SEC Holds MTM Roundtable; Market Rallies On Rumored Treasury Pick

On a day which started with newspapers shouting “Market’s Fall Deepens as Concerns Mount on Banks” (WSJ) and ”Stocks Drop Sharply and Credit Markets Seize Up” (NYT), and ended with “Stocks Soar on News of Choice for Treasury” – on the reported pick of current NY Fed President & CEO (and former Treasury Undersecretary for International Affairs) Timothy F. Geithner to be named Secretary of the Treasury in the Obama administration (an appointment reportedly expected to be announced on Monday) - the SEC conducted the second in a series of roundtables on the impact of mark-to-market (MTM) accounting on banks.

Friday’s SEC roundtable on MTM (agenda, panelists), like the earlier roundtable held on October 29, is aimed at providing input – along with comment letters filed – as the SEC conducts its Congressionally mandated study on MTM (aka fair value or FV) accounting. In accordance with Section 133 of the Emergency Economic Stabilization Act of 2008 (EESA), the SEC’s study is due to be delivered to Congress by Jan. 2, 2009.

SEC Chairman Christopher Cox noted in his opening remarks at the Nov. 21 roundtable, “Already, the input that we’ve received … in response to our request for public comments has indicated that at a minimum there are areas where FV accounting could be improved,” specifically: (1) investors could be better served by a more streamlined model for addressing asset impairments, they observe the current framework for impairment can be difficult to apply, and may provide information of questionable utility, and (2) the current concept of mark-to-market accounting increases the transparency of information provided to investors; but, in inactive or illiquid markets, additional work is necessary to insure the reasonable application of the standards."

The discussion that took place at SEC's November 21 roundtable appeared to confirm the above points, particularly on the need for further guidance on impairment. Some panelists, including KPMG’s Sam Ranzilla, suggested the SEC consider offering guidance on impairment in the short-term; he further advised that if the SEC is not going to issue guidance by year-end, to make that known, so as to set preparers and auditor’s expectations accordingly. There were varying views on the need to amend FAS 157, Fair Value Measurement, or other standards (e.g. FAS 115, Accounting for Certain Investments in Debt or Equity Securities), such as to conform the valuation and impairment models closer to that set forth in FAS 114 (Accounting by Creditors for Impairment of a Loan), or whether further disclosure guidance (and additional disclosures) are needed.

There were also varying opinions on whether regulatory accounting principles (RAP) should be adjusted to back out procyclical effects of fair value accounting, rather than amending Generally Accepted Accounting Principles (GAAP) to address bank regulatory issues. Chairman Cox, and various panelists, reiterated their support for the independence of the FASB and IASB.

In related news, FV was the focus of a breakfast panel at FEI’s Current Financial Reporting Issues conference last week, entitled: Current Financial Controversies: Legal and Auditing Perspectives. Appearing on the panel, presented by SmartPros Ltd., were Kenneth N. Goldmann, SEC Practice Director, J.H. Cohn LLP, and Michael R. Young, Co-Chair of the Securities Litigation Practice Group of Willkie Farr & Gallagher LLP. Panel moderator was Colleen Cunningham, Regional Managing Director, Resources Global Professionals, and former President & CEO of FEI.

We have posted some abbreviated highlights from the SEC’s Nov. 21 roundtable and the Nov. 18 FEI Current Financial Reporting Controversies panel; more details can be found in these FEI summaries: Highlights From SEC Roundtable On Mark-to-Market Accounting, and FEI CFRI Conference Features Panel on Fair Value.

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