[Code of Federal Regulations]
[Title 17, Volume 2]
[Revised as of April 1, 2001]
From the U.S. Government Printing Office via GPO Access
[CITE: 17CFR210.2-01]

[Page 223-232]
 
              TITLE 17--COMMODITY AND SECURITIES EXCHANGES
 
             CHAPTER II--SECURITIES AND EXCHANGE COMMISSION
 
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL STATEMENTS,
 
Sec. 210.2-01  Qualifications of accountants.

                    Preliminary Note to Sec. 210.2-01

    1. Section 210.2-01 is designed to ensure that auditors are 
qualified and independent of their audit clients both in fact and in 
appearance. Accordingly, the rule sets forth restrictions on financial, 
employment, and business relationships between an accountant and an 
audit client and restrictions on an accountant providing certain non-
audit services to an audit client.
    2. Section 210.2-01(b) sets forth the general standard of auditor 
independence. Paragraphs (c)(1) to (c)(5) reflect the application of the 
general standard to particular circumstances. The rule does not purport 
to, and the Commission could not, consider all circumstances that raise 
independence concerns, and these are subject to the general standard in 
Sec. 210.2-01(b). In considering this standard, the Commission looks in 
the first instance to whether a relationship or the provision of a 
service: creates a mutual or conflicting interest between the accountant 
and the audit client; places the accountant in the position of auditing 
his or her own work; results in the accountant acting as management or 
an employee of the audit client; or places the accountant in a position 
of being an advocate for the audit client.
    3. These factors are general guidance only and their application may 
depend on particular facts and circumstances. For that reason, 
Sec. 210.2-01 provides that, in determining whether an accountant is 
independent, the Commission will consider all relevant facts and 
circumstances. For the same reason, registrants and accountants are 
encouraged to consult with the Commission's Office of the Chief 
Accountant before entering into relationships, including relationships 
involving the provision of services, that are not explicitly described 
in the rule.
    (a) The Commission will not recognize any person as a certified 
public accountant who is not duly registered and in good standing as 
such under the laws of the place of his residence or principal office. 
The Commission will not recognize any person as a public accountant who 
is not in good standing and entitled to practice as such under the laws 
of the place of his residence or principal office.
    (b) The Commission will not recognize an accountant as independent, 
with respect to an audit client, if the accountant is not, or a 
reasonable investor with knowledge of all relevant facts and 
circumstances would conclude that the accountant is not, capable of 
exercising objective and impartial judgment on all issues encompassed 
within the accountant's engagement. In determining whether an accountant 
is independent, the Commission will consider all relevant circumstances, 
including all relationships between the accountant and the audit client, 
and not just those relating to reports filed with the Commission.
    (c) This paragraph sets forth a non-exclusive specification of 
circumstances inconsistent with paragraph (b) of this section.
    (1) Financial relationships. An accountant is not independent if, at 
any point during the audit and professional engagement period, the 
accountant has a direct financial interest or a material indirect 
financial interest in the accountant's audit client, such as:
    (i) Investments in audit clients. An accountant is not independent 
when:
    (A) The accounting firm, any covered person in the firm, or any of 
his or her immediate family members, has any direct investment in an 
audit client, such as stocks, bonds, notes, options, or other 
securities. The term direct investment includes an investment in an 
audit client through an intermediary if:
    (1) The accounting firm, covered person, or immediate family member,

