Though rejected by the House, the latest iteration of the federal government’s $700 billion bank bailout proposal would give the Securities and Exchange Commission authority to suspend fair-value measurement rules for single issuers and would direct the Securities and Exchange Commission to study fair value and report the findings to Congress within 90 days. Meanwhile the Financial Accounting Standards Board confirmed today it is developing new guidance around how to establish fair value when markets are illiquid.

The House narrowly rejected the package Monday after intense, weekend negotiation to prop up financial institutions struggling under faulty sub-prime mortgage debt, which has seized credit markets and threatens to further cripple the entire economy. If approved, the package would remind the SEC it has the authority under existing securities laws “to suspend, by rule, regulation, or order,” the application of Financial Accounting Statement No. 157 Fair Value Measurement “for any issuer … or with respect to any class of category of transaction” if the Commission deems it in the public interest and consistent with investor protection.

The package also directs the SEC to study mark-to-market accounting, as spelled out in FAS 157 to consider the effects it has on financial institutions’ balance sheets, the impact it has on bank failures in 2008, the impact on the quality of information provided to investors, the process used at the Financial Accounting Standards Board to develop accounting standards, the advisability and feasibility of modifying accounting standards, and alternatives to FAS 157. The law would require the SEC to include “such administrative and legislatives recommendations as the Commission determines appropriate.”

FASB representative Chris Klimek said something will emerge from FASB on Wednesday with respect to FAS 157 guidance, though she could not say the position or the form the guidance will take. “We’re working on providing guidance consistent with the principles of FAS 157 regarding valuation of assets when markets have become inactive,” she said. “We’re responding to the need for additional guidance on fair-value accounting in what are extraordinary times right now.”

FASB has stood firm in its adherence to FAS 157’s three-tier valuation hierarchy, which gives greatest weight to market pricing in establishing values for financial assets and financial liabilities. The collision of FAS 157’s emphasis on market pricing with the sub-prime collapse has led to intense squabbling over whether fair value has caused current liquidity or merely reflects it. The American Bankers Association called on the SEC last week to issue emergency guidance allowing financial institutions to set aside market inactivity and establish values based on plans to hold certain securities to maturity. The CFA Institute retorted with strenuous objections to such an interpretation of FAS 157, saying investors want the transparency that comes with current market pricing, even when markets are seized.

The SEC also issued guidance last week updating its suggestions about what companies should plan to say in their Management’s Discussion and Analysis regarding the assumptions and estimates that play into their FAS 157 measurements.