(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

Investment Management, Judicial and Accounting Developments Reviewed

At the recent "SEC Speaks" conference hosted by the Practising Law Institute, Susan Nash, an associate director in the Division of Investment Management said that mutual fund communications with shareholders is front and center on SEC Chairman Christopher Cox's agenda. The staff is considering ways to improve communication through the use of technology.

Associate director Douglas Scheidt described developments surrounding exchange-traded funds. There are 300 ETFs today, he said. ETFs started out as "plain vanilla" index-based funds, he said, but have become more complex. Mr. Scheidt mentioned a number of significant exemptive orders relating to ETFs, including one to ProShares Trust for a leveraged ETF and one to Wisdom Tree Trust. There are several applications pending for actively managed ETFs, he said, but a key issue is transparency. The staff will soon issue its recommendation to the Commission.

Mr. Scheidt reported that the SEC has received over 200 comment letters in response to its proposal to amend the definition of accredited investor for investors in private investment vehicles. Almost all of the letters are from investors who oppose the proposal, he said. The common thread is that investors do not want the government deciding whether they are qualified to invest in hedge funds, he explained.

Hedge funds have said they are not interested in obtaining investments from those who do not meet the accredited investor threshold, so the revised definition should not have any impact on them. Mr. Scheidt said the SEC's concern is that hedge funds are notoriously nontransparent and offer a "trust me" sort of investment.

Judicial Developments

Richard Roberts, a former commissioner now with RR&G, asked how the SEC will change the momentum after recent losses in the District of Columbia Circuit Court on investment adviser registration and fund governance rulemaking. No one wants to see the SEC regularly receive such negative results from the D.C. Circuit, according to Mr. Roberts. Brian Cartwright, the SEC's general counsel, said the D.C. Circuit is one of the finest in the nation, and when you bring as many cases as the SEC does, the agency will lose some. The problem has been with the public attention associated with these issues, said the general counsel.

Accounting

Chief Accountant Conrad Hewitt said his key areas of focus are on complexity, XBRL, auditor liability, convergence, the SEC's guidance for management under Section 404 and the Public Company Accounting Oversight Board's proposed standard to replace Auditing Standard No. 2. Complexity is one of Chairman Cox's priorities as well. Mr. Hewitt said he has personally experienced the problems with complex auditing and accounting standards. Today's rules produce financial statements that virtually no one understands, he said.

Mr. Hewitt pledged to become personally involved in developing a framework to reduce complexity in conjunction with the Financial Accounting Standards Board, Financial Executives International and other groups. The focus too often is on the problems that complexity poses for preparers, but seldom on the impact on investors, he said. It is time to get back to the "P" in Generally Accepted Accounting Principles, according to Mr. Hewitt.

The problem with auditor liability has no easy solution, in Hewitt's view. Some countries have introduced the concept of a liability cap or limited liability. Mr. Hewitt referred to the European Commission's recent paper outlining four possible ways to protect the audit industry. On the issue of international convergence of accounting standards, he said he is pleased with the progress that has been made on the steps outlined in former Chief Accountant Donald Nicolaisen's roadmap. The eventual elimination of the reconciliation requirement has the potential to lower costs for issuers, he said.

Mr. Hewitt said the PCAOB's Auditing Standard No. 5 is a very important standard. He is interested in the feedback the PCAOB receives on its proposal. Smaller companies reportedly pay up to five times proportionally what larger companies pay to comply with the Section 404 requirements. Mr. Hewitt hopes the upcoming guidance will help the 4,500 smaller companies that are coming on board with the requirements.

Former commissioner Aulana Peters noted that the IASB is on a two-year track to convergence and asked whether the SEC would rethink its three-year roadmap on reconciliation. It would be helpful if the SEC, FASB and the IASB were on the same timetable, she said. Mr. Hewitt believes they are all on the same timeframe. Perhaps companies can be given the option to use IFRS or GAAP, he said. Europeans want to stay with their principles-based standards, but the United States is still rules-based, and change will take time, he said.

John White, the director of the Division of Corporation Finance, said there is a question of whether the U.S. users of financial statements are ready for a parallel system of financial statements without reconciliation. He believes the 2009 goal is workable, while something faster than that would be difficult. The SEC has a plan to reach out to the user community in the near future, he said.

Former SEC Chairman Harvey Pitt said it is constructive and courageous to speak out on auditor liability. He believes the SEC may have the ability administratively to have an impact. Mr. Pitt supports the move to a more principles-based system of accounting, but questioned its impact on liability. Liability may increase with less specificity, he said.

Mr. Hewitt advised that the staff is looking at all of the angles and working with the largest accounting firms to obtain their views. He added that there are likely to be just as many lawsuits with rules-based standards as with principles-based standards.

Zoe-Vonna Palmrose, the deputy chief accountant in the Office of the Chief Accountant, noted that the changes in the PCAOB's proposed standard on auditing for internal controls reflect what the PCAOB said was its intent all along. Still, she said the revisions are an important psychological change. Small companies were overwhelmed by the stories they have heard about implementing the section 404 requirements.

Joseph Ucuzoglu, the senior adviser to the chief accountant, discussed valuation methods for stock options. Market values are always better than models, but employee stock options do not have market transactions at which to look, he said. Some companies have explored the possibility of creating market values with instruments that track market values based on what a third party would pay. Ucuzoglu said the challenge is in developing the appropriate design and marketing the instruments. The SEC has encouraged experimentation in this area, he added.

Susan Koski-Grafer, the senior associate chief accountant, said the 1,230 listed foreign private issuers from 53 countries rely on 30 different sets of generally accepted accounting principles. International financial reporting standards are growing in use and interest, she said. Ms. Koski-Grafer predicted that the convergence of accounting standards will not be finished for a long time to come. 

Efforts are also underway to create international auditing standards, she noted. The International Auditing and Assurance Standards Board has initiated a standards improvement process. The PCAOB is an observer in the process and offers its views. Ms. Koski-Grafer said that an exposure draft by the IAASB is significant and there are 27 exposure drafts on international auditing scheduled to come out this year. The IAASB wants to lead the movement toward the recognition of international auditing standards, she said. All of these international initiatives have an impact domestically, both directly and indirectly, she added. As securities regulators exchange information, they occasionally pick up each others' ways of thinking. We are all going global, she said.