FROM: U.S. SECURITEIS AND EXCHANGE COMMISSION
Opening Statement at the SEC Open Meeting
by
Chairman Mary Jo White
U.S. Securities and Exchange Commission
Washington, D.C.
June 5, 2013
This is an open meeting of the Securities and Exchange Commission on June 5, 2013.
Today, the Commission will consider proposals that would reform the way money market funds operate in order to make them less susceptible to runs.
As many people know, money market funds are investment vehicles that hold a pool of high-quality, short-term securities. In the early 1980s, the Commission provided money market funds with an exemption making them distinct from mutual funds and certain other investment products. That exemptive rule (Rule 2a-7) allowed these funds generally to maintain a stable share price of $1.00 instead of changing their share prices according to the market value of the securities held by the fund.
The industry has changed substantially since that time. Money market funds are now a significant piece of the nation's financial system. Over the years, money market funds have become a popular investment product for both retail and institutional investors. They also have become an important provider of short-term financing to corporations, banks and governments. All told, money market funds hold nearly $3 trillion in assets, the majority of which are in institutional funds.
While money market funds have thus long served as an important investment vehicle, the financial crisis of 2008 highlighted the susceptibility of these products to runs. In September of that year - at the height of the financial crisis - a money market fund called the Reserve Primary Fund "broke the buck" - a term used when the value of a fund drops and investors are no longer able to get back the full dollar they put in.
Within the same week of that occurrence, investors pulled approximately $300 billion from other institutional prime money market funds. The contagion effect was rapid. The short term credit market dried up, and corporations had trouble borrowing to run their businesses. This reaction contributed to the significant disruption that already was consuming the financial system.
To stop this run, the government stepped in with unprecedented support in the form of the Treasury temporary money market fund guarantee program and Federal Reserve liquidity facilities.
In the aftermath of that experience, the Commission - in 2010 - adopted a series of reforms that increased the resiliency of money market funds. But, as the Commission stated at that time, those reforms were only a first step. Today's proposal takes the critical additional step of addressing the stable value pricing of institutional prime funds - at the heart of the 2008 run - and proposing methods to stop a money market fund run before such a run becomes a systemically destabilizing event.
It has been a journey to get to this point. Commission staff has spent literally years studying different reform alternatives and performing extensive economic analysis in arriving at these recommendations.
These proposals are important in and of themselves and because they advance the public debate that will shape the final rules to address one of the most prominent events arising from the financial crisis.
Today's proposal contains two alternative reforms that could be adopted separately or combined into a single reform package to address run risk in money market funds.
Floating NAV
The first proposed alternative would require that all institutional prime money market funds operate with a floating net asset value (NAV). That is, they could no longer value their entire portfolio at amortized cost and they could not round their share prices to the nearest penny. The set "dollar" would be replaced by a share price that actually fluctuates, reflecting the changing values in these money market funds.
This floating NAV proposal specifically targets the funds where the problems during the financial crisis occurred: institutional, prime money market funds.
Retail and government money market funds - which have not historically faced runs in even the worst of times - would be exempt from the proposed floating NAV requirement.
This approach would thus preserve the stable value fund product for those retail investors who have found it to be convenient and beneficial. It also would allow municipal and corporate investors to have access to government money market funds - a stable value product - if they need it, although it would be a product that holds federal government securities as opposed to the higher-yielding investments of a prime fund.
We are soliciting commenters' views regarding the impact of targeting the floating NAV reform to institutional prime funds and whether government and retail money market funds also should operate with a floating NAV, as well as commenters' views regarding whether today's proposal would effectively differentiate retail funds from institutional funds by imposing a $1 million redemption limit. These and other important questions are specifically posed in the proposal.
I believe the floating NAV reform proposal is important for a number of reasons:
First, by eliminating the ability of early redeemers to receive $1.00 - even when the fund has experienced a loss and its shares are worth somewhat less - this proposal should reduce incentives for shareholders to redeem from institutional prime money market funds in times of stress.
Second, the proposal increases transparency and highlights investment risk because shareholders would experience price changes as an institutional prime money market fund's value fluctuates.
