Risk & Compliance

Sympathy for Fair Value Critics

SEC chair Mary Schapiro is "pushing" FASB for more guidance on mark-to-market accounting rules.
Stephen TaubMarch 11, 2009

Securities and Exchange Commission chairman Mary Schapiro told the House Subcommittee on Financial Services and General Government that she supports changes to the mark-to-market rule, but opposes scrapping it altogether.

In a wide-ranging talk to on Capitol Hill — one that included a plea for more funding to help the SEC take the powerful role in preventing financial abuses that President Obama has said he seeks for it – Schapiro said that she “has sympathy” for critics who want to scrap fair-value accounting rules. By her lights, rule revisions may provide relief for banks and other financial institutions affected by mark-to-market losses recorded during the economic downturn. But she stressed, “it is not our intention that these assets be written down to zero … or to fire-sale prices,” reported the Associated Press.

Nevertheless, Schapiro gave some ground. Although she said the SEC doesn’t advocate suspending the rule, the chairman reportedly said it is “pushing” the Financial Accounting Standards Board to come up with new guidance for companies that will provide “a better application” for determining what assets are worth.

Meanwhile, JPMorgan Chase chairman Jamie Dimon said that although he likes mark to market accounting, it has “been taken to a ridiculous point.” He said in a speech before the U.S. Chamber of Commerce that it creates volatility and has not helped investors. 

Tomorrow, the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises will discuss, among other things, fair value accounting and how it relates to the financial crisis. Part of the discussion will focus on a bill introduced last week by two subcommittee members — Colorado Democrat Ed Perlmutter and Oklahoma Republican Frank Lucas.

The bill aims to replace the SEC as the sole overseer of accounting standards with a newly formed Federal Accounting Oversight Board made up of five top regulators. According to the bill’s current language, the FAOB would be charged with making sure that accounting rules “handle illiquid and liquid assets differently” — which likely includes tampering with current fair value accounting rules. 

In her testimony today, Schapiro also discussed the SEC’s future plans. She noted that President Obama is requesting more than $1 billion for the agency in fiscal 2010, a 9 percent increase over the fiscal 2009 appropriation. Schapiro said the increase will fund an additional 50 staff members for the SEC, enhance its ability to uncover and prosecute fraud, and begin to build desperately needed technology. 

SEC Schapiro1

Specifically, Schapiro said the SEC plans to add staff to the its enforcement program to focus on pursuing tips, complaints, and other leads, thereby increasing the resources the SEC can dedicate to frauds that individuals bring to its attention. Fraud detection and prosecution is no doubt a sensitive subject at the SEC, which has been criticized for missing some of the largest frauds in recent years, including Bernie Madoff’s colossal $50 billion Ponzi scheme.

“The SEC has a number of different processes to track this kind of information, but there is no central repository or system through which this information comes together to ensure it is handled consistently or appropriately,” she said. 

Schapiro also talked about plans to expand its inspections of credit rating agencies, and to strengthen risk-based surveillance and examination oversight of investment advisers. In addition, the chairman expects to increase the number of staffers in the Office of Risk Assessment, the unit dedicated to deepening the SEC’s understanding of risk, and incorporating risk assessment into all aspects of operations.  

Schapiro told Congress that the SEC wants to complete the multi-year efforts to improve the case and exam management tools available to its enforcement and examination programs. An update to those systems will give senior managers access to better information related to the mix of cases, investigations, and examinations that are being worked on.