[Federal Register: December 1, 2008 (Volume 73, Number 231)]
[Notices]
[Page 72903-72906]
[DOCID:fr01de08-146]

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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

Notice of Passenger Facility Charge (PFC) Approvals and
Disapprovals

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Monthly Notice of PFC Approvals and Disapprovals.

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    In October 2008, there were nine applications approved. This notice
also includes information on two applications, one approved in June
2008 and the other approved in September 2008, inadvertently left off
the June 2008 and September 2008 notices, respectively. Additionally,
22 approved amendments to previously approved applications are listed.
SUMMARY: The FAA publishes a monthly notice, as appropriate, of PFC
approvals and disapprovals under the provisions of the Aviation Safety
and Capacity Expansion Act of 1990 (Title IX of the Omnibus Budget
Reconciliation Act of 1990) (Pub. L. 101-508) and Part 158 of the
Federal Aviation Regulations (14 CFR Part 158). This notice is
published pursuant to paragraph d of Sec.  158.29.

PFC Applications Approved

    Public Agency: Blair County Airport Authority, Martinsburg,
Pennsylvania.
    Application Number: 08-06-C-00-AOO.
    Application Type: Impose and use a PFC.
    PFC Level: $4.50.
    Total PFC Revenue Approved in this Decision: $139,918.
    Earliest Charge Effective Date: December 1, 2011.
    Estimated Charge Expiration Date: December 1, 2014.
    Class of Air Carriers not Required to Collect PFCs: Unscheduled
Part 121 and Part 135 charter operators for hire to the general public.
    Determination: Approved. Based on information contained in the
public agency's application, the FAA has determined that the approved
class accounts for less than 1 percent of the total annual enplanements
at Altoona-Blair County Airport.
    Brief Description of Projects Approved for Collection and Use:
    Improve runway 3/21 and 30 safety areas.
    Expand south hangar apron (construction), phase II.
    Acquire land/easements for runway 3/21, phase II.
    Acquire snow removal equipment (snow blower).
    Construct T-Hangar taxilanes (design), phase I.
    Acquire aircraft rescue and firefighting vehicle, class 1 (per Part
139 safety inspectors).
    Rehabilitate airport beacon (replacement).
    Construct hangar taxilanes (construction), phase II.
    Update airport master plan study.
    Acquire land/easement runway 3/21 primary surface, 1 acre, phase
II, purchase.
    Decision Date: June 6, 2008.

FOR FURTHER INFORMATION CONTACT: Lori Ledebohm, Harrisburg Airports
District Office,<PHONE_NUMBER>.

    Public Agency: Lawton Metropolitan Airport Authority, Lawton,
Oklahoma.
    Application Number: 08-06-C-00-LAW.
    Application Type: Impose and use a PFC.
    PFC Level: $4.50.
    Total PFC Revenue Approved in This Decision: $917,000.
    Earliest Charge Effective Date: April 1, 2009.
    Estimated Charge Expiration Date: November 1, 2013.
    Class of Air Carriers not Required to Collect PFCs: None.
    Brief Description of Projects Approved for Collection and Use:
    Emergency generator.
    Terminal building renovations.
    Security enhancements.
    PFC administration fees.
    Decision Date: September 30, 2008.

FOR FURTHER INFORMATION CONTACT: Bill Bell, Arkansas/Oklahoma Airports
Development Office,<PHONE_NUMBER>.
    Public Agency: Metropolitan Nashville Airport Authority, Nashville,
Tennessee.
    Application Number: 08-14-C-00-BNA.
    Application Type: Impose and use a PFC.
    PFC Level: $3.00.
    Total PFC Revenue Approved in This Decision: $55,362,918.
    Earliest Charge Effective Date: November 1, 2011.
    Estimated Charge Expiration Date: June 1, 2016.
    Class of Air Carriers not Required to Collect PFCs:
    Unscheduled air carriers with enplaned passengers using air taxis
that enplane fewer than 25,000 passengers per year.
    Determination: Approved. Based on information contained in the
public agency's application, the FAA has determined that the approved
class accounts for less than 1 percent of the total annual enplanements
at Nashville International Airport.
    Brief Description of Projects Approved for Collection and Use:
    In-line explosive detection system.
    Reconstruct taxiway Alpha south (construction).
    Terminal renovation and concession upgrade, phase II.
    West side spill gates.
    Terminal access road improvements phase I--road and bridge work.
    Terminal apron repair.
    Rehabilitate Federal Inspection Services facility.
    Brief Description of Project Paritally Approved for Collection and
Use: Reconstruct taxiway Bravo south (construction).
    Determination: This project was for the local matching share of an
Airport Improvement Program grant. The grant amount was less than had
been anticipated resulting in a smaller local matching share.
Therefore, the PFC approved amount was reduced from that requested.
    Decision Date: October 2, 2008.

FOR FURTHER INFORMATION CONTACT: Tommy DuPree, Memphis Airports
District Office,<PHONE_NUMBER>.
    Public Agency: Texas A&M University, College Station, Texas.
    Application Number: 08-06-C-00-CLL.
    Application Type: Impose and use a PFC.
    PFC Level: $4.50.
    Total PFC Revenue Approved in This Decision: $1,385,581.
    Earliest Charge Effective Date: April 1, 2009.
    Estimated Charge Expiration Date: January 1, 2013.
    Class of Air Carriers not Required to Collect PFCs: None.
    Brief Description of Projects Approved for Collection and Use:
    Taxiway E rehabilitation.
    Westside apron (with taxiway H-1 fillet).
    Airfield drainage improvements.
    Perimeter fencing upgrades.
    Airfield regulators.
    Runway 16/34 rehabilitation.
    Wind cones.
    Taxiway H construction.
    Terminal apron expansion.
    Terminal building rehabilitation.
    Security system upgrades--closed circuit television system.
    PFC application and administration.
    Decision Date: October 15, 2008.

FOR FURTHER INFORMATION CONTACT: Steven Cooks, Texas Airports
Development Office,<PHONE_NUMBER>.
    Public Agency: Tulsa Airports Improvement Trust, Tulsa, Oklahoma.
    Application Number: 08-06-C-00-TUL.
    Application Type: Impose and use a PFC.
    PFC Level: $3.00.
    Total PFC Revenue Approved in This Decision: $65,043,406.
    Charge Effective Date: April 1, 2010.
    Estimated Charge Expiration Date: September 1, 2026.
    Class of Air Carriers not Required to Collect PFCs: Air taxi/
commercial operators filing FAA Form 1800-31.
    Determination: Approved. Based on information contained in the
public agency's application, the FAA has determined that the approved
class accounts for less than 1 percent of the total annual enplanements
at Tulsa International Airport.
    Brief Description of Projects Approved for Collection and Use:
    Terminal building rehabilitation and improvement.
    Terminal access roadway rehabilitation.
    Medium intensity approach lighting system with runway end
identifier lights installation, runway 26.
    Runway 26 repair and rehabilitation.
    Taxiway C and taxiway L repair and rehabilitation.
    Runway 18L/36R rehabilitation.
    Taxiway J design and rehabilitation.
    Decision Date: October 16, 2008.

