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Cox on IFRS, Credit Ratings, Bear Stearns

Melissa Klein Aguilar | April 29, 2008

The Securities and Exchange Commission’s next move on embracing International Financial Reporting Standards is coming soon, its chairman said recently.

SEC staff will formally propose an updated “roadmap” later this year that outlines how the United States will move to allow—if not ultimately mandate—use of IFRS instead of U.S. Generally Accepted Accounting Principles. The SEC voted last fall to allow foreign companies listed on U.S. exchanges to file periodic reports in IFRS rather than GAAP, and the financial reporting community has been waiting since then for the Commission to give the same choice to domestic filers.


Speaking April 18 at the U.S. Chamber of Commerce, SEC Chairman Christopher Cox said the International Organization of Securities Commissions has established a database for sharing securities regulators’ experiences with adopting IFRS. He also said the SEC has begun working with Britain’s Financial Reporting Council and Financial Services Authority to coordinate enforcement actions over IFRS—a prime question about adopting IFRS that the SEC still struggles to answer. That SEC-FSA protocol is based on a model arrangement developed by staff of the Committee of European Securities Regulator and the SEC, Cox said.

Spokesmen for the SEC declined to give any further details about the updated roadmap or the joint IFRS enforcement protocol.

In his speech, Cox also stressed the need for XBRL, a next-generation computer language to file financial statements, as “going hand-in-glove with the concept of a common accounting language.”

Financial data tagged in XBRL, he said, could be able to transcend various national accounting systems, and would be especially useful if nations moved to a single global accounting standard like IFRS. “It’s possible to imagine … that investors the world over will be able to exchange financial information at the speed of light, tagged with computer codes in a globally accepted format that lets [investors] understand financial information with an economy of effort that’s never been possible before,” he said.

The SEC will hold a meeting May 14 to propose rules to mandate XBRL use in financial statements for U.S. registrants. “There’s simply no question that the objectives for IFRS are significantly advanced by the widening acceptance of a global computer language for presenting and comparing financial information,” Cox told the group.

SEC Plans Rule Reforms on Credit Ratings

The SEC is conducting a major review of credit rating agencies, and new rules to strengthen transparency at those firms are coming as well, SEC Chairman Christopher Cox says.

Speaking before the Senate Banking Committee last week, Cox said about 40 staff members have been paying visits to the rating firms to see whether they diverged from stated procedures on how to determine credit ratings and for managing conflicts of interest.

The rating firms are in political hot water these days for their possible role in letting the credit crisis develop as complex new financial instruments flooded the market in 2004 to 2006. Lawmakers are none too pleased with how the SEC let the situation fester, either.

“We are evaluating whether credit rating agencies adapted their rating approaches in this environment,” Cox told lawmakers. “The staff is observing that the ratings process used to rate these products may have been less quantitatively developed, particularly as the products became more complicated and involved different types of loans, than was generally believed.”

After establishing rules last June for a formal regulatory program to oversee large rating agencies, Cox said, the Commission is already working on additional rules to strengthen accountability and transparency and increase competition among ratings firms. He said the SEC is “far along” in preparing for a second round of rulemaking based on information from the staff examinations and other analyses provided by regulators, industry groups, academics, and other organizations.

Cox expects the SEC to issue rule proposals for public comment “in the near future,” but says the details of the proposals haven’t yet been decided.

Possible changes include enhanced disclosures about ratings performance and rules to manage conflicts of interest, including barring practices such as providing consulting services to the companies that the agencies rate.

Cox said other possible rulemaking may include requiring disclosure of ratings information so that investors can distinguish among ratings for different types of securities. The SEC is also reconsidering its reliance on, and reference to, credit ratings in its own rules, to promote greater due diligence by market participants.

Cox Bares Teeth on Stearns Probe

Meanwhile, the SEC is staying mum on why it reportedly dropped an investigation into whether Bear Stearns improperly valued complex debt securities months before the investment bank’s sudden collapse in March.

Following Bear’s implosion and subsequent acquisition by JPMorgan Chase at a firesale price, Sens. Max Baucus and Charles Grassley, chairman and ranking member of the Senate Finance committee, respectively, sent SEC Chairman Christopher Cox a letter asking him to explain the SEC’s reaction to Bear’s collapse, as well as why a reported probe didn’t result in an enforcement action.

In an April 16 response to that request, Cox said the SEC “does not disclose the existence or non-existence of an investigation or information generated in any investigation, unless made a matter of public record in proceedings brought before the Commission or the courts.”

The senators’ letter cited press reports that the SEC and state authorities had backed off an investigation into Bear Stearns for improperly valuing collateralized debt obligations. Baucus and Grassley asked for copies of any Wells notices (which inform a person that he is the target of an SEC probe), plus other internal documents and communications SEC staff might have generated relevant to Bear Stearns. Like most government agencies, the Commission is loathe to give out such documents freely.