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SEC Proposes Amendments to Auditor Independence Rules

On December 30, 2019, the SEC proposed amendments to Rule 2-01 of Regulation S-X, which sets forth the qualifications and independence standards for public company auditors, in order to carve out certain fact patterns identified by the SEC staff over the years since the initial adoption of the auditor independence framework in 2000 that are deemed less likely to threaten an auditor’s objectivity and impartiality.

If adopted, the proposal would amend the auditor independence rules to, among other things:

  • limit the range of audit client affiliates from which an auditor must maintain its independence (1) by amending the definition of “affiliate of the audit client” to carve out affiliates under common control with the client (i.e., sister entities) that are not material to the controlling entity and, (2) with respect to the audit of an investment company (which would include a registered investment company, business development company and certain private funds), investment adviser or sponsor, by providing that the auditor and audit client would look solely to the definition of “investment company complex” to identify audit client affiliates and by amending the definition of “investment company complex” to, among other things, carve out affiliates under common control that are not material to the controlling entity;

  • shorten the look-back period for assessing compliance with independence requirements for domestic first-time filers to match the one-year look-back period for first-time filers that are foreign private issuers by amending the definition of “audit and professional engagement period”;

  • add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships;

  • narrow the range of persons with which an auditor may not have a direct or material indirect business relationship from “substantial stockholders” of the audit client to “beneficial owners with significant influence” over the audit client; and

  • address certain inadvertent violations of the auditor independence rules that may result from a merger or acquisition through amendments to the transition and grandfathering provisions.
    Comments on the proposal are due on or before March 16, 2020.

The SEC’s proposing release is available here.

© 2020 Vedder Price


About this Author

Legal, Business, John Marten, Investment Attorney, Vedder Price Law FIrm

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Mark Quade Investment Attorney Vedder Price Chicago

Mark Quade is an associate in Vedder Price’s Chicago office and a member of the firm’s Investment Services practice group.

Prior to joining Vedder Price, Mr. Quade served as a 1940 Act attorney and assistant vice president at a mutual fund service provider in Milwaukee, Wisconsin. There, he provided legal support to a registered open-end multiple series trust and its board of trustees, and he also supported proprietary mutual funds. Among other matters, Mr. Quade facilitated investment advisory agreement approval and renewal processes, prepared and reviewed board meeting materials, drafted mutual fund registration statements and responded to SEC comments.

While attending law school, Mr. Quade was a law clerk at a large national bank, a legal intern with the Financial Industry Regulatory Authority, a student attorney at the Business Law Clinic and a research assistant, while also participating in National Moot Court. Prior to law school, he was a senior fund accountant with a Minnesota–based investment advisor.

Mr. Quade earned his J.D. from the University of Minnesota Law School in 2013 with a concentration in Business Law. He graduated cum laude from the University of Wisconsin–River Falls in 2004, where he double majored in Economics and Business Administration.

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Nathaniel Segal, Investment Attorney, Vedder Price Law Firm

Nathaniel Segal is an Associate at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due...

(312) 609 7747
Jacob Tiedt, Vedder Price, investment services attorney

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....