January 18, 2005

Deloitte Touche Tohmatsu
Mr. Charles A. Horstmann
1633 Broadway
New York, New York 10019-6754

Dear Mr. Horstmann:

The staff has reviewed your letter of January 14, 2005 concerning Deloitte Touche Tohmatsu’s (“DTT”) sale by its member firm Deloitte & Touche Espana (“D&T Spain”), DTT’s member firm in Spain, of their consulting business which has operated under the name GMS Management Solutions, S.L. since December 30, 2002 (referred to as “GMS”), to the former consulting partners of GSM. In your letter, you detail key terms of the transaction and conditions that DTT, including entities that have been considered part of DTT under Rule 2-01(f)(2) of Regulation S-X, have complied or will comply with in connection with the completion of the transaction. Your letter concludes that, based on its compliance with those terms and conditions, DTT should not be considered to have a “mutual or conflicting interest” or a “direct or material indirect business relationship” with, or a “direct financial interest or material indirect financial interest” in, any of its audit clients that are also clients of or enter into business relationships with or invest in GMS, or that are invested in by GMS or any departing GMS Partners or employees.

As you are aware, the Sarbanes-Oxley Act of 2002 (the “Act”) expressly prohibits any registered public accounting firm, or any associated person or entity of that firm, from providing certain non-audit services to its audit clients that are “issuers” as defined in the Act. The representations set forth in your letter indicate that DTT has already taken the following steps to divest GMS: (1) D&T Spain has transferred all of its interest in GMS in a private transaction to the GMS Partners and no GMS Partners now have or will receive or retain any equity interest in DTT or D&T Spain; (2) DTT has no corporate governance, or management role in GMS or direct or indirect financial ties with GMS (other than a transitional service arrangement); (3) GMS will not use any variant of the “Deloitte” name; (4) DTT does not and will not receive from GMS any royalty, interest, dividend or other payments, and there is no revenue or profit sharing between DTT and GMS; (5) DTT and GMS are under no obligation to refer clients to one another and there will be no referral fees or other forms of compensation to each other for referrals; (6) DTT and D&T Spain will not compete against GMS for certain services under a three year Non-Compete Agreement; (7) shared services between DTT and GMS are limited and transitional in nature and are for a period of no more than three years; and (8) GMS has no obligation to DTT in connection with any retirement obligation and DTT has no obligation to GMS Partners in connection with retirement benefits of former partners.

Assuming that the representations set forth in your letter are and continue to be accurate, and further assuming that DTT continues to comply with each of the terms and conditions set forth in your letter, the Office of the Chief Accountant (“OCA” or the “staff”) will not recommend an enforcement action asserting that DTT lacks independence as a result of non-audit services provided to DTT’s audit clients by GMS or its employees. Of course, DTT otherwise remains fully subject to the Commission’s independence requirements, as well as the provisions of the Act, with respect to matters not expressly covered by your letter and this response. OCA has taken this position based on the specific facts and circumstances represented in your letter. DTT will consent to any review deemed necessary by the staff, or an appropriate independent party designated by the Commission or the staff (such as the Public Company Accounting Oversight Board) to ascertain compliance. If the divestiture is found not to have satisfied the terms and conditions represented to the staff or if any of the remaining terms or conditions in your letter are not met, the staff’s position will be vitiated, and the staff may recommend an enforcement action. Further, OCA has taken this position based on its evaluation of the relevant policy considerations and does not thereby adopt or endorse the analysis or conclusions set forth in your letter. This response expresses OCA’s position only on these particular facts and circumstances and does not purport to express any legal conclusions on this or any other matter.

Sincerely,

Incoming Letter:

January 14, 2005

Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Deloitte & Touche España, S.L./GMS Management Solutions, S.L.