And, third, the proposal is targeted, by focusing reform on the segment of the market that experienced the run in the financial crisis.
Fees & Gates
The second proposed alternative seeks to directly counter potentially harmful redemption behavior during times of stress.
Under this alternative, non-government money market funds would be required to impose a 2 percent liquidity fee if the fund's level of weekly liquid assets fell below 15 percent of its total assets, unless the fund's board determined that it was not in the best interest of the fund. That determination would be subject to the board's fiduciary duty, and we believe it would be a high hurdle. After falling below the 15 percent weekly liquid assets threshold, the fund's board would also be able to temporarily suspend redemptions in the fund for up to 30 days - or "gate" the fund.
This "fees and gates" alternative potentially could enhance our regulation in several ways:
First, it could more equitably allocate liquidity risk by assigning liquidity costs in times of stress (when liquidity is expensive) to redeeming shareholders - the ones who create the liquidity costs and disruption.
Second, this alternative would provide new tools to allow funds to better manage redemptions in times of stress, and thereby potentially prevent harmful contagion effects on investors, other funds, and the broader markets. If the beginning of a run or significantly heightened redemptions occur, they would no longer continue unchecked, potentially spiraling into a crisis. The imposition of liquidity fees or gates would be an available tool to directly counteract a run.
And, third, this approach also is targeted, focusing the potential limitations on a money market fund investor's experience to times of stress when unfettered liquidity can have real costs.
The two alternative approaches in today's proposal target the common goal of reducing the incentive to redeem in times of stress, albeit in different ways. Accordingly, the proposal requests comment on whether a better reform approach would be to combine the two alternatives into a single reform package - requiring that prime institutional funds have a floating NAV and be able to impose fees and gates in times of stress, and that retail funds be able to impose fees and gates. We specifically solicit and I am interested in commenters' views on this combined approach.
Greater Diversification, Disclosure and Reporting
Importantly, the staff's recommendations also contain a number of other significant reform proposals - tightening diversification requirements, enhancing disclosure requirements, strengthening stress testing and improving reporting on both money market funds and unregistered liquidity funds that could serve as alternatives to money market funds for some investors. These proposed reforms should further enhance the resiliency and transparency of this important product and are significant complements to the other proposals.
Today's proposal is the product of very hard work by all those who have sought to meaningfully reform this investment product that is such a critical piece of the nation's financial fabric.
There have been important and thoughtful comments throughout this process, including suggestions and recommendations from investors, the industry, and fellow regulators. We have given them all very careful consideration and they have proven invaluable to us formulating the important proposals we are voting on today.
In this regard I especially would like to thank all of my fellow Commissioners for their contributions and the spirit of cooperation in which we worked leading up to today's meeting.
I want to reiterate that our goal is to implement an effective reform that decreases the susceptibility of money market funds to run risk and prevents money market fund events similar to those that occurred in 2008 from repeating themselves. With this goal in mind, I very much look forward to the comments and am very pleased that, with my fellow Commissioners, we are moving this reform process forward.
Before I ask Norm Champ, Director of the Division of Investment Management, to discuss the proposed reforms, I would like to thank Norm and his team: Diane Blizzard, Sarah ten Siethoff, Thoreau Bartmann, Brian Johnson, Adam Bolter, Amanda Wagner, Kay Vobis, Jaime Eichen, and Megan Monroe for their tireless work on this rulemaking.
This rulemaking was a true team effort between the Division of Investment Management and the Division of Risk, Strategy and Financial Innovation, so I want to also express my gratitude for the work of Craig Lewis, Kathleen Hanley, Jennifer Marietta-Westberg, Woodrow Johnson, Jennifer Bethel, Virginia Meany, Dan Hiltgen, and Mila Sherman. I also would like to acknowledge the critical work and analysis included in the staff's economic study published late last year, which was highly influential in developing today's proposed reforms.
Thanks as well to Anne Small, Meridith Mitchell, Lori Price, Cathy Ahn, Jill Felker, and Kevin Christy from the Office of the General Counsel; Jim Burns, David Blass, Haime Workie, and Natasha Greiner from the Division of Trading and Markets; and Paul Beswick, Rachel Mincin, and Jeff Minton from the Office of the Chief Accountant.