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alone or together with other persons, supervises or participates in the 
intermediary's investment decisions or has control over the 
intermediary; or
    (2) The intermediary is not a diversified management investment 
company, as defined by section 5(b)(1) of the Investment Company Act of 
1940, 15 U.S.C. 80a-5(b)(1), and has an investment in the audit client 
that amounts to 20% or more of the value of the intermediary's total 
investments.
    (B) Any partner, principal, shareholder, or professional employee of 
the accounting firm, any of his or her immediate family members, any 
close family member of a covered person in the firm, or any group of the 
above persons has filed a Schedule 13D or 13G (17 CFR 240.13d-101 or 
240.13d-102) with the Commission indicating beneficial ownership of more 
than five percent of an audit client's equity securities or controls an 
audit client, or a close family member of a partner, principal, or 
shareholder of the accounting firm controls an audit client.
    (C) The accounting firm, any covered person in the firm, or any of 
his or her immediate family members, serves as voting trustee of a 
trust, or executor of an estate, containing the securities of an audit 
client, unless the accounting firm, covered person in the firm, or 
immediate family member has no authority to make investment decisions 
for the trust or estate.
    (D) The accounting firm, any covered person in the firm, any of his 
or her immediate family members, or any group of the above persons has 
any material indirect investment in an audit client. For purposes of 
this paragraph, the term material indirect investment does not include 
ownership by any covered person in the firm, any of his or her immediate 
family members, or any group of the above persons of 5% or less of the 
outstanding shares of a diversified management investment company, as 
defined by section 5(b)(1) of the Investment Company Act of 1940, 15 
U.S.C. 80a-5(b)(1), that invests in an audit client.
    (E) The accounting firm, any covered person in the firm, or any of 
his or her immediate family members:
    (1) Has any direct or material indirect investment in an entity 
where:
    (i) An audit client has an investment in that entity that is 
material to the audit client and has the ability to exercise significant 
influence over that entity; or
    (ii) The entity has an investment in an audit client that is 
material to that entity and has the ability to exercise significant 
influence over that audit client;
    (2) Has any material investment in an entity over which an audit 
client has the ability to exercise significant influence; or
    (3) Has the ability to exercise significant influence over an entity 
that has the ability to exercise significant influence over an audit 
client.
    (ii) Other financial interests in audit client. An accountant is not 
independent when the accounting firm, any covered person in the firm, or 
any of his or her immediate family members has:
    (A) Loans/debtor-creditor relationship. Any loan (including any 
margin loan) to or from an audit client, or an audit client's officers, 
directors, or record or beneficial owners of more than ten percent of 
the audit client's equity securities, except for the following loans 
obtained from a financial institution under its normal lending 
procedures, terms, and requirements:
    (1) Automobile loans and leases collateralized by the automobile;
    (2) Loans fully collateralized by the cash surrender value of an 
insurance policy;
    (3) Loans fully collateralized by cash deposits at the same 
financial institution; and
    (4) A mortgage loan collateralized by the borrower's primary 
residence provided the loan was not obtained while the covered person in 
the firm was a covered person.
    (B) Savings and checking accounts. Any savings, checking, or similar 
account at a bank, savings and loan, or similar institution that is an 
audit client, if the account has a balance that exceeds the amount 
insured by the Federal Deposit Insurance Corporation or any similar 
insurer, except that an accounting firm account may have an uninsured 
balance provided that the likelihood of the bank, savings and

