[Federal Register Volume 85, Number 229 (Friday, November 27, 2020)]
[Notices]
[Pages 76131-76142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26145]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90473; File No. PCAOB-2020-01]


Public Company Accounting Oversight Board; Notice of Filing of 
Proposed Rules on Amendments to PCAOB Interim Independence Standards 
and PCAOB Rules To Align With Amendments to Rule 2-01 of Regulation S-X

November 20, 2020.
    Pursuant to Section 107(b) of the Sarbanes-Oxley Act of 2002 (the 
``Act'' or ``Sarbanes-Oxley Act''), notice is hereby given that on 
November 20, 2020, the Public Company Accounting Oversight Board (the 
``Board'' or ``PCAOB'') filed with the Securities and Exchange 
Commission (the ``Commission'' or ``SEC'') the proposed rules described 
in Items I and II below, which items have been prepared by the Board. 
The Commission is publishing this notice to solicit comments on the 
proposed rules from interested persons.

I. Board's Statement of the Terms of Substance of the Proposed Rules

    On November 19, 2020, the Board adopted amendments to the PCAOB's 
interim independence standards and PCAOB rules to align with amendments 
by the SEC to Rule 2-01 of Regulation S-X (collectively, the ``proposed 
rules''). The text of the proposed rules appears in Exhibit A to the 
SEC Filing Form 19b-4 and is available on the Board's website at 
https://pcaobus.org/Rulemaking/Pages/Docket047.aspx and at the 
Commission's Public Reference Room.

[[Page 76132]]

II. Board's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rules

    In its filing with the Commission, the Board included statements 
concerning the purpose of, and basis for, the proposed rules. The text 
of these statements may be examined at the places specified in Item IV 
below. The Board has prepared summaries, set forth in sections A, B, 
and C below, of the most significant aspects of such statements. In 
addition, the Board is requesting that, pursuant to Section 
103(a)(3)(C) of the Sarbanes-Oxley Act, the Commission approve the 
proposed rules for application to audits of emerging growth companies 
(``EGCs'').\1\ The Board's request is set forth in section D.
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    \1\ The term ``emerging growth company'' is defined in Section 
3(a)(80) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(80)). See also Inflation Adjustments and Other Technical 
Amendments Under Titles I and III of the JOBS Act, Rel. 33-10332 
(Mar. 31, 2017), 82 FR 17545 (Apr. 12, 2017).
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A. Board's Statement of the Purpose of, and Statutory Basis for, the 
Proposed Rules

(a) Purpose
Summary
    The federal securities laws require, among other things, that 
issuers, brokers, and dealers file certain periodic reports with the 
SEC that contain financial statements audited by an independent public 
accountant. These laws recognize that audits conducted by objective and 
impartial professionals can protect investors and instill confidence in 
the public markets.
    Congress has provided both the SEC and the PCAOB with jurisdiction 
to establish auditor independence standards for audits of issuers and 
broker-dealers. The Sarbanes-Oxley Act specifically authorizes the 
PCAOB to establish independence standards and rules to be used by 
registered public accounting firms in the preparation and issuance of 
audit reports, and as may be necessary or appropriate in the public 
interest or for the protection of investors.\2\
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    \2\ 15 U.S.C. 7213.
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    The Board first exercised its authority under the Act by adopting 
the independence standards of the American Institute of Certified 
Public Accountants (``AICPA''), as they existed as of April 16, 2003, 
as the Board's interim independence standards, and subsequently adopted 
independence rules set out in Section 3, Part 5 of the Rules of the 
Board. Although the PCAOB's standard-setting authority initially 
extended only to audits of issuers, as defined in the Act,\3\ the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank'') 
extended that authority to include audits of brokers and dealers.
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    \3\ See Section 2(a)(7) of the Act, 15 U.S.C. 7201(a)(7).
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    Because both the PCAOB and the SEC have jurisdiction with respect 
to auditor independence, it is important for the PCAOB to consider how 
its independence standards and rules relate to the SEC's requirements, 
including Rule 2-01 of Regulation S-X (``Rule 2-01'').\4\ The PCAOB's 
interim independence standards, as adopted from the AICPA in 2003, 
cover many of the same topics as Rule 2-01. Recognizing the overlap, 
the Board directed audit firms in 2003 to comply with the more 
restrictive of the Board's interim independence standards and Rule 2-
01. Subsequently, the PCAOB's permanent independence rules have imposed 
certain incremental independence obligations (e.g., additional 
prohibitions on tax services for persons in financial reporting 
oversight roles at issuer audit clients \5\) on registered public 
accounting firms. The PCAOB's independence rules use definitions 
aligned with the definitions in the SEC's Rule 2-01(f).
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    \4\ See 17 CFR 210.2-01.
    \5\ PCAOB Rule 3523.
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    From 2003 to 2018, the SEC's requirements and the PCAOB's interim 
independence standards and independence rules worked together to 
establish the independence compliance requirements for auditors subject 
to the Board's jurisdiction. In 2018, however, the SEC began the 
process of making certain amendments to Rule 2-01. Specifically, the 
Commission proposed in 2018, and then adopted in 2019, amendments to 
Rule 2-01(c)(1)(ii)(A) to refocus the analysis that must be conducted 
to determine whether an auditor is independent when the auditor has a 
lending relationship with certain shareholders of an audit client at 
any time during the audit and professional engagement period. The 
Commission next proposed in 2019, and then adopted in 2020, additional 
amendments to address certain arrangements and relationships that the 
SEC believed were less likely to threaten an auditor's objectivity or 
impartiality, so that auditors and audit committees could spend more 
time focusing on relationships that are more likely to pose such 
threats.\6\ Several commenters on the latter proposal noted that the 
SEC's proposed amendments overlapped with the PCAOB's requirements 
relating to lending arrangements and further observed that the SEC's 
proposal to amend certain definitions in Rule 2-01(f) might give rise 
to differences with some of the Board's existing definitions in Rule 
3501.
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    \6\ See Qualifications of Accountants, Release No. 33-10876 
(Oct. 16, 2020) (``2020 Adopting Release'').
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    To avoid differences and duplicative requirements, and to provide 
greater regulatory certainty, the Board adopted targeted amendments to 
its interim independence standards applicable to lending arrangements 
between auditors and audit clients. In addition, the Board adopted 
targeted amendments to align certain terms defined in Rule 3501 with 
the Commission's recent amendments to its definitions of those terms in 
Rule 2-01(f).
Background
SEC Authority and Independence Requirements
    The federal securities laws authorize the SEC to establish 
independence requirements for audits of financial statements filed with 
the Commission.\7\ The SEC's rule on auditor independence is Rule 2-01, 
which the SEC has described as setting forth a ``comprehensive 
framework governing auditor independence.'' \8\ Under the general 
standard in Rule 2-01(b), the SEC ``will not recognize an accountant as 
independent, with respect to an audit client, if the accountant is not, 
or a reasonable investor would conclude that the accountant is not, 
capable of exercising objective and impartial judgment on all issues 
encompassed within the accountant's engagement.''
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    \7\ See, e.g., Strengthening the Commission's Requirements 
Regarding Auditor Independence, Release No. 33-8183 (Jan. 28, 2003), 
68 FR 6006, 6044 (Feb. 5, 2003) (identifying the SEC's statutory 
bases to adopt independence requirements).
    \8\ See Amendments to Rule 2-01, Qualifications of Accountants, 
Release No. 33-10738 (Dec. 30, 2019), 85 FR 2332 (Jan. 15, 2020) 
(``2020 Proposing Release'').
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    In addition to the general standard in Rule 2-01(b), the rule 
includes a non-exclusive specification of circumstances that are 
inconsistent with Rule 2-01(b). Rule 2-01(c)(1)-(4) addresses 
financial, employment, and business relationships between accountants 
and their audit clients, as well as the performance of certain non-
audit services. Other provisions of Rule 2-01(c)-(e) address contingent 
fees, partner rotation on audit engagements, audit committee 
administration of the audit engagement, partner compensation, 
independence quality controls, and grandfathering and transition 
provisions.\9\ Rule 2-01(f)

[[Page 76133]]

defines certain terms used in Rule 2-01. The Commission's 
interpretations on auditor independence are collected in the 
Codification of Financial Reporting Policies,\10\ and the SEC staff has 
also issued ``Frequently Asked Questions'' on auditor independence.\11\
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    \9\ See Rule 2-01(c)(5)-(8) and Rule 2-01(d)-(e).
    \10\ See Codification of Financial Reporting Policies, Section 
600, Matters Relating to Independent Accountants.
    \11\ See Office of the Chief Accountant: Application of the 
Commission's Rules on Auditor Independence Frequently Asked 
Questions, available at https://www.sec.gov/info/accountants/ocafaqaudind080607.htm.
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PCAOB Authority and Independence Requirements
    Under the Act, the Board is authorized to establish ethics and 
independence standards to be used by registered public accounting firms 
in the preparation and issuance of audit reports, as required by the 
Act or SEC rules, or ``as may be necessary or appropriate in the public 
interest or for the protection of investors.'' \12\ The Act also 
authorized the Board to adopt as its rules other professional standards 
that the Board determined satisfied the requirements of Section 
103(a)(1) of the Act.\13\
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    \12\ See Sections 103(a)(1) and 103(b) of the Act, 15 U.S.C. 
7213(a)(1) and (b).
    \13\ See Section 103(a)(3)(A) of the Act, 15 U.S.C. 
7213(a)(3)(A).

