Blog FinReg + Policy Watch October 22, 2020

SEC Updates Auditor Independence Rule

On October 16, the SEC announced that it adopted final amendments to certain auditor independence requirements in Rule 2-01 of Regulation S-X. The final amendments are based on recurring fact patterns that the SEC staff has observed over years of consultations in which certain relationships and services triggered technical independence rule violations that were non-substantive rule breaches or required potentially time-consuming audit committee review of non-substantive matters. The final amendments:

  • Amend the definitions of “affiliate of the audit client,” in Rule 2-01(f)(4) and “investment company complex,” in Rule 2-01(f)(14) to address certain affiliate relationships, including entities under common control;
  • Amend the definition of “audit and professional engagement period,” specifically Rule 2-01(f)(5)(iii), to shorten the look-back period for domestic first time filers in assessing compliance with the independence requirements;
  • Amend Rule 2-01(c)(1)(ii)(A)(1) and (E) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships;
  • Amend Rule 2-01(c)(3) to replace the reference to “substantial stockholders” in the business relationships rule with the concept of beneficial owners with significant influence;
  • Replace the outdated transition provision in Rule 2-01(e) with a new Rule 2-01(e) that introduces a transition framework to address inadvertent independence violations that only arise as a result of a merger or acquisition transactions; and
  • Make certain other miscellaneous updates.

The amendments become effective 180 days after publication in the Federal Register. Voluntary early compliance is permitted after the amendments are published in the Federal Register in advance of the effective date provided that the final amendments are applied in their entirety from the date of early compliance. Auditors are not permitted to retroactively apply the final amendments to relationships and services in existence prior to the effective date or the early compliance date if selected by an audit firm

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