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loan, or similar institution experiencing financial difficulties is 
remote.
    (C) Broker-dealer accounts. Brokerage or similar accounts maintained 
with a broker-dealer that is an audit client, if:
    (1) Any such account includes any asset other than cash or 
securities (within the meaning of ``security'' provided in the 
Securities Investor Protection Act of 1970 (``SIPA'') (15 U.S.C. 78aaa 
et seq.));
    (2) The value of assets in the accounts exceeds the amount that is 
subject to a Securities Investor Protection Corporation advance, for 
those accounts, under Section 9 of SIPA (15 U.S.C. 78fff-3); or
    (3) With respect to non-U.S. accounts not subject to SIPA 
protection, the value of assets in the accounts exceeds the amount 
insured or protected by a program similar to SIPA.
    (D) Futures commission merchant accounts. Any futures, commodity, or 
similar account maintained with a futures commission merchant that is an 
audit client.
    (E) Credit cards. Any aggregate outstanding credit card balance owed 
to a lender that is an audit client that is not reduced to $10,000 or 
less on a current basis taking into consideration the payment due date 
and any available grace period.
    (F) Insurance products. Any individual policy issued by an insurer 
that is an audit client unless:
    (1) The policy was obtained at a time when the covered person in the 
firm was not a covered person in the firm; and
    (2) The likelihood of the insurer becoming insolvent is remote.
    (G) Investment companies. Any financial interest in an entity that 
is part of an investment company complex that includes an audit client.
    (iii) Exceptions. Notwithstanding paragraphs (c)(1)(i) and 
(c)(1)(ii) of this section, an accountant will not be deemed not 
independent if:
    (A) Inheritance and gift. Any person acquires an unsolicited 
financial interest, such as through an unsolicited gift or inheritance, 
that would cause an accountant to be not independent under paragraph 
(c)(1)(i) or (c)(1)(ii) of this section, and the financial interest is 
disposed of as soon as practicable, but no later than 30 days after the 
person has knowledge of and the right to dispose of the financial 
interest.
    (B) New audit engagement. Any person has a financial interest that 
would cause an accountant to be not independent under paragraph 
(c)(1)(i) or (c)(1)(ii) of this section, and:
    (1) The accountant did not audit the client's financial statements 
for the immediately preceding fiscal year; and
    (2) The accountant is independent under paragraph (c)(1)(i) and 
(c)(1)(ii) of this section before the earlier of:
    (i) Signing an initial engagement letter or other agreement to 
provide audit, review, or attest services to the audit client; or
    (ii) Commencing any audit, review, or attest procedures (including 
planning the audit of the client's financial statements).
    (C) Employee compensation and benefit plans. An immediate family 
member of a person who is a covered person in the firm only by virtue of 
paragraphs (f)(11)(iii) or (f)(11)(iv) of this section has a financial 
interest that would cause an accountant to be not independent under 
paragraph (c)(1)(i) or (c)(1)(ii) of this section, and the acquisition 
of the financial interest was an unavoidable consequence of 
participation in his or her employer's employee compensation or benefits 
program, provided that the financial interest, other than unexercised 
employee stock options, is disposed of as soon as practicable, but no 
later than 30 days after the person has the right to dispose of the 
financial interest.
    (iv) Audit clients' financial relationships. An accountant is not 
independent when:
    (A) Investments by the audit client in the accounting firm. An audit 
client has, or has agreed to acquire, any direct investment in the 
accounting firm, such as stocks, bonds, notes, options, or other 
securities, or the audit client's officers or directors are record or 
beneficial owners of more than 5% of the equity securities of the 
accounting firm.
    (B) Underwriting. An accounting firm engages an audit client to act 
as an underwriter, broker-dealer, market-

