Q: Do the partner rotation and compensation requirements apply to auditors of non-issuer brokers and dealers or investment advisers that are non-issuers?

A: The term "audit partner" is intended to apply to an issuer as defined by the Sarbanes-Oxley Act of 2002. Therefore, for brokers and dealers or investment advisers that are not issuers as defined by the Act, the auditors would not be subject to the rotation requirements or the compensation requirements of the Commission's independence rules. However, since the prohibition on non-audit services applies to audit clients, those provisions would apply to auditors of non-issuer brokers and dealers or investment advisers.

Q: Pursuant to Rule 206(4)-2 under the Investment Advisers Act of 1940 (the “Custody Rule”), an accountant performing a surprise examination must meet the standards of independence described in Rules 2-01(b) and (c). Rule 2-01(b) provides the general standard of independence. Rule 2-01(c) provides a non-exclusive list of circumstances, including specific relationships and services, which would be inconsistent with the general standard. How should an accountant who performs a surprise examination under the Custody Rule consider the propriety of non-audit services specified in Rule 2-01(c)(4)(i)-(v) if such services are not subject to the accountant’s procedures during the surprise examination?

A: When engaged to issue an audit or attest report to satisfy a requirement in the Custody Rule, the accountant should consider the application of the general standard of independence to such engagements. The Commission’s 2003 adopting release (Release No. 33-8183 (January 28, 2003),Strengthening the Commission’s Requirements Regarding Auditor Independence), states that there is a rebuttable presumption that certain prohibited non-audit services (e.g., bookkeeping, financial information systems design and implementation) will be subject to audit procedures during an audit of the audit client’s financial statements.

Rule 2-01(c)(4) provides that these non-audit services are prohibited unless “it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the audit client’s financial statements.”

Therefore, it is the staff’s position that, subject to Rule 2-01(b), an accountant performing a surprise examination under the Custody Rule would be able to perform certain non-audit services as long as it is reasonable to conclude that: (1) the results of the non-audit service will not be subject to attest procedures which might be performed during the surprise examination; and (2) the results of the non-audit service would not be subject to audit procedures if the accountant had been engaged to perform a financial statement audit. For example, if a pooled investment vehicle is included in the scope of an adviser’s surprise examination under the Custody Rule, the accountant performing the surprise examination would be prohibited from compiling the pooled investment vehicle’s financial statements.

Q: Rule 206(4)-2 of the Advisers Act (“Custody Rule”) requires that an accountant performing a surprise examination of an adviser, preparing an internal control report of an adviser’s related person qualified custodian or performing an audit of a pooled investment vehicle’s financial statements for purposes of the adviser’s compliance with the Custody Rule must be an “independent public accountant” and thus comply with the applicable provisions of Rule 2-01, including the term “audit and professional engagement period” as defined in Rule 2-01(f)(5). How should the term “audit and professional engagement period” be applied for accountants performing surprise examinations, preparing internal control reports, and auditing pooled investment vehicles’ financial statements pursuant to Rule 206(4)-2?

A: Under the provisions of Rule 2-01, for a surprise examination, the audit and professional engagement period begins the earliest of: (1) the date the accountant signs an initial written agreement to perform the surprise examination as required by Rule 206(4)-2(a)(4); (2) the date the accountant begins attest procedures; or (3) the beginning of the period subject to the surprise examination.

For the preparation of an internal control report or an audit of a pooled investment vehicle’s financial statements, the audit and professional engagement period begins the earliest of: (1) the date the accountant signs an engagement letter or other agreement to prepare the qualified custodian’s internal control report or audit the pooled investment vehicle’s financial statements; (2) the date the accountant begins attest or audit procedures; or (3) the beginning of the period covered by the internal control report or pooled investment vehicle’s financial statements.

In general, the audit and professional engagement period for the surprise examination ends when the accountant notifies the Commission of its termination pursuant to Rule 206(4)-2(a)(4)(iii). While neither the accountant nor the audit client is required to notify the Commission of a termination of an engagement to prepare an internal control report or to audit a pooled investment vehicle’s financial statements under the Custody Rule, consistent with the provisions of Rule 2-01, the audit and professional engagement period for these engagements ends when the audit client or the accountant, as applicable, notifies the other that the client is no longer the accountant’s client for such engagement.

Q: If an accounting firm regularly audits an advisory firm's books or the books of a limited partnership run by the advisory firm, can that accounting firm also be an “independent” public accountant for purposes of performing the surprise examination under the Custody Rule?

A: Yes, provided that the accounting firm meets the definition of “independent public accountant” in section (d)(3) of the rule.