AICPA Code of Professional Conduct · Section 100 - Independence, Integrity, and Objectivity · ET Section 191 - Ethics Rulings on Independence, Integrity, and Objectivity

ET Section 191
.54-.108
Ethics Rulings on Independence, Integrity, and Objectivity


[54.] Member Providing Appraisal, Valuation, or Actuarial Services

[.107-.108] [Deleted May 1999]


[55.] Independence During Systems Implementation

[.109-.110] [Deleted May 1999]


[56.] Executive Search

[.111-.112] [Deleted May 1999]


[57.] MAS Engagement to Evaluate Service Bureaus

[.113-.114] [Deleted August 1995]


[58.] Member as Lessor

[.115-.116] [Deleted May 1998]

[59.] Account With Brokerage Client

[.117-.118] [Deleted November 1987]


60. Employee Benefit Plans—Member's Relationships With Participating Employer(s)

.119 Question—A member has been asked to audit the financial statements of an employee benefit plan that may have one or more participating employer(s). Must the member maintain independence with respect to the participating employer(s) in order to be considered independent of the plan?

.120 Answer—Independence would not be considered to be impaired with respect to the plan unless the member has a financial interest in the participating employer(s) or other relationships with the participating employer(s) that would give the member significant influence over such employer(s). When auditing plans subject to the Employee Retirement Income Security Act (ERISA), Department of Labor (DOL) regulations must be followed.*

[Replaces previous ruling No. 60, Employee Benefit Plans—Member's Relationships With Participating Employer(s), November 1993.]


[61.] Participation of Member's Spouse in Client's Stock Ownership Plans (Including an ESOP)

[.121-.122] [Deleted May 1998]


[62.] Member and Client Are Limited Partners in a Limited Partnership

[.123-.124] [Deleted April 1991]


[63.] Review of Prospective Financial Information—Member's Independence of Promoters

[.125-.127] [Deleted August 1992]


64. Member on Board of Organization for Which Client Raises Funds

.128 Question—Is a member independent of an entity that functions solely to raise funds for an organization if the member serves on the board of directors of the organization?

.129 Answer—A member's independence would be considered to be impaired with respect to a fund-raising foundation if the member serves on the board of directors of the organization. However, if the directorship is clearly honorary, the member's independence would not be considered to be impaired.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee.]


65. Use of the CPA Designation by Member Not in Public Practice

.130 Question—A member who is not in public practice wishes to use his or her CPA designation in connection with financial statements and correspondence of the member's employer. The member also wants to use the CPA designation along with employment title on business cards. Is it permissible for the member to use the CPA designation in these manners?

.131 Answer—Yes. However, if the member uses the CPA designation in a manner to imply that he or she is independent of the employer, the member would be knowingly misrepresenting facts in violation of rule 102 [ET section 102.01]. Therefore, it is advisable that in any transmittal within which the member uses his or her CPA designation, he or she clearly indicate the employment title. In addition, if the member states affirmatively in any transmittal that a financial statement is presented in conformity with generally accepted accounting principles, the member is subject to rule 203 [ET section 203.01].

[Replaces previous ruling No. 65, Use of the CPA Designation by Member Not in Public Practice, February 1996, effective February 29, 1996.]


66. Member's Retirement or Savings Plan Has Financial Interest in Client

.132 Question—A member has been engaged to perform a service requiring independence for a client company. The member has established a retirement or savings plan through which the member has a financial interest in the client company. Would the member's independence be considered impaired because of this financial interest?

.133 Answer—Any direct or material indirect financial interest owned by a member's retirement or savings plan in a client company would be considered to be a direct or material indirect financial interest of the member in that client and would, therefore, impair the member's independence with respect to that client.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee.]


67. Servicing of Loan

.134 Question—Would the mere servicing of a member's loan by a client financial institution impair the member's independence with respect to the client?

.135 Answer—No.

[Replaces previous ruling No. 67, Servicing of Loan, November 1993.]


68. Blind Trust

.136 Question—A member has a direct financial interest in an enterprise for which the member has been engaged to perform a service requiring independence. Would the independence of the member be considered to be impaired if the member transfers the direct financial interest into a blind trust?

