Thursday, November 19, 2009

FASB-Related Amendments (Perlmutter/Lucas; Garrett) Pass House Committee

As reported by Dow Jones Newswire's Sarah Lynch earlier today, U.S. House Panel Approves A Toned-Down Accounting Proposal. The article refers to the Perlmutter/Lucas amendment relating generally to the role that the proposed systemic risk council would play vis-a-vis accounting standard-setting. Separately, an amendment offered by Rep. Scott Garrett, which would require FASB to conduct a study relating to its new standards for securitization accounting, reportedly also passed the House Financial Services Committee today, as detailed further below.

'Toned-Down' Perlmutter/Lucas Amendment
DJ Newswire's Lynch notes in the article linked above:
The House Financial Services Committee agreed by voice vote to a much toned-down proposal Thursday that would allow a systemic risk council of regulators to offer advice about accounting rules that could pose problems to the broader marketplace.

'Toned-down' is an understatement. The amendment was virtually gutted from its original version (as detailed further below), moving from a complete overhaul of FASB oversight via the creation of a Federal Accounting Oversight Board that would take over oversight of FASB from the SEC, to what appears to be a one paragraph amendment (Amendment No. 58) that would add the following item to the list of duties of the Financial Services Oversight Council (the Council), established in the draft systemic risk bill (more formally, the Financial Stability Improvement Act):
To review and submit comments to the Securities and Exchange Commission and any standards setting body with respect to an existing or proposed accounting principle, standard or procedure.

Here's a recap of the history of the Perlmutter/Lucas amendment:
  • The original version of the amendment, co-sponsored by Rep. Ed Permutter (R-CO) and Rep. Frank Lucas (R-OK), as announced by Perlmutter on March 6 (a week before the House Financial Services Committee's March 12 hearing on mark-to-market accounting) would have created a Federal Accounting Oversight Board, transferring the SEC's oversight authority (vis-a-vis FASB) from the SEC to the FAOB. See Perlmutter's March 6 press release, and Lucas's March 11 press release.
  • In the weeks preceding Election Day, Perlmutter was expected to formally introduce the amendment to financial reform legislation being drafted by the House committee. See our Nov. 3 post, FASB Oversight Subject of Congressional Interest.
  • During early November, as the House committee's markup of the systemic risk bill approached, numerous individuals and organizations filed letters with the Chair and Ranking Member of the House Financial Services Committee, Rep. Barney Frank (D-MA) and Rep. Spencer Bachus (R-AL), respectively, to voice support or opposition to the Perlmutter/Lucas amendment, or any amendment more generally, that would impact the independence of accounting standard-setting.
  • Among those filing letters opposing change to independent standard-setting were SEC Chairman Mary L. Schapiro, FEI's Committee on Corporate Reporting, FEI's Committee on Private Companies - Standards, the AICPA, and a joint letter filed by the Center for Audit Quality, CFA Institute, and Council of Institutional Investors. (Links to these letters are in our Nov. 11 and Nov. 6 posts.)
  • Among those supporting the Perlmutter/Lucas amendment, as reported in this Nov. 16 Huffington Post article, included the American Bankers Association, Commercial Mortgage Securities Association, Council of Federal Home Loan Banks, Financial Services Roundtable, National Multi Housing Council, National Apartment Association, National Association of Home Builders, and Real Estate Roundtable.
  • By mid-November, as reported in the Huffington Post, the working draft of the Perlmutter/Lucas amendment had dialed back a bit, no longer calling for removal of the SEC's oversight authority over FASB, but still maintaining certain powers for the Financial Services Oversight Council, including the power to: "suspen[d], modif[y] or eliminat[e] such accounting principles, standards or procedures as they may apply to the stability of the financial system or the safety and soundness of financial companies, as a whole, for such duration as is reasonable and appropriate."
  • The one paragraph version of the Perlmutter/Lucas amendment approved for inclusion in the systemic risk bill by the House Financial Services Committee today, as noted above, makes no change to the SEC's formal oversight authority over the FASB, and provides no 'powers' to the Financial Services Oversight Council with respect to FASB.

The future of the Perlmutter/Lucas amendment depends in part on what the Senate decides (and as we noted last week, Sen. Chris Dodd (D-CT), Chair of the Senate Banking Committee, has said he sees no need to include in his bill anything relating to FASB independence; whether the final version of Perlmutter/Lucas will be adopted as part of the Senate version of the bill or not remains to be seen.)

My two cents
My two cents (I remind you of the disclaimer posted in the right margin of this blog): The long and short of it is, if indeed the sum-total of the Perlmutter/Lucas amendment as passed by the House committee today is the one paragraph amendment (Amendment No. 58) linked above (and if I'm wrong about that, I hope a commenter on this blog will point that out), then the final version of the Perlmutter/Lucas amendment as passed today appears to me to be pretty much motherhood and apple pie, since FASB and the IASB actively seek input from all of their constituents, financial regulators and otherwise, and the amendment calls for the systemic risk council to provide input to FASB and the SEC on accounting rules.

