Dodd-Frank News Center

Swipe Fee Lawsuit Opposed by Financial Services Groups

This story appeared in Bank Digest.

Financial services groups have told a federal court that a lawsuit brought by merchant associations opposed to the Federal Reserve Board’s final rule on debit card interchange or swipe fees would only “exacerbate the Board’s error” by depriving card issuers of the right to make a reasonable return on their product. In November 2011, the National Retail Federation and other merchant groups filed a lawsuit (see 2011 No. 4719) stating that the Fed failed to follow key requirements of the Dodd-Frank Act when it adopted a “flawed” cap on debit card swipe fees. The groups claim that this has allowed big banks to continue charging high swipe fees, while discouraging price competition among card networks. In a friend-of-court brief filed March 15, 2012, with the U.S. District Court for the District of Columbia, the groups, which include the American Bankers Association, The Financial Services Roundtable, and the Consumer Bankers Association, state that the Fed’s imposition of “unreasonable” price controls on interchange fees grants merchants a “multibillion-dollar windfall” by capping fees well below market-based rates.

PCAOB Finds Big Four Audit Firm Deficient in Testing Issuer’s Fair Value Measurement Procedures and Internal Controls

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

A PCAOB inspection team identified matters that it considered to be deficiencies in the performance of the audit work of a Big Four firm, primarily including failures involving fair valuation of asserts and internal control over financial reporting. In some instances, follow-up between the audit firm and the issuer led to a change in the issuer’s accounting or disclosure practices. In some cases, the conclusion that the firm failed to perform a procedure was based on the absence of documentation and the absence of persuasive other evidence, even if the firm claimed to have performed the procedure.

Hedge Fund Industry Seeks Fair Market Valuation for Securities in Dodd-Frank Liquidation Authority

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

The hedge fund industry has urged regulators implementing the orderly liquidation provisions of the Dodd-Frank Act to provide for the fair market valuation of securities of failing financial firms rather than the fixed valuations proposed for government securities and contemplated for other securities. In a letter to the Managed Funds Association said that assigning fixed valuations for certain types of assets in advance, as the Proposed Rule contemplates for Treasury and other U.S. government securities, is likely to lead to valuations inconsistent with the statutory standard of fair market value. It could also lead to distortions in market activity.

In the MFA's view, the appropriate valuation of assets is a critical component of any liquidation process. Section 210(a)(3)(D)(ii)(I) of the Dodd-Frank Act treats any portion of a secured claim which exceeds the fair market value of the underlying collateral as an unsecured claim, paid in the same manner as other general unsecured creditors. But Dodd-Frank does not define the term “fair market value” for the purpose of determining the amount of secured claim that will be treated as an unsecured claim. The proposed rules contemplate adopting a regulation establishing a fixed valuation for U.S. government securities, and asks whether valuations should be fixed for other forms of collateral.

FSA Chair Says Bank Fair Value and Loan Loss Accounting Can Add to Systemic Risk; Notes Tension Between Banking and Securities Regulators

This story appeared in Jim Hamilton's World of Securities Regulation.

Fair value mark-to-market accounting and accounting for loan losses as applied to banks can increase pro-cyclicality and pose a systemic risk, said UK Financial Services Authority Chair Adair Turner, and thus is linked to macro-prudential risk regulation. In remarks at a London conference hosted by the Institute of Chartered Accountants of England and Wales, he noted that no other sector of the economy is remotely comparable to banking in its capacity to be a driver of economic volatility. As a result, accounting standards relevant to banks need to reflect these differences.

On a broader level, the FSA Chair acknowledged the rising tension over fair value accounting between banking and securities regulators, which has spilled over into the accounting standard setters. The banking regulators are convinced that banks are different and that the IASB and FASB must consider this difference. The pure securities regulators, conversely, tend to be more sympathetic to the idea that accounts are for investors and must reflect fair value at all times.

