Regulation S-X – Rule 2-01
Your letter dated June 20, 2016 requests our assurance that we would not recommend enforcement action to the U.S. Securities and Exchange Commission (the “Commission”) against an entity within an “investment company complex” (as defined in Rule 2-01(f)(14) of Regulation S-X) of which the Fidelity Funds, as defined below, are a part (a “Fidelity Entity”) if that Fidelity Entity continues to fulfill its regulatory requirements under the federal securities laws by using the audit services performed by a public accounting firm registered with the PCAOB, as defined below (the “Audit Firm”), where that Audit Firm has relationships that would cause non-compliance with Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Provision”), so long as: (1) the Audit Firm has complied with Rule 3526(b)(1) and (2) of the Public Company Accounting Oversight Board (“PCAOB”), or, with respect to any Fidelity Entity to which Rule 3526 does not apply, has provided substantially equivalent communications; (2) the non-compliance of the Audit Firm is with respect to certain specific lending and ownership relationships as described below; and (3) notwithstanding such non-compliance, the Audit Firm has concluded that it is objective and impartial with respect to the issues encompassed within its engagement.
You state the following:
Fidelity Management & Research Company (“FMR”) or an affiliate sponsors open-end registered investment companies (“Fidelity Funds”), including a number of exchange-traded funds (“Fidelity ETFs”). The federal securities laws require the Fidelity Funds to transmit annually to shareholders and file with the Commission financial statements audited by an independent registered public accounting firm. In addition, certain Fidelity Entities that are not Fidelity Funds engage independent public accounting firms to audit their financial statements and for a number of other reasons, including to satisfy the conditions of Rule 206(4)-2 under the Investment Advisers Act of 1940, as amended, or pursuant to other applicable federal securities laws. The financial statements of each Fidelity Entity to which these requirements apply are audited by Audit Firms.
Prior to engaging the Audit Firms, and annually during their audit engagement, the Audit Committee of the Board of Trustees of each Fidelity Fund (each an “Audit Committee”) received from the relevant Audit Firm written communications in which the Audit Firm affirmed its independence under the relevant PCAOB and Commission independence standards.
An Audit Firm recently advised the Fidelity Funds that, while the Audit Firm believes it is capable of exercising objective and impartial judgment with respect to such Fidelity Funds, it does not qualify as independent under Rule 2‑01 of Regulation S-X because it may not be in compliance with the Loan Provision as a result of certain lending and ownership relationships and underlying facts that, in the view of the Audit Firm, do not influence the audits or the objectivity and impartiality of the Audit Firm’s judgment on issues encompassed within its engagement. Those responsible for the oversight of the Fidelity Funds have not reached a different conclusion with respect to the Audit Firm’s objectivity and impartiality.
Shares of the Fidelity Entities may be held by a wide range of institutions and other entities either beneficially or as record owners for the benefit of their clients or customers. From time to time, some of these institutions, which may also be lenders to registered public accounting firms or their personnel, may hold more than ten percent of a Fidelity Entity’s equity securities beneficially or of record. In many circumstances, the institutions will not have the authority to vote these shares or will not be a lender to the relevant Fidelity Entity’s Audit Firm. In addition, as the Fidelity Funds are registered investment companies, their affiliates for the purposes of the Loan Provision include all of the other entities within the investment company complex (i.e., all of the Fidelity Entities), which include, among others: (1) any registered investment companies or other pooled investment vehicles managed by FMR or an investment adviser that controls, is controlled by, or under common control with, FMR; and (2) FMR and certain of its affiliates.
Fidelity Entities may face one or more of the following circumstances, each of which could have potential implications under the Loan Provision (collectively, “Lending Relationships”):
As a result, you are concerned that under the Loan Provision, a Fidelity Entity’s Audit Firm could be deemed to be not independent with respect to that Fidelity Entity if the Audit Firm or certain of its personnel are in a Lending Relationship. You believe that this would be the case regardless of whether the lender is capable of influencing the Audit Firm or any Fidelity Entity.
PCAOB Rule 3520 requires the Audit Firm and its associated persons to be independent of the Audit Firm’s audit clients. PCAOB Rule 3526(a) requires that an Audit Firm provide its prospective clients with a statement affirming, in writing, that it is compliant with PCAOB Rule 3520. In addition, Rule 3526(b) imposes an ongoing requirement for an Audit Firm to annually communicate with each of its audit clients regarding its independence. Such communication must include: (1) a written description of any relationships between the Audit Firm and the audit client (or certain audit client personnel) that may reasonably be thought to bear on independence; (2) a discussion with the client’s audit committee regarding the potential effects of such relationships on its independence; and (3) a written affirmation that, as of the date of the communication, the Audit Firm is independent in compliance with Rule 3520.