Dear Sirs:

We hereby request that the Staff of the Office of the Chief Accountant (the “Staff”) of the Securities and Exchange Commission (the “Commission” or “SEC”) advise that, based upon and subject to the matters referred to herein, it will not recommend that the Commission take enforcement action against Deloitte Touche Tohmatsu, a Swiss Verein (“DTT”), or its member firms, or its or their respective subsidiaries or any other firms conducting audit activities for SEC registrants under the name “Deloitte Touche Tohmatsu,” “Deloitte Touche,” “Tohmatsu” and other combinations or derivations thereof or otherwise as part of the Deloitte Touche Tohmatsu network of firms or “accounting firm”¹ (collectively, for the purposes of this letter only, “DTT”),² asserting that DTT is not “independent” based upon the attribution to DTT of the activities of the former consulting business of Deloitte & Touche España (“D&T Spain”), DTT’s member firm in Spain, which has operated under the name GMS Management Solutions, S.L. since December 30, 2002 (referred to in this letter as “GMS”). All consulting assets related with the transferred consulting business were transferred by D&T Spain to the partners of GMS (the “GMS Partners”) in December, 2002.

We believe that as a result of the aforementioned transaction, that DTT and GMS are already separate organizations. Under these circumstances, we believe the terms of this separation transaction for GMS, including the conditions proposed herein, serve as a basis for the staff to grant the relief requested.

Legal Analysis

The federal securities laws require that financial statements filed with the Commission by public companies, investment companies, broker-dealers, public utilities, investment advisers and others be certified (audited) by independent public accountants.³ The Commission has adopted Rule 2-01 of Regulation S-X regarding independence of accountants. The general standard set forth in Rule 2-01(b) provides that:

The Commission will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement.⁴

Rule 2-01(b) further provides that:

In determining whether an accountant is independent, the Commission will consider all relevant circumstances, including all relationships between the accountant and the audit client, and not just those relating to reports filed with the Commission.

The preliminary note to Rule 2-01 states that, in considering the standard set forth in Rule 2-01(b), the Commission looks to, among other criteria, whether the relationship or the provision of service “creates a mutual or conflicting interest between the accountant and the audit client.”⁵ Rule 2-01(c) applies the standards set forth in Rule 2-01(b) to particular circumstances that are considered to impair an accountant's independence.⁶ For example, Rule 2-01(c)(1) provides that an accountant will not be considered independent if “the accountant has a direct financial interest or a material indirect financial interest in the accountant’s audit client . . . .” In addition, Rule 2-01(c)(3) provides that:

An accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as the audit client’s officers, directors or substantial stockholders.

For purposes of Rule 2-01, “accounting firm” means “an organization . . . that is engaged in the practice of public accounting . . . and all of that organization’s departments, divisions, parents, subsidiaries, and associated entities, including those located outside the United States.” 17 C.F.R. 210.2-01(f)(2) (emphasis added). Although not expressly defined by rule, the Commission has stated that it intends the phrase “associated entity” to:

reflect our staff’s current practice of addressing these questions in light of all relevant facts and circumstances, looking to the factors identified in our staff’s previous guidance on this subject. While the rules we adopt do not provide accounting firms with the certainty of our proposed rule, we are convinced that a more flexible approach is warranted as the types and nature of accounting firms’ business arrangements continue to develop.

Revision of the Commission’s Auditor Independence Requirements, 65 Fed. Reg. 76008, 76059 (Dec. 5, 2000) (footnote omitted). As part of this guidance, the Commission also cited numerous prior no-action letters that had been issued to address the separation of consulting businesses from accounting firms. Id. at 76059, n.491 (citing various no-action letters). In the prior no-action letters, the Staff has examined whether the firms are associated entities by considering such factors as whether (1) the accounting firm has any ownership interest in the consulting firm; (2) there are restrictions on the use of the accounting firm’s name by the consulting firm; (3) the firms’ corporate governance structures are separate; (4) there is any revenue sharing between the firms; (5) there are any joint marketing agreements between the firms; and (6) there will be any on-going shared services between the firms.

On July 30, 2002, the Sarbanes-Oxley Act of 2002 (‘‘Sarbanes-Oxley Act’’ or “the Act”) became law. Title II of the Sarbanes-Oxley Act, entitled “Auditor Independence,” required the Commission to issue final rules by January 26, 2003, final rules under which certain non-audit services will be prohibited, conflict of interest standards will be strengthened, auditor partner rotation and second partner review requirements will be strengthened, and the relationship between the independent auditor and the audit committee will be clarified and enhanced. However, Congress left the definitions of “accounting firm” and “associated entity” untouched. In its final rulemaking to incorporate Title II of the Sarbanes-Oxley Act into the SEC’s rules and regulations, the SEC also did not amend or modify its definitions of “accounting firm” or “associated entity.” See 68 Fed. Reg. 6006 (Feb. 5, 2003). Consequently, Rule 2-01 continues to direct firms to refer to the staff’s practice of addressing these questions in light of all relevant facts and circumstances, looking to the factors identified in the staff’s previous guidance on this subject.