.137 Answer—The independence of the member would be considered impaired whether or not the financial interest is placed in a blind trust. Further, a member should ensure that a blind trust does not hold a direct or material indirect financial interest in clients for which the member provides services requiring independence.

[Revised, effective June 30, 1990, by the Professional Ethics Executive Committee.]


69. Investment With a General Partner

.138 Question—A private, closely held entity is the general partner and controls limited partnership A as defined in FASB Statement No. 94. The member has a material (to his or her net worth) limited partnership interest in limited partnership A. The member has been asked to provide a service requiring independence for a new limited partnership B with the same general partner. Would the member be independent for purposes of providing services to limited partnership B?

.139 Answer—Because the general partner has control over limited partnership A, the member is considered to have a joint closely held business investment with the general partner, who has significant influence over limited partnership B, the proposed client. Since the member has a material investment in limited partnership A, independence would be considered to be impaired with respect to limited partnership B.

[Replaces previous ruling No. 69, Joint Investment With a Promoter and/or General Partner, April 1991, Effective April 30, 1991.]


70. Member's Depository Relationship With Client Financial Institution

.140 Question—A member maintains checking accounts or has savings accounts, certificates of deposit or money market accounts at a financial institution for which the member provides a service requiring independence. Would the member's checking accounts or savings accounts, certificates of deposit or money market accounts impair the member's and his firm's independence with respect to the financial institution under rule 101 [ET section 101.01] and its interpretations?

.141 Answer—The member's and his firm's independence would not be considered to be impaired with respect to the financial institution provided that the checking accounts, savings accounts, certificates of deposit or money market accounts were fully insured by the appropriate state or federal government deposit insurance agencies. Checking accounts, savings accounts, certificates of deposit and money market accounts not fully insured by state or federal government deposit insurance agencies would not impair independence provided that the uninsured amounts are not material to the member or the member's firm.


71. Use of Nonindependent CPA Firm on an Engagement

.142 Question—Firm A is not independent with respect to an entity. Partners, shareholders, or professional employees of Firm A are participating on Firm B's engagement team for that entity. Would Firm B's independence be considered to be impaired?

.143 Answer—Yes. The use by Firm B of partners, shareholders, or professional employees from Firm A as part of the engagement team will impair Firm B's independence with respect to that engagement.

However, use of the work of such individuals in a manner similar to internal auditors is permissible provided that there is compliance with the Statements on Auditing Standards. Applicable literature contained in the Statements on Auditing Standards should be consulted.


72. Member on Advisory Board of Client

.144 Question—A member has agreed to serve on the advisory board of a client. Would service on the advisory board impair the member's or the member's firm's independence with respect to the client?

.145 Answer—The member's services on the advisory board would impair the member's and the member's firm's independence unless all the following criteria are met: (1) the responsibilities of the advisory board are in fact advisory in nature; (2) the advisory board has no authority to make nor does it appear to make management decisions on behalf of the client; and (3) the advisory board and those having authority to make management decisions (including the board of directors or its equivalent) are distinct groups with minimal, if any, common membership.


[73.] Meaning of the Period of a Professional Engagement

[.146-.147] [Deleted February 1998]


74. Audits, Reviews, or Compilations and a Lack of Independence

.148 Question—If a member in public practice is not independent with respect to a client, is it permissible under rule 101 [ET section 101.01] for the member to issue an audit, review, or compilation report for the client?

.149 Answer—A member may not issue an audit opinion or review report if the member is not independent with respect to the client. A member may issue a compilation report for a client with respect to which the member is not independent. However, the member must specifically disclose his or her lack of independence without giving reasons for the impairment.


75. Member Joining Client Credit Union

.150 Question—A member's partners and employees are members of a credit union that requests the member's firm to provide professional services requiring independence. Does membership in the credit union impair the independence of the member and the member's firm with respect to the credit union?