And now I'll turn the meeting over to Norm Champ to provide a fuller explanation of the proposed reforms we are considering today.
FROM: COMMODITY FUTURES TRADING COMMISSION
CFTC Files Complaint against U.S. Bank, N.A. Alleging Unlawful Use of Peregrine Financial Group, Inc.’s Customer Segregated Funds and Violation of Customer Segregation Laws
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed a Complaint in the U.S. District Court for the Northern District of Iowa against U.S. Bank National Association (U.S. Bank) for unlawfully using and holding Peregrine Financial Group, Inc.’s (Peregrine) customer segregated funds. U.S. Bank is the fifth largest bank in the country and maintains branch offices in Cedar Falls, Iowa, where Peregrine and its owner, Russell R. Wasendorf Sr. (Wasendorf), were located.
The Commodity Exchange Act (CEA) and CFTC regulations prohibit depository institutions, like U.S. Bank, from using or holding funds that belong to customers of a Futures Commission Merchant (FCM) as though they belong to anyone other than the customers, and also prohibit the extension of credit based on such funds to anyone other than the customers.
The Complaint alleges that U.S. Bank was a depository institution serving Peregrine, a registered FCM, and Wasendorf since 1992. From approximately September 2008 to July 2012, U.S. Bank unlawfully accepted Peregrine’s customers’ funds as security on loans it made to Wasendorf, his wife, and his construction company, Wasendorf Construction, L.L.C., to build an office complex for Peregrine in Cedar Falls, Iowa. The Complaint further alleges that from approximately June 2008 to July 2012, U.S. Bank improperly held Peregrine’s customers’ funds in an account U.S. Bank treated as Peregrine’s commercial checking account and knowingly facilitated Wasendorf’s transfers of millions of dollars of customers’ funds out of this account to pay for Wasendorf’s private jet, his restaurant, and his divorce settlement, among other things. U.S. Bank knew that these transfers were not for the benefit of Peregrine’s customers, according to the Complaint.
David Meister, the CFTC’s Director of Enforcement, said: "The Commodity Exchange Act and Commission rules protecting customer funds impose obligations on banks that hold those funds. As should be apparent from today’s action, we will seek to hold a bank to account if it falls short on complying with customer fund protection obligations. Wasendorf stole vast sums of customer money, but his crimes do not excuse U.S. Bank from its own independent responsibilities."
According to the Complaint, Wasendorf defrauded more than 24,000 Peregrine clients and misappropriated more than $215 million over two decades using a customer segregated account at U.S. Bank. In connection with that fraud, Wasendorf misrepresented to the National Futures Association and to Peregrine’s auditor that Peregrine’s customer segregated account at U.S. Bank contained $200 million or more, when in fact the average balance since May 2005 was only $15.7 million. On July 10, 2012, the CFTC instituted a civil action against Wasendorf and Peregrine, CFTC v. Peregrine Financial Group, Inc. and Russell Wasendorf Sr., 1:12-cv-05383 (N.D. IL July 10 2012) (see CFTC Press Release 6300-12, July 10, 2012). Wasendorf was also criminally charged by the United States Attorney’s Office for the Northern District of Iowa, pled guilty, and on January 23, 2013 was sentenced to 50 years in prison and ordered to pay more than $215 million in restitution. United States v. Russell Wasendorf, Sr., 12-cr-2021-LRR.
In this litigation, the CFTC seeks an injunction against U.S. Bank for further violations of the CEA and CFTC Regulations, restitution, disgorgement, and civil monetary penalties, among other appropriate relief.
The following CFTC Division of Enforcement staff members are responsible for this case: Robert Howell, Joy McCormack, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard Wagner.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., June 3, 2013 — The Securities and Exchange Commission today charged a Bellevue, Wash.-based commercial truck manufacturer and a subsidiary for various accounting deficiencies that clouded their financial reporting to investors in the midst of the financial crisis.
