Because these positions are based on the facts that have been provided in various phone calls and in your letter as briefly summarized in our understanding set forth above, it should be noted that any different facts or conditions might require a different conclusion. Further, this response expresses the Office of the Chief Accountant's position only on the auditor independence issues noted above, and does not purport to express any legal conclusion on the questions presented.

In addition, as noted above, we understand that where applicable BDO has utilized a trust other than a rabbi trust to fund its retired partners' capital balances and retirement benefits. Additional information is necessary in order for the staff to better understand the details of the trust vehicle utilized by BDO, including the use and permissibility of this vehicle to meet the requirements of the independence rules. Accordingly, by August 31, 2001 we request that BDO provide the staff with the following:

• A comprehensive analysis of the use of such a vehicle to meet the requirements of the Commission's independence requirements, both old and new.
   
• An analysis of the frequency that this vehicle has been used by BDO in the past, including a list of the involved parties.
   
• A copy of the trust documents.
   
• A comprehensive comparison of the trust vehicle utilized by BDO to a rabbi trust as defined in Rule 2-01.

We request that you confirm your understanding of the above in writing, including an action plan where applicable. In addition, we ask that you supplementally provide the names of all interested parties. Should you have questions, please call either John Morrissey or me at 202-942-4400.

Sincerely,

Samuel L. Burke
Associate Chief Accountant

Initial Inquiry

July 10, 2001

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

Sent by Fax 202-942-9656

Dear Mr. Burke:

At your request, as a follow-up to our prior conversations, I am submitting this letter to seek clarification with respect to the application of the SEC”s interpretation of the transition provisions of Rule 210.2-01(c)(2)(iii) relating to Employment at audit client of former employee of accounting firm. Lee Graul, of BDO Seidman, LLP, initially consulted with you on this issue in January of this year. At that time, a client of our firm had filed its initial registration statement with the Securities and Exchange Commission (“SEC”), which it had expected to become effective prior tp May 5, 2001, the effective date of the aforementioned transition rule. However, due to the relative “softness” of the market, the registration statement was withdrawn by the client. The client now plans to file another registration statements with the SEC later in 2001 and wishes to resolve the independence issues referred to below.

BACKGROUND

The partnership agreement of BDO Seidman, LLP (“BDO”) provides that retired partners’ capital be repaid over 5 years and fixed retirement benefits (which are not funded) be paid based on a formula unrelated to the firm’s revenue or earnings.

In the past few instances where a retired partner joined the board of directors of an SEC-registrant client, BDO funded his/her capital prior to joining the board, and continued to pay the fixed retirement benefits based upon the provisions of the partnership agreement. We believe this policy was in compliance with the prior SEC rules - - FRR Section 602.02.f. Retired Partners. (See following paragraph.)

In the matter which is the subject of this letter, one of our partners retired from the firm on June 30, 2000. In       of 2000, in connection with the original IPO filing, this former partner was asked to join the board of directors of the client that was in registration with the SEC. At that time, we consulted with you concerning our plans to fund this former partner’s capital into a trust, but not the fixed retirement benefits attributable to him. As noted above, the client expected the registration statement to be effective in early 2001, so we believed we could utilize our aforementioned policy for complying with the existing SEC independence rules (602.02.f). Based upon the earlier consultation with you, we were informed that the Office of the Chief Accountant would not object or recommend enforcement action to the Commission if BDO applied the three-month transition in Rule 2-01 (e)(l)(ii) to the “cashout” or funding provisions of all partners leaving to join audit clients as directors.

Based upon that response, we notified the client and former partner of the situation and the need to fund his capital account prior to joining the board of directors. (Note – rather than pay the capital outright, we agreed to transfer the capital to a trust controlled by an independent trustee so that the capital would be outside the firm’s control as long as the former partner remained on the clients board of directors. The terms of the trust and the funding were agreed to by BDO and the former partner). Funding the trust was to take place prior to the former partner joining the board of directors of the client, which was to occur prior to May 5, 2001.

In       2001, the client withdrew its registration statement. At that time, there were no immediate plans to re-file with the SEC, so the inclusion of the former partner on the board of directors of the client and the funding of his capital account was “put on hold”. In       2001, the client decided to re-file the registration statements later in 2001 and, accordingly, BDO began to implement the actions necessary to fund the former partner’s capital prior to his joining the client’s board of directors. As a result, on May 1, 2001, the former partner was appointed to the board of directors of the client.

On May 2, 2001, the BDO individual handling the arrangements for the trust was informed of that the appointment of the former partner to the board of directors was to occur and acknowledged the importance of effectuating and funding the trust. The former partner had several administrative questions concerning the trust arrangements (none of which detracted from his acceptance of its terms) and the BDO individual was attempting to provide answers to those questions prior to such funding. However, because of the unavailability of the former partner around this time period and the misunderstanding by both parties as to the importance of the May 5 funding deadline, the trust was not funded by that date. On May 10, BDO’s National office inquired as to whether the trust was funded by May 5 and was informed that it had not been done.

