(The news featured below is a selection from the news covered in Federal Securities Law Reporter.)

Conference Panelists Review SEC and PCAOB Developments

Carol Stacey, the chief accountant in the SEC's Division of Corporation Finance, provided the keynote address at the SEC Institute's 21st annual national SEC reporting conference in which she said that the complexity of the financial reporting system is affecting full, fair and accurate disclosure. Demands for an answer to every question have formed the body of generally accepted accounting principles, she said. The Financial Accounting Standards Board's codification project will help, in her view, but FASB has a very full plate that includes the international convergence of accounting standards. One means of reducing complexity is through better use of technology, she said.

Ms. Stacey discussed the SEC's pilot project that is exploring the use of XBRL tagged data. The SEC is not currently considering requiring the use of XBRL, she advised, but is assessing its benefits and its potential to reduce costs. Ms. Stacey also called for more education for accountants, suggesting that many are not as technically competent as they need to be with increasingly complex standards such as those governing derivatives. Accountants must stay current with the literature, she said.

Ms. Stacey also called on accountants to apply their judgment. She acknowledged that issuers are experiencing disclosure overload with filings growing in volume in recent years. She said that preparers can reduce that volume by prioritizing disclosure, focusing management's discussion and analysis on the things that keep the CEOs up at night and eliminating boilerplate language and redundant disclosure.

SEC Associate Chief Accountant Todd Hardiman reported on the staff's targeted reviews which have replaced cover-to-cover reviews since the Sarbanes-Oxley Act mandate to review every company every three years. The SEC has met that mandate, according to Mr. Hardiman, though some companies may not know they have been reviewed. It is possible that they were reviewed and the staff had no comments, he explained.

The SEC's decision to make its comment letters public has been widely applauded, Mr. Hardiman said, but issuers have asked the staff to notify them once the review process has finished. The staff recognizes the importance of the timeliness of its reviews and the resolution of conflicts once the securities offering reform rules take effect on December 1, 2005, he said. Under those rules, any material comment letters that have been unresolved for six months must be disclosed.

When the staff issues a comment letter, it typically requests a response in 10 days, according to Mr. Hardiman. If a registrant cannot meet that request, Mr. Hardiman said they should call the contact person cited in the letter. In response to an inquiry, Mr. Hardiman advised that the staff has no plans to codify the letters by issue.

James Wheaton, with the firm Troutman Sanders, recommended that companies look at the comment letters that other issuers in their industry have received when preparing their MD&A. He cited two comment letters in which CEOs and CFOs were asked how they were able to conclude that their internal controls were effective given the deficiencies that they reported.

Laura Phillips, the associate chief auditor of the Public Company Accounting Oversight Board, reviewed the things that went right and those that went wrong with the first year of Section 404 reporting on internal controls. The first year presented staffing problems, a compressed time frame, a lack of guidance for management and the "fear factor" of PCAOB inspections, she said. She believes that the material weaknesses that were reported were largely due to deferred maintenance, a lot of which has now been accomplished. Ms. Phillips also noted that the markets did not over or under react to the disclosures by about 14 percent of companies that reported material weaknesses in their internal controls.

Ms. Phillips said that the PCAOB staff has met with the largest accounting firms to discuss their methodology and any changes they plan to make. She believes the firms have gotten the board's message outlined in the May 16 guidance and that the fear factor with respect to the inspection process has been reduced. The PCAOB plans to issue a report of its findings on the implementation of Auditing Standard No. 2.

Ms. Phillips predicted that costs will decrease in the second year since companies will not have to recreate the documentation of their internal controls. With respect to Auditing Standard No. 4, which awaits SEC approval, Ms. Phillips said that if companies do not think the standard passes the cost/benefit test with respect to reporting on the remediation of a material weakness, they should not do it. It is entirely voluntary.

Senate Hearing Targets Abusive Securities Sales to Military Personnel

The SEC agrees with a recommendation by the Government Accountability Office that Congress should take legislative action to protect military service members from abusive sales of mutual fund contractual plans. In testimony before the Senate Banking Committee, Lori Richards, director of the SEC's Office of Compliance Inspections and Examinations, added that, if the plans are not banned outright, the securities regulators will address the problem through other means.

Congress and the SEC became aware of a problem with the abusive sales of securities products to military personnel following a series of media articles in 2004. Senate Banking Committee Chairman Richard Shelby and Ranking Member Paul Sarbanes asked the GAO to investigate the sales of financial products to military service members and recently held a hearing to review its findings. The GAO recommended that Congress consider acting to ban mutual fund contractual plans, also known as periodic payment plans, in which investors make a long-term series of periodic payments to acquire an interest in a specified unit or fund of securities. The products involve a high front-end load which is forfeited if the investor redeems the investment before the full term of the contract.

The GAO added that regulators should ensure that products sold to military service members meet existing insurance requirements and should develop appropriateness or suitability standards for military sales. The GAO found that the Department of Defense failed to share complaints with financial regulators, which impeded their ability to identify inappropriate sales to military service members. Accordingly, the GAO also recommended that the Department of Defense take steps to improve its information sharing and oversight efforts.

Ms. Richards reported that the SEC has undertaken an extensive examination of sales practices to military personnel in the past year in close coordination with the Department of Defense and the NASD. The SEC brought an enforcement action against a broker-dealer that specialized in the sales of securities to military personnel and ordered the firm to pay $12 million, $5.2 million of which will be returned to customers and the remainder of which will fund an investor education program for the military.

Ms. Richards reported that the firm was responsible for approximately 90 percent of all sales of periodic payment plans and, as of November 2004, ceased to sell them altogether. The SEC found that the broker-dealer's sales materials contained misleading statements and omissions about the costs of no-load funds and about the availability of the government-sponsored savings and investment plan. The government's thrift savings plan offers many of the features of a contractual plan at a lower cost. Ms. Richards added that the staff has established a regular liaison with the office of the Secretary of Defense in order to share information and coordinate examinations.

Periodic payment plans were once a means by which smaller investors could invest small amounts of money in mutual funds, but alternative means of investing have since been developed that accept low initial investments and low periodic payments. These plans have ceased to attract large numbers of civilians, according to Ms. Richards, whose staff identified eight registered financial firms that continue to sponsor the plans. Many of the registered periodic payment plans are no longer being sold, she advised, but many members of the military continue to invest in them. Ms. Richards said that a second examination sweep relating to securities sales to the military is ongoing and staff examiners have conducted unannounced examinations of sales offices located near major military bases.

The SEC believes that Congress should consider addressing the excessive sales charges associated with mutual fund contractual plans by reducing the maximum allowable load or by working with the SEC and the NASD on other means to protect against excessive sales loads. Ms. Richards said the SEC's and NASD's efforts to review the sales of these products were hindered by the lack of standardized data on the persistency rates of the investments in the plans. If the plans are not banned, she said the SEC will work with other regulators to ensure that they have adequate information with which to assess the sales of the plans.