The SEC alleges that PACCAR’s internal accounting controls included ineffective procedures that kept the company from adhering to various accounting rules. PACCAR failed to report the operating results of its aftermarket parts business separately from its truck sales business as required under segment reporting requirements, which are in place to ensure that investors gain the same insight into a company as its executives. PACCAR and its subsidiary also failed to provide complete information about their respective loan and lease portfolios, and PACCAR overstated some loan and lease originations and collections at two foreign subsidiaries in its statement of cash flows.
PACCAR and its subsidiary PACCAR Financial Corp. agreed to settle the SEC’s charges.
"Companies must continually and diligently monitor their internal accounting systems to ensure that the information they are providing investors is accurate and consistent with relevant accounting guidance," said Michael S. Dicke, Associate Regional Director of the SEC’s San Francisco Regional Office. "The deficient controls and procedures at PACCAR caused inconsistencies in its financial reporting and kept investors and regulators from seeing the company through the eyes of management."
According to the SEC’s complaint filed in federal court in Seattle, PACCAR is a Fortune 200 company that designs, manufactures, and distributes trucks and related aftermarket parts that are sold worldwide under the Kenworth, Peterbilt, and DAF nameplates. From 2008 through the third quarter of 2012, PACCAR failed to report the results for its parts business as a separate segment from its truck sales as required under Generally Accepted Accounting Principles (GAAP). For example, PACCAR’s 2009 annual report showed $68 million in income before taxes for its truck segment. However, PACCAR documents and board materials reviewed by senior executives depicted the trucks business with a $474 million loss and the parts business with $542 million profit to arrive at the net income before taxes of $68 million. By at least 2008, PACCAR should have been reporting aftermarket parts as a separate segment in its SEC filings, but failed to do so until year-end 2012.
The SEC’s complaint further alleges that PACCAR and PACCAR Financial Corp. failed to maintain accurate books and records regarding their impaired loans and leases, causing them to improperly identify and disclose loans and leases for impairment. As a result, they understated the amounts of their impaired receivables and the specific reserve associated with the receivables in footnotes to their respective 2009 Form 10-K filings. PACCAR understated the amount of its impaired receivables by 65 percent and the amount of the specific reserve associated with the receivables by 78 percent. PACCAR Financial Corp. understated the amounts by 64 percent and 37 percent. As a result of these deficiencies, PACCAR also made inaccurate statements to the SEC’s Division of Corporation Finance regarding its processes for calculating the specific reserves on its impaired receivables.
According to the SEC’s complaint, PACCAR also overstated equal and offsetting amounts in two lines within its statement of cash flows in the second and third quarters of 2009. PACCAR identified these errors during the first quarter of 2010 and reported corrected figures in its second and third quarter filings in 2010.
The SEC’s complaint charges PACCAR with violations of the reporting, books and records and internal control provisions of the federal securities laws, and charges PACCAR Financial Corp. with violations of the books and records and internal control provisions. Without admitting or denying the charges, they agreed to the entry of a permanent injunction and PACCAR agreed to pay a $225,000 penalty. The settlement, which is subject to court approval, takes into account that PACCAR and PACCAR Financial Corp. have implemented a number of remedial measures to enhance their internal accounting controls and improve their compliance with GAAP.
The SEC’s investigation was conducted by Jason Habermeyer and Cary Robnett of the SEC’s San Francisco Regional Office, and Peter J. Rosario of the Washington D.C. office.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Atlanta Attorney with Converting Investor Funds
On May 31, 2013, the Securities and Exchange Commission charged Robert A. Gist ("Gist"), an Atlanta attorney and former sports agent, and Gist, Kennedy & Associates, Inc. ("Gist Kennedy") (collectively, "Defendants"), a company that Gist controls, with defrauding at least 32 customers out of at least $5.4 million while acting as an unregistered broker from approximately 2003 to the present.
According to the SEC’s complaint filed in the U.S. District Court for the Northern District of Georgia, Gist obtained the customers’ funds on the fraudulent pretense that he would invest conservatively on their behalves in corporate bonds and other securities. The complaint alleges that Gist invested none of the customer funds, but, instead, used the funds for his personal expenses, for the payment of purported dividends and proceeds from securities sales that he falsely claimed to have purchased on behalf of his customers, and for the operation of a company that he controlled until early 2013 known as ENCAP Technologies, LLC. The complaint further alleges that Gist regularly created and provided the customers of Gist Kennedy with fictitious account statements.
