Schapiro confirmation hearings

By Cydney Posner

A few notes of interest from the Schapiro confirmation hearings:

• IFRS. She expressed concerns regarding the existing roadmap. While having uniform international accounting standards would be welcome, she was troubled by the costs of adoption that would be imposed on businesses (especially at this time), the absence of detailed requirements in IFRS relative to GAAP, the potential for inconsistent application among nations, and the possible lack of independence of the IASB (international accounting standard-setting body). Bottom line: Not wedded to the SEC's current IFRS roadmap or even adoption of IFRS.
• Proxy Access. Currently, about 40 foreign markets allow some form of proxy access. She thinks that the U.S. should join that group by allowing access for large, long-term shareholders. Bottom line: Get ready for proxy access.
• Mark-to-Market Accounting. While many investors believe that it provides better transparency, fair value accounting can lead to inappropriate asset write-downs in some circumstances, such as hard-to-value assets (i.e., no active market). She intends to study the recent SEC report.
• Credit-Rating Agencies. These agencies have failed in their role and need an overhaul. The system that requires issuers to pay the credit-rating agencies for their own credit ratings should be reexamined, with possibilities including some type of pooling of funds or funding from other sources.
• Current Regulatory System. The current regulatory system has failed the investing public saving for college or retirement, and she will keep the public's concerns front and center. Our current problems have arisen in part as a result of gaps in regulatory jurisdiction, so-called stovepipe regulation. The current system sometimes creates competition among regulators, not cooperation. Tips on fraud and other criminal activity should be centralized. There should be increased evaluation of potential systemic risk of securities, examining the potential results in varying circumstances (e.g., increases in interest rates). Bottom line: Expect some form of regulatory reorganization, perhaps an umbrella organization….
• Short Sales. The elimination of the uptick rule should be reexamined in the context of a general review of the short sale restrictions.
• Enforcement. She started in Enforcement and has a strong commitment to aggressively reinvigorating enforcement (no matter what the WSJ said about her today). She would remove the "handcuffs" from the Enforcement Division and provide more tools and resources.
• Transparency v. Prohibition. The SEC generally encourages disclosure and transparency as ways to regulate. While prohibition is not the norm, it is not unheard of, and certain types of securities or transactions have been prohibited for some groups or generally. Accordingly, the concept of prohibition is worth exploring in some circumstances.

Finally, there was also some general discussion of the problems of compensatory incentives for taking risks rather than for making wise judgments, the revolving door at the SEC, the absence of FINRA jurisdiction to regulate the areas where the Madoff fraud occurred (i.e., it's not her fault), and the litigation (frivolous, of course) against her in connection with the creation of FINRA.

Bottom line: Not much heat in this love-fest. Expect easy confirmation.