those revisions that will have the greatest practical effect is the proposed increase in the market capitalization threshold. Currently, all public companies with market capitalizations of at least $25 million must contribute to funding the Board's issuer auditor oversight work. That threshold will now increase to $75 million. As a result, approximately 1,100 issuers — about 23 percent of all equity issuers that are currently assessed — will no longer be subject to the support fee. Granting this relief to these smaller public companies will have only a negligible impact on larger issuers, since public companies with market capitalizations below $75 million currently pay only about 0.4 percent of the Board's total accounting support fee.

The rule revisions would also increase the market capitalization, or net asset value, threshold from $250 million to $500 million for investment companies. That change eliminates the fee allocation for about 1,480 mutual funds — roughly 33 percent of all investment companies that are currently assessed.

The broker-dealer funding rules, and the changes to the public company funding rules implement Congress's objective of requiring public companies and broker-dealers to provide the resources for Board oversight of their auditors. The rules will accomplish that goal without burdening smaller public companies, smaller broker-dealers, and smaller investment companies. I support the funding rule changes.

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These amendments were a joint effort of the Office of the General Counsel and the Office of Finance. I want to thank Bob Burns, Associate General Counsel, Nina Mojiri-Azad, Assistant General Counsel, and Annie Braswell, Manager of Accounting, for their work on this project.

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