The complaint alleges that Gist used at least $2.2 million of the converted customer funds for the operation of ENCAP Technologies, LLC ("ENCAP") during the time that he controlled ENCAP, and that the company gave nothing of value in return for the money. The complaint names ENCAP as a relief defendant and seeks disgorgement from it of unjust enrichment in the amount of at least $2.2 million plus prejudgment interest.
Without admitting or denying the SEC’s allegations, Defendants Gist and Gist Kennedy agreed to settle the case against them. The settlement is pending final approval by the court. Specifically, the Defendants consented to the entry of an order permanently enjoining Defendants Gist and Gist Kennedy from future violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 thereunder; permanently enjoining Gist from future violations of Section 15(a) of the Exchange Act; finding Defendants jointly and severally liable for $5.4 million in disgorgement plus prejudgment interest, imposing civil penalties to be determined upon motion of the Commission, freezing the Defendants’ assets, and providing other relief.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Keynote Luncheon Speech
by
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
32nd Annual SEC and Financial Reporting Institute Conference
Pasadena, CA
May 30, 2013
Introduction
Good afternoon and thank you, Dean Bill (Holder) for your kind introduction, and thanks to Randy (Beatty) for inviting me to share my views at the 32nd Annual SEC and Financial Reporting Institute Conference here at USC. I am delighted to be here with all of you today.
You may not hear this too often from people outside your profession, but I have always had a passion for accounting and auditing. I think this has its roots in the time I spent with my father, who was a CPA and the CFO of a publicly-held company; he helped me begin to understand just how important accounting is to business and the financial system. Of course, in my more than two decades with the SEC, which included close to a decade in the Division of Corporation Finance, I have developed a deeper and more complete understanding of the critical role accounting and auditing professionals play in our capital markets.
And today, I am pleased to see that we are working to adapt and expand that role to serve investors and other stakeholders even more effectively in the years ahead, by addressing critical issues at a moment of great change and important progress in the worlds of finance and accounting.
Before I go on, I have a disclosure requirement of my own. I need to remind you that the views I express today are my own, and not those of the Commission, my fellow Commissioners or the Commission’s staff.1
High-Quality Financial Reporting
Because financial information is the starting point for an investor’s decision-making process, high quality accounting standards are critical. Accurate and useful financial information creates the environment in which capital formation sprouts, grows and, sadly, sometimes withers. That is why, when developing accounting standards that will shape an increasingly complex financial environment, it is critical that they accurately reflect the underlying economics of the transactions they document.
Of course, as we know from the many standards-setting processes underway, there is often a diversity of views on how the economics of business transactions should be considered when developing accounting and disclosure requirements, and reconciling them is a primary task of any good standard setter — the development of high-quality accounting standards is certainly dependent upon it.
Reconciling diverse views on corporate finance issues is something I have spent a lot of time on as a Commissioner and regulator. And from my perspective, the most effective way to resolve these differences is to set a standard that expresses a transaction’s economics in a fashion that meaningfully informs investors and resonates with them as they study a company’s disclosures.
FASB / IASB Convergence Projects
We are seeing this dynamic play out in the FASB and IASB priority convergence projects. Earlier today, you discussed significant progress towards an alignment of accounting standards in four key areas — revenue, leases, financial instruments, and insurance.
This progress is a positive development, with both the FASB and the IASB showing great skill in working together to create common standards that will effectively serve investors the world over. However, as Paul [Beswick] noted this morning, publication of the standards is just the starting point. The challenge you face, as CPAs, is to successfully implement any new accounting standards, and thereby collectively protect investors in this evolving financial market.
