Proposed Auditor Independence Rule

The Securities and Exchange Commission has proposed to amend its auditor independence rules in order to determine whether an auditor is independent if it has a lending relationship with certain shareholders of an audit client during its professional engagement period. The auditor independence standard set forth in Rule 2-01 of Regulation S-X requires auditors to be independent of audit clients both "in fact and in appearance." Rule 2-01(c)(1)(ii)(A) addresses debtor-creditor relationships and requires that one consider whether an audit firm has a lending relationship with an entity having record or beneficial ownership of more than 10% of the equity securities of either the firm's audit client or any entity that is a controlling parent company of the audit client, a controlled subsidiary of the audit client, or an entity under common control with the audit client. Several aspects of the current rule have resulted in challenges, especially for funds and fund families.