SEC Adopts Amendments to Auditor Independence Rules

The SEC has adopted a final rule, Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships. This rule includes amendments to the SEC’s auditor independence rules to refocus the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client at any time during an audit or professional engagement period.

Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Provision”) generally provides that an auditor is not independent if that auditor is in a lending relationship with its audit client. In recent years, the SEC has become aware that, in certain circumstances, the existing Loan Provision may not have been functioning as it was intended. Among other things, the amendments:

  • Focus the analysis on beneficial ownership rather than on both record and beneficial ownership;
  • Replace the existing 10 percent bright-line shareholder ownership test with a “significant influence” test;
  • Add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the audit client’s equity securities; and
  • Exclude from the definition of “audit client,” for a fund under audit, any other funds, that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

According to the SEC, the amendments “will more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality, as opposed to certain more attenuated relationships that are unlikely to pose such threats, and thus will focus the analysis on those borrowing relationships that are important to investors.”

The amendments are effective 90 days from publication in the Federal Register.

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