The Commission’s interpretations of Rule 2-01 also are collected in Section 600 of the Codification of Financial Reporting Policies (the “Codification”), entitled “Matters Relating to Independent Accountants.”⁷ Section 602.02.e of the Codification addresses business relationships—such as joint ventures, limited partnership agreements, and investments—that may impair an auditor’s independence. That section provides, in part, that:

Direct and material indirect business relationships . . . with a client . . . will adversely affect the accountant's independence with respect to that client. Such a mutuality or identity of interests with the client would cause the accountant to lose the appearance of objectivity and impartiality in the performance of his audit because the advancement of his interest would, to some extent, be dependent upon the client.

DTT desires to obtain assurance that, following the transaction described below, to the extent that GMS or any partner or employee of GMS provides services for, enters into business relationships with, or invests in or accepts investments from DTT audit clients, DTT’s independence will not be deemed impaired pursuant to Rule 2-01⁸ or rules that are promulgated thereunder or any other provisions of the Commission’s independence rules.

DTT believes that under the conditions detailed in this letter, GMS would not be considered an associated entity of DTT under the terms and conditions governing this Transaction (as defined below), and that DTT would not have a “mutuality of interest” or a “direct or material indirect business relationship” with, or a “direct financial interest or material indirect financial interest” in any of its audit clients as a result of the activities of GMS, its partners, and employees (which activities include, without limitation, providing services to, entering into business relationships with, and making or receiving investments in or from third parties). This conclusion is based on the conditions detailed in this letter, which will, among other things: (1) prohibit any retained equity interest in GMS by D&T Spain or any other entity included in the definition of DTT; (2) impose limitations on the use of the DTT names by GMS; (3) require a strict separation of the corporate governance, management, and financial structures and interests between all entities included in the definition of DTT and GMS; (4) prohibit any revenue or profit sharing between any entity included in the definition of DTT and GMS; (5) prohibit any joint marketing between DTT and GMS; and (6) limit any services between DTT and GMS to those that are transitional in nature.

Factual Background

In December 2002, D&T Spain initiated a restructuring process, whereby it was agreed that ownership of the D&T Spain’s consulting business would be transferred in its entirety to the GMS Partners. As a result of this restructuring process, as detailed further in the D&T Spain/GMS Separation Agreement (the “Separation Agreement”), neither DTT nor D&T Spain holds any equity interest in GMS whatsoever. In addition, neither GMS nor any GMS Partner owns any equity interest in DTT or D&T Spain.

The above described restructuring process, the necessary share transfers, withdrawals and related agreements, together with the Conditions to No-Action Confirmation listed below are referred to collectively as the “Transaction.” 

Other key terms of the Transaction are:

1. D&T Spain agreed not to compete with GMS (the “Non-Compete”), which prohibits D&T Spain from competing against GMS for certain services for a period of 3 years. DTT will effectively be bound by the Non-Compete provision.
    
2. Since the completion of the Transaction, there has been, and there will continue to be no corporate governance, management or direct or indirect financial ties between any entity included in the definition of DTT and GMS (other than payments relating to the Transaction and the transition services arrangement described below).

Conditions to No-Action Confirmation

DTT requests that, subject to compliance with the following conditions, the Staff not recommend enforcement action to the Commission based upon the attribution to DTT of the activities of GMS following completion of the Transaction:

1. As a consequence of the Transaction, neither DTT nor any DTT partner now has or will receive or retain any equity interest in GMS, and neither GMS nor any GMS Partner now has or will receive or retain any equity interest in DTT or D&T Spain.
    
