Securities Regulation Daily Fidelity entities obtain relief from auditor independence loan rule
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Tuesday, June 21, 2016

Fidelity entities obtain relief from auditor independence loan rule

By Amy Leisinger, J.D.

The staff of the SEC’s Division of Investment Management would not recommend enforcement action against Fidelity entities in certain situations in which the independence of an auditor could be questioned. Specifically, the relief permits an entity within the Fidelity investment company complex to continue to fulfill its obligations under Rule 2-01 of Regulation S-X by using the audit services of a public accounting firm that is not technically in compliance with the loan provision concerning auditor independence by virtue of having a loan from an owner of more than 10 percent of the securities of the audit client—in this case, a Fidelity entity.

Independence concerns. According to the request for relief, the audit committee of each Fidelity fund receives written communications affirming audit firms’ independence under relevant PCAOB and SEC rules in connection with audits of financial statements. However, an audit firm recently advised the funds that, while it is capable of remaining objective, it does not qualify as independent because it may not be in compliance with the loan provision of Rule 2-01 as a result of certain lending and ownership relationships. In many circumstances, the request notes, the institutions holding the shares do not have the authority to vote these shares or are not involved in the relationship as a direct lender. Nevertheless, the request explains, the funds’ affiliates for the purposes of the loan provision include all other entities within the Fidelity investment company complex and could create a blanket prohibition based on the affiliate relationships. The concerns underlying the loan provision are generally not implicated with respect to these types of lending relationships, Fidelity contends.

Relief granted. In granting the relief, the staff noted that its position applies only if the audit firm provides all required independence communications to the Fidelity entities and concludes that it can be objective and impartial. In addition, the staff specified that the relief applies only to specific lending and ownership relationships. Specific circumstances include: (1) an institution with a lending relationship with an audit firm while holding for the benefit of its customers more than 10 percent of the shares of a Fidelity entity; (2) an insurance company with such a relationship while holding more than 10 percent of the shares of a Fidelity fund in separate accounts on behalf of its contract holders; and (3) an institution with such a relationship while acting as an authorized participant or market maker to a Fidelity ETF and holding more than 10 percent of the shares of the ETF.

The no-action relief is temporary and expires after 18 months.

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