CURRENT MONTH (May 2025)
PCAOB Reports on 2024 Audit Committee Conversations
By Thomas W. White, Retired Partner, WilmerHale
The Public Company Accounting Oversight Board (“PCAOB”) has issued its annual “spotlight” report setting forth observations and takeaways from staff conversations with 272 audit committee chairs in 2024. (Notably, according to the PCAOB, 78 percent of these audit committee chairs had not previously spoken with the PCAOB as part of its outreach process.) The report describes topics that audit committee chairs spend the most time discussing with their auditors. These matters and key points include:
- Factors Affecting Relationships with the Audit Firm. Audit committee chairs described key factors that are vital to maintaining good working relationships with the firms. These included transparent two-way communication; coordination between the auditor, management and the audit committee; and technical expertise and experience of the audit team.
- Firm Inspection Reports. Most of the audit committee chairs interviewed review the PCAOB’s inspection report of their auditor and other information on the PCAOB website when deciding whether to reappoint the auditor.
- Economic Environment Affecting the Audit. Many audit committee chairs noted that they had discussions with their auditors regarding both economic and geopolitical considerations, including elevated interest rates; increased fraud and technology risks; supply chain disruptions; inflation; and geopolitical considerations. The substance of the discussions largely concerned the risks that these matters presented in the audit and how the audit team was planning to address them.
- Auditing and Accounting. Approximately 63 percent of audit committees had additional discussions, beyond the required communications, with their auditors related to the application to the audit and their financial statements of existing auditing or accounting standards. Audit committees shared that critical audit matters (“CAMs”) were actively discussed during audit committee meetings. Several audit committee chairs criticized the length of CAMs (wanting them to be briefer), the readability of CAMs, and “boilerplate language” that was not specifically tailored to their company.
- The Use of Emerging Technologies in the Audit. The expanded use of technology, including artificial intelligence, was a frequent point of discussion between audit committees and their auditors. Audit committee chairs noted that while the use of technology has the potential to enhance the performance of audit procedures, it cannot replace the need for human oversight. Chairs were concerned that overreliance on technology and automation may result in auditors becoming complacent and not exercising adequate professional judgment and skepticism. At the same time, many chairs wanted to see an increased use of automation and analytics in the audit process to enhance the efficiency and effectiveness of the audit and asked whether this would reduce fees.
The PCAOB also provided responses to frequently asked questions by audit committee chairs. These questions were: 1) How are audits selected for review? 2) What does an inspection entail? 3) Can the PCAOB share inspection results during the calls with audit committee chairs? 4) How do comment forms increase audit quality? 5) Does the PCAOB have educational training or events for audit committee members?
House Passes Legislation to Transfer PCAOB Functions to SEC
By Thomas W. White, Retired Partner, WilmerHale
The House of Representatives has passed a bill that would effectively abolish the Public Company Accounting Oversight Board. The tax-and-spending bill called the “One Big Beautiful Bill Act,” which cleared the House on May 22, would transfer all of the duties and powers of the PCAOB to the Securities and Exchange Commission. (See pages 440–443 of the text of the bill linked here.) The bill would eliminate the annual accounting support fees assessed on public companies and broker-dealers to fund the PCAOB’s operations. The transfer would become effective on a date established by the SEC that is within one year of the date of enactment of the bill.
The bill provides that “existing processes and regulations of the Board, including existing Board auditing standards, shall continue in effect unless modified through rule making by the Commission.” It also provides that employees of the Board as of the date of enactment may be offered employment by the SEC, but at compensation levels “not higher than the highest paid employee of similarly situated employees of the Commission.” (PCAOB employees are not currently subject to federal employee compensation schedules.) The bill also provides that pending enforcement and disciplinary actions will be referred to the SEC or other regulators.
The House legislation must also pass the Senate and be signed by the president before it would become law.
SEC Staff Issues FAQs on Crypto Asset Activities and Distributed Ledger Technology
By Karen Liu, Reid & Wise LLC
On May 15, 2025, the staff of the Division of Trading and Markets (“Staff”) under the U.S. Securities and Exchange Commission ( “SEC”) released the Frequently Asked Questions Relating to Crypto Asset Activities and Distributed Ledger Technology (“FAQs”). On the same day, the Staff withdrew its 2019 joint statement with the Financial Industry Regulatory Authority, Inc. (“FINRA”) regarding broker-dealer custody of digital asset securities, effective immediately.
