The Securities and Exchange Commission seems ready to push forward with its idea of letting U.S. corporations file financial statements according to International Financial Reporting Standards—even as the clock winds down on current SEC leadership—and many fundamental questions about convergence remain.
John White, director of the SEC Division of Corporation Finance, recently gave a speech on convergence and bluntly said: “I truly believe that the endpoint will be U.S. issuers using IFRS and that it is time to move in this direction.”
White made his remarks at a conference held in New York earlier this month to discuss the convergence of IFRS and U.S. Generally Accepted Accounting Principles. Calling it an “inconvenient truth that the world is not looking to U.S. GAAP as the global standard,” he said, “We need to wake up from that part of the dream.”
The SEC staff has been developing a roadmap to converge IFRS and GAAP at some point in the near future—possibly as soon as 2009, although that deadline was first proposed in 2005 and now seems unlikely. SEC Chairman Christopher Cox is now a proponent of letting issuers file financial statements in GAAP or IFRS, regardless of exactly when the two accounting systems are formally declared interchangeable.
Pressure is on the SEC because more than 100 countries now require or permit filings in IFRS. The Commission voted last fall to allow foreign companies to file statements according to IFRS as issued by the International Accounting Standards Board without reconciling those statements to U.S. GAAP, and now the SEC is considering whether to extend that option to U.S. companies as well.
White
Before that can happen, the SEC must answer several significant questions—chiefly, whether to set a fixed date sometime in the future to make IFRS mandatory. In his June 5 speech, White said participants in a recent SEC forum on IFRS had a “lack of enthusiasm” about a period of optional use without a date certain for mandatory use of IFRS.
Additionally, White noted that most major capital markets that have moved to IFRS “have done so on an all-at-once, mandatory basis for almost all domestic public companies in that market.” But, White said, he “can see the value of a transition or voluntary period in a change of this potential magnitude.”
The SEC also faces questions about how IASB is governed, and the broad political turf battles are likely to follow. For example, the SEC currently has veto power over any new accounting standard issued by the Financial Accounting Standards Board. How that veto could be exercised over standards issued by IASB—indeed, whether the SEC would have a veto at all—remains unclear.
As it hashes out the issues, White said the SEC’s principal role “is to show leadership through encouragement and clear direction about the use of IFRS by U.S. companies.”
“The SEC could wait until all appropriate conditions were clearly in place for a move of this sort … but inevitably, there will always be some market, economic, social, or political development that seems to bring into question whether moving to IFRS is appropriate,” White said.
After thorough debate, White said, “policymakers should move ahead, fully informed on perhaps disparate opinions, but also fully committed to one path or another.”
SEC Proposes Rules for Credit Agencies
The SEC has proposed a series of new rules to revamp how credit rating agencies are regulated, in the wake of criticism that the agency did too little, too late to prevent the credit crisis.
The measures, unveiled at a June 11 open meeting, aim to increase transparency in the ratings process and to curb practices blamed for contributing to the recent turmoil in the credit markets.
Among other goals, the proposed rules would prohibit the agencies from issuing ratings on a structured product unless information on the assets underlying the product were available; would bar rating agencies from structuring the same products they rate; and would require agencies to make all ratings and subsequent rating actions publicly available.
The proposals would also bar anyone who participates in determining a credit rating from negotiating the fee the issuer pays for it and would require agencies to disclose the way they rely on the due diligence to verify the assets underlying a structured product and to disclose how frequently credit ratings are reviewed.
A second proposal would require the agencies to distinguish ratings on structured products from those issued on bonds, either through the use of different symbols or by issuing a report disclosing the differences between ratings of structured products and other securities.
“The experience of the sub-prime crisis has shown that many investors viewed the ratings of structured products as a seal of approval, and looked no further,” SEC Chairman Christopher Cox said in the June 11 meeting. When the quality of the ratings came into question, investors were left with no independent way to assess the risk of those products, adding to market illiquidity.
Cox
Nonetheless, Cox said, “We need to enter upon this particular subject of rulemaking with a weather eye to the fact that requiring these changes, simultaneously and across the board, could have unintended market impacts that need to be more fully understood” before the SEC embeds the requirement in a final rule.
The SEC said the full text of the rule proposal will be posted to its Website as soon as possible. Comments are due 30 days after publication in the Federal Register.
On June 25, the SEC will consider a related proposal to reform its rules that make explicit reference to credit ratings to provide “a more thorough description of the basis for the SEC’s use of ratings as a surrogate for compliance with various regulatory conditions and requirements.” That proposal is in response to criticism by some observers who contend that the SEC’s references to credit ratings in its rules give those ratings an implied official seal of approval.
Hearings to Come on Regulatory Reform
The fallout of the Bear Stearns collapse this spring will continue to unfold in Washington this summer, as lawmakers prepare to grill regulators on the consequences of the investment bank’s bailout by the Federal Reserve.
U.S. Rep. Barney Frank, chairman of the House Financial Services Committee, has announced a series of hearings beginning next month on the policy implications of the changes in domestic and international financial markets, including the dramatic growth in assets held outside the commercial banking system, the complex arrangements linking firms that are regulated differently or not at all, and the increasing amount of leverage floating through the financial system.
Frank
The committee will explore the potential systemic risks associated with those developments, the adequacy of current oversight and tools, and the extent to which existing structures are adequate to respond to future problems, according to a press release issued last week.
Specifically, the hearings will examine: The regulatory implications of providing investment banks and others access to the discount window; proposals to improve the oversight and mitigation of systemic risk, including those of the Financial Stability Forum and New York Federal Reserve Bank; the need for enhanced capital and reserve requirements for financial firms and the power of the Federal Reserve and other regulatory agencies to determine whether existing authority is sufficient to protect the financial system and taxpayers.
In a statement, Frank said the hearings are “designed to focus on identifying how much reach and what new capacities are needed to avoid—or respond to—the next crisis.”
Among those expected to be invited to testify are Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, New York Federal Reserve President Timothy Geithner, and Securities and Exchange Commission Chairman Christopher Cox.
Subsequent hearings will examine the ability of the regulatory structure to assess and mitigate systemic risk in order to avoid another Bears Stearns-type crisis in the future.
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