The Securities and Exchange Commission has proposed to amend its auditor independence rules in order to determine whether an auditor is independent if it has a lending relationship with certain shareholders of an audit client during its professional engagement period. The auditor independence standard set forth in Rule 2-01 of Regulation S-X requires auditors to be independent of audit clients both “in fact and in appearance.” Rule 2-01(c)(1)(ii)(A) addresses debtor-creditor relationships and requires that one consider whether an audit firm has a lending relationship with an entity having record or beneficial ownership of more than 10% of the equity securities of either the firm’s audit client or any entity that is a controlling parent company of the audit client, a controlled subsidiary of the audit client, or an entity under common control with the audit client. Several aspects of the current rule have resulted in challenges, especially for funds and fund families. The proposed amendments would focus solely on beneficial (not record) ownership, would replace the bright-line 10% ownership test with a “significant influence” test, would add a “known through reasonable inquiry” standard in relation to identifying beneficial owners of the audit client’s equity securities, and would amend the definition of “audit client” for a fund under audit to exclude from the provision funds that otherwise would be considered “affiliates of the audit client.” In assessing whether a lender has the ability to exert a significant influence over the audit client’s operating and financial policies reference is made to the principles articulated in the Financial Accounting Standard Board’s ASC Topic 323, Investments–Equity Method and Joint Ventures. The ability to exert a significant influence would require a facts-and-circumstances assessment of, among other things, board representation, participation in policy-making, material intra-entity transactions, interchange of management personnel, or technological dependency. The proposing release notes that a benefit of the proposed amendments would be that compliance monitoring would be less burdensome. This seems unlikely in light of the analysis required to be undertaken to assess any “significant influence,” which is fact-based and seemingly more subjective than the current standards.