On July 1, 2015, the SEC announced settled administrative proceedings against Deloitte & Touche LLP (“Deloitte”), the outside auditor of three closed-end funds (the “Funds”); ALPS Fund Services, Inc. (“ALPS”), an administrator of the Funds that provided compliance services; and Andrew C. Boynton, a former member of the Funds’ board of trustees and the audit committee.
From 2006 to 2011, Deloitte Consulting LLP (“Deloitte Consulting”), an affiliate of Deloitte, maintained a business relationship with Mr. Boynton, who served as a member of the Funds’ board of trustees and of the audit committee throughout that period. This relationship involved Deloitte Consulting acquiring from Mr. Boynton, among others, a brainstorming business methodology and later retaining Mr. Boynton as an outside consultant to assist in the implementation of the methodology for Deloitte Consulting clients. For his services, Deloitte Consulting paid Mr. Boynton consulting fees. During the entirety of the relationship, Deloitte served as the Funds’ outside auditor, claiming independence from the Funds.
The internal policies of the parent company of Deloitte and Deloitte Consulting required that an independence consultation be performed before entering into a new business relationship with an outside consultant; however, this consultation was not performed before Deloitte Consulting entered into its arrangement with Mr. Boynton. In addition, Deloitte did not discover that the independence consultation was not performed until almost five years had passed after Deloitte Consulting’s relationship with Mr. Boynton was established.
Deloitte was found to have (i) violated Rule 2-02(b) of Regulation S-X, which requires an outside auditor to maintain independence from audit clients, (ii) violated applicable standards of professional conduct under Section 4C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the SEC’s Rules of Practice and (iii) caused the Funds to have violated Sections 30(a) and 20(a) of and Rule 20a-1 under the 1940 Act, which require funds to file reports of independent auditors with their annual reports and otherwise to disclose certain information regarding independent auditors and audits in SEC filings. In settlement of these charges, Deloitte agreed to be censured and to pay disgorgement of $497,438 plus prejudgment interest of $116,478 and a civil penalty of $500,000.
As administrator to the Funds, ALPS agreed to assist the Funds in fulfilling their responsibilities under Rule 38a-1 under the 1940 Act. Specifically, ALPS provided the Funds with a set of written Rule 38a- 1 compliance policies and procedures and a Chief Compliance Officer to administer the compliance program. The Funds’ policies and procedures regarding the selection, retention and engagement of an independent auditor were found to be inadequate at all relevant times. Accordingly, ALPS was found to have caused the Funds to violate Rule 38a-1. In settlement of these charges, ALPS agreed to pay a civil penalty of $45,000.
Trustee and Audit Committee Member
As a Fund trustee and audit committee member, Mr. Boynton was required to complete an annual questionnaire indicating, among other things, his principal occupation and other positions held as well as any direct or indirect business relationship with Deloitte. Mr. Boynton never identified his relationship with Deloitte Consulting as a principal occupation or other position. Moreover, understanding that Deloitte and Deloitte Consulting were separate legal entities, Mr. Boynton did not disclose his relationship with Deloitte Consulting as an indirect business relationship with Deloitte, and Mr. Boynton did not otherwise inquire whether Deloitte Consulting’s affiliation with Deloitte had any implications under conflict-of-interest or auditor independence rules. Mr. Boynton was found to have caused the Funds to violate Sections 30(a) and 20(a) of and Rule 20a-1 under the 1940 Act. In settlement of these charges, Mr. Boynton agreed to pay disgorgement of $30,000 plus prejudgment interest of $5,329 and a civil penalty of $25,000.
The SEC’s order instituting administrative and cease-and-desist proceedings is available at: http://www. sec.gov/litigation/admin/2015/34-75343.pdf.