A Small Entity Compliance Guide[*]

Introduction

On June 18, 2019, the Securities and Exchange Commission adopted amendments to its auditor independence rules relating to 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. The amendments are intended to focus the rules on those lending relationships that reasonably may bear on external auditors’ impartiality or objectivity and, in so doing, improve the application of Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Provision”) for the benefit of investors while reducing compliance burdens.

Who is affected by the revised rules?

The amendments affect a variety of entities, including the following:

• Domestic and foreign registrants with offerings registered under the Securities Act of 1933 and classes of securities registered under the Securities Exchange Act of 1934;
• Issuers regulated under the Investment Company Act of 1940;
• Investment advisers;
• Broker-dealers; and
• Any other entity whose auditor has to comply with Rule 2-01 of Regulation S-X.

What changes were made to the rules?

The amendments are intended to 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. Specifically, the following revisions were made to the Loan Provision:

• Focus the analysis on beneficial ownership rather than on both record and beneficial ownership;
• Replace the existing ten 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.

What are the compliance dates of the rules?

The amendments will take effect on October 3, 2019.

Other Resources

The adopting release for the new rules can be found on the SEC’s website at https://www.sec.gov/rules/final/2019/33-10648.pdf.

The SEC’s disclosure forms can be accessed on the SEC’s website at https://www.sec.gov/forms.

Contacting the SEC Staff

The SEC’s Office of the Chief Accountant is available to assist small companies and others with questions regarding the amendments. You may contact the Office for this purpose at (202) 551-5300 or OCA-Independence@sec.gov.