.151 Answer—Membership in the credit union would not impair the member's independence with respect to the credit union as long as all of the following criteria are met:

  1. A member and/or his or her partners or employees must individually qualify to join the credit union other than by virtue of the professional services provided to the credit union.
  2. The exercise of the member's vote or other activities must not have significant influence over the operating, financial, or accounting policies of the credit union.
  3. Any loans from the credit union must meet the conditions specified in interpretation 101-1.A.4 [ET section 101.02] and be made under normal lending procedures, terms, and requirements (see interpretation 101-5 [ET section 101.07]).
  4. Any deposits with the credit union must meet the conditions specified in ruling No. 70 [ET section 191.140-.141] under rule 101 [ET section 101.01].

[Effective February 28, 1992, earlier application is encouraged.]


[76.] Guarantee of Loan

[.152-.153] [Deleted December 1991]


77. Individual Considering or Accepting Employment With the Client

.154 Question—During the performance of an engagement, an individual participating in the engagement may be offered employment by the client or may seek employment with the client. What are the implications of these actions with respect to the AICPA Code of Professional Conduct?

.155 Answer—An individual participating in an engagement who is offered employment by, or seeks employment with, that client during the conduct of the engagement must consider whether or not his or her ability to act with integrity and objectivity has been impaired. When the engagement is one requiring independence, the individual must remove himself or herself from the engagement until the employment offer is rejected or employment is no longer being sought, in order to prevent any appearance that integrity or objectivity has been impaired.

A member may become aware that an individual participated in the engagement while employment with the client was being considered or after it had been accepted. In these circumstances the member should consider what, if any, additional procedures may be necessary to ensure that all work had been performed with objectivity and integrity as required under rule 102 [ET section 102.01]. Any additional procedures will depend on the nature of the engagement and may require reperformance of the work or other appropriate procedures.


[78.] Service on Governmental Board

[.156-.157] [Deleted August 1995]


79. Member's Investment in a Partnership That Invests in Member's Client

.158 Question—A member has a direct financial interest in a partnership that invests in a client of the member's firm. Would the member's independence be considered to be impaired with respect to the client?

.159 Answer—If the member is a general partner, or functions in a capacity similar to that of a general partner, in a partnership that invests in a client of the member's firm, the member is deemed to have a direct financial interest in the client. Independence is considered to be impaired.

If the member is a limited partner in a partnership that invests in a client of the member's firm, the member is considered to have an indirect financial interest in the client. Independence would be considered to be impaired if the indirect financial interest is material to the member's net worth.


80. The Meaning of a Joint Closely Held Business Investment

.160 Question—Under rule 101 [ET section 101.01] and interpretation 101-1 [ET section 101.02], a member's independence is considered to be impaired if, during the period of the professional engagement or at the time of expressing an opinion, the member or the member's firm had any joint closely held business investment with the client or any officer, director, or principal stockholder thereof that was material in relation to the member's net worth or to the net worth of the member's firm. What is a joint closely held business investment?

.161 Answer—For purposes of rule 101 [ET section 101.01], its interpretations, and rulings, a joint closely held business investment is a business investment that is subject to control, as defined in FASB Statement No. 94 [AC section C51], by the member, the client, its officers, directors, or principal stockholders, individually or in any combination.


81. Member's Investment in a Limited Partnership

.162 Question—A member is a limited partner in a limited partnership (LP), including a master limited partnership. A client is a general partner in the same LP. Is the member's independence considered to be impaired with respect to (1) the LP, (2) the client, and (3) any subsidiaries of the LP?

.163 Answer1. The member's limited partnership interest in the LP is a direct financial interest in the LP that would impair independence under interpretation 101-1.A.1 [ET section 101.02].

2. The LP is an investee of the client because the client is a general partner in the LP. Therefore, under interpretation 101-8 [ET section 101.10], if the investment in the LP is material to the client, the member's financial interest in the LP would impair the member's independence with respect to the client. However, if the client's financial interest in the LP is not material to the client, an immaterial financial interest of the member in the LP would not impair independence with respect to the client.

3. Since the member is a limited partner in the LP, the member is considered to have an indirect financial interest in all subsidiaries of the LP. If the indirect financial interest in the subsidiaries is material to the member, the member's independence would be considered to be impaired with respect to the subsidiaries under interpretation 101-1.A.1 [ET section 101.02].

If the member or client general partner, individually or together can control the LP, the LP would be considered a joint closely held business investment under interpretation 101-1.A.3 [ET section 101.02] [see ruling No. 80 [ET section 191.160-.161]].