2. As part of the restructuring process, the consulting business has been renamed GMS, and D&T Spain and GMS have agreed that GMS will not use any variant of the “Deloitte” name (e.g., “Deloitte Touche Tohmatsu”).⁹
    
3. DTT and GMS have maintained and will maintain separate corporate governance, management, and financial structures and interests including: separate boards of directors (including no contractual right of DTT to representation on the board of directors or governing body of GMS), executives, employees, capital, credit lines or facilities, client bases, governing documents, operating policies, financial operations and financial and accounting policies. DTT and GMS do not and will not exert financial or other influence over the other party’s corporate governance, management, and financial structures or interests (except that D&T Spain has limited protective rights with respect to the sale of GMS to certain accounting firms).
    
4. DTT does not and will not (other than with respect to services specified in the last sentence of this paragraph 4) accrue, pay to or receive from GMS any royalty, interest, dividend or other payment, whether or not tied to the performance of GMS Accordingly, DTT and GMS will not share profits or revenues from consulting or any other engagements or agreements. After the Transaction, and prior to the date that GMS ceases to occupy shared lease space (as described in paragraph 7 below), DTT and GMS have not entered and will not enter into any prime/subcontractor relationship to provide professional services to the same client, except that existing prime/subcontractor relationships may be completed in accordance with their existing terms; however, in no event will Deloitte be able to provide prohibited services under these relationships and all other relationships will not extend beyond 18 months following issuance of the SEC’s no-action letter.
    
5. DTT and GMS may, but will be under no obligation to, refer clients to one another. DTT will not designate GMS as a preferred provider of services, and DTT and GMS may not pay referral fees or other compensation to each other for referrals to each other nor to any subsidiary, affiliate, employee, or agent of the other. DTT and GMS have not and may not enter into any co- or joint-marketing, advertising or similar agreements or arrangements with the other that are inconsistent with this paragraph 5 or paragraphs 2 or 4 or that do not clearly state that DTT and GMS are separate firms.
    
6. Subject to the Non-Compete referred to in paragraph 9 below, DTT may continue to provide services to clients of GMS under separate engagements with such clients and GMS may continue to provide services to clients of DTT under separate engagements between GMS and such clients.
    
7. DTT and GMS have entered into a transition services agreement (the “TSA”) for certain infrastructure and information services, operations services and other services as specified in the TSA. DTT and GMS may grant each other limited, royalty-free licenses to use certain intellectual property to facilitate the provision of transition services. Neither DTT nor GMS will make a profit on services provided to the other under the TSA. The services provided by DTT and GMS to each other under any TSA will be provided for varying terms, not to exceed three years from the completion of the Transaction. DTT also may receive certain transition services from GMS for limited transition periods following the effective date of the Transaction.
    
   In certain cases, DTT and GMS entered into sublease or license arrangements for shared office space. Under these arrangements, GMS or DTT, as applicable, pay its proportionate share of the cost of such space based on the total square footage of each facility used by or allocated to GMS or DTT, as applicable, under the terms of such subleases or licenses and, with respect to related services and capital costs, under the terms of the TSAs. The sublease or license arrangements for each space do not extend beyond the term of the lease held by DTT or GMS, as applicable. With respect to new leases for office space, DTT and GMS individually will enter directly into such leases with a landlord and will not enter into new subleases with each other for office space after the expiration of the leases currently held by DTT or GMS. Until such relocations are made, DTT and GMS will have separate and distinct office signage and their offices will be clearly distinguishable from one another although they may share certain common facilities.
    
8. DTT will consent to any necessary reviews by the Staff or an appropriate independent party designated by the Commission or the Staff (such as the Public Company Accounting Oversight Board) to ascertain that DTT is complying with the conditions herein provided.
    
9. DTT is bound by the Non-Compete that will extend for a period of three years from the completion of the Transaction. Notwithstanding the previous sentence, DTT may, after expiration of the Non-Compete, provide services otherwise restricted under the Non-Compete, including providing such services to audit clients that file reports with the SEC to the extent permitted by the SEC independence requirements and professional standards at such time.
    
10. GMS has and will have no obligations to DTT in connection with any retirement benefits to continuing or former partners or employees of DTT. DTT has and will have no obligations to GMS in connection with any retirement benefits to continuing or former partners or employees of GMS.
     
11. In accordance with the terms set forth in this letter, on the date that DTT and GMS no longer share lease space, DTT and GMS will be free to contract and enter into business relationships with one another as would any other independent entities.

