By Ann Spaulding, Director of Ethics

The New York State Society of CPAs is at your service to answer questions on ethics and regulation. Contact Ann Spaulding at 212-719-8300 or aspaulding@nysscpa.org, or write a letter of inquiry to the Professional Ethics Committee at the Society’s address for a written response. The American Institute of CPAs has published the following revisions to two ethics rulings:

Financial Services Company Client Has Custody of a Member’s Assets

Q: A financial services company client (for example, insurance company, investment adviser, broker-dealer, bank or other depository institution) has custody of a member’s assets (other than depository accounts), including retirement plan assets. Would independence be considered to be impaired?
A: If a covered member’s assets were held by a financial services company client, independence would not be considered to be impaired provided the services were rendered under the company’s normal terms, procedures and requirements and any of the covered member’s assets subject to the risk of loss were immaterial to the covered member’s net worth. Risk of loss may include losses arising from the bankruptcy of or defalcation by the client but would exclude losses due to a market decline in the value of the assets. When considering the materiality of assets subject to the risk of loss, the covered member should consider the following:

• Protection provided by state or federal regulators (for example, state insurance funds);
• Private insurance or other forms of protection (for example, the Securities Investor Protection Corporation) obtained by the financial services company to protect the assets;
• Protection from creditors (for example, assets held in a pooled separate account).

Member’s Depository Relationship with Client Financial Institution

Q: A member maintains checking or savings accounts, certificates of deposit or money market accounts at a client financial institution. Would these depository relationships impair independence?
A: If an individual is a covered member, independence would not be considered to be impaired 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 or by any other insurer; or
• The uninsured amounts in the aggregate were not material to the net worth of the covered member. (When insured amounts were considered material, independence would not be considered impaired provided the uninsured balance was reduced to an immaterial amount no later than 30 days from the date the uninsured amount becomes material.)

A firm’s depository relationship would not impair its independence provided that the likelihood of the financial institution experiencing financial difficulties was considered to be remote.