Newsflash: SEC Staff Extends Effectiveness of No-Action Relief on Auditor Independence and the “Loan Provision”

The U.S. Securities and Exchange Commission’s Division of Investment Management (SEC Staff) on September 22, 2017 extended indefinitely the effectiveness of no-action relief granted a year earlier with respect to the so-called “Loan Provision” (Relief).1 In the June 2016 Relief, the SEC Staff provided guidance to registered investment companies and their investment advisers concerning compliance with the Loan Provision – Rule 2-01(c)(1)(ii)(A) under Regulation S-X.2 For further information, please refer to Dechert OnPoint, SEC Staff Issues No-Action Relief on Auditor Independence and the Loan Provision. 

By its terms, the Relief had been set to expire on December 20, 2017. The September 22, 2017 letter (Letter) extends indefinitely the Relief’s assurance that the SEC Staff would not recommend enforcement action if a registered fund or other entity in the fund’s “investment company complex,” as that term is defined in Regulation S-X, continues to fulfill its regulatory requirements under the federal securities laws using audit services provided by an audit firm whose relationship with certain lending financial institutions might cause the audit firm not to be in compliance with the Loan Provision. The Relief is subject to conditions intended to ensure that the audit firm remains objective and impartial. 

The Relief addressed what remains ongoing uncertainty concerning the application of the Loan Provision to a variety of situations impacting open-end funds (including exchange-traded funds and variable products funds), closed-end funds and other entities in their investment company complexes. The SEC Staff’s extension of the Relief follows the inclusion of the Loan Provision in the SEC’s updated regulatory agenda, which was published on July 20, 2017. There, the SEC indicated that it was considering final rulemaking with respect to the Loan Provision. In the Letter, the SEC Staff indicated that the extension of the Relief’s effectiveness “will be withdrawn upon the effectiveness of any amendments to the Loan Provision designed to address the concerns expressed in the Relief.” 

Footnotes 

_{1) Letter from James D. McGinnis to Fidelity Management & Research Company, et al. (Sept. 22, 2017).
2) Fidelity Management & Research Company et al., SEC Staff No-Action Letter (June 20, 2016).}