Certain Confirmations

In connection with its request herein, each of DTT and GMS, insofar as each item below relates to it, hereby confirms to the Staff that:

1. DTT (including those firms that have not consummated their separation transactions at the time of the Transaction) continues to be subject to the independence requirements of the securities laws and the SEC’s independence rules and interpretations issued thereunder to the same extent as they were so subject prior to the closing date of the Transaction.
    
2. DTT agrees to the above conditions and has furnished a copy of this letter (and will forward any no-action letter on this subject) to GMS. GMS will expressly acknowledge that it has been furnished a copy of this letter. DTT further represents to the Staff that it is not aware of any provisions of the agreements described herein or any agreement or instrument referred to therein that is inconsistent with this request.
    
3. DTT has furnished the Staff with a copy of the final Agreements (including without limitation the schedules, exhibits and annexes thereto) and hereby represents to the Staff that the final executed versions of such documents do not differ in any respect material to the matters referred to in this letter from the versions so furnished.

Confirmation Requested

Based upon the representations contained herein and in the materials provided herewith, and subject to compliance with the foregoing conditions, we hereby request that the Staff advise that the Office of the Chief Accountant will not assert or recommend enforcement action that assets that DTT’s independence has been impaired to the extent GMS or any of its partners or employees provides services for, enters into business relationships with, or invests in or accepts investments from DTT audit clients. We fully understand that if the Staff takes a no-action position, that position will be based on the representations and undertakings set forth in this letter and continued compliance with the material terms of the related executory contracts. We further understand that failure to comply with any of these conditions would invalidate the relief granted by the Staff in response to this request as of the date the Staff’s relief was communicated to DTT.

Certain matters described above have not yet been publicly announced. Accordingly, pursuant to 17 C.F.R. § 200.81(b), we hereby request confidential treatment of the contents of our communications with the Staff with respect to all issues relating to this letter (the “Confidential Material”) until a date 120 days after release of your response to us, or such earlier date as the Staff is advised by us that all of the information contained in the Confidential Material has been made public. However, when the Staff determines to grant the no-action relief requested herein, we understand and agree that the letter itself and the text of your response to the letter may be made public immediately. In addition to this request for confidential treatment, we will request, under separate cover, confidential treatment for the transaction documentation and the other materials furnished to you in connection with this letter pursuant to the provisions of 17 C.F.R. § 200.83.

* * *

If for any reason you do not concur with the views expressed in this letter, we respectfully request an opportunity to discuss this matter with the Staff prior to any written response to our letter. If you have any questions or need any additional information concerning the foregoing, please do not hesitate to call Scott Bayless of Deloitte & Touche SEC Services at 202-879-5315, or Douglas R. Cox of Gibson, Dunn & Crutcher LLP at 202-887-3531.

cc: W. Scott Bayless – Deloitte & Touche LLP
Douglas R. Cox – Gibson, Dunn & Crutcher LLP

¹ As such term is defined pursuant to Rule 2-01(f)(2) of Regulation S-X.

² Or any other entity that would be subject to the Commission’s independence rules as defined in Rule 2-01(f)(2) of Regulation S-X.

³ See, e.g., 15 U.S.C. §§ 77aa(25), (26), 15 U.S.C. §§ 78l, 78q, and 78m, 15 U.S.C. §§ 79e(b), 79j, 79n, 15 U.S.C. §§ 80a-8, 80a-29, 15 U.S.C. §§ 80b-3(c)(1).

⁴ 17 C.F.R. § 210.2-01(b). Under Rule 2-01, the term “accountant” includes “any accounting firm with which the certified public accountant or public accountant is affiliated.” Id. § 210.2-01(f).

⁵ Id. § 2.10.2-01 (para. 2 of Preliminary Note).

⁶ See id.

⁷ Codification of Financial Reporting Policies, Section 600-Matters Relating to Independent Accountants, reprinted in Fed. Sec. L. Rep. (CCH) ¶ 73,251, et seq.

⁸ Rule 2-01(f)(6) of Regulation S-X.

⁹ The parties believe that under the relevant precedents set forth in note 3 above, GMS would be entitled to use a variant of the “Deloitte” name and logo for a limited transitional period, but have determined that such an arrangement is not necessary.

http://www.sec.gov/info/accountants/staffletters/dtt011805.htm