Introduction[*]

On October 16, 2020, the Securities and Exchange Commission adopted amendments to certain auditor independence requirements in Rule 2-01 of Regulation S-X (“Rule 2-01”).  These amendments are intended to more effectively focus the independence analysis on those relationships or services that are more likely to pose threats to an auditor’s objectivity and impartiality.   

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.

What changes were made to the rules?

Informed by decades of staff experience applying Rule 2-01, the amendments maintain the bedrock principle that auditors must be independent in fact and in appearance while modernizing the rules to more effectively focus the analysis on relationships and services that may pose threats to an auditor’s objectivity and impartiality.

Specifically, the amendments to Rule 2-01, among other things:

• Amend the definitions of “affiliate of the audit client” in Rule 2-01(f)(4) and “investment company complex” in Rule 2-01(f)(14) to address certain affiliate relationships, including entities under common control;
• Amend the definition of “audit and professional engagement period,” specifically Rule 2-01(f)(5)(iii), to shorten the look-back period for domestic first-time filers in assessing compliance with the independence requirements;
• Amend Rules 2-01(c)(1)(ii)(A)(1) and (E) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships;
• Amend Rule 2-01(c)(3) to replace the reference to “substantial stockholders” in the business relationships rule with the concept of beneficial owners with significant influence;
• Replace the outdated transition provision in Rule 2-01(e) with a new transition framework to address inadvertent independence violations that only arise as a result of a corporate event, such as a merger or acquisition transaction, involving audit clients; and
• Make certain other miscellaneous updates.

What are the compliance dates of the rules?

The amendments will take effect on June 9, 2021.

Other Resources

The adopting release for the new rules can be found on the SEC’s website, available at https://www.sec.gov/rules/final/2020/33-10876.pdf.

The SEC’s disclosure forms can be accessed on the SEC’s website, available 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.