Final rule issued on loans with shareholders of SEC audit clients

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In brief , PwC US Jun 27, 2019

The SEC has amended the rules for determining when a lending relationship could impair auditor objectivity and impartiality.

What happened?

On June 18, 2019, the SEC issued a final rule, Auditor Independence With Respect to Certain Loans or Debtor-Creditor Relationships, which amends the “Loan Provision” in Rule 2-01 of Regulation S-X. The SEC intends the amendment to more effectively identify debtor-creditor relationships that could impair an auditor’s objectivity and impartiality.

The rule amendments are generally consistent with the 2018 proposal and refocuses the independence analysis when the auditor has a lending relationship with certain shareholders of an audit client at any time during an audit or professional engagement period. The amendments:

  • Focus the analysis on beneficial ownership (rather than on both owners of record and beneficial ownership);

  • Replace the existing 10% bright-line shareholder ownership test with a “significant influence” test (consistent with the principles set forth in ASC 323, Investments – Equity Method and Joint Ventures; and

  • Add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the audit client’s equity securities.

For a fund under audit, the amendments exclude from the definition of “audit client” any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending relationships.

The following lending relationships continue to be permissible:

  • Automobile loans and leases collateralized by the automobile

  • Loans fully collateralized by the cash surrender value of an insurance policy 

  • Loans fully collateralized by cash deposits at the same financial institution 

  • A mortgage loan collateralized by the borrower’s primary residence provided the loan was not obtained while the covered person in the firm was a covered person


Why is this important?

The rule amendments change how an auditor’s independence is determined with respect to lending relationships between the auditor and certain shareholders of an audit client.

What's next?

The current requirements of the Loan Provision will remain in force pending the final rule becoming effective. The SEC has indicated that the final rule will become effective 90 days after the date of its publication in the Federal Register.


To have a deeper discussion on the final SEC loan rule, contact:

Michael Greaney

Partner, PwC US


Contact us

David Schmid

David Schmid

International Accounting Leader, National Professional Services Group, PwC US

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