Audit & Assurance

Contact: Peggy McCaffrey

In a no-action letter issued by the Securities and Exchange Commission (SEC) Division of Investment Management to Fidelity Management and Research Company in June 2016, the SEC provided temporary relief in connection with audit firm independence and Regulation S-X Rule 2-01 (c)(1)(ii)(A), or, the “Loan Rule.”

That temporary relief was set to expire on December 20, 2017, but now has been extended indefinitely — or upon “the effectiveness of any amendments to the Loan Provision designed to address the concerns expressed in the Relief.” Until such time, the SEC has promised not to take action against entities using auditors who are potentially in violation of the Loan Rule. The Rule deems an audit firm not independent if the firm, any covered person in the firm or any of their immediate family members have a loan to or from an audit client, or beneficial owners of more than 10 percent of the audit client’s equity securities.

While the ongoing relief is welcomed by the fund industry, it is only in effect if the following conditions are met to ensure that audit firms remain independent and impartial:

• The audit firm has provided the client’s audit committee with written disclosure regarding relationships between the audit firm and the client that may bear on the audit firm’s independence and discussed the potential impact of those relationships on audit independence with the audit committee on at least an annual basis;
• The non-compliance of the audit firm is with respect to certain lending and ownership relationships; and
• Notwithstanding the lending relationship, the audit firm has concluded that it is objective and impartial with respect to its engagement.

In addition to meeting the above requirements, funds and their audit committees should keep in close communication with their auditors and keep a close eye on developments surrounding the Loan Rule and its potential reinstatement.