IASB Chair Charts Path to New Fair Value Standard; Rejects Interim Adoption of US Standard

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The IASB is on target to replace the fair value accounting standard embodied in IAS 39 with a new standard that will attain broad global acceptance. In remarks before the European Parliament’s Economic and Monetary Affairs Committee, IASB Chair David Tweedie said that the new fair value rules would be adopted after an extensive consultation that will take into account the views of all stakeholders, including the Committee, ECOFIN, central banks and regulators. The comment period on the proposed reform of IAS 39 has ended, said the Chair, and the IASB received letters from more than 200 individuals and organizations. Additional board meetings have already been held, and will continue to be scheduled as required to complete the project in time for the 2009 financial year.

IASB Assures Obama and G-20 on Fair Value Accounting Reforms

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Ahead of the G-20 Pittsburgh summit, the oversight body of the IASB has assured the G-20 that the reform of the international standard for fair value accounting in proceeding along the lines of principles outlined by the Basel Committee. Complimentary reform of loan loss provisioning is also on target. In a letter to President Barack Obama, host of the G-20, Gerrit Zalm, chair of the IASB oversight committee, stressed the urgency in completing the first component of the comprehensive revision of IAS 39, the IASB’s financial instrument standard, by year end. In this work, the IASB is guided by principles of transparency and the avoidance of undue complexity enunciated by Basel and recently endorsed by the G-20 Finance Ministers, including Treasury Secretary Tim Geithner. In addition, Basel urges that the standards reflect the need for earlier recognition of loan losses.

Banking Industry Says Proposed Changes to Fair Value Accounting Would Contravene G-20 Goals by Disrupting Convergence and Increasing Procyclicality

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Ahead of the G-20 meeting, a letter to the Treasury and the Fed from the banking industry emphasized that the fair value accounting changes proposed by the IASB and FASB would increase procyclicality, disrupt the global convergence of accounting standards, and undermine the banking business model. As such, the proposals fly in the face of the G-20’s endorsed reform of accounting standards. The American Bankers Association urged Treasury and the Fed to tell the G-20 conference that the fair value accounting proposals are contrary to the G-20’s own recommendations.

G-20 Finance Ministers Endorse Single Set of Global Accounting Standards Based on Basel Principles

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

In preparation for the upcoming G-20 summit in Pittsburgh, the G-20 Finance Ministers have issued a communiqué calling for a convergence towards a single set of high-quality, global, independent accounting standards on financial instruments, loan-loss provisioning, off-balance sheet exposures and the impairment and valuation of financial assets. Within the framework of the independent accounting standard setting process, the G-20 encouraged the IASB to take account of the Basel Committee’s guiding principles on IAS 39 and the report of the Financial Crisis Advisory Group. Earlier this year, the IASB set forth a draft for a new fair value standard to replace IAS 39. The comment period on the proposal ends on September 28, 2009. A final standard is expected in the first half of 2010.

G-20 Finance Ministers Endorse Reform of Executive Compensation in Alingment with Long-Term Value Creation

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

In preparation for the upcoming G-20 summit in Pittsburgh, the G-20 Finance Ministers have issued a communiqué calling for a framework on corporate governance and executive compensation practices designed to prevent short-term risk taking and mitigate systemic risk. The new executive compensation regime should be globally consistent and build on and strengthen the application of the Financial Stability Board principles.

OTS Guides on Impaired Securities Accounting Issues

This story appeared in Bank Digest.

Thrifts have been given guidance on how the OTS expects them to apply generally accepted accounting principles (GAAP) to securities that have declined in value to less than their amortized cost on an other-than-temporary basis. Determining whether a security has suffered an other-than-temporary impairment is relevant to a thrift's earnings and regulatory capital, the OTS said. The decision, which the agency said is “complex and involves significant judgment,” must be made by the thrift's management, not by an outside auditor. Factors to be considered include the severity of the decline in value, the term of the decline, the volatility of the security's value, external ratings and the thrift's ability to hold the security until the value has recovered. The agency set out separate tests for debt and equity securities.