82. Campaign Treasurer

.164 Question—A member has been asked to serve as the campaign treasurer of the campaign organization of a candidate for the office of mayor. If the member serves in this capacity, would the member's independence be impaired with respect to (1) the political party with which the candidate is associated, (2) the municipality of which the candidate may become mayor, and (3) the campaign organization?

.165 Answer—Independence would not be considered to be impaired with respect to the political party or municipality. However, due to his or her role as treasurer, the member would not be considered to be independent with respect to the campaign organization itself.


[83.] Member on Board of Component Unit and Auditor of Oversight Entity

[.166-.167] [Deleted January 1996]


[84.] Member on Board of Material Component Unit and Auditor of Another Material Component Unit

[.168-.169] [Deleted January 1996]


85. Bank Director

.170 Question—May a member in public practice serve as a director of a bank?

.171 Answer—Yes; however, before accepting a bank directorship, the member should carefully consider the implications of such service if the member has clients that are customers of the bank.

These implications fall into two categories:

  1. Confidential Client Information—Rule 301 [ET section 301.01] provides that a member in public practice shall not disclose any confidential client information without the specific consent of the client. This ethical requirement applies even though failure to disclose information may constitute a breach of the member's fiduciary responsibility as a director.
  2. Conflicts of Interest—Interpretation 102-2 [ET section 102.03] provides that a conflict of interest may occur if a member performs a professional service (including service as a director) and the member or his or her firm has a relationship with another entity that could, in the member's professional judgment, be viewed by appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity and the relationship is disclosed to and consent is obtained from all appropriate parties, performance of the service shall not be prohibited.

In view of the above factors, it is generally not desirable for a member in public practice to accept a position as bank director where the member's clients are likely to engage in significant transactions with the bank. If a member is engaged in public practice, the member should avoid the high probability of a conflict of interest and the appearance that the member's fiduciary obligations and responsibilities to the bank may conflict with or interfere with the member's ability to serve the client's interest objectively and in complete confidence.

The general knowledge and experience of CPAs in public practice may be very helpful to a bank in formulating policy matters and making business decision; however, in most instances, it would be more appropriate for the member as part of the member's public practice to serve as a consultant to the bank's board. Under such an arrangement, the member could limit activities to those which did not involve conflicts of interest or confidentiality problems.


[86.] Partially Secured Loans

[.172-.173] [Deleted February 1998]


[87.] Loan Commitment or Line of Credit

[.174-.175] [Deleted February 1998]


[88.] Loans to Partnership in Which Members are Limited Partners

[.176-.177] [Deleted February 1998]


[89.] Loan to Partnership in Which Members are General Partners

[.178-.179] [Deleted February 1998]


[90.] Credit Card Balances and Cash Advances

[.180-.181] [Deleted February 1998]


91. Member Leasing Property to or From a Client

.182 Question—A member or member's firm (member) is leasing property to or from a client. Would the independence of the member be impaired with respect to the client?

.183 Answer—Independence would not be considered to be impaired if the lease meets the criteria of an operating lease (as defined in [FASB Statement] No. 13, paragraph 6.a.ii [AC section L10.102]), the terms and conditions set forth in the lease agreement are comparable with other leases of a similar nature, and all amounts are paid in accordance with the terms of the lease.

Independence would be considered to be impaired if the lease meets the criteria of a capital lease (as defined in FASB Statement No. 13, paragraph 6.a.i [AC section L10.102]) unless the lease is in compliance with interpretations 101-1.A.4 [ET section 101.02] and 101-5 [ET section 101.07], because the lease would be considered to be a loan to or from the client.

[Revised, effective May 31, 1998, by the Professional Ethics Executive Committee.]


92. Joint Interest in Vacation Home

.184 Question—A member holds a joint interest in a vacation home along with an officer, director, or principal stockholder of an entity for which the member performs services requiring independence. Would the vacation home constitute a "joint closely held business investment" for the purposes of interpretation 101-1.A.3 [ET section 101.02]?

.185 Answer—Yes. The vacation home, even if solely intended for the personal use of the owners, would be considered a joint closely held business investment as defined in ethics ruling No. 80 [ET section 191.160-.161]. Accordingly, the materiality provisions of interpretation 101-1.A.3 [ET section 101.02] must be considered in assessing independence.


