The Securities and Exchange Commission brought and settled an administrative proceeding against the independent auditor to three closed-end funds, an independent trustee of those funds, and the fund’s administrator for violations of the funds’ auditor independence requirements. Specifically, the independent trustee, who served on the funds’ audit committees, had an undisclosed consulting relationship with an associated entity of the fund auditor that negatively impacted the auditors’ independence.
The proceeding stresses the need to carefully monitor the independence of auditors, and makes it clear that the procedures used to monitor independence must be thorough. The administrator to the funds had agreed to assist the funds in discharging their responsibilities under Rule 38a-1 of the Investment Company Act, and assisted the funds in preparing and circulating trustee and officer questionnaires. However, its trustee and officer questionnaires did not expressly cover business relationships with the auditor’s affiliates, and it did not provide sufficient training to assist the funds’ board members in the discharge of their responsibilities as to auditor independence.
The SEC believed that as a result of the deficient questionnaires and insufficient training, one of the independent trustees, who served on the funds’ audit committees, had an undisclosed consulting relationship with an associated entity of the funds’ auditor. The relationship eventually was detected by the funds’ auditor, which reported it to the funds and, subsequently, to the SEC. The SEC found that the auditor violated the independence requirement; that the auditor and the trustee caused the funds to file reports that were not audited by independent public accountants; and that the fund administrator caused the funds to violate Rule 38a-1 of the Investment Company Act, which requires funds to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws. The auditor was required to disgorge approximately $614,000 and to pay a civil money penalty of $500,000, while the trustee was required to disgorge approximately $35,000 and to pay a civil money penalty of $25,000, and the fund administrator was subjected to a civil money penalty of $45,000.
Funds should ensure that their trustee and officer questionnaires addresses business relationships with the auditor’s affiliates, and that their boards have sufficient training with regard to auditor independence. They should reassess the effectiveness of their questionnaires and training with regard to other independence determinations.