FOR FURTHER INFORMATION CONTACT: Lana Logan, Arkansas/Oklahoma Airports
Development Office,<PHONE_NUMBER>.
    Public Agency: Luzerne and Lackawanna Counties, Avoca,
Pennsylvania.
    Application Number: 08-05-C-00-AVP.
    Application Type: Impose and use a PFC.
    PFC Level: $4.50.
    Total PFC Revenue Approved in This Decision: $6,888,604.
    Earliest Charge Effective Date: April 1, 2011.
    Estimated Charge Expiration Date: August 1, 2017.
    Class of Air Carriers not Required to Collect PFCs: None.
    Brief Description of Projects Approved for Collection and Use:
    Runway 4/22 overlay.
    Runway 4/22 emergency repairs.
    Runway sensor system computers.
    Security vehicles including airfield radios and aircraft rescue and
firefighting pagers.
    Replace 22-foot runway flared end snow plow.
    Continuous runway friction measuring equipment.
    Seal coat aircraft ramp and rejuvenate taxiways to runway 10/28.
    Expand concrete area of airline ramp.
    Four wheel drive loader.
    Brief Description of Projects Approved for Collection:
    Rehabilitate general aviation and old terminal apron.
    Quick response aircraft rescue and firefighting vehicle.
    Construct taxiway B extension to runway 22 end (environmental
assessment and design).
    Rehabilitate landside roadway.
    Construct shoulders along taxiway D.
    Brief Description of Disapproved Project:
    Construct covered walkway to employee parking.
    Determination: This project is not Airport Improvement Program
eligible, and therefore, is not PFC eligible.
    Decision Date: October 17, 2008.

FOR FURTHER INFORMATION CONTACT: Lori Ledebohm, Harrisburg Airports
District Office,<PHONE_NUMBER>.
    Public Agency: Clark County Department of Aviation, Las Vegas,
Nevada.
    Application Number: 08-07-U-00-LAS.
    Application Type: Use PFC revenue.
    PFC Level: $4.50.
    Total PFC Revenue Approved for Use in this Decision: $379,859,124.
    Charge Effective Date: April 1, 2014.
    Estimated Charge Expiration Date: July 1, 2022.
    Class of Air Carriers not Required to Collect PFC's: No change from
previous decision.
    Brief Description of Projects Approved for Use at a $4.50 PFC
Level:
    Design of terminal 3.
    Russell Road relocation.
    Brief Description of Project Approved for Use at a $3.00 PFC Level:
Russell Road park.
    Decision Date: October 23, 2008.

FOR FURTHER INFORMATION CONTACT: Ron Biaoco, San Francisco Airports
District Office,<PHONE_NUMBER>, extension 626.
    Public Agency: City of Amarillo, Texas.
    Application Number: 08-01-C-00-AMA.
    Application Type: Impose and use a PFC.
    PFC Level: $4.50.
    Total PFC Revenue Approved in This Decision: $19,200,000.
    Earliest Charge Effective Date: December 1, 2008.
    Estimated Charge Expiration Date: July 1, 2018.
    Class of Air Carriers not Required to Collect PFC's:
    Nonscheduled/on-demand Part 135 air carriers filing FAA Form 1800-
31.
    Determination: Approved. Based on information contained in the
public agency's application, the FAA has determined that the approved
class accounts for less than 1 percent of the total annual enplanements
at Rick Husband Amarillo International Airport.
    Brief Description of Project Approved for Collection and Use:
Construction of the terminal building addition and update of systems in
the main terminal.
    Decision Date: October 29, 2008.

FOR FURTHER INFORMATION CONTACT: Glenn Boles, Texas Airports
Development Office,<PHONE_NUMBER>.
    Public Agency: City of Houston, Texas.
    Application Number: 08-01-C-00-IAH.
    Application Type: Impose and use a PFC.
    PFC Level: $3.00.
    Total PFC Revenue Approved in this Decision: $1,372,445,143.
    Earliest Charge Effective Date: December 1, 2008.
    Estimated Charge Expiration Date: November 1, 2027.
    Class of Air Carriers not Required to Collect PFCs:
    Air taxi/commercial operators filing FAA Form 1800-31.
    Determination: Approved. Based on information contained in the
public agency's application, the FAA has determined that the approved
class accounts for less than 1 percent of the total annual enplanements
at George Bush Intercontinental Airport.
    Brief Description of Projects Approved for Collection and Use:
    Automated people mover system.
    Terminal B expansion program and related improvements.
    Central Federal Inspection Services facility.
    New north parallel runway.
    PFC program administrative costs.
    Central plant heating, ventilation, and air conditioning upgrades.
    Terminal A/B south taxiways.
    Decision Date: October 29, 2008.

FOR FURTHER INFORMATION CONTACT: Ben Guttery, Texas Airports
Development Office,<PHONE_NUMBER>.
    Public Agency: Evansville-Vanderburgh Airport Authority,
Evansville, Indiana.
    Application Number: 08-02-C-00-EVV.
    Application Type: Impose and use a PFC.
    PFC Level: $4.50.
    Total PFC Revenue Approved in this Decision: $3,983,706.

    Earliest Charge Effective Date: December 1, 2008.
    Estimated Charge Expiration Date: March 1, 2013.
    Class of Air Carriers not Required to Collect PFC's:
    Air taxi/commercial operators filing FAA Form 1800-31.
    Determination: Approved. Based on information contained in the
public agency's application, the FAA has determined that the approved
class accounts for less than 1 percent of the total annual enplanements
at Evansville Regional Airport.
    Brief Description of Projects Approved for Collection and Use:
    Install perimeter road, fence, and drainage basin.
    PFC administrative costs.
    Decision Date: October 30, 2008.

FOR FURTHER INFORMATION CONTACT: Gary Wilson, Chicago Airports District
Office,<PHONE_NUMBER>.
    Public Agency: Duluth Airport Authority, Duluth, Minnesota.
    Application Number: 08-08-C-00-DLH.
    Application Type: Impose and use a PFC.
    PFC Level: $4.50.
    Total PFC Revenue Approved in This Decision: $422,485.
    Earliest Charge Effective Date: May 1,2010.
    Estimated Charge Expiration Date: April 1, 2011.
    Class of Air Carriers not Required to Collect PFC's: Air taxi/
commercial operators.
    Determination: Approved. Based on information contained in the
public agency's application, the FAA has determined that the approved
class accounts for less than 1 percent of the total annual enplanements
at Duluth International Airport.
    Brief Description of Projects Approved for Collection and Use:
    Preparation of PFC letter of intent.
    Conduct wildlife assessment.
    Design terminal building modifications.
    Planning for replacement terminal building and apron.
    Rehabilitate and expand cargo apron.
    Rehabilitate runway 3/21.
    Remove and replace boiler in terminal building.
    Conduct pavement condition index inventory study.
    Prepare spill prevention control and countermeasures plan.
    Expand terminal building for baggage and ticketing.
    Prepare plans and specifications for passenger boarding bridge.
    Rehabilitate and expand general aviation aircraft parking area.
    Construct taxiway to new general aviation apron.
    Construct general aviation apron.
    Construct taxiway to future hangar area.
    Construct taxilane within future hangar area.
    Relocate and construct general aviation area access road.
    Replace airport beacon.
    Purchase Minnesota Power hangar.
    Purchase Monaco T-Hangar.
    Decision Date: October 30, 2008.

FOR FURTHER INFORMATION CONTACT: Nancy Nistler, Minneapolis Airports
District Office,<PHONE_NUMBER>.

