AICPA’s FinREC Comments on Two SEC Rule Proposals

September 29, 2015

The Financial Reporting Executive Committee (FinREC) of the American Institute of CPAs (AICPA) commented to the U.S. Securities and Exchange Commission in an August 17 letter about two rules proposed by the SEC – Investment Company Reporting Modernization (IC proposal) and Amendments to Form ADV and Investment Advisers Act Rules (IA proposal).

“FinREC supports the Commission’s efforts to modernize the reporting and disclosure of information provided by investment companies regulated under the Investment Company Act of 1940 (1940 Act),” James A. Dolinar, chairman of FinREC, and Brent Oswald, chairman of the AICPA Investment Companies Expert Panel, wrote in the letter.  FinREC comments primarily relate to financial reporting matters in response to certain proposed changes to Regulation S-X in the IC proposal.  The letter also included observations regarding very limited aspects of Form N-CEN and Form ADV.

Specific areas of comment related to the IC proposal included those concerning derivatives linked to a custom index or basket, identification of securities that are illiquid, tax basis disclosures for derivatives, disclosures regarding open futures contracts and non-cash income, securities lending disclosures and disclosure regarding a change in auditor on Form N-CEN.

The IA proposal related to amendments to Form ADV and Investment Advisers Act of 1940 rules would, among other matters, require advisers to provide the Public Company Accounting Oversight Board (PCAOB) registration number for the auditor performing the surprise security examination.  Such surprise examination is generally required annually of investment advisers who have custody of client funds or securities.  Dolinar and Oswald pointed out that Rule 206(4)-2(a)(4) under the Investment Advisers Act does not necessarily require an independent public accountant to be registered with the PCAOB to perform such annual examination unless an adviser or its related party is serving as a qualified custodian.  Therefore, they recommended that the phrase “if applicable” be added to the instructions in order to prevent the appearance of unintentionally modifying the existing rule.