SEC Proposes Rule Change To Address Funds' Auditor Independence Problem

In a May 3, 2018 release (the "Release"), the SEC proposed amendments to the "Loan Rule" (as defined below), part of the SEC's auditor independence rule, Rule 2-01 of Regulation S-X. If adopted as proposed, the amendments should virtually eliminate the problems that led to the SEC staff's 2016 no-action letter regarding the application of the Loan Rule to an investment company complex.¹

The Release states that the SEC is aware that the Loan Rule is not currently working as intended and can have "broader disruptive effects, particularly for funds." The Release acknowledges that there are certain fact patterns in which an auditor's independence is not impaired despite a failure to comply with the current requirements of the Loan Rule. To remedy the situation, the SEC is proposing amendments so that the Loan Rule will better focus on debtor-creditor relationships that may impair an audit firm's impartiality. Specifically, the proposed amendments: