FASB announced that among issues to be discussed at this Wednesday’s FASB board meeting, it will consider an “Agenda decision” on whether to defer the effective date of FAS 157, Fair ValueMeasurement.
In its October 1, 2007 comment letter, the Small Public Company Task Force of Financial Executives International, asked FASB to consider delaying the effective date of FAS 157 which otherwise would become effective this year, due to the need for more time to address implementation issues (including those being addressed by FASB’s Valuation Resource Group which met for the first time this month), as well as to understand the full scope of GAAP standards impacted by FAS 157, and implement related systems changes, controls and documentation.
FASB reported that it has received a second request for a delay of FAS 157 from the Institute of Management Accountants (IMA’s) Financial Reporting Committee. See “FASB Mulls Fair Value Delay,” by Sarah Johnson in today’s CFO.com, “FEI, IMA Panels Urge One-Year Delay Of FASB Fair Value Asset, Liability Rules,” by Steve Burkholder in BNA’s Daily Report for Executives Oct. 5, and “Standard-Setter Throws Coals on Hot Fair Value Debate,” by Jennifer Hughes in Oct. 11 Financial Times.
The Wall Street Journal had a related article about FASB’s levels 1, 2, and 3 in the new Fair Value Measurement hierarchy under FAS 157 on the front page of Friday’s edition, “U.S. Investors Face an Age of Murky Pricing,” by Susan Pulliam, Randall Smith and Michael Siconolfi. In a chart at the end of the article, they described level 1 as ‘marking to market,’ level 2 as ‘marking to matrix,’ and level 3 as ‘marking to model.’ Level 3 is the most controversial, with the most implementation issues, followed by level 2.
The WSJ article also alleged that certain institutional holders of illiquid or hard to value securities, in particular mortgage backed and other asset backed securities, may be engaging in what is essentially fraudulent pricing practices. These allegations raise special issues for compliance personnel and in-house counsel at hedge funds and mutual fund groups. The valuation a manager places on securities affects the price at which fund investors purchase and redeem interests in a fund, and also contributes to the calculation of the management fee and performance allocation to which a fund manager is entitled. To the extent a fund manager overvalues securities, certain investors may be disadvantaged in the purchase and redemption process, and the fund manager can earn an inflated fee. Because such conduct would fall under the anti-fraud provisions of the Investment Advisers Act, the SEC (and State Attorneys General) could bring enforcement action against unregistered advisers as well as registered advisers. To the extent compliance personnel knew or should have known about these matters, they could have personal liability pursuant to Rule 206(4)-7 under the Investment Advisers Act, and in-house lawyers could be subject to disciplinary action under Rule 102(e) under the SEC’s Rules of Practice, which allows the SEC to bar attorneys from the securities industry.
Jay B. Gould | Partner
Pillsbury Winthrop Shaw Pittman LLP