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maker, promoter, or analyst with respect to securities issued by the 
accounting firm.
    (2) Employment relationships. An accountant is not independent if, 
at any point during the audit and professional engagement period, the 
accountant has an employment relationship with an audit client, such as:
    (i) Employment at audit client of accountant. A current partner, 
principal, shareholder, or professional employee of the accounting firm 
is employed by the audit client or serves as a member of the board of 
directors or similar management or governing body of the audit client.
    (ii) Employment at audit client of certain relatives of accountant. 
A close family member of a covered person in the firm is in an 
accounting role or financial reporting oversight role at an audit 
client, or was in such a role during any period covered by an audit for 
which the covered person in the firm is a covered person.
    (iii) Employment at audit client of former employee of accounting 
firm. A former partner, principal, shareholder, or professional employee 
of an accounting firm is in an accounting role or financial reporting 
oversight role at an audit client, unless the individual:
    (A) Does not influence the accounting firm's operations or financial 
policies;
    (B) Has no capital balances in the accounting firm; and
    (C) Has no financial arrangement with the accounting firm other than 
one providing for regular payment of a fixed dollar amount (which is not 
dependent on the revenues, profits, or earnings of the accounting firm):
    (1) Pursuant to a fully funded retirement plan, rabbi trust, or, in 
jurisdictions in which a rabbi trust does not exist, a similar vehicle; 
or
    (2) In the case of a former professional employee who was not a 
partner, principal, or shareholder of the accounting firm and who has 
been disassociated from the accounting firm for more than five years, 
that is immaterial to the former professional employee.
    (iv) Employment at accounting firm of former employee of audit 
client. A former officer, director, or employee of an audit client 
becomes a partner, principal, shareholder, or professional employee of 
the accounting firm, unless the individual does not participate in, and 
is not in a position to influence, the audit of the financial statements 
of the audit client covering any period during which he or she was 
employed by or associated with that audit client.
    (3) Business relationships. An accountant is not independent if, at 
any point during the audit and professional engagement period, the 
accounting firm or any covered person in the firm has any direct or 
material indirect business relationship with an audit client, or with 
persons associated with the audit client in a decision-making capacity, 
such as an audit client's officers, directors, or substantial 
stockholders. The relationships described in this paragraph do not 
include a relationship in which the accounting firm or covered person in 
the firm provides professional services to an audit client or is a 
consumer in the ordinary course of business.
    (4) Non-audit services. An accountant is not independent if, at any 
point during the audit and professional engagement period, the 
accountant provides the following non-audit services to an audit client:
    (i) Bookkeeping or other services related to the audit client's 
accounting records or financial statements.
    (A) Any service involving:
    (1) Maintaining or preparing the audit client's accounting records;
    (2) Preparing the audit client's financial statements that are filed 
with the Commission or form the basis of financial statements filed with 
the Commission; or
    (3) Preparing or originating source data underlying the audit 
client's financial statements.
    (B) Notwithstanding paragraph (c)(4)(i)(A) of this section, the 
accountant's independence will not be impaired when the accountant 
provides these services:
    (1) In emergency or other unusual situations, provided the 
accountant does not undertake any managerial actions or make any 
managerial decisions; or
    (2) For foreign divisions or subsidiaries of an audit client, 
provided that:

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    (i) The services are limited, routine, or ministerial;
    (ii) It is impractical for the foreign division or subsidiary to 
make other arrangements;
    (iii) The foreign division or subsidiary is not material to the 
consolidated financial statements;
    (iv) The foreign division or subsidiary does not have employees 
capable or competent to perform the services;
    (v) The services performed are consistent with local professional 
ethics rules; and
    (vi) The fees for all such services collectively (for the entire 
group of companies) do not exceed the greater of 1% of the consolidated 
audit fee or $10,000.
    (ii) Financial information systems design and implementation.
    (A) Directly or indirectly operating, or supervising the operation 
of, the audit client's information system or managing the audit client's 
local area network.
    (B) Designing or implementing a hardware or software system that 
aggregates source data underlying the financial statements or generates 
information that is significant to the audit client's financial 
statements taken as a whole, unless:
    (1) The audit client's management has acknowledged in writing to the 
accounting firm and the audit client's audit committee, or if there is 
no such committee then the board of directors, the audit client's 
responsibility to establish and maintain a system of internal accounting 
controls in compliance with section 13(b)(2) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78m(b)(2));
    (2) The audit client's management designates a competent employee or 
employees, preferably within senior management, with the responsibility 
to make all management decisions with respect to the design and 
implementation of the hardware or software system;
    (3) The audit client's management makes all management decisions 
with respect to the design and implementation of the hardware or 
software system including, but not limited to, decisions concerning the 
systems to be evaluated and selected, the controls and system procedures 
to be implemented, the scope and timetable of system implementation, and 
the testing, training, and conversion plans;
    (4) The audit client's management evaluates the adequacy and results 
of the design and implementation of the hardware or software system; and
    (5) The audit client's management does not rely on the accountant's 
work as the primary basis for determining the adequacy of its internal 
controls and financial reporting systems.
    (C) Nothing in this paragraph (c)(4)(ii) shall limit services an 
accountant performs in connection with the assessment, design, and 
implementation of internal accounting controls and risk management 
controls, provided the auditor does not act as an employee or perform 
management functions.
    (iii) Appraisal or valuation services or fairness opinions.
    (A) Any appraisal service, valuation service, or any service 
involving a fairness opinion for an audit client, where it is reasonably 
likely that the results of these services, individually or in the 
aggregate, would be material to the financial statements, or where the 
results of these services will be audited by the accountant during an 
audit of the audit client's financial statements.
    (B) Notwithstanding paragraph (c)(4)(iii)(A) of this section, the 
accountant's independence will not be impaired when:
    (1) The accounting firm's valuation expert reviews the work of the 
audit client or a specialist employed by the audit client, and the audit 
client or the specialist provides the primary support for the balances 
recorded in the client's financial statements;
    (2) The accounting firm's actuaries value an audit client's pension, 
other post-employment benefit, or similar liabilities, provided that the 
audit client has determined and taken responsibility for all significant 
assumptions and data;
    (3) The valuation is performed in the context of the planning and 
implementation of a tax-planning strategy or for tax compliance 
services; or
    (4) The valuation is for non-financial purposes where the results of 
the valuation do not affect the financial statements.