    When the PCAOB was established in 2003, the Board adopted the 
professional standards promulgated by other bodies, including the 
AIPCA, on an interim basis, as authorized under the Act,\14\ which 
assured continuity and certainty in the standards that govern audits 
of public companies.\15\ The Board further stated that it would 
determine whether to adopt its interim standards as permanent 
standards of the Board, or repeal or modify those standards, in the 
future.\16\ Currently, Rule 3500T, Interim Ethics and Independence 
Standards, requires registered public accounting firms to comply 
with independence standards as described in Rule 101 of the AICPA's 
Code of Professional Conduct (``AICPA Code''), as well as the 
AICPA's interpretations and rulings thereunder that appear in ET 
Sec. Sec.  101 and 191, as in existence on April 16, 2003, to the 
extent not superseded or amended by the Board.\17\ A Note to Rule 
3500T also states that the Board's interim independence standards do 
not supersede the Commission's auditor independence rules and that 
registered public accounting firms must comply with the ``more 
restrictive'' of the rules.\18\
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    \14\ See Section 103(a)(3)(B) of the Act, 15 U.S.C. 
7213(a)(3)(B).
    \15\ See PCAOB Rel. No. 2003-006, Establishment of Interim 
Professional Auditing Standards (Apr. 18, 2003) (``2003 Adopting 
Release'').
    \16\ See id. at 3.
    \17\ Rule 3500T also requires compliance with (1) certain 
independence standards and interpretations of the former 
Independence Standards Board, to the extent not superseded by the 
Board and (2) certain ethics standards described in Rule 102 of the 
AICPA Code and the related interpretations and rulings thereunder, 
as in existence on April 16, 2003, to the extent not superseded or 
amended by the Board.
    \18\ See also PCAOB Release No. 2013-010, Amendments to Conform 
the Board's Rules and Forms to the Dodd-Frank Act and Make Certain 
Updates and Clarifications (Dec. 4, 2013) at 20 fn. 60 (stating that 
the Note to Rule 3500T ``means that the less restrictive rule still 
applies but satisfying the more restrictive rule is deemed to 
satisfy the less restrictive rule'').

    The PCAOB began to adopt permanent independence rules in 2005.\19\ 
These rules set forth the fundamental ethical obligation for a 
registered public accounting firm and its associated persons to be 
independent of the firm's audit clients throughout the audit and 
professional engagement period,\20\ and include definitions of certain 
terms used in the Board's independence rules.\21\ The rules also 
prohibit contingent fee arrangements for any service or product a 
registered public accounting firm provides to an audit client (Rule 
3521), restrict certain types of tax services that may be provided to 
an audit client and to persons in a financial reporting oversight role 
at an issuer audit client (Rules 3522 and 3523), require audit 
committee pre-approval of certain tax services and services related to 
internal control over financial reporting to be performed for an issuer 
audit client (Rules 3524 and 3525), and require certain communications 
with an audit client's audit committee concerning auditor independence 
(Rule 3526). In 2013, after Dodd-Frank was enacted, the Board adopted 
amendments to certain of these rules to extend their application to 
audits of brokers and dealers.\22\
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    \19\ In 2005, the Board adopted Rules 3501-3502 and Rules 3520-
3524. See PCAOB Release No. 2005-014, Ethics and Independence Rules 
Concerning Independence, Tax Services, and Contingent Fees (July 26, 
2005) (``2005 Adopting Release''). In 2007 and 2008, the Board 
adopted Rules 3525 and 3526, respectively. See PCAOB Release No. 
2007-005, Auditing Standard No. 5--An Audit of Internal Control Over 
Financial Reporting That Is Integrated with An Audit of Financial 
Statements and Related Independence Rule and Conforming Amendments 
(May 24, 2007); PCAOB Release No. 2008-003, Ethics and Independence 
Rule 3526, Communication with Audit Committees Concerning 
Independence, Amendment to Interim Independence Standards, Amendment 
to Rule 3523, Tax Services for Persons in Financial Reporting 
Oversight Roles, Implementation Schedule for Rule 3523 (Apr. 22, 
2008).
    \20\ See PCAOB Rule 3520. Registered public accounting firms 
must satisfy not only the Board's independence requirements, but 
also all other independence criteria applicable to a firm's 
engagement, including Rule 2-01. See Note 1 to PCAOB Rule 3520.
    \21\ In adopting the definitions in Rule 3501, the Board stated 
that many of those definitions were based on the SEC's existing 
definitions of those terms in Rule 2-01. See, e.g., 2005 Adopting 
Release at 19 n. 36 (the Board's definition of the term ``audit and 
professional engagement period'' in Rule 3501(a)(iii) ``adapts the 
definition of `audit and professional engagement period' from the 
definition of that term in * * * Rule 2-01 of the Commission's 
Regulation S-X''); id. at 21 n. 43 (the Board's definitions of the 
terms ``affiliate of the audit client'' and ``investment company 
complex'' in Rules 3501(a)(i) and 3501(i)(ii) are ``verbatim the 
SEC's definitions of these same terms and should be understood to 
cover the same entities that would be covered by these terms in 
applying the SEC's independence rules'').
    \22\ See PCAOB Release No. 2013-010.
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Recent SEC Amendments to Rule 2-01
    From 2003 through 2019, there were no changes to Rule 2-01 by the 
Commission. In June 2019, the SEC adopted amendments to Rule 2-
01(c)(1)(ii)(A) (the ``Loan Provision'') ``to refocus the analysis that 
must be conducted to determine whether an auditor is independent when 
the auditor has a lending relationship with certain shareholders of an 
audit client at any time during the audit and professional engagement 
period.'' \23\ The Commission further stated that the amendments 
``would more effectively identify those debtor-creditor relationships 
that could impair an auditor's objectivity and impartiality, yet would 
not include certain attenuated relationships that are unlikely to 
present threats to objectivity or impartiality.'' \24\
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    \23\ See Auditor Independence With Respect to Certain Loans or 
Debtor-Creditor Relationships, Release No. 33-10648 (June 18, 2019), 
84 FR 32040 (July 5, 2019) (``2019 Adopting Release'').
    \24\ Id. at 84 FR 32043.
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    In December 2019, the SEC proposed further updates to Rule 2-01, 
including additional amendments to the provisions of Rule 2-01(c)(1) 
that address lending relationships. In proposing these amendments, the 
SEC stated that they were intended ``to more effectively focus the 
[independence] analysis on those relationships or services that are 
more likely to pose threats to an auditor's objectivity and 
impartiality.'' \25\ After considering public comments on the proposal, 
the Commission amended Rule 2-01 again in October 2020.\26\
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    \25\ See 2020 Proposing Release at 85 FR 2350.
    \26\ See 2020 Adopting Release.
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    The final amendments added certain student and consumer loans to 
the Commission's categorical exclusions from independence-impairing 
lending relationships. The SEC also updated several of the definitions 
in Rule 2-01(f), including amendments to the definitions of the terms 
``affiliate of the audit client'' and ``investment company complex'' in 
Rule 2-01(f)(4) and (f)(14) to address certain affiliate relationships, 
including entities under common control, and an amendment to the 
definition of ``audit and professional

