ICI/IDC Draft Comment Letter on SEC's Proposed Amendments to Auditor Independence Rule; Comments Due to ICI by Friday, March 6
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February 26, 2020 TO: Accounting/Treasurers CommitteeAuditor Independence Working Group RE: ICI/IDC Draft Comment Letter on SEC's Proposed Amendments to Auditor Independence Rule; Comments Due to ICI by Friday, March 6
In December, the Securities and Exchange Commission proposed amendments to its auditor independence rule intended to update certain elements of the rule so that relationships and services that do not pose threats to the auditor’s objectivity and impartiality do not trigger non-substantive violations or potentially time-consuming audit committee review of non-substantive matters.[1]
The proposed amendments would: i) amend the definitions of “affiliate of the audit client” and “investment company complex” to add materiality qualifiers to the analysis of entities under common control; ii) amend the definition of “audit and professional engagement period” to shorten the look-back period for domestic first time filers; iii) add certain student loans and de minimis consumer loans to the categorical exclusions from independence impairing lending relationships; iv) replace the reference to “substantial stockholders” in the business relationship rule with the concept of beneficial owners with significant influence; and v) replace the transition and grandfathering element of the rule with a framework to address inadvertent independence violations that arise as a result of merger and acquisition transactions.
A draft comment letter from ICI and the Independent Directors Council is attached for your review. Please provide any written comments to Greg Smith at smith@ici.org by the close of business on Friday, March 6. Comments are due to the SEC by Monday, March 16.
The draft comment letter strongly supports the proposed amendments. The draft letter indicates that modernizing the rule to address non-substantive violations that do not impair the auditor’s objectivity and impartiality will save audit committees, management, auditors and Commission staff time and resources and enable them to more effectively direct their attention toward accounting and auditing matters of importance to the integrity and reliability of a fund’s financial statements. The draft comment letter:
- Supports the amendment to the definition of affiliate of the audit client that would add a materiality qualifier to entities under common control with the audit client;
- Supports the amendment to the definition of investment company complex that would add a materiality qualifier to investment advisers under common control with the fund’s investment adviser (sister adviser) and the funds managed by the sister adviser;
- Supports the addition of student loans to a covered person to the types of loans excluded from the prohibition on loans from the audit client to the audit firm’s covered persons;
- Recommends that the SEC add student loans to the covered person’s immediate family members to the types of loans excluded from the prohibition on loans;
- Supports the adoption of a “transition framework” enabling auditors to cure independence violations that arise from a merger or acquisition transaction.
Gregory M. Smith
Senior Director, Fund Accounting and Compliance
endnotes
[1] See Amendments to Rule 2-01, Qualifications of Accountant, Release No. 33-10738 (December 30, 2019) available at https://www.sec.gov/rules/proposed/2019/33-10738.pdf. For a summary of the proposed amendments see SEC Proposes Amendments to Auditor Independence Rule, ICI Memorandum No. 32137 (January 10, 2020) available at https://www.ici.org/my_ici/memorandum/memo32137.