The U.S. Securities & Exchange Commission has recommended against temporarily suspending “mark to market,” or fair value, accounting rules, and Art Renner, executive director of the Connecticut Society of Certified Public Accountants, applauded the decision.
“Why would the SEC suspend an important evaluation technique merely because we don’t like what it’s telling us?” Renner said. “The rules are in place to tell us what’s really going on in the market.”
Several lobbying groups for the financial services industry have blamed the rules for exacerbating the current financial crisis and pushed to have them eased.
But in a recent 211-page report to Congress, the SEC said there was no evidence to suggest that the accounting rules have played a significant role in the collapse of U.S. financial institutions. Those failures, it said, appeared to be the result of growing credit losses, concerns about asset quality and eroding lender and investor confidence.
Fair value accounting requires financial companies to write down (or up) the value of certain assets to their current market value, or the price they would bring in if they were put on the open market.
Opponents of fair value accounting say it has forced banks to post massive write-downs of their mortgage-backed securities, or other assets, which have lost most of their value on the open market.
As banks and other financial institutions write down their assets, some have been forced by regulators to raise capital to meet minimum capital standards.
But the SEC said “investors generally believe fair value accounting increases financial reporting transparency and facilitates better investment decision-making.” The agency said an abrupt elimination of fair value and market-to-market requirements would erode investor confidence.
The SEC did call for the development of additional guidance and other tools for determining fair value when relevant market information is not available in illiquid or inactive markets.
Congress ordered the SEC to look at mark to market accounting when it passed the $700 billion Wall Street bailout last fall, and it has the authority change the rules or let them stand.
Renner said he doubted Congress would interfere with the rules. “Politicizing accounting rules would open a real Pandora’s box,” he said. “I don’t think it will happen.”
Indexed Annuity Rules
Amid growing concerns over abusive sales practices by insurance agents, the SEC has also ruled that it will regulate the increasingly popular indexed annuity as a security rather than as an insurance product.
The policy shift will require agents who sell the product to become registered as securities providers with the Financial Industry Regulatory Authority.
Indexed annuities guarantee customers a return on their principle investment, but the interest rate is tied to the performance of a market index such as the Dow Jones Industrial Average.
The SEC ruled that such products should be considered securities if the amounts payable under the contract are “more likely than not” to exceed guaranteed amounts.
Today, more than $123 billion is invested in equity-indexed annuities, according to the SEC.
Equity-indexed annuities are often sold to seniors and can lock up older investors’ money for more than a decade. Until now, the question of whether equity-indexed annuities are insurance products or securities subject to investor protections under the federal securities laws has not been clearly answered.
The 4-1 vote by the SEC last month ends that long-running dispute, subjecting the financial products to additional disclosure rules and altering how they will be sold to investors.
Workers’ Comp Check
The Workers’ Compensation Commission has unveiled a new interactive Web site — http://wcc.state.ct.us/online-services/coverage-verification-service.htm. — that enables employees to see whether or not a business operating in the state has workers’ compensation insurance coverage.
The new Internet option, which is called Coverage Verification Service, provides information for employers that have bought a workers’ compensation insurance policy and employers that have obtained approval from the Workers’ Compensation Commission to self-insure their own workers.
The information is based on the National Council on Compensation Insurance database, developed from insurance policy information reported to the Workers’ Compensation Commission.
Greg Bordonaro is a Hartford Business Journal staff writer.
