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The Securities and Exchange Commission passed new rules on auditor independence that bode well for the many thousands of lawyers within the Big Five’s ranks both in the United States and abroad. The newly adopted rules appear to represent a softening of the SEC’s position on legal services by auditors of public companies and their associated law firms, especially as compared to the rules relating to legal services that were originally proposed by the Commission in June. To be sure, the auditor independence rules concern services to public companies that are audit clients and such clients’ affiliates and not to non-audit clients or private companies. But for the Big Five firms, providing law-related services to publicly-traded audit clients represents a major avenue of expansion, especially because the Big Five tend to leverage off of their audit relationships with clients to establish and build broader and more lucrative client relationships. While the originally proposed rules had threatened the Big Five’s global law affiliates and their expansion into law-services related markets in the United States, the newly approved rules are far less restrictive. Now the Big Five appear to have gotten a green light on their international law networks, their law-related expert and consulting services in the United States and elsewhere, and some potential flexibility when it comes to joint ventures and other relationships between the Big Five and/or their law affiliates and United States law firms. While the text of the new rules has yet to be released, under a fact sheet that the SEC has published on the new rules, which were unanimously approved by the SEC on November 15, the Commission backed off a position iterated last June in its proposed independence rules that had stated that “an accountant is not independent of an audit client if that accountant provides any service to the audit client or its affiliates that, in the jurisdiction in which the service is provided, may be provided only by someone licensed to practice law.” That proposed restriction appeared to ban law practice by the Big Five and their affiliates both in the United States and abroad alike where such services were provided to Big Five audit clients whose securities are publicly traded in United States markets. That could have posed a major problem for the Big Five in terms of their establishment and expansion of vast overseas law networks, particularly Arthur Andersen, PriceWaterhouseCoopers, Ernst & Young and KPMG, which have been further along in that process than Deloitte & Touche. However, in a summary of the new rule, the SEC appears to have given the foreign law affiliates at least a partial blessing. Under a fact sheet on the new rule, the SEC limits legal services “under circumstances in which the person providing the service must be admitted to practice before the courts of a U.S. jurisdiction.” The new rule “clarifies the uncertainty that has been surrounding the affiliated law networks of the Big Five abroad,” said Joe Petito, principal at PriceWaterhouseCoopers. Tony Williams, co-worldwide managing partner at Andersen Legal, the law network associated with Arthur Andersen, called the new rules “an encouraging development.” In addition to confining the ban on law practice to U.S. jurisdictions, in another departure from the proposed rule in the favor of some of the attorneys who work at the Big Five, the SEC dropped a highly restrictive definition of legal services and its restriction on expert services. These restrictions could have put a damper on law-related consulting services by the Big Five. The SEC also potentially opened the door to the provision of legal services to audit clients of Big Five firms through joint ventures by dropping a very broad definition of affiliate that had been in the originally proposed rule. That provision clearly would have encompassed relationships such as that between Ernst & Young and McKee, Nelson, Ernst & Young, which remains the only United States law firm to include a Big Five firm in its name. MNE&Y has carefully avoided the possibility of running afoul of SEC independence standards by refraining from providing legal services to SEC-regulated E&Y audit clients. However, depending upon the wording of the final rule, it’s possible that if MNE&Y does not fall under the definition of affiliate, the restriction on Big Five legal services under U.S. law might not extend to entities such as McKee Nelson. The new rules are expected to encourage further development of law-related capacities by the Big Five, including the possibility of ventures between global law affiliates and United States law firms.

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