                                           Amendments To PFC Approvals
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                                                                                Original     Amended
                                            Amendment      Original         Amended      Estimated    Estimated
        Amendment No., City, State           Approved    Approved Net    Approved Net   Charge Exp.  Charge Exp.
                                               Date       PFC Revenue     PFC Revenue       Date         Date
----------------------------------------------------------------------------------------------------------------
*03-05-C-01-AOO Altoona, PA..............     06/08/08        $232,460        $208,710     11/01/13     12/01/11
92-01-C-11-SJC San Jose, CA..............     09/26/08     $64,570,368     $65,220,180     07/01/96     07/01/96
99-07-C-03-SJC San Jose, CA..............     09/26/08     $12,628,000     $12,778,609     07/01/02     07/01/02
01-11-C-03-SJC San Jose, CA..............     09/26/08    $131,055,103    $131,401,412     01/01/07     02/01/08
94-01-C-05-ISP Islip, NY.................     09/29/08     $21,974,503     $21,865,831     07/01/04     07/01/04
92-01-C-01-ACV Arcata, CA................     09/30/08        $188,500        $169,564     03/01/94     03/01/94
04-04-0-01-LAW Lawton, OK................     09/30/08        $253,021        $249,492     10/01/05     10/01/05
97-01-C-02-MFE McAllen, TX...............     09/30/08      $3,114,426      $3,304,011     01/01/02     01/01/02
03-03-C-01-HLN Helena, MT................     10/07/08      $2,336,432      $2,938,178     06/01/10     10/01/12
94-01-C-10-10-CVG Covington, KY..........     10/08/08     $35,797,000     $27,431,000     04/01/96     04/01/96
95-02-C-07-CVG Covington, KY.............     10/08/08     $76,920,000     $73,633,000     12/01/98     12/01/98
01-06-C-04-CVG Covington, KY.............     10/08/08     $19,580,000     $16,313,000     11/01/02     11/01/02
01-07-C-06-CVG Covington, KY.............     10/08/08     $39,590,000     $39,596,000     02/01/04     02/01/04
02-08-C-04-CVG Covington, KY.............     10/08/08    $268,108,000    $213,098,000     11/01/11     05/01/09
07-11-C-01-CVG Covington, KY.............     10/08/08      $6,478,000      $3,590,000     11/01/15     09/01/12
08-08-C-01-JNU Juneau, AK................     10/09/08      $8,142,712      $9,905,870     08/01/16     11/01/17
06-07-C-01-BUR Burbank, CA...............     10/09/08     $19,543,195     $26,793,195     09/01/12     09/01/12
96-03-0-02-LAX Los Angeles, CA...........     10/10/08     $52,027,000     $54,716,297     01/01/96     01/01/96
01-04-C-02-MAF Midland, TX...............     10/14/08      $1,622,298      $1,395,921     11/01/14     11/01/14
07-05-C-01-MAF Midland, TX...............     10/14/08      $1,553,549      $1,544,032     08/01/15     08/01/15
01-04-C-01-CLL College Station, TX.......     10/16/08      $1,174,445      $1,306,529     01/01/07     01/01/07
04-08-C-03-RNO Reno, NV..................     10/23/08     $26,712,865     $49,500,000     08/01/07     07/01/07

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NOTES: The amendment denoted by an asterisk (*) includes a change to the PFC level charged from $3.00 per
  enplaned passenger to $4.50 per enplaned passenger. For Altoona, PA this change is effective on December 1,
  2008.

    Issued in Washington, DC on November 20, 2008.
Joe Hebert,
Manager, Financial Analysis and Passenger Facility Charge Branch.
[FR Doc. E8-28227 Filed 11-28-08; 8:45 am]

BILLING CODE 4910-13-M


application of current Rule 2-01(f)(4)(ii) and (iii). The proposed
amendment simply would align the ICC definition with the existing
definition of affiliate of the audit client. Consistent with an auditor
of an operating company, auditors of investment companies and
investment advisers or sponsors who, under the proposed amendments, are
directed to look solely to proposed Rule 2-01(f)(14), would be required
to consider significant influence when identifying affiliates of the
audit client.
b. Proposed Amendment to ``Audit and Professional Engagement Period''
    Currently, the term ``audit and professional engagement period'' is
defined differently for domestic first time filers and FPI first time
filers.\85\ A domestic IPO registration statement must include either
two or three years of audited financial statements, and auditors of
domestic first time filers need to comply with Rule 2-01 for all
audited financial statement periods included in the registration
statement.\86\ This may result in certain inefficiencies in the IPO
process for domestic filers, such as the need to delay the offering or
switch to a less well-qualified auditor to comply with independence
requirements. In comparison, for FPIs, the corresponding ``audit and
professional engagement period'' includes only the fiscal year
immediately preceding the initial filing of the registration statement
or report. As a consequence, the current definition of the ``audit and
professional engagement period'' creates disparate application of the
independence requirements between domestic issuers and FPIs. To address
this disparate treatment, we propose to amend the definition such that
the one-year look-back provision applies to all first time filers,
domestic and foreign.
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    \85\ See Section II.A.2.
    \86\ For example, a specialized auditor may be excluded from
consideration if the auditor provided a prohibited service (e.g.,
management functions) to a domestic filer in the third year before
the firm files the registration statement for the first time. Even
though the auditor has stopped providing such service to the filer
starting two years prior to the firm's filing the registration
statement, under the current definition, the auditor will not
qualify as ``independent'' under Rule 2-01.
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    The proposed amendment to the definition of ``audit and
professional engagement period'' would require domestic first time
filers to assess auditor independence over a shortened look-back period
(i.e., a single immediate preceding year). The proposed change likely
would alleviate the compliance challenges noted above for both domestic
first time filers and their auditors. As a result, this proposed
amendment could help domestic firms avoid the compliance costs
associated with switching auditors or delaying the filing of an initial
registration statement. These reduced compliance costs may facilitate
additional domestic IPOs and thereby promote efficiency and capital
formation.
    This proposed amendment might also expand the pool of eligible
auditors for domestic first time filers. The potential increase in the
number of eligible auditors for these filers could foster competition
among eligible auditors and thus reduce the cost of audit services.\87\
Specifically, where an audit client is looking to potentially change
auditors, an audit client would be able to select from a broader group
of auditors to perform audit services related to the audit client's IPO
even if the auditor had provided prohibited services or had prohibited
relationships in the second or third year prior to filing the IPO.
However, the audit industry is already highly concentrated, especially
with respect to IPOs,\88\ and consequently, such a benefit may not be
significant. The expanded pool of qualified auditors could allow the
first time domestic filers to better match auditor expertise to audit
engagements. We anticipate that the improved alignment between auditor
expertise and audit engagement likely would positively influence audit
and financial reporting quality, thereby benefiting investors and
improving market efficiency.\89\
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    \87\ See supra note 77.
    \88\ See United State Government Accountability Office, Audits
of Public Companies--Continued Concentration in Audit Market for
Large Public Companies Does Not Call for Immediate Action (2008)
available at www.gao.gov/new.items/d08163.pdf. See also Patrick
Velte and Markus Stiglbauer, Audit Market Concentration and Its
Influence on Audit Quality, 5 Intl. Bus. Res. (2012) 146; and
Xiaotao Liu and Biyu Wu, Do IPO Firms Misclassify Expenses? Working
paper, (2019). They show that 84.2% of IPO firms of their sample use
Big 4 auditors before going public.
    \89\ See supra note 79 and accompanying text.
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    The proposed change in the look-back period for domestic first time
filers might lead to some financial statements in early years being
audited by auditors that do not meet the Commission's current
independence requirements, thus potentially compromising the integrity
and reliability of financial reporting information related to the
earlier second and third years, if included in the first filing.
However, this potential adverse effect would be mitigated by the
requirement for these auditors to meet applicable independence
requirements--such as AICPA independence requirements--for the audits
of these periods and by the application of the general standard in Rule
2-01(b) to the relationships and services in those earlier years. In
addition, there are often, if not always, internal and external
governance mechanisms (e.g., audit committee and underwriters) in place
at first time filers, and auditors are subject to heightened litigation
risk around IPOs.\90\
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    \90\ See Ray Ball and Lakshmana Shivakumar, Earnings Quality at
Initial Public Offerings, 45, J. Acct. Econ. (2008) 324-349. See
also Ramgopal Venkataraman, Joseph P. Weber and Michael Willenborg,
Litigation Risk, Audit Quality, and Audit Fees: Evidence from
Initial Public Offerings. 83 Acct Rev. (2008) 1315-1345.
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c. Proposed Amendments to Loans or Debtor-Creditor Relationships
    Currently, Rule 2-01 prohibits certain loans/debtor-creditor
relationship and other financial interests with a few exceptions.\91\
Commenter feedback from the Loan Provision Proposing Release supported
certain additional exceptions

