As described in our prior Alert, in June, the Division provided a temporary no-action letter (the “Letter”) to the Fidelity family of funds and affiliated entities whose financial statements are audited by a public accounting firm that is not “independent” from the funds and entities because of non-compliance with Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Rule”).
On September 23, 2016, the Investment Company Institute (the “ICI”) published a list of FAQs that the ICI believes reflects the Division’s interpretation of the Letter, based upon telephone calls with ICI members and the staff of the Division. Most notably, the list of FAQs confirms that funds are not required to test fund ownership throughout the year to determine the impact of the Loan Rule (e.g., determine record or beneficial ownership and/or whether such an owner could exercise discretionary voting authority), unless a matter that could influence the objectivity and impartiality of the independent auditor is put before fund shareholders for approval. In addition, the list of FAQs confirms that, when conducting the “reasonable inquiry” prescribed by the Letter in connection with certain imminent shareholder meetings, “negative consent” letters may be used to determine whether an entity owns more than 10 percent of a fund’s shares or exercises discretionary voting authority. The negative consent letter would inform the recipient that the fund will assume that the recipient will not exercise discretionary voting authority over greater than 10 percent of the fund’s shares, unless the fund receives a written response indicating otherwise.
We note that, while a fund may not be required to test fund ownership throughout the year to determine the impact of the Loan Rule, a fund may want to consider its communications with its auditor in advance of the fund’s audit regarding any 10 percent record or beneficial owners identified by the fund during the year. This may help identify potential Loan Rule issues earlier, leaving time to verify compliance with the terms of the Letter or, if necessary, to rely on a different auditor.