[[Page 76134]]

engagement period'' in Rule 2-01(f)(5) to shorten the ``look back 
period'' for domestic first-time filers in assessing compliance with 
the Commission's independence requirements.\27\
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    \27\ Other revisions to Rule 2-01 adopted by the SEC included an 
amendment to the Commission's restriction on business relationships 
in Rule 2-01(c)(3), an amendment to replace an existing transition 
and grandfathering provision in Rule 2-01(e) with a new transition 
provision addressing mergers or acquisitions involving an audit 
client, and certain miscellaneous updates.
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Amendments to the Board's Independence Requirements
Overview
    The Board adopted amendments to the PCAOB's interim independence 
standards and independence rules to eliminate differences and 
duplicative requirements in its independence requirements following the 
SEC's amendments to Rule 2-01 in 2019 and 2020, respectively. 
Specifically, as discussed below, the Board amended ET Sec.  101.02 and 
deleted ET Sec.  101.07, both of which are interpretations of Rule 101 
of the AICPA Code that are part of the Board's interim independence 
standards. In addition, the Board deleted ET Sec. Sec.  191.150-.151, 
ET Sec. Sec.  191.182-.183, ET Sec. Sec.  191.196-.197, and ET 
Sec. Sec.  191.220-.222, which are four Ethics Rulings under Rule 101 
that also address lending arrangements and are part of the Board's 
interim independence standards. Finally, the Board amended Rule 3501, 
which defines certain terms used in Section 3, Part 5 of the Rules of 
the Board, to align the definitions of three terms used in the 
independence requirements of both the SEC and the PCAOB.\28\
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    \28\ The Board also considered whether to amend the Board's 
independence rules to align with the SEC's new provision for 
addressing inadvertent violations described in Rule 2-01(e). Rule 2-
01(e) provides that 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 Rule 2-01, provided that the firm satisfies certain conditions, 
which include having a quality control system in place as described 
in Rule 2-01(d)(3) with specified features. The PCAOB has an ongoing 
project to consider revisions to the Board's quality control 
standards, including an ethics and independence component that would 
address the fulfillment of firm and individual responsibilities 
under applicable ethics and independence requirements. See PCAOB 
Release No. 2019-003, Potential Approach to Revisions to PCAOB 
Quality Control Standards (Dec. 17, 2019). Accordingly, the Board 
believed it would be premature to amend its independence rules to 
conform to the SEC's exemption described in Rule 2-01(e). Pending 
further action, however, the Board generally would not expect to 
consider an accounting firm's independence impaired solely because 
an audit client engages in a merger or acquisition that gives rise 
to a relationship or service that is inconsistent with the Board's 
independence rules, provided that the firm has satisfied all the 
conditions in Rule 2-01(e). In such circumstances, firms should also 
consider their obligations under Rule 3526, Communication with Audit 
Committees Concerning Independence.
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    As discussed further below, without amendments to the Board's 
interim independence standards, certain provisions that address lending 
relationships would overlap with and differ from Rule 2-01, as amended. 
Specifically, ET Sec.  101.02 and ET Sec.  101.07 would be inconsistent 
with the SEC's restrictions on lending relationships and the exceptions 
to those restrictions in Rule 2-01(c)(1)(ii), as amended. In addition, 
the four Ethics Rulings would also be inconsistent with the 
Commission's independence requirements.
    Moreover, absent amendments to the Board's definitions of the terms 
``affiliate of the audit client,'' ``audit and professional engagement 
period,'' and ``investment company complex'' in Rule 3501(a)(ii), 
(a)(iii), and (i)(ii), these definitions would differ from the SEC's 
definitions of those terms in Rule 2-01(f)(4), (f)(5), and (f)(14), as 
amended. Confusion might arise if certain terms used in both the 
PCAOB's and the SEC's independence rules were defined differently by 
the Board and the Commission.\29\
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    \29\ See 2005 Adopting Release at 19-21. Several commenters on 
the 2020 Proposing Release identified a potential inconsistency 
between the Commission's proposed amendments to the definitions in 
Rule 2-01 and the existing definitions in Rule 3501 and urged the 
SEC and the PCAOB to preserve the alignment of the definitions in 
Rule 2-01 with the Board's definitions in Rule 3501.
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    These targeted amendments to the Board's independence requirements 
apply to all audits conducted under PCAOB standards. The amendments 
should clarify the professional obligations of auditors and avoid 
regulatory uncertainty regarding the treatment of lending arrangements 
and the scope of the definitions in the independence requirements of 
the PCAOB and the SEC.
Amendments to Interim Independence Standards
    The SEC's 2019 amendments to Rule 2-01(c)(1)(ii)(A)(1) replaced the 
category of owners of an audit client's equity securities whose lending 
relationships with an accountant may impair independence (``any 
individuals owning ten percent or more of the client's outstanding 
equity securities'') with ``beneficial owners (known through reasonable 
inquiry) of the audit client's equity securities where such beneficial 
owner has significant influence over the client.'' At that time, the 
Commission stated that it had become aware that ``in certain 
circumstances, the existing [requirement] may not be functioning as it 
was intended,'' and that the amendments ``would more effectively 
identify those debtor-creditor relationships that could impair an 
auditor's objectivity and impartiality,'' while excluding ``certain 
attenuated relationships that are unlikely to present threats to 
objectivity or impartiality.'' \30\
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    \30\ See 2019 Adopting Release at 84 FR 32042-43.
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    In addition, as amended in October 2020, Rule 2-01(c)(1)(ii)(A)(1) 
includes an exception from the scope of the Loan Provision for student 
loans obtained from a financial institution client under its normal 
lending procedures, terms, and requirements by a covered person in a 
firm or his or her immediate family members, provided the loans were 
not obtained while the covered person was a covered person. The 
amendments also replace a prior exception in Rule 2-01(c)(1)(ii)(E) for 
certain credit card balances and cash advances from a lender that is an 
audit client with an exception for consumer loans, provided that the 
aggregate outstanding balance is reduced to $10,000 or less on a 
current basis taking into consideration the payment due date and any 
available grace period.\31\
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    \31\ See 2020 Adopting Release at 53-57 and 59-62. In proposing 
amendments to Rule 2-01(c)(1)(ii), the SEC reiterated that certain 
debtor-creditor relationships between an accounting firm, a covered 
person, or a covered person's immediate family members ``reasonably 
may be viewed as creating a self-interest that competes with the 
auditor's obligation to serve only investors' interests,'' but 
stated that ``not all creditor or debtor relationships threaten an 
auditor's objectivity and impartiality.'' See 2020 Proposing Release 
at 85 FR 2339, citing Revision of the Commission's Auditor 
Independence Requirements, Release No. 33-7870 (June 30, 2000), 65 
FR 43148, 43161 (July 12, 2000).
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    The amendments to Rule 2-01 in 2019 and 2020 created differences 
between Rule 2-01 and the Board's independence requirements. Under Rule 
3500T, registered public accounting firms and their associated persons 
must comply with independence standards in Rule 101 of the AICPA Code 
and the interpretations and rulings thereunder, as in existence on 
April 16, 2003, to the extent not superseded or amended by the Board. 
These interpretations include ET Sec.  101.02, which provides, among 
other things, that loans from owners of 10% or more of an audit 
client's equity securities to an accounting firm, other individuals who 
fall within the definition of a ``covered member'' of the firm,\32\ and 
the immediate family of