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    (iv) Actuarial services.
    (A) Any actuarially-oriented advisory service involving the 
determination of insurance company policy reserves and related accounts 
for the audit client, unless:
    (1) The audit client uses its own actuaries or third-party actuaries 
to provide management with the primary actuarial capabilities;
    (2) Management accepts responsibility for any significant actuarial 
methods and assumptions; and
    (3) The accountant's involvement is not continuous.
    (B) Subject to complying with paragraph (c)(4)(iv)(A)(1)-(3) of this 
section, the accountant's independence will not be impaired if the 
accountant:
    (1) Assists management to develop appropriate methods, assumptions, 
and amounts for policy and loss reserves and other actuarial items 
presented in financial reports based on the audit client's historical 
experience, current practice, and future plans;
    (2) Assists management in the conversion of financial statements 
from a statutory basis to one conforming with generally accepted 
accounting principles;
    (3) Analyzes actuarial considerations and alternatives in federal 
income tax planning; or
    (4) Assists management in the financial analysis of various matters, 
such as proposed new policies, new markets, business acquisitions, and 
reinsurance needs.
    (v) Internal audit services. Either of:
    (A) Internal audit services in an amount greater than 40% of the 
total hours expended on the audit client's internal audit activities in 
any one fiscal year, unless the audit client has less than $200 million 
in total assets. (For purposes of this paragraph, the term internal 
audit services does not include operational internal audit services 
unrelated to the internal accounting controls, financial systems, or 
financial statements.); or
    (B) Any internal audit services, or any operational internal audit 
services unrelated to the internal accounting controls, financial 
systems, or financial statements, for an audit client, unless:
    (1) The audit client's management has acknowledged in writing to the 
accounting firm and the audit client's audit committee, or if there is 
no such committee then the board of directors, the audit client's 
responsibility to establish and maintain a system of internal accounting 
controls in compliance with section 13(b)(2) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78m(b)(2));
    (2) The audit client's management designates a competent employee or 
employees, preferably within senior management, to be responsible for 
the internal audit function;
    (3) The audit client's management determines the scope, risk, and 
frequency of internal audit activities, including those to be performed 
by the accountant;
    (4) The audit client's management evaluates the findings and results 
arising from the internal audit activities, including those performed by 
the accountant;
    (5) The audit client's management evaluates the adequacy of the 
audit procedures performed and the findings resulting from the 
performance of those procedures by, among other things, obtaining 
reports from the accountant; and
    (6) The audit client's management does not rely on the accountant's 
work as the primary basis for determining the adequacy of its internal 
controls.
    (vi) Management functions. Acting, temporarily or permanently, as a 
director, officer, or employee of an audit client, or performing any 
decision-making, supervisory, or ongoing monitoring function for the 
audit client.
    (vii) Human resources.
    (A) Searching for or seeking out prospective candidates for 
managerial, executive, or director positions;
    (B) Engaging in psychological testing, or other formal testing or 
evaluation programs;
    (C) Undertaking reference checks of prospective candidates for an 
executive or director position;
    (D) Acting as a negotiator on the audit client's behalf, such as 
determining position, status or title, compensation, fringe benefits, or 
other conditions of employment; or