And, finishing the convergence projects is, of course, not the end of the story for the United States and IFRS. I continue to look forward to a day when there is one set of global accounting standards, and we are taking a number of steps in that direction at the SEC, including soliciting views from U.S. publicly held companies regarding these issues. As Paul noted earlier, the IFRS already plays an important role in the U.S. capital markets. For example, today with US foreign private issuers already using IFRS, we have a significant public market — with approximately 450 companies with a market capitalization in the trillions — already trading on the basis of financial statements prepared in accordance with those standards.
I hope that, as these common standards come on line, you will work with accounting colleagues and corporate managers to ensure a successful transition resting on four pillars.
The first pillar of successful implementation is training, and these projects will require training across all constituents at all levels within the organization — from the staff accountant performing the filing review to the senior management. In addition, we all need to consider how we can make sure that investors understand the changes that are occurring. In order for that to happen, you and all of the other affected personnel at the entities you represent will first need to take as much time as necessary to fully understand the new standards yourselves.
The next pillar is resources. It is important that companies devote sufficient time and resources to updating their financial reporting systems in the wake of these changes. We can already see that the standard-setters understand the significance of the changes and the need for a sufficiently long implementation period. But companies themselves must also be sure to allot adequate time to amending processes and systems, and resources necessary to run parallel systems, until they feel fully comfortable reporting financial information using the new standards.
The third pillar is identification of interpretative issues. The standard-setters are spending a great deal of effort now to ensure that the new standards are as precise as possible. But there will always be areas that demand interpretation. It will be important to identify areas where there is diversity in application and address them through interpretative guidance so that investors are not harmed and financial statements are transparent. I expect the SEC staff will be fairly active in this space.
In addition, I commend the FASB for proactively addressing this area by bringing together a broad spectrum of representative constituents into an implementation group that will raise practice interpretation issues related to the proposed revenue standard. This is about timely communication that allows thoughtful deliberation, and the goal is to do this in an open and transparent manner. I also think is it a positive sign that the IASB has agreed to participate in this initiative and that we, through the SEC staff, will be an observer. Perhaps this could serve as a pilot for all of the new standards in development and a new tool for the profession.
The final pillar is a focus on investor understanding. When there is an accounting policy choice, we should select the accounting that best reflects the basic economics of the transaction. With more principles-based standards, it is of the utmost importance to consider the substance of the transaction and the economics. Disclosure that is transparent and communicates the critical judgments will allow the investor to see transactions through managements’ eyes, allowing them to better understand the motivations and the potential pitfalls or benefits of the transaction, and to make more informed decisions. Depending upon the transaction, this may mean going beyond the explicit disclosure requirements. Again, I encourage you to look beyond abstract accounting standards and disclosure checklists and think about what would be meaningful to an investor seeking to understand a transaction’s importance. A check-the-box mentality may not produce the best financial information.
Increase Outreach to Investors Related to Financial Reporting
Increased investor understanding should always be a primary goal of new standards. But to end up with standards which support that goal, we need to start the standard-setting process with investor outreach. Finding out what is on investors’ minds is a necessary step because this will improve the overall quality of the standards.
Recently, we have seen an increase in investor outreach, in large part thanks to a strong effort by FASB, but I believe there is still room for improvement. For example, the FASB, in its due process, should emphasize collecting feedback from users. We need to ask ourselves: "Do we really know what matters to an investor?" "What information is the investor looking for?" And "have we received feedback from a cross-section of the different types of investors?"
As the SEC looks to update its guidance as a result of final new accounting standards, we, too, will be seeking to understand the needs of investors in advance of any amendments.
Disclosures
One of the parts of my job that I enjoy most is the opportunity to interact with individuals who are devoted to providing investors with high-quality financial reporting. In these interactions, I get to hear all of the wonderful things that the Commission is doing well and, not surprisingly, what the Commission could do better. One issue that has been raised in these discussions is the level of required disclosures that are included in a company’s filings with the Commission.