QUESTIONS

1. Since the former partner was appointed to the board of directors of the privately held client on May 1, 2001, prior to the effective date of the transition rule:
    
1. Can BDO continue to apply its interpretation of the former rule (FRR 602.02.f) under which it would fund only the capital account, but not the fixed retirement benefits; or , in the alternative,
    
2. Since the client will not actually become an SEC registrant until after May 5, 2001, is the new SEC rule even applicable; such new rule requiring the funding of both capital and fixed retirement benefits?
    
2. Would the aforementioned transition rule apply to the client prior to its registration statements becoming effective, since it had previously filed an initial registration statement?
    
3. Assuming the answer to either questions 1(a) or 2 is “yes”, would the SEC staff object to a conclusion that, notwithstanding the unintentional delay in the actual funding of the capital account into a trust, the agreement prior to May 5th by BDO and the former partner with respect to the terms of the trust and the subsequent funding of the trust under the former rule would be sufficient to comply with the then existing independence rule?

DISCUSSION

Question 1

Based upon our earlier discussions, you indicated the SEC staff would use the later of: (i) the date upon which a company became a registrant, or (ii) the date upon which the former partner became a director, to apply the transition rule. Based upon those prior discussions, because the client would become a registrant after May 5, 2001, due to the anticipated effective date of its registration statement, it would seem that the SEC may deem the new rule as being applicable to the former partner rather than the transition rule. However, as I noted during our discussion, this position does not seem to be logical or evenhanded for the reasons set forth below.

As a consequence of the staff’s view, it is BDO’s contention that private companies intending to go public would be held to a more restrictive standard than existing SEC registrants. That is, if a former partner of BDO had been appointed to the board of directors of an existing registrant prior to May 5, 2001, the firm would only have had to fund his/her capital by that date, but would not have had to his/her fixed retirement benefits by said date. On the other hand, if a former partner of BDO had been appointed to the board of directors of a private company that filed an IPO which become effective after May 5, 2001, both the former partner’s capital and fixed retirement benefits would have had to have been funded prior to May 5, 2001.

It is certainly understandable that independence standards applied to auditors of SEC registrants may need to be more restrictive than those applied to privately-held companies. In fact, in the situation described in this letter, BDO had agreed to fund the former partner’s capital account to comply with the existing SEC rule, which is more restrictive than Rule 101-2 of the AICPA Code of Professional Conduct. However, it does not seem necessary in protecting the public interest to apply a more restrictive independence standard to a privately-held company under any circumstance.

The three-month transition rule for funding former partners capital accountant appropriately reflects the need to consider arrangements between companies, former partners and the accounting firms which are under consideration during that period. Section F3 of the discussion section of the new independence rules states that the three-month transition provision, “which essentially grandfathers existing employment relationships” was included “because out intention was not to require former firm employees who are currently in …financial oversight roles at audit clients to leave their positions to preserve the accounting firm’s independence.”

There in no reference in the transition rule or the related discussion which would apply different standards to a company which was not yet an SEC registrant. From an investor’s standpoint, there should be no distinction between (1) an individual who, before May 5, 2001, became a director of a privately-held company, which became an SEC registrant after May 5th and whose capital was funded pursuant to the SEC independence rules which existed prior to that date, and (2) an individual in the same circumstances, except that the company was an existing registrant on May 5, 2001. From the standpoint of the company, its stockholders and the director in situation (1) above, there would be no less a hardship in requiring the director to leave his position to preserve firm’s independence than there would be in situation (2).

Based upon the above logic, we believe the appropriate way to interpret the transition rule is to tie its applicability to the date when the former partner was appointed to the client’s board of directors (regardless as to whether the company was public or private at such time). In our opinion, this would result in a logical and consistent application of the rules to all registrants.

Question 2

The SEC staff has consistently applied SEC accounting and independence rules and interpretations to companies which have filed initial registration statements. It would appear that the transition provisions relating to Rule 210.2-01( c)(2)(iii) should be similarly applied. That is provided an IPO was filed prior to May 5, 2001, and the former partner was a director of the then privately held company on that date, the funding requirements of the then existing independence rules would be acceptable.

Question 3

Assuming the staff does not object to our conclusions with respect to Questions 1 and 2 above, we request the staff to consider this third question. Since all parties agreed to the terms of the trust to fund the former partner’s capital in early 2001, and BDO had the funds available for transfer to the trust, funding the trust after May 5, 2001, should not preclude the application of the former SEC rules, which we believe would not prohibit payments of capital through a trust and would not require the funding of fixed retirements benefits. As explained above, the failure to fund the trust by May 5th resulted from inadvertent miscommunication due, at least in part, to the complexity of, and confusion with respect to, the interpretation of transition provisions, which in our view are not substantive reasons to require BDO to apply the funding requirements of the new independence rules rather than the transition rules to the issue at hand. If the staff does not object to our position on this question, the trust will be funded immediately.

* * * * * *

We appreciate your consideration of the issues addressed in this letter and look forward to a prompt response. If you have any questions, or need any additional information call me at 212-885-8560.

Very truly yours,

Larry Shapiro
Partner

CC: Wayne Kolins
Lee Graul

http://www.sec.gov/info/accountants/noaction/ltrbdoseid081601.htm