(or exclusions) for these otherwise prohibited financial interests. As
a result, the proposed amendments would make the following additional
changes: (1) Include, as part of the exceptions, student loans for a
covered person's educational expenses as long as the loan was obtained
while the individual was not a covered person, and (2) update the
Credit Card Rule to refer instead to ``consumer loans'' in order to
except personal consumption loans such as retail installment loans,
cell phone installment plans, and home improvement loans that are not
secured by a mortgage on a primary residence.
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    \91\ Rule 2-01(c)(1)(ii).
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    The proposed amendments to except certain student and consumer
loans that are less likely to raise threats to auditors' objectivity or
impartiality may alleviate some compliance burdens. For instance, audit
firms would no longer have to monitor such student and consumer loans
as part of their compliance program. The proposed amendments would
permit certain covered persons (including audit partners and staff) to
be considered independent notwithstanding the existence of certain
lending relationships, such as student loans or consumer loans. The
potential expansion of qualified audit partners and staff may allow
audit firms to more readily identify audit partners and staff for a
given audit engagement and improve matching between partner and staff
experience with audit engagements. The improved alignment between
partner and staff experience and audit engagements can increase audit
efficiency and reduce audit costs. Such efficiency gains may transfer
to audit clients in the form of reduced audit fees and audit delays.
    Moreover, the better alignment between partner and staff experience
and audit engagement may increase audit quality.\92\ Since audit
quality improvement increases financial reporting quality, this benefit
likely would accrue to the overall investment community.\93\ Finally,
the proposed amendments likely would make it easier for covered persons
and their immediate family members to obtain necessary consumer loans,
as they would no longer need to be concerned about such loans
categorically being deemed as independence impairing.
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    \92\ See e.g., G. Bradley Bennett & Richard C. Hatfield, The
Effect of the Social Mismatch between Staff Auditors and Client
Management on the Collection of Audit Evidence, 88 Acct. Rev. (2013)
31-50.
    \93\ See supra note 74 and accompanying text.
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    The exclusion of previously prohibited financial obligations may
increase the likelihood that some covered persons may participate in an
audit of a client even when the covered persons or their family members
have some financial relationships with the audit client, or an audit
client's officers, directors, or beneficial owners. However, we do not
believe student loans obtained by covered persons prior to being a
covered person or de minimis consumer loans are likely to threaten an
auditor's objectivity and impartiality.
d. Proposed Amendments to the Reference to ``Substantial Stockholder''
in the Business Relationships Rule
    The Business Relationships Rule currently refers to ``substantial
stockholders'' to identify a type of ``person associated with the audit
client in a decision-making capacity.'' \94\ Under the current rule, a
business relationship between a substantial stockholder of the audit
client, among others, and the auditor or covered person would be
considered independence-impairing. The proposed amendment would change
the term ``substantial stockholders'' to ``beneficial owners (known
through reasonable inquiry) of the audit client's equity securities
where such beneficial owner has significant influence over the audit
client'' to align this rule with changes recently made to the Loan
Provision. The proposed amendment should improve compliance with the
auditor independence rules by improving the clarity and reducing the
complexity of application of the Business Relationships Rule.
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    \94\ See Rule 2-01(c)(3).
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    There may be some additional compliance costs to auditors and audit
clients associated with having to comply with a standard that now
requires identifying beneficial owners of equity securities that have
``significant influence'' over the audit client, as opposed to
identifying ``substantial stockholders.'' However, any such additional
cost should be limited given that the concept of ``significant
influence'' has been part of the Commission's auditor independence
rules since 2000,\95\ and we do not expect a significant learning curve
in applying the test for auditors and registrants.
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    \95\ See e.g., Rule 2-01(f)(4)(ii) and (iii).
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e. Proposed Amendments for Inadvertent Violations for Mergers and
Acquisitions
    Currently, certain aspects of Rule 2-01 require auditor
independence compliance during the audit and professional engagement
period, which may include periods before, during, and after merger and
acquisition transactions. As a result, certain merger and acquisition
transactions could give rise to inadvertent violations of auditor
independence requirements. For example, an auditor may provide
management functions to a target firm and auditing services to an
acquirer prior to the occurrence of an acquisition. As a result, the
acquisition may result in an auditor independence violation that had
not existed prior to the acquisition. In this scenario, the auditor's
objectivity and impartiality is likely not impaired.\96\
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    \96\ See supra note 51.
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    There may be compliance costs associated with the application of
the current rule in that registrants might have to: (i) Delay mergers
and acquisitions in order to comply with Rule 2-01, (ii) forgo
potentially value-enhancing transactions altogether, or (iii) switch
auditors or stop the prohibited relationships or services mid-stream,
potentially resulting in disruption to the registrant.
    We are proposing amendments to Rule 2-01 to establish a transition
framework for mergers and acquisitions to address these costs. Under
the proposed amendments, auditors and their audit clients would be able
to transition out of prohibited relationships or services in an orderly
manner in certain situations. As such, the proposed amendments likely
would reduce registrants' independence compliance costs in merger and
acquisition transactions by reducing the uncertainty associated with
incidences of inadvertent violations of auditor independence due to
these corporate events. For example, the proposed transition framework
would allow, in certain situations, up to six months after the
transaction effective date to correct the prohibited relationship or
service. As a result, the proposed framework would help registrants,
especially those entities with complex organizational structures and
those actively pursuing merger and acquisition transactions, to achieve
full and timely compliance with the auditor independence requirements
when they undertake mergers and acquisitions without missing out on the
ideal timing for such transactions. In addition, investors may
indirectly benefit from the value created through timely mergers and
acquisitions and costs saved from managing inadvertent independence
violations.
    There may be transitional costs to auditors and audits clients as
they adapt to the proposed framework. However, given that the framework
follows the consideration of the audit firm's quality controls similar
to existing Rule 2-

01(d), we do not expect a significant learning curve in applying the
proposed framework for auditors and audit clients. The proposed
framework does not alter the independence requirements for entities
involved in mergers and acquisitions per se; rather, the framework
offers a more practical approach to, and timeline for, addressing
inadvertent independence violations as a result of certain merger and
acquisition transactions. Thus, we do not anticipate significant
compliance costs associated with this amendment.

