US2019-12: Final rule issued on loans with shareholders of SEC audit clients

US2019-12: Final rule issued on loans with shareholders of SEC audit clients

Publication date: 27 Jun 2019

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At a glance

The SEC has amended the independence rule with respect to certain loans and debtor-creditor relationships with shareholders of SEC audit clients.

What happened?

On June 18, 2019, the SEC issued a final rule, Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships, which amends the "Loan Provision" in Rule 2-01 of Regulation S-X. The SEC intends the amendment to more effectively identify debtor-creditor relationships that could impair an auditor's objectivity and impartiality.

The rule amendments are generally consistent with the 2018 proposal and refocuses the independence analysis when the auditor has a lending relationship with certain shareholders of an audit client at any time during an audit or professional engagement period. The amendments:

  • Focus the analysis on beneficial ownership (rather than on both owners of record and beneficial ownership);

  • Replace the existing 10% bright-line shareholder ownership test with a "significant influence" test (consistent with the principles set forth in ASC 323, Investments – Equity Method and Joint Ventures; and

  • Add a "known through reasonable inquiry" standard with respect to identifying beneficial owners of the audit client's equity securities.

For a fund under audit, the amendments exclude from the definition of "audit client" any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

The following lending relationships continue to be permissible:

  • Automobile loans and leases collateralized by the automobile

  • Loans fully collateralized by the cash surrender value of an insurance policy

  • Loans fully collateralized by cash deposits at the same financial institution

  • A mortgage loan collateralized by the borrower's primary residence provided the loan was not obtained while the covered person in the firm was a covered person

Why is this important?

The rule amendments change how an auditor's independence is determined with respect to lending relationships between the auditor and certain shareholders of an audit client.

What's next?

The current requirements of the Loan Provision will remain in force pending the final rule becoming effective. The SEC has indicated that the final rule will become effective 90 days after the date of its publication in the Federal Register.

To have a deeper discussion, contact:

Michael Greaney


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