93. Service on Board of Directors of Federated Fund-Raising Organization

.186 Question—A member serves as a director or officer of a local United Way or similar organization that operates as a federated fund-raising organization from which local charities that are clients of the member receive funds. Does the member have a conflict of interest under rule 102 [ET section 102.01]?

.187 Answer—Interpretation 102-2 [ET section 102.03] provides that a conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another entity that could, in the member's professional judgment, be viewed by the client or other appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity and the relationship is disclosed to and consent is obtained from the appropriate parties, performance of the service shall not be prohibited. (If the service is one requiring independence, consult ethics ruling No. 14 [ET section 191.027-.028] under rule 101 [ET section 101.01]).


94. Indemnification Clause in Engagement Letters

.188 Question—A member proposes to include in engagement letters a clause that provides that the client would release, indemnify, defend, and hold the member (and his or her partners, heirs, executors, personal representatives, successors, and assigns) harmless from any liability and costs resulting from knowing misrepresentations by management. Would the inclusion of such an indemnification clause in engagement letters impair the member's independence with respect to the client?

.189 Answer—No.


95. Agreement With Attest Client to Use ADR Techniques

.190 Question—Alternative dispute resolution (ADR) techniques are used to resolve disputes (in lieu of litigation) relating to past services, but are not used as a substitute for the exercise of professional judgment for current services. Would a predispute agreement to use ADR techniques between a member and a client cause the member's independence to be impaired?

.191 Answer—No. Such an agreement would not cause an impairment of independence since the member and the client are not in threatened or actual positions of material adverse interests by reason of threatened or actual litigation.


96. Commencement of ADR Proceeding

.192 Question—Would the commencement of an alternative dispute resolution (ADR) proceeding impair independence?

.193 Answer—Except as stated in the next sentence, independence would not be considered to be impaired because many of the ADR techniques designed to facilitate negotiation and the actual conduct of those negotiations do not place the member and the client in threatened or actual positions of material adverse interests. Nevertheless, if the member and client are in a position of material adverse interests because the ADR proceedings are sufficiently similar to litigation, ethics interpretation 101-6 [ET section 101.08] should be applied. Such a position would exist if binding arbitration were used.


[97]. Performance of Certain Extended Audit Services

[.194-.195] [Deleted August 1996]


98. Member's Loan From a Nonclient Subsidiary or Parent of an Attest Client

.196 Question—A member has obtained a loan from a nonclient. The parent or a subsidiary of the nonclient is a client of the member requiring independence. Does the member's loan from the nonclient subsidiary or parent impair the member's independence with respect to the client?

.197 Answer—A member's loan, that is not a "grandfathered" or "permitted" loan under interpretation 101-5 [ET section 101.07], from a nonclient subsidiary would impair the member's independence with respect to the client. However, a loan from a nonclient parent would not impair the member's independence with respect to the client subsidiary as long as the subsidiary is not material to its parent.


99. Member Providing Services for Company Executives

.198 Question—A member has been approached by a company, for which he or she may or may not perform other professional services, to provide personal financial planning or tax services for its executives. The executives are aware of the company's relationship with the member, if any, and have also consented to the arrangement. The performance of the services could result in the member recommending to the executives actions that may be adverse to the company. What rules of conduct should the member consider before accepting and during the performance of the engagement?

.199 Answer—Before accepting and during the performance of the engagement, the member should consider the applicability of Rule 102, Integrity and Objectivity [ET section 102.01]. If the member believes that he or she can perform the personal financial planning or tax services with objectivity, the member would not be prohibited from accepting the engagement. The member should also consider informing the company and the executives of possible results of the engagement. During the performance of the services, the member should consider his or her professional responsibility to the clients (that is, the company and the executives) under Rule 301, Confidential Client Information [ET section 301.01].


100. Actions Permitted When Independence Is Impaired

.200 Question—If a member was independent when his or her report was initially issued, may the member re-sign the report or consent to its use at a later date when his or her independence is impaired?