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such covered members may impair the accounting firm's independence, 
unless permitted by ET Sec.  101.07. ET Sec.  101.02 also includes 
provisions relating to the collection and repayment of loans by covered 
members who were formerly employed by or otherwise associated with an 
audit client. In turn, ET Sec.  101.07, which is also an interpretation 
of Rule 101 of the AICPA Code, reiterates the restrictions on certain 
loans in ET Sec.  101.02, but provides exceptions for certain 
grandfathered and permitted loans that are not deemed to impair a 
covered member's independence. Following the SEC's amendments to Rule 
2-01 in 2019 and 2020, the requirements under existing ET Sec.  101.02 
and ET Sec.  101.07 with respect to lending arrangements are 
inconsistent with the Commission's requirements under Rule 2-01, as 
amended.
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    \32\ The definition of a ``covered member'' for purposes of ET 
Sec.  101.02 and ET Sec.  101.07 is similar to the definition of a 
``covered person in the firm'' in Rule 2-01(f)(11) in certain 
respects, but differs in other respects. For example, the AICPA's 
definition of ``covered member,'' as of April 16, 2003, includes an 
accountant's firm, whereas the SEC's definition of ``covered persons 
in the firm'' in Rule 2-01(f)(11) only includes certain natural 
persons.
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    ET Sec. Sec.  191.150-.151, ET Sec. Sec.  191.182-.183, ET 
Sec. Sec.  191.196-.197 and ET Sec. Sec.  191.220-.221 are four Ethics 
Rulings under Rule 101 of the AICPA Code, as in existence on April 16, 
2003. These rulings (Ethics Rulings 75, 91, 98, and 110) discuss the 
application of ET Sec.  101.02 and ET Sec.  101.07 regarding lending 
arrangements in specific circumstances and include references to ET 
Sec.  101.02, ET Sec.  101.07, or both:
     Ethics Ruling 75 addresses membership in a client credit 
union and conditions to be followed to preserve independence if loans 
are made to the auditor, including compliance with requirements with 
respect to lending arrangements under ET Sec.  101.02 and ET Sec.  
101.07.
     Ethics Ruling 91 addresses the leasing by an auditor of 
property to or from a client and provides that certain capital leases 
would be considered a loan that impairs independence unless the 
arrangement complied with requirements with respect to lending 
arrangements under ET Sec.  101.02 and ET Sec.  101.07.
     Ethics Ruling 98 addresses an auditor's loan from a 
nonclient subsidiary or parent of an attest client and provides, among 
other things, that a loan from a nonclient subsidiary would impair the 
auditor's independence unless it was a grandfathered or permitted loan 
pursuant to ET Sec.  101.07.
     Ethics Ruling 110 addresses, among other things, loans 
from an audit firm's client to or from an entity over which an auditor 
has control and provides that, in such situations, independence is 
impaired unless the loan is permitted under ET Sec.  101.07.
    Each of these rulings also includes other language that is 
inconsistent with the SEC's independence requirements. For example, ET 
Sec. Sec.  191.150-.151 (Ethics Ruling 75) permits an auditor to have 
certain uninsured deposits at a credit union client that are not 
allowed under Rule 2-01(c)(1)(ii)(B), while ET Sec. Sec.  191.196-.197 
(Ethics Ruling 98) provides that certain loans from a nonclient parent 
of an audit client would not impair independence, even though such 
loans are not allowed under Rule 2-01(c)(1)(ii)(A) in some 
circumstances.\33\
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    \33\ In addition, ET Sec. Sec.  191.-182-.183 (Ethics Ruling 91) 
and ET Sec. Sec.  191.220-.221 (Ethics Ruling 110) are less 
restrictive in certain respects than Section 602.02.e of the 
Codification of Financial Reporting Policies. In particular, ET 
Sec. Sec.  191.-182-.183 (Ethics Ruling 91) permits an auditor to 
enter into certain operating leases with an audit client without 
regard to the materiality of the lease, which is inconsistent with 
Section 602.02.e, while ET Sec. Sec.  191.220-.221 (Ethics Ruling 
110) differs from Section 602.02.e in describing the circumstances 
in which a loan to or from an audit client from an entity with which 
an auditor is connected as an officer, director, or shareholder may 
impair independence.
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    The Board updated its requirements with respect to lending 
relationships to avoid such differences and duplicative requirements. 
Specifically, the Board amended ET Sec.  101.02 to delete the language 
in that interpretation that addresses lending arrangements and deleting 
ET Sec.  101.07 in its entirety. In addition, the Board deleted ET 
Sec. Sec.  191.150-.151, ET Sec.  191.182-.183, ET Sec. Sec.  
191.196-.197 and ET Sec. Sec.  191.220-.221 (Ethics Rulings 75, 91, 98, 
and 110) to eliminate inconsistent requirements in these rulings 
relating to lending arrangements under the Board's interim independence 
standards and the SEC's independence rules and guidance.
    The Board took this action in light of the SEC's amendments to Rule 
2-01. Removing the provisions relating to lending arrangements from the 
Board's interim independence standards, rather than making specific 
amendments to conform them to the SEC's amendments to Rule 2-01, avoids 
duplicative Board and SEC independence requirements on lending 
arrangements and helps facilitate compliance with Rule 2-01, as 
amended, by clarifying a firm's professional obligations. The 
amendments should also facilitate cooperation and coordination between 
the Board and the SEC when monitoring compliance with the SEC's revised 
independence requirements in Rule 2-01.
    In adopting the amendments to the interim independence standards, 
the Board also took notice of the regulatory process employed by the 
Commission to update its independence framework for lending 
arrangements in Rule 2-01. Specifically, before amending Rule 2-01 in 
both 2019 and 2020, the SEC issued a rulemaking proposal, identified 
the Commission's rationale for proposed amendments to Rule 2-01, 
solicited public comment on its proposals, and included an economic 
analysis that included a description of the problem, an analysis of 
potential benefits and costs, and a consideration of alternatives. 
After receiving public comments on the proposals, many of which broadly 
supported the objective of the proposed amendments or were generally in 
favor of the proposals, the Commission then adopted the amendments 
largely as proposed.\34\ The Board has considered the SEC's rulemaking 
record on both proposals. The Board believed that this process--
structured by the Commission to satisfy the requirements of the 
Administrative Procedure Act--is at least as robust as the Board's 
process would have been had the PCAOB considered amendments to the 
Board's independence requirements without the benefit of the SEC's 
analysis.
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    \34\ A few commenters did not support the SEC's proposals, and 
one of these commenters expressed the view that the proposals could 
negatively affect investor protection and capital formation. This 
commenter suggested that, in lieu of the proposals, more should be 
done to strengthen auditor independence standards and the 
enforcement of such standards. See 2020 Adopting Release at 5-6.
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    Accordingly, the Board did not perceive any reason or compelling 
basis in the SEC's rulemaking record to disregard the goal of the SEC's 
2019 and 2020 amendments or to impede the benefits that the Commission 
sought to achieve through its revisions to Rule 2-01 by maintaining 
differences between the independence requirements of the Board and the 
SEC relating to lending arrangements. If the Board were to determine at 
a future date that diverging from the SEC's approach to lending 
arrangements is necessary or appropriate in the public interest or for 
the protection of investors, the Board retains the authority under the 
Act to do so.
Amendments to Rule 3501
    The Board adopted Rule 3501 as part of a suite of independence 
rules in 2005. Although the Board's permanent independence rules, which 
now include Rules 3520 through 3526, impose additional substantive 
restrictions on auditors beyond those set forth in Rule 2-01, the scope 
of those rules has been consistent with the SEC's approach in Rule 2-
01.
    Specifically, when the Board adopted Rule 3501, it based the 
definitions of the terms ``affiliate of the audit client'' in Rule 
3501(a)(ii), ``audit and professional

[[Page 76136]]

engagement period'' in Rule 3501(a)(iii), and ``investment company 
complex'' in Rule 3501(i)(ii) on the SEC's definitions of the same 
terms in Rule 2-01.\35\ The existing definitions of ``affiliate of the 
audit client,'' and ``investment company complex'' in Rule 3501 largely 
tracked the SEC's definitions of those terms verbatim, except for 
different formatting. The definition of ``audit and professional 
engagement period'' in Rule 3501 was adapted from the Commission's 
definition of that term in Rule 2-01, with the only difference being 
the replacement of references to an ``accountant'' in Rule 2-01(f)(5) 
with references to a ``registered public accounting firm'' in Rule 
3501(a)(iii). This distinction reflects the use of the term 
``accountant'' under Rule 1001(a)(ii) to refer to natural persons who 
are certified public accountants or authorized to engage in public 
accounting or participate in audits, whereas Rule 2-01(f)(5) defines 
the term more broadly to include accounting firms with which certified 
public accountants or public accountants are affiliated.
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    \35\ See 2005 Adopting Release at 19-21.
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    The Board's definitions in Rule 3501, in turn, determine the scope 
of the substantive requirements in Rules 3520 through 3526.\36\ Rules 
3520 through 3526 address independence matters in addition to those 
expressly addressed in Rule 2-01, including the impact of certain tax 
services on independence (Rules 3522 and 3523), audit committee pre-
approval of certain tax services and services related to internal 
control over financial reporting (Rules 3524 and 3525), and 
communications with audit committees concerning independence (Rule 
3526).\37\
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    \36\ Specifically the term ``investment company complex'' 
appears in the definition of ``affiliate of the audit client.'' In 
turn, the term ``affiliate of the audit client'' appears in the 
definition of the term ``audit client,'' which is used in each of 
Rules 3520 through 3526.
    \37\ In addition, both the SEC and the PCAOB have adopted 
restrictions on the receipt of contingent fees by audit firms. The 
Commission's restrictions are set forth in Rule 2-01(c)(5), and the 
Board's restrictions are set forth in Rule 3521.
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    The SEC's amendments to Rule 2-01 in 2020 included revisions to the 
definitions of each of the terms ``affiliate of the audit client,'' 
``audit and professional engagement period,'' and ``investment company 
complex'' in Rule 2-01(f). These amendments resulted in differences 
between the SEC's definitions of those terms and the Board's 
definitions in Rule 3501. Discussed in more detail below are (1) the 
relevant SEC amendments and why the Commission changed these 
definitions; (2) the resulting differences between the SEC's amended 
definitions and the Board's existing definitions; and (3) why and how 
the Board amended the definitions of these three terms in Rule 3501 to 
avoid differences with the SEC's amended definitions.
    As discussed above with respect to the amendments to the Board's 
interim independence standards, in amending the definitions of 
``affiliate of the audit client,'' ``investment company complex,'' and 
``audit and professional engagement period'' in Rule 3501, the Board 
took note of the SEC's rulemaking process when the Commission amended 
the definitions of those terms in Rule 2-01(f) in 2020. The SEC's 
robust process included a detailed rationale for the amendments to the 
definitions and was also informed by public comment on the Commission's 
proposals. The Board believed it was important to align the definitions 
of these terms in Rule 3501 with the SEC's amended definitions in Rule 
2-01(f) to ensure they have the same meaning under the independence 
rules of the Board and the SEC and avoid the confusion that might arise 
if the same terms were used in the independence rules of the PCAOB and 
the Commission, but defined differently.
``Affiliate of the Audit Client'' and ``Investment Company Complex'' 
Definitions
    Prior to the SEC's 2020 amendments to Rule 2-01, the term 
``affiliate of the audit client'' was defined in Rule 2-01(f)(4) to 
include, in part, both ``[a]n entity that has control over the audit 
client, or over which the audit client has control, or which is under 
common control with the audit client, including the audit client's 
parents and subsidiaries'' and ``[e]ach entity in the investment 
company complex when the audit client is an entity that is part of an 
investment company complex'' (emphasis added). Rule 2-01(f)(14), in 
turn, had defined an ``investment company complex'' to include, in 
part, ``[a]ny entity controlled by or controlling an investment adviser 
or sponsor * * * or any entity under common control with an investment 
adviser or sponsor * * * if the entity: (1) Is an investment adviser or 
sponsor; or (2) Is engaged in the business of providing administrative, 
custodian, underwriting, or transfer agent services to any investment 
company, investment adviser, or sponsor * * *.''
    In its 2020 amendments to Rule 2-01, the Commission amended these 
definitions to address challenges that had arisen in their application, 
including in the private equity and investment company contexts, and 
more effectively focus on those relationships and services that the SEC 
believed were more likely to threaten auditor objectivity and 
impartiality. The SEC's amendments also include dual materiality 
thresholds in the respective common control provisions and distinguish 
how the definition applies when an accountant is auditing a portfolio 
company, an investment company, or an investment adviser or sponsor.
    The SEC's amendments created differences with certain definitions 
in Rule 3501. Accordingly, the Board aligned the definitions of the 
terms ``affiliate of the audit client'' and ``investment company 
complex'' in Rule 3501 to be consistent with the SEC's 2020 amendments 
to the definitions of these terms in Rule 2-01(f). The Board's 
amendments to these definitions avoid potential confusion by auditors 
when applying the independence rules of the SEC and PCAOB; without such 
amendments, auditors would be required to undertake a different 
analysis to determine which entities fall within or outside the scope 
of the ``affiliate of the audit client'' and ``investment company 
complex'' definitions (and, therefore, considered the ``audit client'') 
for purposes of Rule 2-01 and the Board's rules.
    Accordingly, the Board amended Rule 3501(a)(ii) and Rule 
3501(i)(ii) to conform to the SEC's amended definitions in Rule 2-
01(f)(4) and 2-01(f)(14). Specifically, the Board amended these 
definitions to incorporate the SEC's amended definitions by cross-
referencing the SEC's definitions in Rule 2-01(f). This approach is 
intended to facilitate the continued alignment of the Board's 
definitions in Rule 3501(a)(ii) and Rule 3501(i)(ii) with the SEC's 
definitions in Rule 2-01(f). In the event of later changes by the SEC 
to the scope of those definitions in Rule 2-01(f), the definitions of 
these terms in Rule 3501 would automatically update, without requiring 
further action by the Board.\38\ The Board did not delete these 
definitions, as it did with respect to the provisions of the Board's 
interim independence standards that address lending arrangements and 
overlap with the SEC's independence criteria, because the definitions 
in Rule 3501 remain relevant for purposes of Rules

