1 See Memorandum to Accounting/Treasurers Committee No. 30-99, SEC Rules Committee No. 71-99, dated
September 23, 1999.
[11324]
October 20, 1999
TO: ACCOUNTING/TREASURERS COMMITTEE No. 35-99
SEC RULES COMMITTEE No. 80-99
RE: DRAFT ICI COMMENT LETTER ON AUDITOR INDEPENDENCE
______________________________________________________________________________
Attached for your review is a draft comment letter on the Independence Standards Board's
proposal on audits of mutual funds. The proposal is intended to provide standards by which the
independence of the audit firm and its partners and employees from mutual fund complexes may be
established.1 The proposal would require a specified set of persons in the audit firm to be independent
of non-audit client "sister" funds when auditing a mutual fund. In particular, the accounting firm itself,
and its retirement plans (other than self-directed defined contribution employee benefit plans), the audit
engagement team, and its chain of command, and the partners and managerial employees in offices
participating in a significant portion of the audit must be independent of non-audit client sister funds
when auditing a mutual fund. In addition, the proposal would permit spouses of certain partners to
invest in audit client funds through an employer sponsored benefit plan.
Please call me at (202) 326-5851 by Wednesday, October 27th with any comments on the
attached draft comment letter.
Non-audit Client Sister Funds
Currently, in order to maintain independence with respect to audit client funds, auditors must
also be independent of all other funds within the same fund complex or advised by the same investment
adviser. These restrictions apply to all partners in the firm, irrespective of whether they actually
participate in the engagement. The proposal would permit partners and other employees not on the
"engagement team" to invest in non-audit client sister funds. The draft comment letter supports this
proposal as a reasonable relaxation of existing rules.
Spouse Investment in Audit Client Funds
Currently, spouses and dependents of partners are prohibited from investing audit client funds.
The proposal would permit spouses of partners not on the engagement team, not in its chain of
command, and not in an office participating in the engagement, to invest in audit-client funds through
an employer sponsored benefit plan. The draft comment letter supports this provision and recommends
additional circumstances in which spouses of partners should be permitted to invest in audit-client
funds. First, spouses of partners should be permitted to make direct investments in audit-client funds
(i.e., in addition to investments through employer sponsored benefit plans). Second, spouses of partners
in the engagement office should be permitted to invest in audit-client funds through employer
sponsored benefit plans, so long as the partner does not work on the engagement and is not part of the
chain of command.
Gregory M. Smith
Director - Operations/
Compliance & Fund Accounting
Attachment