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    (E) Recommending, or advising the audit client to hire, a specific 
candidate for a specific job (except that an accounting firm may, upon 
request by the audit client, interview candidates and advise the audit 
client on the candidate's competence for financial accounting, 
administrative, or control positions).
    (viii) Broker-dealer services. Acting as a broker-dealer, promoter, 
or underwriter, on behalf of an audit client, making investment 
decisions on behalf of the audit client or otherwise having 
discretionary authority over an audit client's investments, executing a 
transaction to buy or sell an audit client's investment, or having 
custody of assets of the audit client, such as taking temporary 
possession of securities purchased by the audit client.
    (ix) Legal services. Providing any service to an audit client under 
circumstances in which the person providing the service must be admitted 
to practice before the courts of a United States jurisdiction.
    (5) Contingent fees. An accountant is not independent if, at any 
point during the audit and professional engagement period, the 
accountant provides any service or product to an audit client for a 
contingent fee or a commission, or receives a contingent fee or 
commission from an audit client.
    (d) Quality controls. An accounting firm's independence will not be 
impaired solely because a covered person in the firm is not independent 
of an audit client provided:
    (1) The covered person did not know of the circumstances giving rise 
to the lack of independence;
    (2) The covered person's lack of independence was corrected as 
promptly as possible under the relevant circumstances after the covered 
person or accounting firm became aware of it; and
    (3) The accounting firm has a quality control system in place that 
provides reasonable assurance, taking into account the size and nature 
of the accounting firm's practice, that the accounting firm and its 
employees do not lack independence, and that covers at least all 
employees and associated entities of the accounting firm participating 
in the engagement, including employees and associated entities located 
outside of the United States.
    (4) For an accounting firm that annually provides audit, review, or 
attest services to more than 500 companies with a class of securities 
registered with the Commission under section 12 of the Securities 
Exchange Act of 1934 (15 U.S.C. 78l), a quality control system will not 
provide such reasonable assurance unless it has at least the following 
features:
    (i) Written independence policies and procedures;
    (ii) With respect to partners and managerial employees, an automated 
system to identify their investments in securities that might impair the 
accountant's independence;
    (iii) With respect to all professionals, a system that provides 
timely information about entities from which the accountant is required 
to maintain independence;
    (iv) An annual or on-going firm-wide training program about auditor 
independence;
    (v) An annual internal inspection and testing program to monitor 
adherence to independence requirements;
    (vi) Notification to all accounting firm members, officers, 
directors, and employees of the name and title of the member of senior 
management responsible for compliance with auditor independence 
requirements;
    (vii) Written policies and procedures requiring all partners and 
covered persons to report promptly to the accounting firm when they are 
engaged in employment negotiations with an audit client, and requiring 
the firm to remove immediately any such professional from that audit 
client's engagement and to review promptly all work the professional 
performed related to that audit client's engagement; and
    (viii) A disciplinary mechanism to ensure compliance with this 
section.
    (e) Transition and grandfathering.
    (1) Transition.
    (i) Appraisal or valuation services or fairness opinions and 
internal audit services. Until August 5, 2002, providing to an audit 
client the non-audit services set forth in paragraphs (c)(4)(iii) and 
(c)(4)(v) of this section will not impair an accountant's independence 
with respect to the audit client if performing

