Chapter 5 Applying the Rules Family Members

Chapter 5 — Applying the rules: Family members When is my family subject to the rules? If you are a covered member with respect to an attest client, members of your immediate family (your spouse or equivalent and dependents) generally must follow the same rules you follow. For example, your spouse’s investments must be investments you could own under the rules. This rule applies even if your spouse keeps the investments in the spouse’s own name or with a different broker. In addition, when materiality is a factor, the covered member’s and immediate family member’s financial interests are combined. This general rule has exceptions for certain employment situations and employee benefit plans: a. Your immediate family member’s employment with an attest client would not impair your firm's independence, provided the family member is not in a key position. b. Immediate family members in permitted employment positions may participate in certain employee benefit plans (other than certain share-based arrangements or nonqualified deferred compensation plans) that are attest clients or sponsored by an attest client, provided the plan is offered to all employees in comparable positions, and the immediate family member does not serve in a position of governance for the plan or have the ability to supervise or participate in the plan’s investment decisions or selection of investment options. c. Immediate family members of certain covered members may invest in an attest client through employee benefit plans that aren’t considered share-based compensation arrangements or nonqualified deferred compensation arrangements (for example, retirement or savings accounts), provided the immediate family member has no other investment options available for selection, and when such option becomes available, the immediate family member selects the option and disposes of any financial interest in the attest client. d. Immediate family members in permitted employment positions of certain covered members may participate in share-based compensation arrangements and nonqualified deferred compensation plans, provided certain safeguards are implemented. e. The covered members whose families may invest or participate in the plans described in items (c)–(d) are i. partners and managers who provide only nonattest services to the attest client. ii. partners or partner equivalents who are covered members only because they practice in the same office where the attest client’s lead attest partner practices in connection with the engagement. At no time may any direct or material indirect financial interests in an attest client permitted by the preceding exceptions exceed 5 percent of the attest client’s outstanding equity securities or other ownership interests. If you are not a covered member, see the section “Do any of the Rules Apply to Me If I Am Not a Covered Member?” in chapter 3, “Applying the Rules-Covered Members and Other Firm Professionals,” of this guide. 19 The SEC rules concerning holding unexercised stock options requires the immediate family member to exercise or forfeit vested stock options as soon as the closing market price of the underlying stock equals or exceeds the exercise price. The AICPA rule recognizes that a privately held entity may not have a ready market for its shares or that thinly traded securities may have volatile markets. Therefore, the triggering event requiring an immediate family member to exercise the vested stock options occurs when the market price of the underlying stock equals or exceeds the exercise price for 10 consecutive days Alternatively, the SEC’s rules concerning employee stock ownership plans (ESOPs) are more restrictive than the AICPA’s rules in that the immediate family member must dispose of the publicly traded shares received as soon as possible. Because the AICPA rules deal exclusively with private-sector securities, it is possible that when the immediate family member receives shares from an ESOP, the family member may not be able to dispose of the shares because there is not a ready market for the shares. Accordingly, the AICPA’s rules allow the immediate family member to require the employee to exercise the employee’s put option for the employer to repurchase the shares as soon as permitted by the ESOP terms. If the employer does not pay for the repurchase shares within 30 days, the repurchase obligation must be immaterial to the covered member during the payout period. What about my other relatives? The close relatives (siblings, parents, and nondependent children) of most covered members are subject to some employment and financial restrictions. Your close relative’s employment by an attest client in a key position impairs independence, except for covered members who are considered covered members only because they provided more than 10 hours of nonattest services to the attest clients. Rules pertaining to your close relatives’ financial interests differ depending on why you are considered a covered member: • • If you are a covered member because you participate on the client’s attest engagement team, your independence would be considered to be impaired if you are aware that your close relative has a financial interest in the attest client that either o was material to your relative’s net worth or o enables the relative to exercise significant influence over the attest client. If you are a covered member because you are able to influence the attest engagement or are a partner or partner equivalent in the office in which the lead attest engagement partner practices in connection with the engagement, your independence will be impaired if you are aware that your close relative has a financial interest in the attest client that o is material to your relative’s net worth and o enables your relative to exercise significant influence over the attest client. 20 Under SEC rules, your close family members include your spouse (or equivalent) and dependents and your parents, nondependent children, and siblings. If you are a covered person, your independence is affected if your close family member • has an accounting role or financial reporting oversight role with the SEC audit client (for example, the family member is a treasurer, CFO, accounting supervisor, or controller) or • owns more than 5 percent of a client’s equity securities or controls the client. In addition, independence is considered to be impaired if any partner’s close family member controls an SEC audit client. 21