SEC updates certain auditor independence requirements

The SEC’s amendments will more effectively focus the independence analysis on those relationships or services that are most likely to threaten an auditor’s objectivity and impartiality.

Applicability

Final rule: SEC Release No. 33-10876; 34-90210

• Public companies
• SEC registered investment companies
• SEC registered investment advisors
• SEC registered broker-dealers
• Private funds complying with the SEC’s custody rule
• Any other companies otherwise subject to SEC independence rules

Relevant dates

• October 16, 2020 – Final rules adopted
• Effective date is 180 days after publication in the Federal Register

Voluntary early compliance is permitted after the amendments are published in the Federal Register provided the final amendments are applied in their entirety. Except for the revisions to the exemptions regarding student loans, consumer loans and multiple mortgages, retroactive application is not permitted.

Key impacts

The SEC’s amendments revise auditor independence requirements in several important ways:

• amends the definition of ‘Affiliate of the Audit Client’ and ‘Investment Company Complex.’ This will likely result in fewer sister entity affiliates of the entity under audit;
• reduces the length of time that domestic first-time filers must comply with all SEC independence requirements to the most recent year;
• revises certain loan and debtor-creditor provisions for student loans, home equity and de minimis consumer loans;
• amends the business relationships rule to replace the reference to ‘substantial stockholders’ with the concept of ‘beneficial owners with significant influence over the entity under audit’; and
• introduces a transition framework for services and relationships with new affiliates that result from an audit client’s merger and acquisition transactions.

Report contents

• Applicability
• Key changes
• Why did the SEC propose the amendments?
• Summary of the amended auditor independence rules
• Consideration of the SEC’s General Standard for Independence
• Effective date and transition

Related content

Defining Issues: SEC amends the loan provisions for its auditor independence rules