The FAQs addressed the Staff’s views about whether and how certain broker-dealer financial responsibility rules and transfer agent rules apply to crypto assets and distributed ledger technology. According to footnote 1 of the FAQs, for purposes of the FAQs, the term “crypto asset” means “an asset that is generated, issued, and/or transferred using a blockchain or similar distributed ledger technology network, including, but not limited to, assets known as ‘tokens,’ ‘digital assets,’ ‘virtual currencies,’ and ‘coins,’ and that relies on cryptographic protocols.” Some FAQs relate to crypto asset securities, while some other FAQs relate to non-security crypto assets. The FAQs contain ten questions and answers.
With respect to the applications of certain broker-dealer financial responsibility rules, the FAQs made the following clarifications:
- Paragraph (b) of Exchange Act Rule 15c3-3 does not apply to crypto assets that are not securities, but applies only to securities carried by a broker-dealer for the account of customers or for a proprietary securities account of another broker or dealer, known as a “PAB account.” (See FAQ 1.)
- The Staff will not object if crypto asset securities are not in certificated form when held at an otherwise qualifying control location under paragraph (c) of Exchange Act Rule 15c3-3. (See FAQ 2.)
- Broker-dealers carrying crypto asset securities for a customer or PAB account may establish control under paragraph (c) of Exchange Act Rule 15c3-3. The SEC’s 2020 statement “Custody of Digital Asset Securities by Special Purpose Broker-Dealers” (“SPBD Statement”) is merely a temporary “safe harbor” and is not mandatory for broker-dealers seeking to custody crypto assets securities. (See FAQ 3.)
- Broker-dealer custody and capital requirements do not prohibit broker-dealers from facilitating in-kind creations and redemptions in connection with a spot crypto exchange-traded product (“ETP”), but broker-dealers taking proprietary positions in the assets underlying an ETP would need to account for those assets as part of their net capital calculations. In addition, it is okay for a broker-dealer to treat a proprietary position in bitcoin or ether as being readily marketable for purposes of determining whether the 20 percent haircut applicable to commodities under Appendix B of Rule 15c3-1 applies. (See FAQ 4.)
- Crypto assets that are investment contracts treated as securities are not protected by Securities Investor Protection Corporation (“SIPC”) if they are not the subject of a registration statement filed under the Securities Act of 1933. (See FAQ 5.)
- Because SIPC protection generally extends to customer claims for “securities,” SIPC does not protect customer claims for non-security crypto assets when held for the customer by a SIPC member broker-dealer. (See FAQ 6.)
- With respect to customers’ non-security crypto assets, a broker-dealer may agree with its customers that such non-security crypto assets custodied by the broker-dealer for the customers for purposes of Article 8 of the Uniform Commercial Code (“UCC”) be treated as “financial assets” and carried in a “securities account” (as those terms are defined thereunder), thereby preventing such non-security crypto assets from becoming part of the broker-dealer’s estate if the broker-dealer is placed in a liquidation under the Securities Investor Protection Act of 1970 or the Bankruptcy Code. (See FAQ 7.)
- A broker-dealer that conducts a non-security crypto asset business could make and keep the same records for its non-security crypto activities as it does for its securities activities, which may help ensure adequate records are made and preserved. (See FAQ 8.)
With respect to the applications of certain transfer agent rules, the FAQs highlighted the Staff’s following views:
- A person providing services for an issuer of a crypto asset security would be required to register with the SEC as a transfer agent if (i) such crypto asset security is a security that is registered under Section 12 of the Exchange Act or which would be required to be registered except for the exemption from registration provided by Section 12(g)(2)(B) or Section 12(g)(2)(G) of the Exchange Act, and (ii) such services qualify as any of five activities enumerated in Section 3(a)(25) of the Exchange Act. (See FAQ 9.)
- A registered transfer agent is allowed to utilize distributed ledger technology as its official “Master Securityholder File” (as defined under Exchange Act Rule 17Ad-9(b)), provided that the transfer agent complies with all other applicable requirements under the federal securities laws. (See FAQ 10.)
The FAQs demonstrate the SEC’s fit-for-purpose approach for market participants. Although, like all other staff statements, the FAQs are not an SEC rule or regulation and have no legal force or effect, they provide significant guidance to broker-dealers and transfer agents regarding the applications of certain SEC rules to crypto. Apparently, the FAQs did not address all regulatory uncertainties around crypto. As described by Commissioner Hester M. Peirce in her statement on these FAQs, the FAQs are “an incremental step along the journey.” Market participants may expect more clarifications from the Staff and the SEC. According to SEC Chairman Paul S. Atkins in his Keynote Address at the Crypto Task Force Roundtable on Tokenization on May 12, 2025, issuance, custody and trading will be three areas of the SEC’s focus for crypto asset policy.
