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SEC New Auditor Rules Proposal

Modernization of the regs?

By John M. Baker, Esq.

On November 6, 2000 the SEC announced that it will consider adoption of its proposed rules on auditor independence at an open meeting on Wednesday, November 15, 2000, at 10 am. According to the SEC’s announcement, the rule amendments are intended to modernize the Commission’s regulations regarding investments by auditors and members of their families, auditors’ employment relationship, and the scope of services provided by audit firms to their audit clients. In addition, the rules would require companies to disclose in their annual proxy statements certain information about non-audit services provided by their auditors during the last fiscal year.

The SEC press release is available at The proposed regulations are enormously controversial, and it is interesting that their consideration is timed to be immediately after the election and so soon after the adoption of Regulation FD.

The SEC has an unusually large amount of relevant material online, with links collected at

For my prior posts on the proposal, see and

The SEC’s Office of the Chief Accountant recently issued a no-action letter to KPMG LLP on auditor independence. KPMG LLP (Oct. 16, 2000). KPMG sought assurance that, following the initial public offering of KPMG Consulting, Inc. (“KCI”), to the extent KCI provides certain consulting services for, enters into business relationships with, and/or makes investments in KPMG audit clients, or to the extent that KPMG audit clients invest in KCI, KPMG’s independence will not be deemed impaired under SEC rules.

The SEC staff agreed to the no-action position, subject to a number of conditions. Those conditions will, among other things:

  1. limit at the outset and within five years end KPMG’s equity interest in KCI;
  2. impose limitations on KCI’s use of the KPMG name;
  3. require a strict separation of the corporate governance of KPMG and KCI;
  4. forbid any revenue or profit sharing between KPMG and KCI;
  5. forbid any joint marketing agreements between KPMG and KCI; and
  6. limit any shared services between KPMG and KCI.

The KPMG letter is available at

Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.  

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