D. Effects on Efficiency, Competition and Capital Formation

    We believe that the proposed amendments likely would improve the
practical application of Rule 2-01, enhance efficiency of rule
implementation, reduce compliance burdens, and increase competition
among auditors. They also may facilitate capital formation.
    The proposed amendments to Rule 2-01 aim to reduce or remove
certain practical challenges associated with the auditor independence
analysis by focusing the analysis on those relationships and services
that are more likely to pose a threat to an auditor's objectivity and
impartiality. The proposed amendments are expected to expand the pool
of eligible auditors and covered persons to undertake audit engagements
without impairing auditors' independence. As a result, audit clients
should have more options and audit costs may decrease. The potential
expansion of eligible auditing service providers may also lead to
better alignment between the audit client's needs and the auditor's
expertise. The improved alignment between auditor specialties and audit
clients could enable auditors to perform auditing services more
efficiently and effectively, thus potentially reducing audit fees and
increasing audit quality over the long term.
    The proposed amendments deemphasize relationships and services that
are unlikely to threaten auditor objectivity and impartiality, thus
allowing auditors and audit clients to focus on those relationships and
services that are more likely to threaten the auditor's objectivity and
impartiality. To the extent that the proposed amendments do so, the
quality of financial reporting is likely to improve, and the amount of
audit client audit committee attention to independence questions when
objectivity and impartiality is not at issue will be reduced, thus
allowing the board to focus on its other responsibilities. Furthermore,
we expect that improved identification of threats to auditor
independence would increase investor confidence about the quality and
accuracy of the information reported. Reduced uncertainty about the
quality and accuracy of financial reporting should attract capital and
thus reduce cost of capital, facilitate capital formation and improve
overall market efficiency.\97\
---------------------------------------------------------------------------

    \97\ See supra note 74. See also Nilabhra Bhattacharya, Frank
Ecker, Per Olsson, and Katherine Schipper, Direct and Mediated
Associations among Earnings Quality, Information Asymmetry and the
Cost Of Equity, 87, Acct Rev. (2012) 449-482; and Shuai Ma. Economic
Links and the Spillover Effect of Earnings Quality on Market Risk.
92 Acct Rev. (2017). 213-245.
---------------------------------------------------------------------------

    The proposed amendments also may lead to changes in the competitive
structure of the audit industry. We expect more accounting firms to be
eligible to provide auditing services and be in compliance with
proposed Rule 2-01. If the larger audit firms are the ones more likely
to engage in non-audit relationships and services, and therefore, are
more likely not to be in compliance with the existing Rule 2-01, then
these firms are more likely to be positively affected by the proposed
amendments. In particular, these firms may be able to compete for or
retain a larger pool of audit clients. At the same time, the larger
firms' potentially increased ability to compete for audit clients could
potentially crowd out the auditing business of smaller audit firms.
However, we estimate that the four largest accounting firms already
perform 46 percent of audits for all registrants (or about 75 percent
of accelerated and large accelerated filers) and more than 80 percent
in the registered investment company space.\98\ As a result, we do not
expect any potential change in the competitive dynamics among auditor
firms to be significant.
---------------------------------------------------------------------------

    \98\ See supra note 71. Also, as of December 2018, there were
approximately 12,577 fund series, with total net assets of $23
trillion that are covered by Morningstar Direct with identified
accounting firms. There were 23 accounting firms performing audits
for these investment companies. These audit services were very
concentrated, as 86% of the funds were audited by the four largest
accounting firms.
---------------------------------------------------------------------------

E. Alternatives

    We considered certain alternative approaches to the proposed
amendments, which we summarize below.
    The proposed amendments would exclude certain student loans of a
covered person that were obtained prior to the individual becoming a
covered person in the audit firm from consideration as part of the
independence analysis, as such loans are less likely to influence an
auditor's objectivity and impartiality. The proposed exclusion,
however, would not encompass student loans to immediate family members
of the covered person. An alternative approach would be to exclude all
student loans of a covered person and the individual's immediate family
members obtained before the individual became a covered person. Student
loans for immediate family members are individually similar to those
for the covered person and may be less likely to pose threats to the
objectivity or impartiality of the covered person. Excluding such loans
could further address auditors' constraints when seeking to maintain
compliance with the auditor independence requirements. However, when
all student loans of the covered person's immediate family members are
considered, the aggregated amount could be significant and, as a
result, excluding such loans could increase threats to the covered
person's independence.
    Another alternative to the exclusion of student loans of the
covered person would be a bright-line test in which, if the percentage
of the aggregate amount of the student loans of a covered person and
his or her immediate family members to the total wealth of the covered
person's family is below a certain threshold, then all of the students
loans would be excluded from the prohibition. This alternative has the
advantage of better capturing the importance of the student loans to
the covered person's financial interests. However, this alternative,
because it is a bright-line test, may lead to over-identifying or
under-identifying scenarios where the auditor's objectivity and
impartiality are deemed impaired, especially in cases close to the
selected percentage threshold. In addition, this alternative could
present operational and privacy challenges in calculating and
monitoring changes to a family's total wealth.
    The proposed transition framework for merger and acquisition
transactions includes a provision that in certain situations allows
affected auditors and audit clients up to six months following the
completion of the transaction to promptly correct the prohibited
relationship or service. An alternative approach would be to require
correction within six months following the merger or acquisition
announcement. A benefit of this alternative approach would be the
improved timeliness of auditor compliance following merger and
acquisition transactions. Under this alternative, auditors and
registrants would assess independence compliance analysis immediately
following the

announcement that a definite agreement has been reached. However, some
mergers and acquisitions take a long time to be completed and a
substantial portion of such transactions never reach completion. As a
result, an alternative window of six months following announcement of
the merger or acquisition may unnecessarily increase compliance burdens
and associated costs (e.g., switching costs) for both affected
companies and their auditors when such transactions are delayed or
never successfully completed.
    Finally, an alternative approach to shortening the look-back period
for domestic first time filers would be to increase the look-back
period for foreign first time filers to align with the current
requirement for domestic first time filers. While this alternative
would help level the playing field for both domestic and foreign first
time filers and reduce the likelihood of potential independence
impairing relationships and services, it would increase compliance
burdens for foreign first time issuers and thus may reduce the
incentives for the foreign first time filers to list in the United
States, thereby impeding capital formation and limiting investment
opportunities for U.S. investors.

F. Request for Comment

    We request comment on all aspects of our economic analysis,
including the potential costs and benefits of the proposed amendments
and alternatives thereto, and whether the rules, if adopted, would
promote efficiency, competition, and capital formation or have an
impact on investor protection. Commenters are requested to provide
empirical data, estimation methodologies, and other factual support for
their views, in particular, on costs and benefits estimates.

IV. Paperwork Reduction Act

    The amendments we are proposing do not impose any new ``collections
of information'' within the meaning of the Paperwork Reduction Act of
1995 (``PRA''),\99\ nor do they create any new filing, reporting,
recordkeeping, or disclosure requirements. Accordingly, we are not
submitting the proposed amendments to the Office of Management and
Budget for review in accordance with the PRA.\100\ We request comment
on whether our conclusion that the proposed amendments would not impose
any new collections of information is correct.
---------------------------------------------------------------------------

    \99\ 44 U.S.C. 3501 et seq.
    \100\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

V. Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \101\ requires the
Commission, in promulgating rules under section 553 of the
Administrative Procedure Act,\102\ to consider the impact of those
rules on small entities. We have prepared this Initial Regulatory
Flexibility Act Analysis (``IRFA'') in accordance with 5 U.S.C. 603.
This IRFA relates to the proposed amendments to Rule 2-01 of Regulation
S-X.
---------------------------------------------------------------------------

    \101\ 5 U.S.C. 601 et seq.
    \102\ 5 U.S.C. 553.
---------------------------------------------------------------------------

A. Reasons for and Objectives of the Proposed Action

    As discussed above, the primary reason for, and objective of, the
proposed amendments is to update certain provisions within the
Commission's auditor independence rules to more effectively focus the
analysis on those relationships or services that are more likely to
pose threats to an auditor's objectivity and impartiality.
Specifically, the proposed amendments would:
     Amend the definitions of affiliate of the audit client and
ICC to address certain affiliate relationships;
     Shorten the look-back period for domestic first time
filers in assessing compliance with the independence requirements;
     Add certain student loans and de minimis consumer loans to
the categorical exclusions from independence-impairing lending
relationships;
     Replace the reference to ``substantial stockholders'' in
the business relationship rule with the concept of beneficial owners
with significant influence;
     Introduce a transition framework for merger and
acquisition transactions to consider whether an auditor's independence
is impaired; and
     Make certain other updates.
    The reasons for, and objectives of, the proposed rules are
discussed in more detail in Sections I and II above.

