On June 18, 2019, the SEC adopted final amendments (the “Amendments”) to the auditor independence rules set forth in Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Rule”). The Loan Rule identifies debtor-creditor relationships that may affect whether an auditor is independent. The SEC has come to recognize that the existing formulation of the Loan Rule has captured distant relationships (for example, those of an auditor — or certain of its personnel or their immediate family members — as debtors to entities that are also the record owners of 10 percent or more of the equity securities of funds that are, or are related to, audit clients) that are unlikely in fact to affect the auditor’s objectivity and impartiality. The Amendments are intended to more effectively identify and evaluate debtor-creditor relationships that may reasonably affect an external auditors’ impartiality or objectivity and improve the application of the Loan Rule by reducing unnecessary analyses of factual matters of which the auditor would normally have no other reason to be aware.

In particular, the Amendments (i) focus the analysis solely on beneficial ownership; (ii) replace the existing 10 percent bright-line shareholder ownership test with a “significant influence” test; (iii) add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the audit client’s equity securities; and (iv) exclude from the definition of “audit client,” for a fund under audit, any other funds that otherwise would be considered affiliates of the audit client under the Loan Rule. The Amendments should benefit investors by focusing the analysis on borrowing relationships that are capable of affecting auditor independence while also reducing compliance burdens associated with such analysis.

The Amendments will become effective 90 days after they are published in the Federal Register.

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