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SEC Staff Issues No-Action Relief on Auditor Independence

The SEC staff has issued no-action relief for situations where an auditor’s independence may be compromised by the “loan rule.”  The loan rule generally prohibits “[a]ny loan (including any margin loan) to or from an audit client, or an audit client's officers, directors, or record or beneficial owners of more than ten percent of the audit client's equity securities.”  In the fund context, “audit client” is complex as it includes not only the fund that is being audited, but also other entities within the investment company complex.  The issue first received wide-spread attention following a filing in May by Invesco.

The letter addresses three specific situations where the auditor may have a lending relationship with:

  • An institution that is the record holder of more than 10% of an entity in the fund complex
  • An insurance company that holds more than 10% of the shares of an entity in the fund complex in separate accounts that it maintains for its contract holders and
  • An authorized participant or market maker to an ETF in the complex and holds more than 10% of the shares (either of record or beneficially) of the ETF.

The staff’s no-action relief would allow a fund complex to continue to use an independent auditor that violates the loan rule provided that:

  • The auditor complies with PCAOB Rules 3526(b)(1) and (2) which require the auditor to discuss with client audit committees relationships that may “reasonably be thought to bear on independence” and the potential effect of those relationships
  • The non-compliance with SEC independence rules is limited to the lending relationships described above and
  • The audit firm concludes that, despite non-compliance with the loan rule, the firm remains objective and impartial with respect to the engagement.

The relief in the letter will last for 18 months from the issuance of the letter.

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