[[Page 76137]]

3520 through 3526, which are part of the Board's permanent independence 
rules. The Board retains the authority to amend these definitions in 
the future, should the Board determine that such amendments are 
necessary or appropriate in the public interest or for the protection 
of investors.
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    \38\ The Board only amended through cross-references those 
definitions in Rule 3501 that were identical to the SEC's 
definitions in Rule 2-01(f) and also the subject of the Commission's 
2020 amendments. Certain other defined terms in Rule 3501, such as 
the definitions of ``financial reporting oversight role'' and 
``immediate family member'' in Rules 3501(f)(i) and 3501(i)(i), 
respectively, continue to track the text of the SEC's definitions of 
those terms in Rule 2-01(f).
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``Audit and Professional Engagement Period'' Definition
    Prior to its amendment by the SEC in 2020, the term ``audit and 
professional engagement period'' had been defined differently in Rule 
2-01(f)(5) for domestic issuers and for foreign private issuers 
(``FPIs'') with respect to situations where a company first files, or 
is required to file, a registration statement or report with the 
Commission.\39\ Specifically, Rule 2-01(f)(5)(i) and (ii) had defined 
the ``audit and professional engagement period'' to include both the 
``period covered by the financial statements being audited or 
reviewed'' and the ``period of the engagement to audit or review the 
financial statements or to prepare a report filed with the 
Commission.'' For audits of the financial statements of FPIs, however, 
Rule 2-01(f)(5)(iii) narrowed the ``audit and professional engagement 
period'' to exclude periods prior to ``the first day of the last fiscal 
year before the [FPI] first filed, or was required to file, a 
registration statement or report with the Commission, provided there 
has been full compliance with home country independence standards in 
all prior periods covered by any registration statement or report filed 
with the Commission.''
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    \39\ A ``foreign private issuer'' is any foreign issuer other 
than a foreign government, except for an issuer that (1) has more 
than 50% of its outstanding voting securities held of record by U.S. 
residents; and (2) any of the following: (i) A majority of its 
executive officers or directors are citizens or residents of the 
United States; (ii) more than 50% of its assets are located in the 
United States; or (iii) its business is principally administered in 
the United States. See 17 CFR 240.3b-4(c).
---------------------------------------------------------------------------

    Under the SEC's amendments to the definition of ``audit and 
professional engagement period'' in Rule 2-01(f)(5)(iii), the one-year 
``look back'' provision for issuers filing or required to file a 
registration statement or report with the Commission for the first time 
(``first-time filers'') will apply to all such filers. As a result, an 
auditor for a first-time filer that is either a domestic issuer or an 
FPI would apply Rule 2-01 for the most recently completed fiscal year 
included in its first filing, 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. In 
amending Rule 2-01(f)(5)(iii), the SEC stated that the prior definition 
of ``audit and professional engagement period'' may have resulted in 
certain inefficiencies in the initial public offering (``IPO'') process 
for domestic filers, and that the narrower definition applicable to 
FPIs had created a disparate application of the independence 
requirements between domestic issuers and FPIs.\40\
---------------------------------------------------------------------------

    \40\ See 2020 Adopting Release at 101.
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    The Commission's amendment to Rule 2-01(f)(5)(iii) created a 
difference between that definition and the definition of ``audit and 
professional engagement period'' in Rule 3501(a)(iii), specifically 
under paragraph (3) of this definition. Maintaining different 
definitions of this term under the independence rules of the SEC and 
PCAOB could lead to potential confusion among auditors, since the term 
``audit and professional engagement period'' appears in numerous 
provisions of Rule 2-01, while Rules 3520 through 3523 also set forth 
certain circumstances that are deemed to impair an audit firm's 
independence if they occur during either the ``audit and professional 
engagement period'' or the ``professional engagement period.''
    To avoid this potential confusion when applying the independence 
rules of the SEC and PCAOB, the Board amended the definition of ``audit 
and professional engagement period'' in Rule 3501(a)(iii)(3) to be 
consistent with the SEC's amendment to Rule 2-01(f)(5)(iii). As 
discussed above with respect to the amendments to the definitions of 
``affiliate of the audit client'' and ``investment company complex,'' 
without an amendment to this definition, it would no longer be 
consistent with the SEC's definition in Rule 2-01(f)(5)(iii), as has 
been the case since the Board adopted its definition in 2005. Instead, 
the one-year look back period would apply to both domestic issuers and 
FPIs that were first-time filers under Rule 2-01, but only to FPIs that 
were first-time filers under Rule 3501(a)(iii)(3).
    The Board did not replace the current definition of ``audit and 
professional engagement period,'' however, with a cross-reference to 
Rule 2-01(f)(5). Specifically, the Board continued to use the term 
``registered public accounting firm'' in the definition of ``audit and 
professional engagement period,'' rather than the term ``accountant,'' 
which is used in Rule 2-01(f)(5). The term ``accountant'' has a 
different meaning under Rule 1001(a)(ii) than under Rule 2-01(f)(1), 
whereas the use of the term ``registered public accounting firm'' is 
consistent with the Act and other rules of the Board. As with the SEC's 
amendment to Rule 2-01(f)(5)(iii) in 2020, under Rule 3501(a)(iii)(3), 
as amended, the one-year look back period will apply to both domestic 
issuers and FPIs that are first-time filers.
Administrative Considerations
    The Board took action to make targeted amendments to its interim 
independence standards and Rule 3501 in light of the SEC's recent 
amendments to Rule 2-01. Removing the provisions relating to lending 
arrangements from the Board's interim independence standards avoids 
differences and duplicative PCAOB and Commission requirements that 
would otherwise exist after the effective date of the SEC's amendments 
to the independence requirements in Rule 2-01(c)(1)(ii) on lending 
arrangements. The Board also amended the definitions of certain terms 
used in Rule 3501 to align these definitions with the SEC's amended 
definitions of the same terms in Rule 2-01(f) to ensure they have the 
same meaning under the independence rules of the Board and the SEC. The 
Board believed the regulatory process employed by the Commission to 
update its independence rules under Rule 2-01 was at least as robust as 
the Board's process would have been had the PCAOB considered amendments 
to the Board's independence requirements without the benefits of the 
SEC's analysis. Therefore, the Board believed that public notice and 
comment in advance of adopting these targeted amendments to the Board's 
independence requirements was not necessary.
Effective Date
    The Board determined that the targeted amendments to its interim 
independence analysis and Rule 3501 take effect, subject to approval by 
the SEC, 180 days after the date of the publication of the SEC's 
October 16, 2020 amendments to Rule 2-01 in the Federal Register. The 
effective date is aligned with the effective date of the Commission's 
amendments to Rule 2-01.\41\ Auditors may elect to comply before the 
effective date at any point after SEC approval of the Board's 
amendments, provided that the final amendments are applied in their 
entirety.
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    \41\ See 2020 Adopting Release at 81.
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(b) Statutory Basis
    The statutory basis for the proposed rules is Title I of the Act.