When I hear this sort of comment, I think the natural inclination is to be somewhat skeptical of a company not wanting to be as transparent as possible with their investors. But increasingly, we hear that the level of disclosures is interfering with a registrant’s ability to communicate with investors. Of course, we need to investigate and evaluate that assertion. But, if for now, I accept this assumption to be a fact, then what are the appropriate next steps? In my view, there seem to be two potential next steps to research the issue and consider potential improvements. One path would be to rethink the entire regime. While this route may sound encouraging on first blush, it fails to acknowledge that our current disclosure regime has served investors well for decades. And, because of the enormity of the task, it runs the risk of taking too long while not being as impactful as it might otherwise be. A more targeted review of some of the areas where the information is not perceived to be as valuable has the advantage of being completed more quickly and therefore have a more immediate impact.
In addition to important areas of line item disclosure, I believe that the prime target for improvement is Management’s Discussion and Analysis ("MD&A"). As I have said many times before, these disclosures about where a company’s been and where it’s going "should be made in a way that communicates — truly speaks — to shareholders. . . . [that] truly enables the owners [of the company], the shareholders, to view the company and its prospects through the eyes of its insiders."
2 So I encourage you all to give us your thoughts on disclosure requirements; we really need to work together to ensure that disclosure truly serves to inform.
Role of the Auditor
Stepping back for a moment from front-line accounting, it is important that, as we shape the financial reporting structure of the future, we continue to emphasize and enhance the role of the auditors who serve as gatekeepers to the public securities markets. The integrity and reliability of the financial reporting system relies heavily on auditors having significant responsibility for the large volume of financial information that supports the Commission's full disclosure system.
Congress, in creating our system, granted the accounting profession an important public trust. This trust in auditors, combined with the vigilance of the Public Company Accounting Oversight Board ("PCAOB"), helps to form the foundation of the financial reporting process. We look to auditors not only to help detect problems, but, most importantly, to prevent problems from occurring in the first place, by deterring those who would fudge numbers, take shortcuts, or, more subtly, tolerate inappropriate biases that have the effect of making an otherwise reasonable estimate or judgment unreasonable.
Role of the PCAOB
Experience teaches us that there is value in auditing the auditors as well, and, since its creation 10 years ago, the PCAOB has grown into an important regulatory body with a significant investor protection role in this area.
The PCAOB is in a unique and fortunate position of having its standard setting, inspections, and enforcement all under one roof. The potential benefits of this structure are remarkable because they are all critical components of what some have called the "audit performance feedback loop" — the processes of, for example, leveraging the information gathered during inspections and enforcement actions to develop high quality standards.
More than 2,300 accounting firms are registered with the PCAOB, about 900 of them based overseas. As you know, one of the PCAOB’s most important mandates is to conduct inspections of accounting firms registered with the Board. And since 2002, it has conducted inspections of thousands of audits of U.S. public companies in the U.S. and abroad.
One area that has been nearest and dearest to my heart in overseeing the PCAOB is auditor performance standards.
As I have often said, I would like to see the PCAOB devote more attention to updating and maintaining their performance standards and quality control, which have the most direct effect on how audits are performed. High quality audit standards that set clear expectations for auditor performance are absolutely critical to our financial system.
I’m encouraged that standards regarding the auditing of related parties and significant unusual transactions, as well as auditing accounting estimates, including fair value measurements, are on the PCAOB’s current standard setting agenda. However, I think more can be done to enhance the development and maintenance of high quality auditing standards. There are also a number of very important auditing matters under consideration globally, such as the considerations for changes to the auditor’s reporting model. It is important that the PCAOB be a leader in advancing the continuing improvement of audit quality, including by sharing experiences, knowledge and views between regulators. This also includes monitoring the activities of other regulators, standard setters, and legislative bodies as they explore changes to the way audits are conducted or auditors are overseen.
A second priority is expanding the PCAOB’s ability to perform inspections in certain jurisdictions outside the U.S. The Board has made remarkable progress over the past year in advancing new cooperative agreements and developing relationships with non-U.S. regulators, enabling advancements of inspections of audits around the globe. A strong, global inspection program is critical to evaluating audit performance and provides important information necessary for the PCAOB to improve their auditing and quality control standards as well as for firms to improve their own quality controls.