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those services did not impair the accountant's independence under pre-
existing requirements of the Commission, the Independence Standards 
Boards, or the accounting profession in the United States.
    (ii) Other financial interests and employment relationships. Until 
May 7, 2001, having the financial interests set forth in paragraph 
(c)(1)(ii) of this section or the employment relationships set forth in 
paragraph (c)(2) of this section will not impair an accountant's 
independence with respect to the audit client if having those financial 
interests or employment relationships did not impair the accountant's 
independence under pre-existing requirements of the Commission, the 
Independence Standards Board, or the accounting profession in the United 
States.
    (iii) Quality controls. Until December 31, 2002, paragraph (d)(4) of 
this section shall not apply to offices of the accounting firm located 
outside of the United States.
    (2) Grandfathering. Financial interests included in paragraphs 
(c)(1)(ii)(A) and (c)(1)(ii)(F) of this section and employment 
relationships included in paragraph (c)(2) of this section in existence 
on May 7, 2001, and contracts for the provision of services described in 
paragraph (c)(4)(ii) of this section in existence on February 5, 2001 
will not be deemed to impair an accountant's independence if they did 
not impair the accountant's independence under pre-existing requirements 
of the Commission, the Independence Standards Board, or the accounting 
profession in the United States.
    (3) Settling financial arrangements with former professionals. To 
the extent not required by pre-existing requirements of the Commission, 
the Independence Standards Board, or the accounting profession in the 
United States, the requirement in paragraph (c)(2)(iii) of this section 
to settle financial arrangements with former professionals applies to 
situations that arise after the effective date of this section.
    (f) Definitions of terms. For purposes of this section:
    (1) Accountant, as used in paragraphs (b) through (e) of this 
section, means a certified public accountant or public accountant 
performing services in connection with an engagement for which 
independence is required. References to the accountant include any 
accounting firm with which the certified public accountant or public 
accountant is affiliated.
    (2) Accounting firm means an organization (whether it is a sole 
proprietorship, incorporated association, partnership, corporation, 
limited liability company, limited liability partnership, or other legal 
entity) that is engaged in the practice of public accounting and 
furnishes reports or other documents filed with the Commission or 
otherwise prepared under the securities laws, and all of the 
organization's departments, divisions, parents, subsidiaries, and 
associated entities, including those located outside of the United 
States. Accounting firm also includes the organization's pension, 
retirement, investment, or similar plans.
    (3) Accounting role or financial reporting oversight role means a 
role in which a person is in a position to or does:
    (i) Exercise more than minimal influence over the contents of the 
accounting records or anyone who prepares them; or
    (ii) Exercise influence over the contents of the financial 
statements or anyone who prepares them, such as when the person is a 
member of the board of directors or similar management or governing 
body, chief executive officer, president, chief financial officer, chief 
operating officer, general counsel, chief accounting officer, 
controller, director of internal audit, director of financial reporting, 
treasurer, vice president of marketing, or any equivalent position.
    (4) Affiliate of the audit client means:
    (i) An 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;
    (ii) An entity over which the audit client has significant 
influence, unless the entity is not material to the audit client;
    (iii) An entity that has significant influence over the audit 
client, unless the audit client is not material to the entity; and