[[Page 76138]]

B. Board's Statement on Burden on Competition

    Not applicable. The Board's consideration of the economic impacts 
of the proposed rules is discussed in section D below.

C. Board's Statement on Comments on the Proposed Rules Received From 
Members, Participants or Others

    The Board did not solicit written comments on the proposed rules. 
Therefore, there are no comments on the proposed rules received from 
stakeholders.

D. Economic Considerations and Application to Audits of Emerging Growth 
Companies

    The Board is mindful of the economic impacts of its rulemaking. 
This section discusses economic considerations related to the 
amendments, including the need for the rulemaking; description of the 
baseline; consideration of benefits, costs, and unintended 
consequences; and alternatives considered. It also discusses 
considerations related to audits of EGCs.
Need for Rulemaking
    The Board needed to amend its interim independence standards and 
independence rules to (1) eliminate differences and duplicative 
requirements between Rule 2-01 and the Board's independence 
requirements; and (2) avoid the confusion that might arise if certain 
terms were used in the independence rules of the PCAOB and the 
Commission, but defined differently. The Board also did not perceive 
any reason or compelling basis in the SEC's rulemaking record to impede 
the benefits that the Commission sought to achieve through its 
revisions to Rule 2-01 in 2019 and 2020 by maintaining differences 
between the independence requirements of the Board and the SEC relating 
to lending arrangements or by not addressing the differences in the 
definitions of certain terms that appear in the independence rules of 
both the Commission and the Board.
    Specifically, because the PCAOB and the SEC both have jurisdiction 
with respect to auditor independence, it is important for the PCAOB to 
consider how its independence standards and rules relate to the SEC's 
requirements. The PCAOB's interim independence standards, as adopted 
from the AICPA in 2003, cover many of the same topics as Rule 2-01 and 
the SEC's regulations and the PCAOB's interim independence standards 
and independence rules have worked together to establish the 
independence obligations for auditors subject to the Board's 
jurisdiction. Amendments to Rule 2-01 adopted by the SEC, however, 
included amendments to the scope of Rule 2-01(c)(1)(ii) to exclude 
certain lending arrangements that the SEC did not believe posed a 
threat to an auditor's objectivity or impartiality. The Commission also 
adopted targeted amendments to the definitions of the terms ``affiliate 
of the audit client,'' ``audit and professional engagement period,'' 
and ``investment company complex,'' as used in Rule 2-01(f).
    To avoid differences and duplicative requirements, the Board 
adopted targeted amendments to its interim independence standards 
applicable to lending arrangements between auditors and audit clients. 
These amendments deleted the independence criteria that relate to 
lending arrangements under ET Sec. Sec.  101.02 and 101.07, as well as 
under ET Sec. Sec.  191.150-.151, ET Sec. Sec.  191.182-.183, ET 
Sec. Sec.  191.196-.197 and ET Sec. Sec.  191.220-.221, and thereby 
eliminated inconsistent requirements under the Board's interim 
independence standards and the SEC's independence rules and guidance. 
In addition, the Board adopted targeted amendments to its independence 
rules to align the definitions of ``affiliate of the audit client,'' 
``audit and professional engagement period,'' and ``investment company 
complex'' with the SEC's amendments to the definitions of the same 
terms in Rule 2-01(f). These amendments avoid the potential confusion 
that might arise if these terms were used in both the SEC's and the 
PCAOB's independence rules, but defined differently in Rule 2-01(f) and 
Rule 3501.
Baseline
    The Board evaluated potential benefits, costs, and unintended 
consequences of the Board's amendments relative to a baseline that 
includes the amendments to Rule 2-01 adopted by the SEC in 2019 and 
2020. In other words, the baseline assumes that the amendments that the 
SEC adopted in 2020 to Rule 2-01 have become effective.
    In identifying the baseline, the Board gave consideration to the 
existing framework of independence requirements as well as the parties 
that would be affected by the Board's amendments. The existing 
framework of independence requirements applicable to engagements 
performed by registered public accounting firms and their associated 
persons is described in section A and includes the Board's interim 
independence standards, the Board's permanent independence rules 
(including Rules 3501 and 3502 and Rules 3520 through 3526), and the 
SEC's independence rules and guidance. In addition, the Board's quality 
control standards require firms to establish policies and procedures to 
provide reasonable assurance that firm personnel maintain independence, 
both in fact and appearance, in all required circumstances.\42\ This 
framework, including the amendments to Rule 2-01 adopted by the SEC in 
2019 and 2020, provides the baseline against which the impacts of the 
Board's amendments can be considered.
---------------------------------------------------------------------------

    \42\ See QC Sec.  20.09, System of Quality Control for a CPA 
Firm's Accounting and Auditing Practice.
---------------------------------------------------------------------------

    With respect to the affected parties, the Board took note of the 
SEC's analysis of the parties that would be affected by the SEC's 
amendments to Rule 2-01 in the 2019 Adopting Release and the 2020 
Adopting Release. The SEC observed that the amendments will affect 
auditors, audit clients, institutions engaging in financing 
transactions with audit firms and their partners and employees, current 
or potential affiliates of audit clients, and ``covered persons'' of 
accounting firms and their immediate family members, and will affect 
investors indirectly.\43\ The Board's amendments are expected to affect 
the same parties.
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    \43\ See 2019 Adopting Release at 84 FR 32054; 2020 Adopting 
Release at 86.
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    Due to limitations on the data available, the SEC was unable to 
estimate precisely the number of audit engagements, the number of 
lenders, or the number of covered persons and their immediate family 
members that would be immediately affected by the SEC's amendments.\44\ 
Instead, the SEC estimated the potential universe of auditors that 
might be impacted by the amendments, and reported that 1,729 audit 
firms were registered with the PCAOB as of August 3, 2020.\45\ The SEC 
also estimated that approximately 6,792 issuers filing on domestic 
forms and 849 FPIs filing on foreign forms would be affected by the 
SEC's amendments.\46\ In addition:
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    \44\ See id.
    \45\ See 2020 Adopting Release at 87.
    \46\ See id.
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     For the SEC's amendments to the Loan Provision, the 
Commission focused mainly on the investment management industry and 
provided statistics on audited fund series and their investment company 
auditors.\47\
---------------------------------------------------------------------------

    \47\ See 2019 Adopting Release at 84 FR 32054-55.
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     For the SEC's amendment related to the ``look-back'' 
period for assessing independence compliance with respect to first-time 
filers, the Commission examined historical data for domestic IPOs and 
reported that there were

[[Page 76139]]

approximately 543 domestic IPOs between January 1, 2017 and December 
31, 2019.\48\
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    \48\ See 2020 Adopting Release at 88.
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     For the SEC's amendments to the ``investment company 
complex'' definition, the Commission focused on registered investment 
companies and unregistered funds. The SEC reported that, as of 
September 2020, there were 2,763 registered investment companies that 
filed annual reports on Form N-CEN. It also reported the numbers and 
total net assets of mutual funds, exchange traded funds, closed-end 
funds, variable annuity separate accounts, money market funds, and 
business development companies as of July 2020.\49\
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    \49\ See id. at 88-89.
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    The above estimates and statistics regarding the parties 
immediately affected by the SEC's amendments are also relevant to the 
Board's related amendments. Specifically, the Board's amendments are 
intended to align the Board's interim independence standards relating 
to lending arrangements with the independence criteria presented in 
Rule 2-01 and to align the meaning of the definitions of certain terms 
used in the independence rules of the SEC and the PCAOB.
Consideration of Benefits, Costs, and Unintended Consequences
    This section discusses the potential benefits, costs, and 
unintended consequences of the Board's amendments. The analysis is 
largely qualitative in nature because the Board is unable to quantify 
the economic effects due to a lack of information necessary to provide 
reasonable estimates. Similar to the SEC, the Board is not able to 
reasonably estimate the number of current audit engagements that will 
be immediately affected by the amendments as we lack relevant data 
about such engagements. The Board also similarly does not have precise 
data on audit clients' ownership and control structures.\50\
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    \50\ See id. at 86.
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Benefits
    The Board's amendments avoid differences between the independence 
requirements of the PCAOB and the SEC by deleting the portions of the 
interim independence standards relating to lending arrangements and 
aligning the meaning of certain definitions used in the independence 
rules of the SEC and the PCAOB. The amendments should thus clarify the 
professional obligations of auditors and avoid regulatory uncertainty 
regarding the treatment of lending arrangements and the meaning of 
certain terms used in the independence requirements of both the SEC and 
the PCAOB, leading to a potential reduction in overall compliance 
costs. In amending the Board's independence requirements, the Board 
also took note of certain of the potential benefits identified by the 
Commission when amending Rule 2-01 in 2019 and 2020.\51\
---------------------------------------------------------------------------