Audits of Broker Dealers
The Dodd-Frank Act gave the Board explicit authority over the audits and auditors of broker-dealers’ financial statements. Currently, the Board has an interim broker/dealer inspection program in place, and it issued its first public progress report on that program last year. The initial results were concerning. The Board plans to continue inspections under the interim program until rules for a permanent program take effect. Its next progress report is expected later this year and will cover a much larger number of firms and audits. I will be very much interested in the results.
In addition, in June 2011, the Commission proposed amendments to Rule 17a-5, the rule that contains the financial reporting requirements for brokers and dealers. Among other things, the proposed amendments are intended to increase focus on certain financial and custodial requirements and facilitate the PCAOB’s implementation of its oversight of broker-dealer audits. In July 2011, the PCAOB proposed new auditing and attestation standards that would apply to the audits of broker and dealers. I am hopeful that the Commission will move forward to finalize its rules in the near future and that, once we do, the PCAOB will likewise move forward expeditiously.
PCAOB Inspection Reports — Enhancing Inspection Report Content
I understand that one of the PCAOB’s new near term priority projects is directed at improving the content and readability of inspection reports and that the Board is in the early stages of conducting outreach as part of this efforts. I’m encouraged by this development — higher quality inspection reports will promote better understanding of the issues and help to prevent similar problems going forward. In particular, I believe that PCAOB inspection reports should include citations to aspects of the relevant standards or rules and an evaluation of how the auditor’s performance compared to such requirements.
Conclusion
We are all charged with creating and implementing an accounting and audit foundation that will allow investors to make sense of the rapidly changing financial markets, and ensure that the results are not only timely and accurate, but also comprehensible and useful to investors. The new standards that are developed should be informed by thoughtful and robust analytical thinking and with the needs of investors uppermost in our minds. These new standards need to be clear, appropriately and consistently applied, and then effectively enforced. Timely communication between all players leading up to the effective date will be critical to help pave the road to success.
Thank you for your time, and I look forward to answering your questions.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Obtains Final Judgment and Issues Administrative Orders Against John A. ("Jack") Grant
The Securities and Exchange Commission announced today that on May 17, 2013, the Honorable George A. O’Toole Jr. of the United States District Court for the District of Massachusetts entered a final judgment against defendant John A. ("Jack") Grant, a lawyer and former stockbroker living in Yarmouth Port, MA. Among other relief, the final judgment imposes a permanent injunction against future violations of certain antifraud provisions of the federal securities laws and orders Jack Grant to pay a total of $201,392.27.
The Commission also announced today the issuance of administrative orders barring Jack Grant from the securities industry and from practicing before the Commission.
In its federal court Complaint, the Commission alleged that Jack Grant violated a Commission bar from association with investment advisers by associating with his son Lee Grant’s investment advisory firm, Sage Advisory Group LLC ("Sage"), and by acting as an investment adviser himself. In 1988, the Commission filed a previous enforcement action against Jack Grant alleging that he sold $5,500,000 of unregistered securities and misappropriated investors’ funds. At that time, Jack Grant agreed to a settlement that resulted in a July 1988 order barring him from association with brokers, dealers, and investment advisers.
Jack Grant did not remove himself from the securities business, however, and instead continued to provide investment advice to individuals and small businesses. The Commission’s Complaint alleged that he retooled his service as the Law Offices of Jack Grant and used his son, Lee Grant, to help implement his investment advice. The Complaint further alleged that Jack Grant, Lee Grant, and Sage failed to inform their advisory clients that Jack Grant is barred from associating with investment advisers.
The final judgment permanently enjoins Jack Grant from violating Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. In addition, the final judgment orders him to comply with the Commission’s 1988 bar order and orders him to undertake notification to his clients of the final judgment. Without admitting or denying the Commission’s allegations, Jack Grant consented to the entry of the final judgment.
Jack Grant also consented to the Commission’s entry in follow-on administrative proceedings of a permanent bar, pursuant to Section 203(f) of the Advisors Act, prohibiting him from association with any broker, dealer, or investment adviser, among other entities, and an order, pursuant to Rule 102(e), permanently suspending him from practicing before the Commission as an attorney. The Commission entered the administrative orders on May 30, 2013.
The Commission’s action against Lee Grant and Sage is still pending.
Posts
