June 29, 2007

SEC Commissioners Testify: A Relatively Warm Reception?

There was a lot of talk this week about many key regulatory issues, starting off with Tuesday’s appearance by all five Commissioners before the House Committee on Financial Services. As noted in this Wednesday Washington Post article, questioning was relatively gentle from the Committee, with Rep. Barney Frank (D., Mass.) setting the tone with a statement that the Commission has “hit the right balance.” In prepared testimony, the Commissioners defended the SEC’s recent actions on virtually all fronts, including oversight of the Enforcement Division’s negotiation of penalties, efforts to improve the clarity of mutual fund and 401(k) disclosure (as well as other fund issues such as 12b-1 fees and soft dollars), the adoption of guidance on implementing SOX Section 404, proxy reform and work to realize the overall promise of interactive data.

On this last point, Chairman Cox repeated a presentation that he delivered back in March at the USC Marshall School of Business, demonstrating the much-anticipated XBRL tool that will permit analysis of the S&P 500’s executive compensation data. As he did in March, Cox demonstrated how users can slice and dice the numbers to compute total compensation based on inclusion of the grant date fair value of equity awards (as the rules were originally adopted last summer) rather than the expensed portion of those awards (as the rules were changed by the “December surprise”). The Chairman noted that 62% of the companies in this data set actually reported a higher total compensation number based on the December surprise methodology, as compared to what the would have reported under the grant date fair value method.

In response to questioning about Congressional efforts to establish a means for shareholders to have a “say on pay,” Chairman Cox was noncommittal. He did commit on proxy access, however, telling the Committee that the agency planned to propose changes to the proxy rules by late July so that new rules could be in place before the 2008 proxy season. While Cox said that he did not favor “a national bylaw” approach, he did indicate that it was important to have “one rule for the whole country” in the wake of the Second Circuit’s AFSCME v. AIG decision. Rep. Frank promised hearings on the issue of proxy access once a rule is proposed. On the broader topic of proxy reform, the Chairman pointed to the themes covered at the May roundtables as ripe for consideration, including the prospect for an electronic shareholder forum.

It remains to be seen whether the Commissioners can actually reach any sort of consensus on proxy access by the end of July, given that a vote has been very publicly postponed twice in the past 9 months!

Imagine a World with Understandable Financial Statements

Financial statements have been getting a bad rap for some time now because of their ever-increasing complexity and lack of clarity, yet no one seems to know what to do about it. On Wednesday, the SEC announced that a newly-established SEC Advisory Committee on Improvements to Financial Reporting is on the case. According to the notice establishing the Advisory Committee, it will kick things off with a public meeting on August 2 at the SEC’s Washington offices. Operating under this charter, the Advisory Committee will be comprised of between 14 to 18 members and will have an anticipated life of about 1 year. Robert Pozen, chairman of MFS Investments, has been tapped to chair the Advisory Committee, but it remains to be seen who will fill out the remaining seats.

The SEC has tasked the Advisory Committee with a huge job: figure out what is broken with the current system, and come up with proposals on how to make the process better and the end-product more transparent and “user-friendly.” Not surprisingly, the Advisory Committee is going to focus on how technology can make things better by utilizing XBRL, hyperlinks and other technological advancements.

For more discussion of the Advisory Committee, check out FEI’s “Financial Reporting” Blog.

Paulson’s 10 Cents: “Next Steps” to Global Competitiveness

Earlier this week, Treasury Secretary Paulson announced his six “next steps” toward improving the global competitiveness of US markets. Among the notable items outlined in his action plan are: pursuing a modernized regulatory structure for financial services providers (to be proposed early next year); encouraging best practices among asset managers and hedge funds to deal with investor protection, market discipline and systemic risk; rolling out improved investor education efforts; and working on cross-border mutual recognition.

[Not to be outdone by this week’s discussion of key issues by so many luminaries, those intrepid talking heads at the “Sarbanes-Oxley Report” debate the thorny issue of options backdating in their latest installment.]

– Dave Lynn