B. Legal Basis

    We are proposing the amendments pursuant to Schedule A and Sections
7, 8, 10, and 19 of the Securities Act, Sections 3, 10A, 12, 13, 14,
17, and 23 of the Exchange Act, Sections 8, 30, 31, and 38 of the
Investment Company Act, and Sections 203 and 211 of the Investment
Advisers Act.

C. Small Entities Subject to the Proposed Rules

    The proposed amendments would affect small entities that file
registration statements under the Securities Act, the Exchange Act, and
the Investment Company Act and periodic reports, proxy and information
statements, or other reports under the Exchange Act or the Investment
Company Act, as well as smaller registered investment advisers and
smaller accounting firms. The RFA defines ``small entity'' to mean
``small business,'' ``small organization,'' or ``small governmental
jurisdiction.'' \103\ The Commission's rules define ``small business''
and ``small organization'' for purposes of the Regulatory Flexibility
Act for each of the types of entities regulated by the Commission.
Securities Act Rule 157 \104\ and Exchange Act Rule 0-10(a) \105\
define an issuer, other than an investment company, to be a ``small
business'' or ``small organization'' if it had total assets of $5
million or less on the last day of its most recent fiscal year. We
estimate that, as of December 31, 2018, there are approximately 1,173
issuers, other than registered investment companies, that may be small
entities subject to the proposed amendments.\106\ The proposed
amendments would affect small entities that have a class of securities
that are registered under Section 12 of the Exchange Act or that are
required to file reports under Section 15(d) of the Exchange Act. In
addition, the proposed amendments would affect small entities that
file, or have filed, a registration statement that has not yet become
effective under the Securities Act and that has not been withdrawn.
---------------------------------------------------------------------------

    \103\ 5 U.S.C. 601(6).
    \104\ 17 CFR 230.157.
    \105\ 17 CFR 240.0-10(a).
    \106\ This estimate is based on staff analysis of issuers,
excluding co-registrants, with EDGAR filings on Forms 10-K, 20-F and
40-F, or amendments thereto, filed during the calendar year of
January 1, 2018, to December 31, 2018. The analysis is based on data
from XBRL filings, Compustat, and Ives Group Audit Analytics.
---------------------------------------------------------------------------

    An investment company is considered to be a ``small business'' for
purposes of the RFA, if it, together with other investment companies in
the same group of related investment companies, has net assets of $50
million or less at the end of the most recent fiscal year.\107\
Commission staff estimates that, as of June 2019, approximately 42
registered open-end mutual funds, 8 registered ETFs, 33 registered
closed-end funds, and 16 BDCs (collectively, 99 funds) are small
entities.\108\
---------------------------------------------------------------------------

    \107\ 17 CFR 270.0-10(a).
    \108\ This estimate is derived an analysis of data obtained from
Morningstar Direct as well as data reported to the Commission for
the period ending June 2019.

---------------------------------------------------------------------------

    For purposes of the RFA, an investment adviser is a small entity if
it:
    (1) Has assets under management having a total value of less than
$25 million;
    (2) Did not have total assets of $5 million or more on the last day
of the most recent fiscal year; and
    (3) Does not control, is not controlled by, and is not under common
control with another investment adviser that has assets under
management of $25 million or more, or any person (other than a natural
person) that had total assets of $5 million or more on the last day of
its most recent fiscal year.\109\
---------------------------------------------------------------------------

    \109\ 17 CFR 275.0-7.
---------------------------------------------------------------------------

    We estimate, as June 30, 2019, that there are approximately 470
investment advisers that would be subject to the proposed amendments
that may be considered small entities.\110\
---------------------------------------------------------------------------

    \110\ This estimate is based on SEC registered investment
adviser responses to Item 12 of Form ADV.
---------------------------------------------------------------------------

    For purposes of the RFA, a broker-dealer is considered to be a
``small business'' if its total capital (net worth plus subordinated
liabilities) is less than $500,000 on the date in the prior fiscal year
as of which its audited financial statements were prepared pursuant to
Rule 17a-5(d) under the Exchange Act,\111\ or, if not required to file
such statements, a broker-dealer with total capital (net worth plus
subordinated liabilities) of less than $500,000 on the last day of the
preceding fiscal year (or in the time that it has been in business, if
shorter); and that is not affiliated with any person (other than a
natural person) that is not a small business or small
organization.\112\ As of December 31, 2018, there are approximately 985
small entity broker-dealers that will be subject to the final
amendments.\113\
---------------------------------------------------------------------------

    \111\ 17 CFR 240.17a-5(d).
    \112\ 17 CFR 240.0-10(c).
    \113\ This estimate is based on the most recent information
available, as provided in Form X-17A-5 Financial and Operational
Combined Uniform Single Reports filed pursuant to Section 17 of the
Exchange Act and Rule 17a-5 thereunder.
---------------------------------------------------------------------------

    Our rules do not define ``small business'' or ``small
organization'' for purposes of accounting firms. The Small Business
Administration (SBA) defines ``small business,'' for purposes of
accounting firms, as those with under $20.5 million in annual
revenues.\114\ We have limited data indicating revenues for accounting
firms, and we cannot estimate the number of firms with less than $20.5
million in annual revenue. We request comment on the number of
accounting firms with revenue under $20.5 million.
---------------------------------------------------------------------------

    \114\ 13 CFR 121.201 and North American Industry Classification
System (NAICS) code 541211. The SBA calculates ``annual receipts''
as all revenue. See 13 CFR 121.104.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The proposed amendments would not impose any reporting,
recordkeeping, or disclosure requirements. The proposed amendments
would impose new compliance requirements with respect to Rule 2-01.
    With respect to the proposed amendments related to student loans,
consumer loans, and the definition of the audit and engagement period
for first time filers, we believe that such proposed amendments would
not increase costs for smaller entities, including smaller accounting
firms. With respect to the proposed amendments related to the
definitions of affiliate of the audit client and ICC, the proposed
amendments should serve to reduce, if at all, the number of entities
that are deemed affiliates of the audit client. As such, any additional
compliance effort related to the revised definitions would be offset by
the less restrictive nature of the proposed definition as compared to
the current definition.
    With respect to the proposed amendment adding a merger and
acquisition transition framework, there would be a new compliance
burden only if the auditor and its client seek to avail themselves of
the framework. As such, any additional compliance effort would be
offset in any circumstance where relationships and services prohibited
under the current rule would be deemed not to impair independence under
the proposed amendments.
    Regarding the amendment to the Business Relationship Rule to
replace the reference to ``substantial stockholders'' with the concept
of beneficial owners with significant influence, the concept of
``significant influence'' already exists in other parts of the auditor
independence rules, including the recently amended Loan Provision.\115\
As such, we believe that affected entities likely would be able to
leverage any existing practices, processes or controls to comply with
the proposed amendments compared to having separate compliance
requirements by retaining the reference to substantial stockholder.
---------------------------------------------------------------------------

    \115\ See supra note 7.
---------------------------------------------------------------------------

    Compliance with the proposed amendments would require the use of
professional skills, including accounting and legal skills. The
proposed amendments are discussed in detail in Section II above. We
discuss the economic impact, including the estimated costs, of the
proposed amendments in Section III (Economic Analysis) above.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    We believe that the proposed amendments would not duplicate,
overlap or conflict with other Federal rules.

