SEC Adopts Amendments to Improve the Application of the Auditor Independence Rules to Loan Provision

The Securities and Exchange Commission adopted amendments to the 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 Commission has become aware of circumstances where the existing rules capture relationships that otherwise do not bear on the impartiality or objectivity of the auditor.  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 the Loan Provision for the benefit of investors while reducing compliance burdens. 

“This rulemaking reflects the staff’s extensive experience and judgment, and I thank them for their continued commitment to retrospective review,” said SEC Chairman Jay Clayton.  “The amendments we are adopting today 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.”

These amendments will become effective 90 days after they are published in the Federal Register. 

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FACT SHEET

Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships
SEC Seriatim Approval

Action

The Commission adopted amendments to the 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 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. 

Highlights

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 Commission has become aware that, in certain circumstances, the existing Loan Provision may not have been functioning as it was intended. 

The amendments will 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’s next?

These amendments will become effective 90 days after they are published in the Federal Register.