For private funds to comply with the Custody Rule, they usually rely on the annual, independent audit prong for compliance. That rule requires an audit from an auditor that is subject to audit as defined in Regulation S-X. The SEC has proposed some changes to Regulation S-X that affect the auditor independent framework.
“Many of the current independence requirements have not been updated since their initial adoption in 2000 and amendments in 2003. Since that time, the Commission and our staff have, through several consultations per year, continued to learn about the application of our independence rule set and the efficiency and effectiveness of our independence requirements as market conditions and industry practices have changed. The proposed amendments to Rule 2-01 are designed to respond to these changes, reflect the SEC staff’s experience administering the independence requirements, and incorporate consideration of the recent and longer term feedback received from the public. “
The changes look like they will mostly be at the edges of compliance and not have a significant impact on auditor independence for fund managers.
I had some questions about auditor independence a few years ago and found the decision-making about independence to be very opaque with almost no public guidance. This modernization may help improve this process.
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