As noted in a Nov. 18 letter by the Financial Services Roundtable , the FSR supported the 'revised' (i.e. one paragraph) Perlmutter/Lucas amendment, because it: "leaves the current structure at the SEC in place, but provides a much-needed review if accounting principles threaten the safety and soundness of the economy."

By putting this duty for financial regulators to review and comment on FASB standards into law, it may make some people nervous, (perhaps having the provision written into law 'raises the bar' so to speak) but I believe the scaled down version of the amendment (i.e. the one paragraph version passed today) may be looked upon as a significant improvement by some, vs. the earlier, more draconian versions of the amendment which would have directly impacted FASB oversight by removing it from the SEC and placing it with a new board.

NOTE: Still to come: reconciliation of the Perlmutter/Lucas amendment in this systemic risk bill, with the Miller amendment (amendment No. 13) passed earlier by the House committee as part of the Investor Protection Act; the Miller amendment would form a Financial Reporting Forum (tasked with "meet[ing] to discuss immediate and long-term issues critical to financial reporting) - not unlike the FRF proposed by the SEC Advisory Committee on Improvements to Financial Reporting (CIFiR) - except that Miller proposes that the banking regulators be part of the FRF too, and as proposed by Miller, would require the FRF to issue an annual report, including any legislative recommendations.

In addition, I believe that the wording as agreed to today in the one-paragraph Perlmutter/Lucas amendment may transcend some of the earlier debate over whether or not accounting standard setters need to be concerned about the economic impact of their standards, including, potentially, procyclicality or systemic risk per se, or whether systemic risk is solely within the realm of government regulators.

On this point, see Prof. David Albrecht's post today in his blog, The Summa. Albrecht says: "As I blogged yesterday, it is a fact of life that accounting standards frequently have economic consequences. It is government’s responsibility to adjudicate between competing economic interests." (I may have more to say about Albrecht's posts in a future blog post as well.)

Similarly, I don't think the role of systemic risk considerations vis-a-vis investor considerations is as much an all-or-nothing issue as some may have seemingly portrayed it, particularly since the debate that takes place in standard-setting usually isn't over an extreme dichotomy like systemic risk vs. investor transparency, but over more nuanced - 'conceptual,' the standard-setters and their groupies (I place myself in the groupie category) would call it - issues, like breaking down the relevance, reliability, and understandability of particular accounting standards, principles or rules.

Reasonable people can, and do, disagree over what the most relevant or reliable information is, and how to balance those two sometimes competing needs (and other competing needs as well, including theoretical vs. practical, cost vs. benefit). Therefore, to have an all-consuming focus on whether standard-setting can straddle both systemic risk and investor protection considerations, to me, in some respects, is a red herring, like the old Miller Lite Tastes Great! Less Filling! debate.

The fundamental technical questions involved in developing accounting standards that result in information that is relevant and reliable are extremely challenging and perhaps less accessible to the general public than hyped debate pitting overarching issues of systemic risk considerations against investor transparency considerations (case in point: Huff Post's Civil War in Corporate America) but hopefully things will soon return to normal and folks can work together on the shared goal of high quality standard-setting and high quality financial reporting.

Garrett Amendment Requires FASB To Issue Study on FAS 166, 167
Separately, an amendment introduced by Rep. Scott Garrett (R-NJ) (see Garrett's Nov. 18 press release) relating to FAS 166 and FAS 167 (which amended FAS 140 and FIN 46R, removing the exception from off-balance sheet treatment for QSPEs, and changing the related consolidation rules for securitizations and asset sales) was also passed by the House Financial Services Committee, according to a Nov. 19 press release issued by the Commercial Mortgage Securities Association. As described in Garrett's press release:
This amendment would require the Financial Accounting Standards Board (FASB) to conduct a study of the combined impact by each individual asset-backed security of the new credit risk retention requirements contained in the bill and the new securitization accounting rules (FAS 166 and 167) and make statutory and regulatory recommendations for eliminating any negative impacts on the continued viability of the asset-backed securitization markets and on the availability of credit for new lending. This study would be required to be completed in 90 days and in coordination and consultation with the Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC).
Given that FAS 166 and FAS 167 are set to take effect on 1/1/10, there may be questions as to how feasible a study taking place over 90 days crossing year-end would be, and what any practical implications of such a study would be, combined with the fact that the Senate has not completed its markup of its version of the financial regulatory reform package, and the ultimate version that will be signed into law is not yet known. Stay tuned.

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