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Congress on Bear Stearns; SEC Technical Stuff; XBRL

Melissa Klein Aguilar | April 15, 2008

It looks like the Securities and Exchange Commission will be spending a lot more time digging into the mess surrounding Bears Stearns’ collapse.

The agency received two letters in less than a week calling for separate probes related to the now-acquired investment bank: one asking why the SEC didn’t take enforcement action against it last year, and another asking the SEC to widen its probe into abusive short selling of Bear Stearns’ stock.

The first request came from U.S. Sen. Chuck Grassley, ranking Republican on the Senate Finance Committee. Grassley called on the SEC’s inspector general to investigate why the Enforcement Division declined to bring a case against Bear Stearns last year for improperly valuing mortgage-related investments. Those investments turned out to be wildly overvalued, Bear lurched into a liquidity crisis, and the company was scooped up by JP Morgan last month for a fraction of its former value.

“Given the later collapse and federally backed bailout of Bear Stearns, Congress needs to understand more about this case and why the SEC ultimately sought no enforcement action,” Grassley wrote in an April 2 letter to Inspector General David Kotz.


Grassely said he’s “particularly interested” in light of the SEC’s failed investigation of Pequot Capital Management. A Senate report released last year, based on another probe requested by Grassley, found that senior SEC officials showed “extraordinary deference” to a particular witness, referring to Morgan Stanley CEO John Mack.

“I need to know whether the same problems identified in the Pequot investigation were repeated in the Bear Stearns case,” Grassely wrote. He asked for an investigation and a final report on whether there was any “improper action or misconduct” relating to the SEC’s investigation of Bear Stearns and the Commission’s decision to close the investigation.

Grassley also asked the inspector general to follow up on previous audit work related to the offices in the Division of Trading and Markets responsible for regulating the largest broker-dealers and their associated holding companies, including the adequacy of any reviews conducted regarding Bear Stearns.

Meanwhile, the chairman of the House Financial Services Committee has called on the SEC to widen its investigation into questionable trading in Bear Stearns’ stock in the days leading up to its collapse to see if similar activity in the stocks of other investment banks points to efforts to drive prices down through manipulative short sales.


Rep. Barney Frank, D-Mass., citing an “unusually high” level of short selling in Bear Stearns’ stock and the purchase of then out-of-the-money put options in the days preceding its collapse, noted “strong indications” of similar market activity in the stocks of other major investment banks.


“Some allege this was a coordinated activity on the part of various market participants—who also pushed rumors the banks were in trouble—in an effort to drive share prices down,” Frank wrote in an April 4 letter to SEC Chairman Christopher Cox. “I strongly encourage you to widen your review to include trading activity in the stock of all of the large investment banks.”

Depending on what the Commission finds, Frank said it could lead to a broader inquiry into short selling by the SEC and Congress.

Report: SEC Should Improve SRO Oversight

The SEC’s inspector general says the Commission generally provides “well-organized” processes for stock exchanges and other self-regulatory organizations to adopt new rules, but that oversight could still be improved.

In a report released March 31, the Office of the Inspector General said the SEC doesn’t consistently approve proposed rule changes within the time limits set forth in the Securities Exchange Act and should improve its overall timeliness in reviewing proposed rule changes.

According to the report, the SEC didn’t approve proposed rule changes within the prescribed time period in 8 of 15 instances that the OIG reviewed.

The report includes 19 recommendations. Among other things, the OIG said the SEC’s Division of Trading and Markets should establish and track a division-wide goal for issuing releases on proposed rule change; establish a policy to ensure that the division meets the statutory timeframe for approving proposed rule changes that have been published in the Federal Register; provide a written policy containing procedures for following up with SRO staff when more detail about the rule change is necessary; and institute criteria for asking an SRO to withdraw a proposed rule change and for rejecting a proposed rule change.

The SEC has agreed with all of the recommendations.

SEC Expands XBRL Software Family Again

The SEC has unveiled yet another tool to showcase the capabilities of interactive data, as it ramps up for rulemaking to mandate the use of eXtensible Business Reporting Language sometime later this year.

The newest XBRL tool, the Mutual Fund Reader, lets investors compare more easily information provided by mutual funds on fund cost, risk, investment objectives, and past performance. The SEC approved rule amendments last June to let mutual funds submit risk-return summary information from their prospectuses using XBRL. So far, 20 mutual funds have voluntarily submitted their information in the interactive data format.

The new software, available on the SEC’s Website, lets users compare as many as three fund classes based on chosen parameters. The program follows the February release of the Financial Explorer, which allows for the comparison of financial data at public companies. The SEC released an Executive Compensation viewer and Interactive Financial Report viewer last year.

The SEC is expected to propose a rule sometime this spring to phase in use of XBRL by companies submitting filings to the agency.

New Form 8-K Interpretations Posted

Financial reporting types, heads up: The SEC has published new Form 8-K interpretations.

The interpretations, posted April 3, are the latest to be revamped as part of an ongoing effort by the SEC’s Division of Corporation Finance staff to update and reformat the interpretive positions.

The revised Form 8-K Compliance and Disclosure Interpretations replace the Form 8-K interpretations in the July 1997 Manual of Publicly Available Telephone Interpretations, the June 13, 2003, Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures, and the November 22, 2004, Form 8-K Frequently Asked Questions.