SEC’s Division of Investment Management Extends Limited “Loan Rule” Relief

September 27, 2017

In a no-action letter dated September 22, 2017 (the “September 2017 Letter”), the Office of Chief Counsel of the SEC’s Division of Investment Management (the “Staff”) extended the temporary assurances it previously provided to a fund group (the “fund”), where in response to the fund’s request in June 2016, the Staff stated that it would not recommend enforcement action against the fund if it continued to fulfill its regulatory requirements by using the audit services of a non-compliant auditing firm under the circumstances represented by the fund.

In response to the fund’s initial request, the Staff issued a no-action letter (the “June 2016 Letter”), confirming that it would generally not object if the fund used financial statements to comply with the federal securities laws requiring an audit opinion where (i) the opinion is issued by an auditing firm that is not in compliance with the “Loan Rule”1; (ii) such non-compliance is limited to the specified lending and ownership relationships described by the fund, including making a reasonable inquiry about the impact of the Loan Rule; and (iii) the auditing firm’s judgment remains objective and impartial.

The Staff’s relief is subject to the following conditions:

  • The fund’s auditing firm must comply with certain rules and requirements of the Public Company Accounting Oversight Board, including the requirement that the firm provide certain written communications regarding its independence to the fund’s audit committee;
  • The auditing firm’s non-compliance with the Loan Rule must be with respect to one of the specific lending and ownership relationships described in the June 2016 Letter; and
  • Notwithstanding such non-compliance, the auditing firm must have concluded that it is objective and impartial with respect to the issues encompassed within its engagement.

The Staff added that the relief will be withdrawn upon the effectiveness of any amendment to the Loan Rule designed to address the concerns expressed in the June 2016 Letter.


1 Registered funds are required to distribute to shareholders annual reports that include financial statements certified by an independent auditing firm. Rule 2-01 of Regulation S-X sets forth specific arrangements that the SEC deems inconsistent with an auditing firm’s independence. The so-called “Loan Rule,” which is one of the specified arrangements, provides that an auditing firm is not independent with respect to an audit client if, among other things, the accountant, or certain persons associated with the accountant, has certain lending or debtor-creditor relationships with the client or any of the client’s officers, directors or beneficial owners of more than 10% of the client’s equity securities.


If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.