Rule 2-01(b) of Regulation S-X 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. Rule 2-01(c) sets forth a non-exclusive specification of circumstances that are considered inconsistent with independence under Rule 2-01(b), including the Loan Provision. In particular, the Loan Provision states, in relevant part: “An accountant is not independent when the accounting firm, any covered person in the firm, or any of his or her immediate family members has … [a]ny loan (including any margin loan) to or from an audit client, or an audit client’s officers, directors, or record or beneficial owners of more than ten percent of the audit client’s equity securities….” An audit client is defined within Rule 2-01(f)(6) of Regulation S-X as including any affiliate of the entity whose financial statements are being audited and would thus include entities that control, are controlled by or are under common control with such entities. The audit client also includes each entity in the investment company complex when the audit client is an entity that is part of an investment company complex.
The consequences of the Loan Provision are such that an accounting firm is not considered independent under Rule 2-01(b) of Regulation S-X if it has a lending relationship with any entities having a record or beneficial ownership of more than ten percent of any entity within the investment company complex of an audit client, regardless of whether those entities in the investment company complex are audited by the accounting firm.
You note that the Audit Firm has represented that, notwithstanding the Audit Firm’s noncompliance with the Loan Provision due to a lending relationship, following an evaluation of the impact of this lending relationship on its independence, it has been able to maintain its impartiality and objectivity with respect to the planning for and execution of the Fidelity Funds’ audits. In support of this conclusion, you argue that the Audit Firm has emphasized, among other things, that the institution with which it has a lending relationship is not able to impact the impartiality of the Audit Firm or assert any influence over the Fidelity Fund whose shares the institution owned or its investment adviser, under the circumstances. You represent that those responsible for the oversight of the Fidelity Funds have not reached a different conclusion with respect to the Audit Firm’s objectivity and impartiality.
You therefore believe that the concerns underlying the Loan Provision are generally not implicated with respect to this and other Lending Relationships when the record or beneficial owner of shares of a Fidelity Entity is not able to exercise undue influence over the Fidelity Entity and the objectivity and impartiality of the audits performed for any Fidelity Entities are not impaired. You further represent that prior to engaging the Audit Firms, and annually during their audit engagement, the Audit Committees (or relevant management committee, in the case of a Fidelity Entity that is not a Fidelity Fund) will continue to receive from the relevant Audit Firm written communications in which the Audit Firm represented that it complied with PCAOB Rules 3526(b)(1) and (2) or substantially equivalent communications, as applicable.
You represent that, with regard to the Lending Relationships, if one or more matters relating to (i) the election of trustees or directors, (ii) the appointment of an independent auditor, or (iii) other matters that similarly could influence the objectivity and impartiality of the independent auditor are put before shareholders of a Fidelity Entity for vote the Fidelity Entity will make reasonable inquiry as of the record date about the impact of the Loan Provision. You represent that if the Fidelity Entity determines as part of that inquiry that an institution in a Lending Relationship in fact exercises discretionary voting authority with respect to at least ten percent of the Fidelity Entity’s shares, the Fidelity Entity would not rely on this relief and would instead take other appropriate action, consistent with its obligations under the federal securities laws.
We would not object to a Fidelity Entity using financial statements to comply with the federal securities laws that require an audit opinion, when such opinion is made by an Audit Firm that has identified a failure to comply with the Loan Provision, where the failure to comply with the Loan Provision is limited to the Lending Relationships, including making a reasonable inquiry, as described within this letter and where the Audit Firm’s judgment remains objective and impartial. 
Accordingly, based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission against a Fidelity Entity if that Fidelity Entity continues to fulfill its regulatory requirements under the federal securities laws by using the audit services performed by an Audit Firm that is not in compliance with the Loan Provision under the circumstances described herein, so long as:
Our assurances are temporary and will expire 18 months from issuance. We may or may not renew these assurances as appropriate. Because our position is based on your facts and representations, you should note that any different facts or circumstances might require a different conclusion. This letter represents only the Division’s position on enforcement action and does not purport to express any legal conclusion on the questions presented.