.201 Answer—Yes. A member may re-sign the report or consent to its use at a later date when his or her independence is impaired, provided that no "post-audit work" is performed by the member during the period of impairment. The term "post-audit work," in this context, does not include inquiries of successor auditors, reading of subsequent financial statements, or such procedures as may be necessary to assess the effect of subsequently discovered facts on the financial statements covered by the member's previously issued report.


101. Client Advocacy and Expert Witness Services

.202 Question—Would the performance of expert witness services be considered as acting as an advocate for a client as discussed in interpretation 102-6 [ET section 102.07]?

.203 Answer—No. A member serving as an expert witness does not serve as an advocate but as someone with specialized knowledge, training, and experience in a particular area who should arrive at and present positions objectively.


102. Member's Indemnification of a Client

.204 Question—As a condition to retaining a member or member's firm for the performance of a professional service requiring independence, client or prospective client requests that the member or member's firm enter into an agreement providing, among other things, that the member or member's firm indemnify the client for damages, losses, or costs arising from lawsuits, claims, or settlements that relate, directly or indirectly, to client acts. Would the member or member's firm entering into such an agreement be independent of the client?

.205 Answer—No. Such an agreement would impair independence under interpretation 101-1.A [ET section 101.02] and interpretation 101-1.B [ET section 101.02].


103. Member Providing Attest Report on Internal Controls

.206 Question—If a member or a member's firm (member) provides extended audit services for a client in compliance with interpretation 101-13 [ET section 101.15], would the member be considered independent in the performance of an attestation engagement to report on the client's assertion regarding the effectiveness of its internal control over financial reporting?

.207 Answer—Independence would not be impaired with respect to the issuance of such a report if all of the following conditions are met:

  1. The member's activities have been limited in a manner consistent with interpretation 101-13 [ET section 101.15].
  2. Management has assumed responsibility to establish and maintain internal control.
  3. Management does not rely on the member's work as the primary basis for its assertion and accordingly has (a) evaluated the results of its ongoing monitoring procedures built into the normal recurring activities of the entity (including regular management and supervisory activities) and (b) evaluated the findings and results of the member's work and other separate evaluations of controls, if any.

104. Member Providing Operational Auditing Services

.208 Question—As part of an extended audit engagement, a member or member's firm (member) may be asked to review certain of the client's business processes, as selected by the client, for how well they function, their efficiency, or their effectiveness. For example, a member may be asked to assess whether performance is in compliance with management's policies and procedures, to identify opportunities for improvement, and to develop recommendations for improvement or further action for management consideration and decision making. Would the member's independence be considered to be impaired in performing such a service?

.209 Answer—The member's independence would not be considered to be impaired provided that during the course of the review the member does not act or appear to act in a capacity equivalent to that of a member of client management or of an employee. The decision as to whether any of the member's recommendations will be implemented must rest entirely with management.


105. Frequency of Performance of Extended Audit Procedures

.210 Question—In providing extended audit services, would the frequency with which a member performs an audit procedure impair the member's independence?

.211 Answer—The independence of the member or member's firm would not be considered to be impaired provided that the member's activities have been limited in a manner consistent with interpretation 101-13 [ET section 101.15] and the procedures performed constituted separate evaluations of the effectiveness of the ongoing control and monitoring activities/procedures that are built into the client's normal recurring activities.


106. Member Has Significant Influence Over an Entity That Has Significant Influence Over a Client

.212 Question—A member or member's firm (member) has significant influence, as defined in interpretation 101-9 [ET section 101.11], over an entity that has significant influence over a client. Would independence be considered to be impaired with respect to the client?

.213 Answer—Yes. Because the member has significant influence over an entity that has significant influence over a client, the member also is considered to have significant influence over the client.

See interpretation 101-8 [ET section 101.10] for further guidance.


107. Participation in Health and Welfare Plan of Client

.214 Question—A member participates in or receives benefits from a health and welfare plan (the "Plan") sponsored by a client. Would the independence of the member or member's firm be considered to be impaired with respect to the client sponsor and the Plan?

.215 Answer—Participation of the member in a Plan sponsored by a client would impair the independence of the member or member's firm with respect to the client sponsor and the Plan. However, if the member's participation in the Plan, or benefits received thereunder, arises as the result of the permitted employment of the member's spouse or cohabitant in accordance with interpretation 101-9 [ET section 101.11], independence would not be impaired provided that the Plan is normally offered to all employees in equivalent employment positions.


