## Facts

- The SEC instituted administrative proceedings against KPMG under Exchange Act § 21C and SEC Rule of Practice 102(e), alleging auditor-independence failures and related reporting violations.
- KPMG formed a consulting arrangement with BayMark in 1995 that included (1) licensing the “KPMG” name, (2) $100,000 loans to four BayMark principals, and (3) a 5% interest in BayMark’s net income, giving KPMG an ongoing financial interest in BayMark.
- The SEC’s Chief Accountant cautioned KPMG that the relationship raised independence concerns if KPMG audited BayMark’s clients.
- A KPMG engagement partner introduced BayMark to PORTA, an existing KPMG audit client; PORTA hired a BayMark principal as its COO, and BayMark’s compensation included a success fee tied to PORTA’s performance.
- KPMG discussed internally whether the BayMark–PORTA relationship impaired independence under applicable standards.
- KPMG and the SEC’s Chief Accountant discussed steps to cure independence concerns (ending name use, repaying loans, terminating the licensing-fee arrangement), but the SEC was not told about the success-fee component.
- KPMG did not fully implement the cure steps before certifying PORTA’s 1995 financial statements, and a senior KPMG official misrepresented the SEC’s awareness to continue the audit.
- The SEC found KPMG was not independent due to its continuing BayMark financial interest and a loan to a BayMark principal who became a PORTA officer, and concluded KPMG caused PORTA’s reporting violations when it certified the annual report.
- The SEC issued a cease-and-desist order and relied in part on an interpretation of AICPA Rule 302 (contingent fees) to find additional misconduct.

## Issues

1. Whether Exchange Act § 21C authorizes the SEC to issue a cease-and-desist order against an accountant who “causes” violations of § 13(a) and Rule 13a-1, and whether negligence suffices.
2. Whether due process required fair notice before the SEC could sanction KPMG based on the SEC’s interpretation of AICPA Rule 302.
3. Whether the SEC adequately found a likelihood of future violations to support a cease-and-desist order under § 21C.
4. Whether challenges to the order’s breadth or vagueness were forfeited by failing to raise them in the administrative proceeding.

## Decision

- The court denied KPMG’s petition for review and left the SEC’s cease-and-desist order in effect.
- The court held the SEC could proceed under § 21C against a person who causes reporting violations and could apply a negligence standard.
- The court held KPMG lacked fair notice of the SEC’s interpretation of AICPA Rule 302 and that this interpretation could not support sanctioning KPMG.
- The court concluded any deficiency or ambiguity in the SEC’s explanation of future-risk findings was harmless on this record because the SEC would reach the same result.
- The court held several objections to the order’s scope were waived because they were not raised before the SEC.

## Legal Principles

- Exchange Act § 21C permits the SEC to issue cease-and-desist orders against “any person” who is causing, has caused, or will cause violations of the securities laws or SEC rules.
- Scienter is not required for § 21C relief when the underlying violation (such as § 13(a) and Rule 13a-1) can be established on negligence; the SEC may impose remedial relief based on a failure to exercise ordinary care.
- Due process bars sanctions based on an agency’s novel interpretation of a professional-conduct rule when regulated parties lacked fair notice that the conduct would be treated as unlawful.
- A § 21C cease-and-desist order requires a sufficient basis to infer a risk of future violations; where the record strongly supports that inference, remand may be unnecessary despite imperfections in the agency’s articulation.
- Appellate review is limited to objections preserved in the administrative process; arguments not presented to the agency may be forfeited.

## Conclusion

The D.C. Circuit upheld the SEC’s use of Exchange Act § 21C to impose a cease-and-desist order on KPMG for negligently causing issuer reporting violations through impaired auditor independence, while rejecting sanctions grounded on an interpretation of AICPA Rule 302 that KPMG lacked fair notice of, and finding additional challenges either harmless or waived.


KPMG, LLP v. SEC, 289 F.3d 109 (D.C. Cir. 2002)