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Cox Testifies on Measures for Improving Financial Disclosures

SEC Chairman Christopher Cox, in testimony before the Senate Banking Committee, said he is pursuing four key initiatives to improve the quality of disclosure for investors: moving disclosure from boilerplate to plain English, moving the disclosure in long, hard-to-read documents to easy-to-navigate Web pages, reducing accounting complexity and reducing fraud, especially when aimed at elderly Americans. Cox called for an all-out war on complexity which he said will require the concerted efforts of the SEC, FASB and the PCAOB. The effort will require a commitment for the long term, he said, but he believes it will be well worth it.

Committee Chairman Richard Shelby (R-AL), referring to his hearing last month on credit rating agencies, said there is a virtual consensus on the need to promote competition, address conflicts of interest and establish regulatory oversight. He asked Cox for his views on the impact of the concentration in the industry. Cox acknowledged the intense focus by the Banking Committee and the SEC in recent years. He said it is important to avoid any new barriers to entry and to provide an entry process that is transparent and timely.

Shelby noted that the regulation of rating agencies begins and ends with the SEC's recognition of a rating agency as a nationally recognized statistical rating organization. There is no further oversight, he said. Cox said the SEC's options with respect to credit agencies, without additional authority from Congress, include the withdrawal of the no-action letter recognizing the rating agency as an NRSRO or it could bring an enforcement action if warranted. He noted that Standard & Poor's, Moody's and Fitch are registered with the SEC under the Investment Advisers Act, so the Commission has oversight of their investment advisory functions.

Senator Paul Sarbanes (D-MD) pointed to the rebound in the market since the Sarbanes-Oxley Act was passed and noted the tendency to forget about scandals. However, he cited three SEC enforcement actions in the past month, including a $250 million settlement with Bear Stearns for late trading and market timing abuses, a settlement of $50 million from Tyco for improper accounting. Sarbanes asked if the SEC has the resources and expertise to detect problems in the hedge fund industry.

Senator Chuck Hagel (R-NE) followed up on Sarbanes' hedge fund inquiry, noting that he and Christopher Dodd (D-CT) will hold a hearing May 16 on hedge funds. Cox has been asked to testify at the hearing along with other members of the President's Working Group on Capital Markets. Hagel asked Cox if the SEC's hedge fund rules had gone into effect even though they were being challenged in federal court. Cox said there was no change in status and the rules had gone into effect as written. A small group may be holding off registration while the lawsuit is pending, he said.

Several senators were concerned that Fannie Mae was permitted to continue its listing on the New York Stock Exchange even though it had not filed its periodic reports since 2004. Cox said Fannie Mae had a timetable for preparing its financial statements and submitting its filings with the SEC. He attributed some of the delay to Fannie Mae's transition to 1934 Act reporting. Hagel said that, given the SEC's focus on investors, he would expect concern about a public company that has filed no financial statements since 2004 and continues its listing. He believes it sends the wrong message to the markets. 

Senator John Sununu (R-NH) said the delay was not related to Fannie Mae's compliance with 1934 Act reporting but due to its accounting irregularities and attempts to manipulate its earnings. He said it set a very bad precedent to provide the exemption from delisting.

Some of the senators cited a recent study by Ernst & Young which addressed the drop in the number of large company initial public offerings in the U.S. Sarbanes said a number of IPOs went to foreign exchanges because they were privatizations of formerly state-owned enterprises and listed on the local exchanges due to political direction. Some exchanges are aggressively marketing their lower regulatory standards, he added, but he believes the U.S. should continue as the gold standard for regulation and corporate governance.

Dodd asked about the final report that was submitted to the SEC by the Advisory Committee on Smaller Public Companies and its recommendation on section 404 that would remove 80% of public companies from its requirements. Cox said the emphasis is on making section 404 work without unnecessary costs. Section 404 was a modest part of the Sarbanes-Oxley legislation, he said, but Auditing Standard No. 2 runs hundreds of pages. Some of the problems relate to the practices that developed under AS2, he explained. Cox said it is not a question of to whom section 404 should apply but how. The SEC will work with the PCAOB to get all of the benefits without the unnecessary costs, he said. Cox noted that the Advisory Committee pointed to the lack of a workable framework for smaller companies, and COSO is working on a framework that may present a solution. He added that the SEC wants to do what Congress intended with respect to the statute. 

Several senators raised concerns about Regulation B. Senator Jim Bunning (R-KY) referred to a letter that was sent to former SEC Chairman William Donaldson asking that the regulation be withdrawn given the opposition by banking regulators. Cox advised that he was meeting with banking regulators after the hearing to attempt to hammer out a regulatory response to their concerns. Senator Michael Crapo (R-ID) said that he has concluded that additional legislative guidance is needed under Regulation B to provide regulatory relief for financial institutions. Cox expressed willingness to work with Congress and said it was high time to adopt final rules.