F. Significant Alternatives

    The RFA directs us to consider alternatives that would accomplish
our stated objectives while minimizing any significant adverse impacts
on small entities. In connection with the proposed amendments, we
considered certain types of alternatives, including:
    (1) The establishment of differing compliance or reporting
requirements or timetables that take into account the resources
available to small entities;
    (2) The clarification, consolidation or simplification of
compliance and reporting requirements under the rule for small
entities;
    (3) The use of performance rather than design standards; and
    (4) An exemption from coverage of the rule, or any part of the
rule, for small entities.
    In connection with our proposed amendments to Rule 2-01, we do not
think it feasible or appropriate to establish different compliance or
reporting requirements or timetables for small entities. The proposed
amendments are designed to address compliance challenges for both large
and small audit clients and audit firms. With respect to clarification,
consolidation or simplification of compliance and reporting
requirements for small entities, the proposed amendments do not contain
any new reporting requirements.
    While the proposed amendments establishing a materiality test for
common control in the affiliate of the audit client definition,
amending the ICC definition, providing a transition framework for
mergers and acquisitions, and using a ``significant influence'' test in
the Business Relationships Rule would create new compliance
requirements, these proposed amendments are meant to better identify
those relationships and services that could impair an auditor's
objectivity and impartiality thereby resulting in fewer instances where
certain relationships and services would cause the auditor to violate
our independence requirements, as compared to the current rule. The
flexibility that could result from the proposed amendments

would be applicable to all affected entities, regardless of size.
    With respect to using performance rather than design standards, we
note that several of the proposed amendments are more akin to
performance standards. Rather than prescribe the specific steps
necessary to apply such standards, the proposed amendments recognize
that ``materiality'' and ``significant influence'' can be implemented
using reasonable judgment to achieve the intended result. Regarding the
mergers and acquisitions transition framework, the proposed amendments
do not prescribe specific procedures or processes and instead focus on
requiring the performance that would lead to the identification of
potential violations and how to address such violations. We believe
that the use of these standards would accommodate entities of various
sizes while potentially avoiding overly burdensome methods that may be
ill-suited or unnecessary given the facts and circumstances.
    The proposed amendments are intended to update the independence
rules to reflect recent feedback received from the public and our
experience administering those rules since their adoption nearly two
decades ago and address certain compliance challenges for audit firms
and their clients, including those that are small entities. In this
respect, exempting small entities from the proposed amendments would
increase, rather than decrease, their regulatory burden relative to
larger entities.

G. Solicitation of Comment

    We encourage the submission of comments with respect to any aspect
of this IRFA. In particular, we request comments regarding:
     The number of small entities that may be subject to the
proposed amendments;
     The existence or nature of the potential impact of the
proposed amendments on small entities discussed in the analysis;
     How to quantify the impact of the proposed amendments; and
     Alternatives that would accomplish our stated objectives
while minimizing any significant adverse impact on small entities.
    Respondents are asked to describe the nature of any impact and
provide empirical data supporting the extent of the impact. Such
comments will be considered in the preparation of the Final Regulatory
Flexibility Analysis, if the proposed amendments are adopted, and will
be placed in the same public file as comments on the proposed
amendments.

VI. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\116\ the Commission must advise the Office of
Management and Budget as to whether a proposed regulation constitutes a
``major'' rule. Under SBREFA, a rule is considered ``major'' when, if
adopted, it results or is likely to result in:
---------------------------------------------------------------------------

    \116\ Public Law 104-121, Tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment or
innovation.
    If a rule is ``major,'' its effectiveness generally will be delayed
for 60 days pending Congressional review.
    We request comment on whether our proposed amendments would be a
``major rule'' for purposes of SBREFA. We solicit comment and empirical
data on:
     The potential effect on the U.S. economy on an annual
basis;
     Any potential increase in costs or prices for consumers or
individual industries; and
     Any potential effect on competition, investment or
innovation.
    We request those submitting comments to provide empirical data and
other factual support for their views to the extent possible.

VII. Statutory Basis

    The proposed amendments described in this release are being
proposed under the authority set forth in Schedule A and Sections 7, 8,
10, and 19 of the Securities Act, Sections 3, 10A, 12, 13, 14, 17, and
23 of the Exchange Act, Sections 8, 30, 31, and 38 of the Investment
Company Act of 1940, and Sections 203 and 211 of the Investment
Advisers Act of 1940.

List of Subjects in 17 CFR Part 210

    Accountants, Accounting, Banks, Banking, Employee benefit plans,
Holding companies, Insurance companies, Investment companies, Oil and
gas exploration, Reporting and recordkeeping requirements, Securities,
Utilities.
    In accordance with the foregoing, the Commission proposes to amend
title 17, chapter II of the Code of Federal Regulations as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

0
1. The authority citation for part 210 continues to read as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n,
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30,
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c),
Pub. L. 112-106, 126 Stat. 310 (2012), unless otherwise noted.

0
2. Amend Sec.  210.2-01 by
0
a. Removing Preliminary Note to Sec.  210.2-01;
0
b. Adding an introductory paragraph;
0
c. Revising paragraph (c)(1)(ii)(A)(1)(iii);
0
d. Revising paragraph (c)(1)(ii)(A)(1)(iv);
0
e. Adding paragraph (c)(1)(ii)(A)(1)(v);
0
f. Revising paragraph (c)(1)(ii)(E);
0
g. Revising paragraph (c)(2)(iii)(B)(2)(i);
0
h. Revising paragraph (c)(2)(iii)(C)(3)(i);
0
i. Revising paragraph (c)(3);
0
j. Revising paragraph (c)(6)(i)(A)(1);
0
k. Revising paragraph (c)(6)(i)(B)(1);
0
l. Revising paragraph (e);
0
m. Revising paragraph (f)(4);
0
n. Revising paragraph (f)(5)(iii);
0
o. Revising paragraph (f)(6); and
0
p. Revising paragraph (f)(14), to read as follows:

Sec.  210.2-01   Qualifications of accountants.

