Today I am writing about an accounting error I have been seeing more and more while performing audits of exchange traded funds (“ETFs”).

BBD recently attended the Investment Adviser Association Compliance Conference, which was held last month in Washington, DC.  Among the hot topics covered were developments related to GIPS^® Performance Verification and the SEC's Custody Rule.

As detailed in a previous post, Regulation S-X Rule 2-01(c)(1)(ii)(A) (the "Loan Rule") prohibits accounting firms from having certain financial relationships with their audit clients and affiliated entities. 

In October 2016, the SEC adopted amendments to Regulation S-X as part of its Investment Company Reporting Modernization efforts. These amendments:

• Update specific disclosure requirements for most types of derivatives
• Update disclosures for other investments as well as investments in and advances to affiliates
• Amend certain rules regarding the general form and content of financial statements

Most of the disclosure requirements are already in place in the industry.  The effective date of these amendments is August 1, 2017. However, certain modifications have been made that are important to communicate. Below, you’ll find a summary of the significant points in the recent amendments along with brief notes on changes from current practice.

In this post, we’ll consider the following:

• Current requirements, as updated by the RIC Modernization Act of 2010, for allocating earnings and profits across multiple distribution dates in instances where total annual distributions exceed earnings and profits for funds that have fiscal year ends that span two calendar years (e.g.  non-calendar fiscal year end funds)

• Why this requirement may impact the reporting of distributions in a semi-annual report

There has been much press recently about potential independence issues for certain Big Four auditors of mutual funds as a result of the SEC’s “Loan Rule.”  However, it is not uncommon for large audit firms to have independence issues outside of the “Loan Rule” given their volume of employees, relationships with banks, advisors, etc., as well as audit clients.

Almost two years ago, the SEC adopted amendments to the rules that govern money market mutual funds meant to address the risk of investor runs in money market funds. In summary, the rules in part:

1. Require a floating NAV for institutional prime money market funds
2. Allow for fees and gates to discourage and/or suspend redemptions temporarily at certain asset thresholds

Subject to the approval of the SEC, new PCAOB rules will require individual audit partner disclosure on audit reports issued after June 30, 2017, along with other information regarding other accounting firms participating in the audit. The disclosure will take place in a filing separate from that which includes the Report of the Registered Public Accounting Firm - Form AP.

From time to time, we receive resources from industry colleagues that we believe would be of value to our clients and industry friends.

Generally speaking, investment companies are exempt from presenting a statement of cash flows in their semi-annual and annual reports, provided they meet three conditions.