August 25, 2014

MD&A: SEC Brings “Known Uncertainties” Case Against BofA

Last week, it was big news that DOJ announced a record $16.7 billion settlement with Bank of America to put its mortgage-backed issues – part of the ’07 financial crash – behind it. This civil action from the DOJ was brought for violations of FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act of 1989).

Dwarfed by that announcement was that the SEC also secured a civil settlement for MD&A violations (press release & complaint). MD&A cases are not brought all that frequently – read about other MD&A enforcement actions on pages 48-52 of our “MD&A Handbook

This is the BofA case in a nutshell: BofA admitted that it failed to disclose known uncertainties regarding potential increased costs related to mortgage loan repurchase claims stemming from more than $2 trillion in residential mortgage sales from ’04 through ’08 by the bank and certain companies it acquired. In connection with these sales, BofA made contractual representations and warranties about the underlying quality of the mortgage loans and underwriting – in the event that a loan buyer claimed a breach, the bank could be obligated to repurchase the related loan. The known uncertainties included whether Fannie Mae, a mortgage loan purchaser from Bank of America, had changed its repurchase claim practices after being put into conservatorship, the future volume of repurchase claims from Fannie Mae and certain monoline insurance companies that provided credit enhancements on certain mortgage loan sales, and the ultimate resolution of certain claims that Bank of America had reviewed and refused to repurchase but had not been rescinded by the claimants.

Meanwhile, Citigroup’s settlement with the SEC earlier in the month means that it is now a “bad actor” – and perhaps the SEC won’t waive the restrictions this time around as reported by this Reuters article

The Debate Over Disclosing “Critical Audit Matters” in Audit Reports

This article lays out how the PCAOB’s proposal to beef up the audit report is causing concern for both auditors and CFOs…

Here’s a Cooley blog about the PCAOB preparing to finalizing a standard for identifying lead audit engagement partners – and here’s a letter from CII weighing in on that upcoming action…

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– CalPERS Lauds Majority Support for Voting Calculus Proposal
– Recommendation Against Target Directors: Did ISS Get It Right?
– State Street’s Director Tenure Policy: May Result in Votes Against Directors
– Shareholder Proposals: No-Action Letter Stats
– Europe: Proxy Advisors Respond to Shareholder Rights Directive

– Broc Romanek