[14557]
March 19, 2002
TO: ACCOUNTING/TREASURERS MEMBERS No. 5-02
CLOSED-END INVESTMENT COMPANY MEMBERS No. 11-02
COMPLIANCE ADVISORY COMMITTEE No. 24-02
SEC RULES MEMBERS No. 21-02
RE: SEC ANNOUNCES ACTIONS FOR ANDERSEN CLIENTS
The SEC recently issued a series of orders and rules1 intended to allow Andersen clients
to continue to make regulatory filings and to minimize any disruptions that may occur as a
result of the indictment of Arthur Andersen LLP. The SEC’s orders and rules are summarized
below.
Registrants that Continue to Engage Andersen
Issuers whose audits are completed by Andersen after March 14, 2002, must obtain from
Andersen certain representations concerning audit quality controls. The Commission will
continue to accept financial statements audited by Andersen so long as Andersen can provide
these assurances.
The Commission has adopted Temporary Note 3T to Article 3 of Regulation S-X for
issuers, including investment companies that make filings that include accountant’s reports
issued after March 14, 2002. The rule specifies that issuers are required to include as an exhibit
to their filings a letter by the issuer addressed to the Commission. The letter must state that
Andersen has represented to the issuer that the audit was subject to Andersen’s quality control
system to provide reasonable assurance that the engagement was conducted in compliance with
professional standards and that there was appropriate continuity of Andersen personnel
working on audits, availability of national office personnel working on audits, and availability
of personnel at foreign affiliates of Andersen to conduct the relevant portions of the audit. The
disclosures in Temporary Note 3T must also be made in the annual report to shareholders.
1 Release Nos. IC- 25463 and IC-25464 (March 18, 2002). These releases are available on the SEC website at
www.sec.gov/rules/final/33-8070.htm
2
Registrants that are Unable or Choose not to Engage Andersen
The Commission has issued specific relief for investment companies with obligations to
file annual reports on Form N-SAR, annual reports to shareholders, and amendments to
registration statements that are unable or choose not to engage Andersen.2 An investment
company is eligible for relief (“Eligible Fund”) if 1) Andersen had been engaged on or after
March 14, 2002 as the fund’s independent public accountant, 2) the Eligible Fund, on or before
March 14, 2002, had not obtained a manually signed audit report from Andersen in respect to
those financial statements; and 3) the Eligible Fund is unable to obtain from Andersen or elects
not to have Andersen issue a manually signed audit report with respect to its financial
statements.
1. Form N-SAR
Eligible funds with fiscal years ending between December 15, 2001 and April 15, 2002
may file Form N-SAR based on unaudited information. These Eligible Funds must then file an
amendment no later than 60 days after the date they were originally required to file Form N-
SAR that contains 1) responses based on audited financial information, 2) the auditor’s report
on internal controls, and 3) an exhibit discussing any material changes from the previous
unaudited filing.
2. Annual Reports to Shareholders
Eligible Funds with fiscal years ending between January 1, 2002 and April 15, 2002 may
transmit to shareholders annual reports containing 1) unaudited financial statements, and 2)
disclosure reflecting the guidance in Temporary Note 2T to Article 3 of Regulation S-X. Among
other things, this disclosure requires a prominent statement that the filing contains unaudited
financial statements in lieu of audited financial statements because the issuer was unable to
obtain an audit report from Andersen, or elected not to have Andersen issue an audit report.
These Eligible Funds must then file an amendment no later than 60 days after the date they
were originally required to file the original annual report that contains 1) audited financial
statements, 2) a discussion of any material changes from the unaudited financial statements,
and 3) changes to any other section of the annual report to reflect any changes in the audited
financial statements.
Many closed-end funds annually solicit proxies, which must be accompanied or
preceded by an annual report. The relief requires a closed-end fund that amends its annual
report to include audited financial statements, to inform its shareholders through a press
release, and to post its audited financial statements to its website, if the company’s proxy
solicitation has not been completed before the time audited financial statements are filed.
2 The SEC also adopted relief relating to verification of assets in custody by an independent public accountant. The
relief provides for a 60-day extension when the investment company terminates the engagement with Andersen,
provided the required examinations are performed by a successor accountant. The SEC also adopted relief relating to
an investment adviser’s audited balance sheet on Schedule G to Form ADV.
3
3. Amendments to Registration Statements
An Eligible Fund with a fiscal year ending between January 1, 2002 and April 15, 2002
may file a post-effective amendment updating its registration statement within six months
(rather than 120 days) of the end of its fiscal year, if the fund has timely filed its Form N-SAR.
These funds must 1) update their registration statement 120 days after fiscal year-end with
unaudited financial information, and 2) provide prospectus disclosure reflecting the guidance
in Temporary Note 2T to Article 3 of Regulation S-X. However, pursuant to Temporary Note
1T to Article 3 of Regulation S-X, the post-effective amendment adding audited financial
statements must be filed no later than the earlier of 1) 6 months after the fiscal year end, or 2)
the date on which an amended annual report to shareholders containing audited financial
information is filed with the Commission (i.e., 120 days after the fiscal year-end as described
above).
The Commission’s release emphasizes that companies should make their own
independent decisions regarding retaining Andersen to complete current audits and that these
actions are intended only to provide neutral flexibility for companies as they make those
decisions.
Selection of Auditors by Investment Companies
The relief granted by the Commission provides an additional 60 days for an investment
company to select an independent public accountant whose financial statements for its last
fiscal year were audited by Andersen and whose fiscal year ended on or before April 15, 2002.
The relief permits a fund that had selected Andersen as its independent public accountant on or
before March 14, 2002, and thereafter terminated the appointment, to select a new independent
public accountant by a majority vote of the independent directors of the fund. The relief
suspends the “in person” requirement and permits directors to cast votes in a meeting by any
means of communication that allows all directors to communicate with each other
simultaneously.
Gregory M. Smith
Director - Operations/Compliance & Fund
Accounting