James D. McGinnis
 See, e.g., Section 30(e) of the Investment Company Act of 1940 (“1940 Act”) and Rule 30e-1 thereunder (requiring registered investment companies to transmit annually to shareholders financial statements audited by an independent accountant); Form N-1A (requiring audited financial statements to be included or incorporated by reference in open-end registered investment companies’ registration statements); Regulation S-X. Regulation S-X sets forth the required content of financial statements of issuers of securities registered under the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the 1940 Act, including registered investment companies, and establishes the qualifications for auditor independence.
 For example, Rule 206(4)-2(b)(4) provides an audit exception to certain pooled investment vehicles which includes, among other things, that the vehicle is subject to annual audit by an Audit Firm, and that audited financial statements are sent to investors on an annual basis.
 You state that the Audit Committees regularly engage in active discussions of independence-related issues with the Audit Firms.
 Such lending relationships may also include holding debt securities issued by an Audit Firm.
 The staff notes that, for the purposes of the Lending Relationships, the relevant institutions are those that control the record or beneficial owner of more than ten percent of the shares of a Fidelity Entity (i.e., entities that are under common control with or controlled by the record or beneficial owner are not as such implicated by the Loan Provision).
 The staff understands that, in many circumstances, an authorized participant undertakes steps to limit its discretion to vote these shares (e.g., the authorized participant has agreed to mirror vote the shares (i.e., vote the shares held by it in the same proportion as the vote of all other shareholders), pass through the vote to an unaffiliated third-party entity, or has otherwise relinquished its right to vote such shares). There also may be circumstances where an institution with a lending relationship with an Audit Firm beneficially owns more than ten percent of the shares of an entity (e.g., a closed-end fund) and has similarly undertaken steps to limit the institution’s discretion to vote these shares (e.g., shares are held in an irrevocable voting trust without discretion for the institution as to the voting of shares, the institution has agreed to mirror vote the shares, the institution has agreed to pass through the vote to an unaffiliated third-party entity, or the institution has otherwise relinquished its right to vote such shares).
 See Revision of the Commission’s Auditor Independence Requirements, Securities Act Rel. No. 7919 (Nov. 21, 2000).
 We note that such analysis would also apply to a Fidelity Entity that is not a Fidelity Fund, so long as those responsible for the oversight of such Fidelity Entity did not reach a different conclusion with respect to the Audit Firm’s objectivity and impartiality.
 We expect that the Fidelity Entities will develop policies and procedures that are reasonably designed to ensure that they make a reasonable inquiry, in a manner best suited to their organizations. For example, one possible approach could be that if a Fidelity Entity solicits investor approval with respect to a matter that could influence the objectivity and impartiality of the Audit Firm, the Fidelity Entity could review available ownership records and contact applicable owners to inquire whether an institution in a lending relationship with the Fidelity Entity’s Audit Firm owns of record or beneficially more than ten percent of the shares of the Fidelity Entity.
 A Fidelity Entity could rely on this relief, however, if an institution that has a lending relationship with an Audit Firm beneficially owns more than ten percent of the shares of a Fidelity Entity that is audited by a different Audit Firm. For example, a financial entity with a lending relationship with an Audit Firm (“Firm A”) also may beneficially own shares of one or more funds (“Fund B”) in the investment company complex. Fund B is audited by a different Audit Firm that does not have a lending relationship with the financial entity; however, Firm A audits other fund(s) (“Fund A”) within the investment company complex. The lender financial entity does not beneficially own shares of Fund A. While Firm A’s lending relationship with the financial entity which has ownership of Fund B implicates the Loan Provision, in this circumstance, Firm A cannot influence the audit of Fund B.
 The staff understands that investors rely upon audited financial statements in making their investment decisions. Accordingly, timely and accurate financial statements, audited by an Audit Firm that is independent, are crucial to capital formation and investor confidence.
 We would take the same view of any entity within an investment company complex that engages an Audit Firm to satisfy a registration or reporting requirement under the Securities Act and/or the Exchange Act. We also would take the same view with respect to an institution that has a lending relationship with an Audit Firm that beneficially owns more than ten percent of the shares of an entity (e.g. a closed-end fund) where such shares are held in an irrevocable voting trust without discretion for the institution as to the voting of shares, the institution has agreed to mirror vote the shares, the institution has agreed to pass through the vote to an unaffiliated third-party entity, or the institution has otherwise relinquished its right to vote such shares.
 Our analysis underlying these temporary assurances has been developed in consultation with the staff of the Office of the Chief Accountant and the Division of Corporation Finance.