    Section 210.2-01 is designed to ensure that auditors are qualified
and independent of their audit clients both in fact and in appearance.
Accordingly, the rule sets forth restrictions on financial, employment,
and business relationships between an accountant and an audit client
and restrictions on an accountant providing certain non-audit services
to an audit client. Section 210.2-01(b) sets forth the general standard
of auditor independence. Paragraphs (c)(1) to (c)(5) of this section
reflect the application of the general standard to particular
circumstances. The rule does not purport to, and the Commission could
not, consider all circumstances that raise independence concerns, and
these are subject to the general standard in Sec.  210.2-01(b). In
considering this standard, the Commission looks in the first instance
to whether a relationship or the provision of a service: Creates a
mutual or conflicting interest between the

accountant and the audit client; places the accountant in the position
of auditing his or her own work; results in the accountant acting as
management or an employee of the audit client; or places the accountant
in a position of being an advocate for the audit client. These factors
are general guidance only, and their application may depend on
particular facts and circumstances. For that reason, Sec.  210.2-01(b)
provides that, in determining whether an accountant is independent, the
Commission will consider all relevant facts and circumstances. For the
same reason, registrants and accountants are encouraged to consult with
the Commission's Office of the Chief Accountant before entering into
relationships, including relationships involving the provision of
services, that are not explicitly described in the rule.
* * * * *
    (c) * * *
    (1) * * *
    (ii) * * *
    (A) * * *
    (1) * * *
    (iii) Loans fully collateralized by cash deposits at the same
financial institution;
    (iv) Mortgage loans collateralized by the borrower's primary
residence provided the loans were not obtained while the covered person
in the firm was a covered person; and
    (v) Student loans obtained for a covered person's educational
expenses provided the loans were not obtained while the covered person
in the firm was a covered person.
* * * * *
    (E) Consumer loans. Any aggregate outstanding consumer loan balance
owed to a lender that is an audit client that is not reduced to $10,000
or less on a current basis taking into consideration the payment due
date and any available grace period.
* * * * *
    (2) * * *
    (iii) * * *
    (B) * * *
    (2) * * *
    (i) Persons, other than the lead partner and the Engagement Quality
Reviewer, who provided 10 or fewer hours of audit, review, or attest
services during the period covered by paragraph (c)(2)(iii)(B)(1) of
this section;
* * * * *
    (C) * * *
    (3) * * *
    (i) Persons, other than the lead partner and the Engagement Quality
Reviewer, who provided 10 or fewer hours of audit, review, or attest
services during the period covered by paragraph (c)(2)(iii)(C)(2) of
this section;
* * * * *
    (3) Business relationships. An accountant is not independent if, at
any point during the audit and professional engagement period, the
accounting firm or any covered person in the firm has any direct or
material indirect business relationship with an audit client, or with
persons associated with the audit client in a decision-making capacity,
such as an audit client's officers, directors, or beneficial owners
(known through reasonable inquiry) of the audit client's equity
securities where such beneficial owner has significant influence over
the audit client. The relationships described in this paragraph (c)(3)
do not include a relationship in which the accounting firm or covered
person in the firm provides professional services to an audit client or
is a consumer in the ordinary course of business.
* * * * *
    (6) * * *
    (i) * * *
    (A) * * *
    (1) The services of a lead partner, as defined in paragraph
(f)(7)(ii)(A) of this section, or Engagement Quality Reviewer, as
defined in paragraph (f)(7)(ii)(B) of this section; for more than five
consecutive years; or
* * * * *
    (B) * * *
    (1) Within the five consecutive year period following the
performance of services for the maximum period permitted under
paragraph (c)(6)(i)(A)(1) of this section, performs for that audit
client the services of a lead partner, as defined in paragraph
(f)(7)(ii)(A) of this section, or Engagement Quality Reviewer, as
defined in paragraph (f)(7)(ii)(B) of this section, or a combination of
those services; or
* * * * *
    (e) Transition provisions for mergers and acquisitions involving
audit clients. An accounting firm's independence will not be impaired
because an audit client engages in a merger or acquisition that gives
rise to a relationship or service that is inconsistent with this rule,
provided that:
    (i) The accounting firm is in compliance with the applicable
independence standards related to the services or relationships when
the services or relationships originated and throughout the period in
which the applicable independence standards apply;
    (ii) The accounting firm's lack of independence under this rule has
been or will be corrected as promptly as possible under relevant
circumstances as a result of the occurrence of the merger or
acquisition;
    (iii) The accounting firm has in place a quality control system as
described in Rule 2-01(d)(3) that has the following features:
    (A) Procedures and controls that monitor the audit client's merger
and acquisition activity to provide timely notice of a merger or
acquisition; and
    (B) Procedures and controls that allow for prompt identification of
potential violations after initial notification of a potential merger
or acquisition that may trigger independence violations, but before the
transaction has occurred.
    (f) * * *
    (4) Affiliate of the audit client means:
    (i) An entity:
    (A) That has control over the audit client or over which the audit
client has control, including the audit client's parents and
subsidiaries;
    (B) Which is under common control with the audit client, including
the audit client's parents and subsidiaries, unless the entity is not
material to the controlling entity;
    (C) Over which the audit client has significant influence, unless
the entity is not material to the audit client; and
    (D) That has significant influence over the audit client, unless
the audit client is not material to the entity; or
    (ii) Each entity in the investment company complex as determined in
paragraph (f)(14) of this section when the entity under audit is an
investment company or investment adviser or sponsor, as those terms are
defined in paragraphs (f)(14)(ii), (iii), and (iv) of this section.
    (5) * * *
    (iii) The ``audit and professional engagement period'' does not
include periods ended prior to the first day of the last fiscal year
before the issuer first filed, or was required to file, a registration
statement or report with the Commission, provided there has been full
compliance with applicable independence standards in all prior periods
covered by any registration statement or report filed with the
Commission.
    (6) Audit client means the entity whose financial statements or
other information is being audited, reviewed, or attested to and any
affiliates of the audit client, other than, for purposes of paragraph
(c)(1)(i) of this section, entities that are affiliates of the audit
client only by virtue of paragraphs (f)(4)(i)(C), (f)(4)(i)(D), or
(f)(14)(i)(E) of this section.
* * * * *

    (14) * * *
    (i) * * *
    (A) An entity under audit that is an:
    (1) Investment company; or
    (2) Investment adviser or sponsor;
    (B) The investment adviser or sponsor of any investment company
identified in paragraph (f)(14)(i)(A)(1) of this section;
    (C) Any entity controlled by or controlling any investment adviser
or sponsor identified in paragraph (f)(14)(i)(A)(2) or (B), or any
investment company identified in paragraph (f)(14)(i)(A)(1), of this
section;
    (D) Any entity under common control with any investment company
identified in paragraph (f)(14)(i)(A)(1) of this section, any
investment adviser or sponsor identified in paragraph (f)(14)(i)(A)(2)
or (B) of this section, or any entity identified in paragraph
(f)(14)(i)(C) of this section; if the entity:
    (1) Is an investment company, investment adviser or sponsor, unless
the entity is not material to the controlling entity; or
    (2) Is engaged in the business of providing administrative,
custodian, underwriting, or transfer agent services to any entity
identified in paragraphs (f)(14)(i)(A) through (f)(14)(i)(B);
    (E) Any entity over which any entity identified in paragraph
(f)(14)(i)(A) of this section has significant influence, unless the
entity is not material to the entity identified in paragraph
(f)(14)(i)(A), or any entity that has significant influence over any
entity in paragraph (f)(14)(i)(A) of this section, unless the entity
identified in paragraph (f)(14)(i)(A) is not material to the entity
that has significant influence over it; and
    (F) Any investment company that has an investment adviser or
sponsor included in this definition by paragraphs (f)(14)(i)(A) through
(f)(14)(i)(D) of this section.
    (ii) An investment adviser, for purposes of this definition, does
not include a sub-adviser whose role is primarily portfolio management
and is subcontracted with or overseen by another investment adviser.
    (iii) Sponsor, for purposes of this definition, is an entity that
establishes a unit investment trust.
    (iv) An investment company, for purposes of paragraph (f)(14) of
this section, means any investment company or entity that would be an
investment company but for the exclusions provided by Section 3(c) of
the Investment Company Act of 1940 (15. U.S.C. 80-a3(c)).
* * * * *

    By the Commission.

    Dated: December 30, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-28476 Filed 1-14-20; 8:45 am]
 BILLING CODE 8011-01-P