    \51\ See generally 2019 Adopting Release at 84 FR 32055-56; 2020 
Adopting Release at 89-92.
---------------------------------------------------------------------------

     For example, the SEC stated in the 2019 Adopting Release 
and the 2020 Adopting Release that its amendments to Rule 2-01 may 
reduce compliance costs for audit firms and audit clients by updating 
existing requirements that may be unduly burdensome. The SEC also 
observed that, under the amended rules, auditors and their clients will 
be able to focus their attention and resources on monitoring those 
relationships and services that pose the greatest risk to auditor 
independence, thus reducing overall compliance burdens without 
significantly diminishing investor protections.\52\
---------------------------------------------------------------------------

    \52\ See 2020 Adopting Release at 89.
---------------------------------------------------------------------------

     The SEC observed that the amendments to Rule 2-01 may lead 
to a potentially larger pool of auditors eligible to perform audit 
engagements, which in turn could reduce the costs associated with 
searching for an independent auditor and reduce the costs resulting 
from switching from one audit firm to another. In this regard, the 
Commission further stated that an expanded pool of eligible auditors 
also might improve matching between auditor expertise and necessary 
audit procedures and considerations for a particular audit client, 
which could lead to improvements in audit quality and financial 
reporting quality, as well as improvements in the efficiency of 
auditing processes. If the amendments lead to improvements in financial 
reporting quality, investors might be positioned to make more efficient 
investment decisions.\53\
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    \53\ See 2019 Adopting Release at 84 FR 32055; 2020 Adopting 
Release at 95-96.
---------------------------------------------------------------------------

     The SEC stated that auditors also could benefit from 
potentially having a broader spectrum of audit clients and clients for 
non-audit services as a result of the SEC's amendments to Rule 2-01. 
For example, the Commission observed that if the amendments reduce 
certain burdensome constraints on auditors in complying with the 
independence requirements, auditors likely will incur fewer compliance 
costs. Another example was the Commission's observation that the 
amendments potentially could reduce auditor turnover due to changes in 
audit clients' organizational structure arising from certain merger and 
acquisition activities.\54\
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    \54\ See 2020 Adopting Release at 91.
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     The Commission's 2019 Adopting Release and the 2020 
Adopting Release also discuss the expected benefits of each of the 
specific amendments to Rule 2-01 adopted by the Commission. For 
example, the SEC stated that its amendments to Rule 2-01(c)(1)(ii) to 
permit some covered persons to be considered independent 
notwithstanding the existence of certain lending relationships, such as 
student and consumer loans satisfying the criteria set forth in Rule 2-
01, might lead to improved matching between partner and staff 
experience and audit engagements and, therefore, to increases in audit 
efficiency and audit quality.\55\ Another example was the Commission's 
observation that the amendment to the definition of ``audit and 
professional engagement period'' in Rule 2-01(f)(5), such that the one-
year look back provision applies to all first-time filers, domestic and 
foreign, might avoid the need for a domestic first-time filer to delay 
an IPO or switch to a different auditor to comply with independence 
requirements.\56\
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    \55\ See id. at 103-04.
    \56\ See id. at 101.
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    To the extent they eliminate potential conflicts with Rule 2-01, as 
amended, the Board's amendments to its interim independence standards 
regarding lending arrangements increase the likelihood that the 
benefits anticipated by the SEC will be realized. In addition, the 
Board's amendments to align the definitions of ``affiliate of the audit 
client,'' ``audit and professional engagement period,'' and 
``investment company complex'' with the SEC's amendments avoid the 
potential compliance costs of having to apply different definitions of 
the same terms when complying with the independence rules of the SEC 
and the PCAOB.
Costs and Unintended Consequences
    The Board also considered the potential costs and unintended 
consequences of the amendments to its interim independence standards 
and independence rules. Overall, the Board does not anticipate that the 
amendments are likely to impose significant incremental compliance 
costs on audit firms and audit clients, or give rise to unintended 
consequences, since the amendments are limited in nature and audit 
firms are expected to revise their independence policies and procedures

[[Page 76140]]

to take into account the SEC's amendments to Rule 2-01 in 2019 and 
2020.
    In evaluating the potential costs and unintended consequences of 
the Board's amendments, the Board also took note of the SEC's analysis 
of the potential costs and other consequences associated with its 
amendments to Rule 2-01 in the 2019 Adopting Release and the 2020 
Adopting Release. For example, in adopting amendments to Rule 2-01 in 
2020, the SEC stated that, if the amendments to Rule 2-01 result in an 
increased risk to auditor objectivity and impartiality due to newly 
permissible relationships and services, then investors might have less 
confidence in the quality of financial reporting, which could lead to 
less efficient investment allocations and increased cost of 
capital.\57\ The Commission also observed, however, that it did not 
anticipate significant costs to investors or other market participants 
associated with the amendments because they address relationships and 
services that are less likely to threaten auditors' objectivity and 
impartiality.\58\
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    \57\ See id. at 92.
    \58\ See id.
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    The Commission further observed in the 2019 Adopting Release and 
the 2020 Adopting Release that its updates to Rule 2-01 might require 
more efforts from auditors and audit clients to familiarize themselves 
with the SEC's amended requirements. For example, the Commission 
observed in the 2019 Adopting Release that its revisions to the Loan 
Provision might require the exercise of more judgment in independence 
determinations, thus potentially contributing to increases in 
compliance costs in the short term.\59\ However, the Commission also 
stated that it did not anticipate that its amendments to the Loan 
Provision in 2019 would impose significant compliance costs on 
auditors.\60\ The Commission similarly observed in the 2020 Adopting 
Release that certain of its amendments to Rule 2-01 earlier this year, 
such as the inclusion of a dual materiality threshold in the 
``affiliate of the audit client'' and ``investment company complex'' 
definitions in Rules 2-01(f)(4) and 2-01(f)(14), might require more 
efforts from audit firms and audit clients to familiarize themselves 
with and apply the amended requirements, but that it did not anticipate 
significant incremental compliance costs.\61\
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    \59\ See 2019 Adopting Release at 84 FR 32056-57.
    \60\ See id. at 84 FR 32056.
    \61\ See 2020 Adopting Release at 97, 99-100.
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    The Board also took note of the Commission's observation in the 
2019 Adopting Release and the 2020 Adopting Release that the SEC's 
updates to Rule 2-01 could result in some crowding-out effect in the 
audit industry. For example, the SEC stated in the 2019 Adopting 
Release that the potentially increased ability of larger firms to 
compete for audit clients under the amendments to Rule 2-01 adopted by 
the SEC in 2019 could potentially crowd out smaller audit firms, but 
also estimated that four audit firms already performed 86% of audits in 
the investment management industry.\62\ In addition, the Commission 
observed in the 2020 Adopting Release that the larger accounting firms 
may be more likely to be positively affected by the amendments to Rule 
2-01 as these firms may be able to compete for or retain a larger pool 
of audit clients, which could potentially crowd out the audit business 
of smaller audit firms.\63\ The SEC estimated that the four largest 
accounting firms already performed 49.2% of audits for all registrants 
and more than 80% of audits in the registered investment company space 
and, as a result, it did not expect any potential change in the 
competitive dynamics among accounting firms to be significant.\64\
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    \62\ See 2019 Adopting Release at 84 FR 32057.
    \63\ See 2020 Adopting Release at 108-09.
    \64\ See id. at 109.
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Alternatives Considered
    The Board considered three alternatives to the amendments to its 
interim independence standards and independence rules described herein: 
(1) Making amendments to its interim independence standards and 
independence rules to track the language of the SEC's amendments to 
Rule 2-01 as closely as possible; (2) issuing guidance relating to 
compliance with the independence requirements of the PCAOB and the SEC 
following the Commission's amendments to Rule 2-01 in 2020; or (3) 
taking no action.
    First, the Board considered making specific amendments to its 
interim independence standards to track the language of the SEC's 
amendments to Rule 2-01 as closely as possible. This alternative would 
have maintained duplicative and overlapping requirements relating to 
lending arrangements under ET Sec.  101.02 and ET Sec.  101.07, as well 
as under ET Sec. Sec.  191.150-.151, ET Sec. Sec.  191.182-.183, ET 
Sec. Sec.  191.196-.197, and ET Sec. Sec.  191.220-.221, in the Board's 
interim independence standards established by the AICPA. This approach 
also would have been more challenging from a drafting perspective, 
especially with respect to potential amendments to the provisions of 
the Board's interim independence standards relating to grandfathered 
and permitted loans, since the Board's interim independence standards 
use different terminology and have a different organizational structure 
than Rule 2-01. As a result, this alternative would have provided less 
clarification to auditors on their professional obligations with 
respect to lending arrangements than the approach adopted by the Board, 
which eliminates duplicative and overlapping requirements relating to 
lending arrangements under the Board's interim independence standards.
    Under the first alternative, the Board also considered amending the 
definitions of ``affiliate of the audit client'' and ``investment 
company complex'' in Rules 3501(a)(ii) and (i)(ii), respectively, to 
track the language of the SEC's amendments to the definitions of the 
same terms in Rule 2-01 as closely as possible. The Board decided to 
amend the definitions of ``affiliate of the audit client'' and 
``investment company complex'' by incorporating by reference the 
definition of these terms used in Rule 2-01. Amending the definitions 
to clarify that these terms have the same meaning as defined in Rule 2-
01(f) avoids having to repeat the same definitions in the Board's 
rules. As discussed, however, the Board amended the definition of 
``audit and professional engagement period'' in Rule 3501(a)(iii) to 
conform to the SEC's amendments to the definition of ``audit and 
professional engagement period'' in Rule 2-01(f)(5) by adapting the 
Commission's definition and using specific terms used in the Act and 
other rules of the Board (specifically, by replacing the term 
``accountant'' with the term ``registered public accounting firm'').
    Second, as an alternative to rulemaking, the Board considered the 
issuance of guidance to inform auditors that, after the effective date 
of the SEC's 2020 amendments to Rule 2-01, the Board would not object 
if auditors looked to the requirements of Rule 2-01, as amended, when 
complying with the independence requirements relating to lending 
arrangements under the Board's interim independence standards and 
applying the definitions set forth in Rule 3501(a)(ii), (a)(iii) and 
(i)(ii). This alternative could be accomplished relatively quickly and 
would avoid the need for the Board to amend the Board's interim 
independence standards or Rule 3501. This approach would leave in 
place, however, provisions of the Board's interim independence 
standards relating to lending arrangements and definitions of certain 
terms in Rule 3501

