December 9, 2008

SEC Tweaks Rules on Credit Ratings

Last week, the SEC adopted a number of changes to its credit rating rules that were originally proposed back in June. Here is the press release and Chairman Cox’s remarks.

This latest round of changes largely originated out of the SEC’s examination of the NRSRO rating practices for structured finance deals. At the open meeting last Wednesday, the SEC did not consider any of the proposed changes to its rules targeted at eliminating references to credit ratings, and it remains unclear whether those rule proposals will move forward. The SEC did not move forward on proposals to require a change in the symbols used by NRSROs for rating structured finance products.

The SEC adopted a number of new prohibited conflicts of interest for NRSROs and their personnel including: (1) making recommendations to an issuer about obtaining a credit rating; (2) having the same personnel discuss fees and ratings; (3) gifts from rated issuers in excess of $25. The rule changes also call for internet disclosure of ratings history when the NRSO follows an “issuer pays” model, and enhanced disclosure of performance measures, verification procedures and credit surveillance policies. Enhanced documentation will be required for model deviations, and credit rating agencies will need to retain complaints about credit analysts.

The SEC also reproposed rules concerning additional internet disclosure for “issuer pays” NRSROs and public disclosure of data underlying structured finance ratings.

From the AICPA Conference: Cox on the SEC’s Fair Value Study

The AICPA’s “National Conference on Current SEC and PCAOB Developments” kicked off in Washington yesterday, and Chairman Cox delivered a speech that covered a number of current accounting concerns at the SEC.

Among the things covered in Cox’s speech were some insights into the SEC’s EESA-mandated study on fair value accounting. His preliminary observations seemed to confirm what was reported in an article in yesterday’s WSJ, which noted that sources indicate that the SEC plans to keep fair value accounting in place, while seeking to refine its application.

Cox noted these preliminary findings from the study:

“First, for many financial institutions, investments marked-to-market through earnings on a quarterly basis represent a minority of their total investment portfolio. A larger portion of investment portfolios consists of available-for-sale securities or loans. As you know, investments in loans and available-for-sale securities are not marked-to-market through earnings each period. Rather, these securities are subject to (in some cases, difficult) judgments on other-than-temporary impairments.

Second, most investors, and many others, agree that fair value is a meaningful and transparent measure of an investment for financial reporting purposes. Financial reporting is intended to meet the needs of investors. While financial reporting may serve as a starting point for other users, such as prudential regulators, the information content provided to investors should not be compromised to meet other needs.

Third, accounting standards have served our capital markets well, but we must endeavor to continue to develop robust best practice guidance for auditors and preparers — particularly for fair value measurements of securities traded in inactive or illiquid markets. Education efforts and the development of application guidance must provide a path for auditors and preparers to reach a common ground on these difficult issues.”

I'll have more from the AICPA conference later this week.

TARP Update: Is There Progress?

Yesterday, Interim Assistant Secretary for Financial Stability Neel Kashkari delivered remarks at the OTS Annual National Housing Forum. In assessing the progress to date of the TARP program, Kashkari stated:

“People often ask: how do we know our program is working? First, we did not allow the financial system to collapse. That is the most direct, important information. Second, the system is fundamentally more stable than it was when Congress passed the legislation. While it is difficult to isolate one program's effects given policymakers' numerous actions, one indicator that points to reduced risk of default among financial institutions is the average credit default swap spread for the eight largest U.S. banks, which has declined more than 200 basis points since before Congress passed the EESA. Another key indicator of perceived risk is the spread between LIBOR and OIS: one-month and three-month LIBOR-OIS spreads have each declined about 100 basis points since the law was signed and about 180 basis points from their peak levels before the CPP was announced.“

I guess there is some good news in there.

- Dave Lynn