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    (iv) Each entity in the investment company complex when the audit 
client is an entity that is part of an investment company complex.
    (5) Audit and professional engagement period includes both:
    (i) The period covered by any financial statements being audited or 
reviewed (the ``audit period''); and
    (ii) The period of the engagement to audit or review the audit 
client's financial statements or to prepare a report filed with the 
Commission (the ``professional engagement period''):
    (A) The professional engagement period begins when the accountant 
either signs an initial engagement letter (or other agreement to review 
or audit a client's financial statements) or begins audit, review, or 
attest procedures, whichever is earlier; and
    (B) The professional engagement period ends when the audit client or 
the accountant notifies the Commission that the client is no longer that 
accountant's audit client.
    (iii) For audits of the financial statements of foreign private 
issuers, the ``audit and professional engagement period'' does not 
include periods ended prior to the first day of the last fiscal year 
before the foreign private issuer 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.
    (6) Audit client means the entity whose financial statements or 
other information is being audited, reviewed, or attested and any 
affiliates of the audit client, other than, for purposes of paragraph 
(c)(1)(i) of this section, entities that are affiliates of the audit 
client only by virtue of paragraph (f)(4)(ii) or (f)(4)(iii) of this 
section.
    (7) Audit engagement team means all partners, principals, 
shareholders, and professional employees participating in an audit, 
review, or attestation engagement of an audit client, including those 
conducting concurring or second partner reviews and all persons who 
consult with others on the audit engagement team during the audit, 
review, or attestation engagement regarding technical or industry-
specific issues, transactions, or events.
    (8) Chain of command means all persons who:
    (i) Supervise or have direct management responsibility for the 
audit, including at all successively senior levels through the 
accounting firm's chief executive;
    (ii) Evaluate the performance or recommend the compensation of the 
audit engagement partner; or
    (iii) Provide quality control or other oversight of the audit.
    (9) Close family members means a person's spouse, spousal 
equivalent, parent, dependent, nondependent child, and sibling.
    (10) Contingent fee means, except as stated in the next sentence, 
any fee established for the sale of a product or the performance of any 
service pursuant to an arrangement in which no fee will be charged 
unless a specified finding or result is attained, or in which the amount 
of the fee is otherwise dependent upon the finding or result of such 
product or service. Solely for the purposes of this section, a fee is 
not a ``contingent fee'' if it is fixed by courts or other public 
authorities, or, in tax matters, if determined based on the results of 
judicial proceedings or the findings of governmental agencies. Fees may 
vary depending, for example, on the complexity of services rendered.
    (11) Covered persons in the firm means the following partners, 
principals, shareholders, and employees of an accounting firm:
    (i) The ``audit engagement team'';
    (ii) The ``chain of command'';
    (iii) Any other partner, principal, shareholder, or managerial 
employee of the accounting firm who has provided ten or more hours of 
non-audit services to the audit client for the period beginning on the 
date such services are provided and ending on the date the accounting 
firm signs the report on the financial statements for the fiscal year 
during which those services are provided, or who expects to provide ten 
or more hours of non-audit services to the audit client on a recurring 
basis; and
    (iv) Any other partner, principal, or shareholder from an ``office'' 
of the accounting firm in which the lead audit

[[Page 232]]

engagement partner primarily practices in connection with the audit.
    (12) Group means two or more persons who act together for the 
purposes of acquiring, holding, voting, or disposing of securities of a 
registrant.
    (13) Immediate family members means a person's spouse, spousal 
equivalent, and dependents.
    (14) Investment company complex.
    (i) ``Investment company complex'' includes:
    (A) An investment company and its investment adviser or sponsor;
    (B) Any entity controlled by or controlling an investment adviser or 
sponsor in paragraph (f)(14)(i)(A) of this section, or any entity under 
common control with an investment adviser or sponsor in paragraph 
(f)(14)(i)(A) of this section 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; and
    (C) Any investment company or entity that would be an investment 
company but for the exclusions provided by section 3(c) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-3(c)) that has an 
investment adviser or sponsor included in this definition by either 
paragraph (f)(14)(i)(A) or (f)(14)(i)(B) of this section.
    (ii) An investment adviser, for purposes of this definition, does 
not include a sub-adviser whose role is primarily portfolio management 
and is subcontracted with or overseen by another investment adviser.
    (iii) Sponsor, for purposes of this definition, is an entity that 
establishes a unit investment trust.
    (15) Office means a distinct sub-group within an accounting firm, 
whether distinguished along geographic or practice lines.
    (16) Rabbi trust means an irrevocable trust whose assets are not 
accessible to the accounting firm until all benefit obligations have 
been met, but are subject to the claims of creditors in bankruptcy or 
insolvency.

[37 FR 14594, July 21, 1972, as amended at 48 FR 9521, Mar. 7, 1983; 65 
FR 76082, Dec. 5, 2000]