[[Page 76141]]

that include differences with Rule 2-01, as amended, or otherwise 
overlap with the SEC's independence requirements relating to lending 
arrangements. This approach might also create regulatory uncertainty 
and additional costs by leaving auditors and audit clients, especially 
those who were not aware of the Board's guidance, uncertain as to their 
professional obligations.
    Third, the Board considered taking no action at this time to amend 
its interim independence standards or independence rules. This 
alternative would require auditors to comply with two different sets of 
independence requirements relating to lending arrangements under Rule 
2-01 and the Board's interim independence standards \65\ and to look to 
two different definitions of ``affiliate of the audit client,'' ``audit 
and professional engagement period,'' and ``investment company 
complex'' when complying with the independence rules of the SEC and the 
PCAOB. While this approach might underscore the Board's authority to 
establish independence standards for registered public accounting 
firms, it would leave unaddressed certain differences between the 
independence requirements of the Board and the SEC that had not existed 
when the PCAOB adopted its interim independence standards in 2003 or 
began to adopt its permanent independence rules in 2005, including with 
respect to both lending arrangements and the scope of the entities 
considered part of the ``audit client'' for purposes of the Board's 
independence rules. This approach might also impede some of the 
benefits that the Commission sought to achieve through its revisions to 
Rule 2-01 and result in additional compliance costs when applying two 
different definitions of the same terms in Rule 2-01 and the Board's 
rules.
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    \65\ See supra note 15 (discussing the Note to Rule 3500T).
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    In comparison to these alternatives, the Board's decision to remove 
the provisions relating to lending arrangements from the Board's 
interim independence standards avoids duplicative requirements in the 
independence requirements of the Board and the SEC on lending 
arrangements and helps facilitate compliance with Rule 2-01, as 
amended, by clarifying the professional obligations of audit firms. The 
amendments should also facilitate cooperation and coordination between 
the Board and the SEC when monitoring compliance with the SEC's revised 
provisions in Rule 2-01(c)(1)(ii) relating to lending arrangements.
Application to Audits of Emerging Growth Companies
    Pursuant to Section 104 of the Jumpstart Our Business Startups Act 
(``JOBS Act''), rules adopted by the Board subsequent to April 5, 2012 
generally do not apply to the audits of EGCs, as defined in Section 
3(a)(8) of the Securities Exchange Act of 1934, unless the SEC 
``determines that the application of such additional requirements is 
necessary or appropriate in the public interest, after considering the 
protection of investors, and whether the action will promote 
efficiency, competition, and capital formation.'' \66\ As a result of 
the JOBS Act, the rules and related amendments to PCAOB standards the 
Board adopts are generally subject to a separate determination by the 
SEC regarding their applicability to audits of EGCs.
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    \66\ See Public Law 112-106 (Apr. 5, 2012). See Section 
103(a)(3)(C) of the Act, as added by Section 104 of the JOBS Act. 
Section 104 of the JOBS Act also provides that any rules of the 
Board requiring (1) mandatory audit firm rotation or (2) a 
supplement to the auditor's report in which the auditor would be 
required to provide additional information about the audit and the 
financial statements of the issuer (auditor discussion and analysis) 
shall not apply to an audit of an EGC. The Board's amendments do not 
fall within either of these two categories.
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    To inform consideration of the application of the Board's rules and 
standards to audits of EGCs, the Board's staff publishes a white paper 
that provides general information about characteristics of EGCs.\67\ As 
of the November 15, 2019 measurement date, the PCAOB staff identified 
1,761 companies that had identified themselves as EGCs and had filed 
audited financial statements with the SEC, including an audit report 
signed by a registered public accounting firm in the 18 months 
preceding the measurement date.
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    \67\ See PCAOB white paper, Characteristics of Emerging Growth 
Companies and Their Audit Firms as of November 15, 2019 (Nov. 9, 
2020), available on the Board's website.
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    In amending Rule 2-01 in 2019 and 2020, the Commission conducted an 
economic analysis, which included an analysis of the effect of the 
amendments to Rule 2-01 on efficiency, competition, and capital 
formation. The SEC concluded that the amendments to Rule 2-01 likely 
would improve the practical application of Rule 2-01 and reduce 
compliance burdens, and might increase competition among auditors and 
lead to a potential reduction in audit costs. In addition, the 
Commission determined that the amendments to Rule 2-01 may also 
facilitate capital formation.\68\ Additionally, the SEC's economic 
analysis regarding the amendments to the definition of ``audit and 
professional engagement period'' in Rule 2-01(f)(5) concluded that a 
shorter look-back period may facilitate additional IPOs and thereby 
promote efficiency and capital formation.
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    \68\ See 2019 Adopting Release at 84 FR 32057; 2020 Adopting 
Release at 107.
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    The economic considerations discussed above are generally 
applicable to audits of EGCs. Moreover, if the Board's amendments were 
determined not to apply to the audits of EGCs, auditors would be 
required to address the differing independence requirements in their 
independence policies and procedures and in their quality control 
systems, which would create the potential for confusion.
    Accordingly, and for the reasons explained above, the Board 
requests that the Commission determine that it is necessary or 
appropriate in the public interest, after considering the protection of 
investors and whether the action will promote efficiency, competition, 
and capital formation, to apply the Board's targeted amendments to its 
interim independence standards and independence rules to audits of 
EGCs. The Board stands ready to assist the Commission in considering 
any comments the SEC receives on these matter during the Commission's 
public comment process.

III. Date of Effectiveness of the Proposed Rules and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period not more than an 
additional 45 days (i) if the Commission determines that such longer 
period is appropriate and publishes the reasons for such determination 
or (ii) as to which the Board consents, the Commission will:
    (A) By order approve or disapprove such proposed rules; or
    (B) institute proceedings to determine whether the proposed rules 
should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed 
rules are consistent with the requirements of Title I of the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/pcaob.shtml); or

[[Page 76142]]

     Send an email to rule-comments@sec.gov. Please include 
File Number PCAOB-2020-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number PCAOB-2020-01. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/pcaob.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rules that are filed 
with the Commission, and all written communications relating to the 
proposed rules between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing will also be available for inspection 
and copying at the principal office of the PCAOB. All comments received 
will be posted without charge. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number PCAOB-2020-01 and should be submitted on or 
before December 18, 2020.

    For the Commission by the Office of the Chief Accountant, by 
delegated authority.\69\
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    \69\ 17 CFR 200.30-11(b)(1) and (3).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26145 Filed 11-25-20; 8:45 am]
BILLING CODE 8011-01-P


