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Glassman Discusses Impact of SEC Regulation Outside U.S.

In remarks at a conference on SEC regulation outside the U.S. , Commissioner Cynthia Glassman, referring to the various extensions of the compliance date with the implementation of Sarbanes-Oxley Act section 404 for smaller public companies and foreign private issuers, said that while postponement may be helpful, the SEC must still address how the process can be improved. A prescriptive, one size fits all approach in not required, nor is it effective, she said. Glassman said the recently announced May 10 roundtable will help the SEC and the PCAOB determine whether last year's guidance has been embraced or whether additional steps are needed. She remains receptive to any recommendations for improving the process, including changes to Auditing Standard No. 2.

To implement the section 404 requirements effectively and efficiently, Glassman said that auditors must set the scope of their evaluations according to the level of risk. This approach would incorporate the proper context, she said, which includes management's perspective on what is important to the business and the financial reports.

Glassman also reviewed the SEC's proposed rules to make it easier for foreign private issuers to deregister and exit the SEC's reporting system. She reported that European Union officials and others have said that the proposals may not go far enough in easing the exit from the SEC's reporting system and urged others to submit their views.

Glassman described the SEC's recent statement on corporate penalties and said she is generally pleased with it. She emphasized that the guidelines are not about penalties levied against individuals for wrongdoing, but they acknowledge that such penalties are an important deterrent.

Glassman also addressed the hot topic of executive compensation and the SEC's proposed rules to improve compensation disclosure. She expects to see a significant number of comments on the proposal and hopes that the SEC will be able to consider final action on the proposal quickly.

Glassman touched on the SEC's hedge fund adviser registration rule that recently went into effect. She opposed the registration requirement, which she viewed as insufficiently analyzed. Glassman said the extensive staff review that was completed in 2003 did not convince her of the growing retailization of hedge funds and increasing fraud, the perceived evils that led to the rulemaking initiative.

Not surprisingly, she said, the rule has had unintended but totally predictable consequences. One is that global funds are excluding U.S. investors and the other is that U.S. domestic funds are lengthening their lock-up periods or closing their funds to avoid being defined as hedge funds and subjecting their advisers to registration. Accordingly, U.S. investors are blocked from the global market and the longer lock-ups reduce liquidity, she said.

Glassman said she supports the goals of the project to converge U.S. GAAP and international financial reporting standards. She also supports the roadmap to eliminating the reconciliation of IFRS to U.S. GAAP. The SEC staff has begun planning the initial phase of the roadmap, she said, but it cannot evaluate the results of IFRS/U.S. GAAP reconciliation until mid-year since IFRS were only recently implemented in many countries for the first time.