108. Participation of Member or Spouse in Retirement, Savings, or Similar Plan Sponsored by, or That Invest in, Client

.216 Question—A member participates in a retirement, savings, or similar plan ("Benefit Plan") that is either sponsored by a client ("Sponsor Client") or invests in the Sponsor Client or in another client of the member ("Other Client"). Would the independence of the member or member's firm be considered to be impaired with respect to the Sponsor Client, the Other Client, or the Benefit Plan?

.217 Answer—Participation of the member in a Benefit Plan that is sponsored by a client or that invests in a client would impair independence with respect to the Sponsor Client, the Other Client, and the Benefit Plan. However, if the member's participation in the Benefit Plan arises as the result of the permitted employment of the member's spouse or cohabitant in accordance with interpretation 101-9 [ET section 101.11], independence would not be impaired if all of the following conditions are met:

  1. The Benefit Plan is normally offered to all employees in equivalent employment positions.

  2. If the Benefit Plan provides for an investment option by the spouse, the investment option selected by the spouse is not in the Sponsor Client or the Other Client.

  3. If no other investment option is available (also see ruling No. 35 [ET section 191.069—.070]), and the right of possession exists, the investment is promptly withdrawn and disposed. The right of possession is not considered to exist if a penalty significant to the investment is imposed upon withdrawal.

  4. If the right of possession does not exist, the spouse's investment through the Benefit Plan in the Sponsor Client or the Other Client is considered an indirect financial interest and is not material to the member's net worth.

109.Member's Investment in Financial Services Products That Invest in Clients

.218 Question—Amounts contributed by a member or a member's firm (member) for investment purposes, including retirement plans, are invested or managed by a non-client financial services company that offers financial services products, for example, insurance contracts and other investment arrangements, which allow the member to direct his or her investment into debt or equity securities. Under what circumstances would the independence of the member be considered to be impaired?

.219 Answer—If the member has the ability to direct and does direct his or her investment through a financial services product into a client, the independence of the member would be considered to be impaired with respect to that client because such an investment is considered to be a direct financial interest in the client as defined under interpretation 101-1 [ET section 101.02]. If the member does not exercise his or her ability to direct the investment but the financial services product were to invest in a client, such investment would be a direct financial interest in the client and independence would be considered to be impaired.

If the member does not have the ability to direct the investment and the financial services product invests in a client, the member is considered to have an indirect financial interest in the client. If the indirect financial interest becomes material to the member, the member's independence would be considered to be impaired. (See ethics ruling No. 35 under rule 101 [ET section 191.069-.070] for additional guidance with respect to investments in mutual funds.)

Further, an investment in a financial services product that invests only in clients of the member is considered to be a direct financial interest in such client, and independence would be considered to be impaired.

110. Member Is Connected With an Entity That Has a Loan to or From a Client

.220 Question—A member is connected with an entity as an officer, director, or principal shareholder, and that entity has a loan to or from the member's client. Would the independence of the member or member's firm be considered to be impaired with respect to the client?

.221 Answer—If a member has control over the entity, as defined in Financial Accounting Standards Board Statement no. 94 [FASB, Current Text, AC section C51], the existence of a loan to or from the client would impair the independence of the member or member's firm unless the loan from the client is specifically permitted under interpretation 101-5 [AICPA Professional Standards, ET section 101.07].

If a member who does not control the entity is connected with the entity as an officer, director, or principal shareholder, he or she should consider interpretation 102-2 [ET section 102.03], which provides that a conflict of interest may occur if a member performs a professional service for a client and the member or his or her firm has a relationship with another entity that could, in the member's professional judgment, be viewed by the client or other appropriate parties as impairing the member's objectivity. If the member believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client and other appropriate parties, the rule shall not operate to prohibit the performance of the professional service.

When making the decision as to whether to perform a professional service and in making disclosure to the appropriate parties, the member should consider Rule 301, Confidential Client Information [ET section 301.01].


*Note: Currently, DOL regulations are more restrictive than the position stated in this ruling.
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