Under the 49th: U.S. regulatory update

(June 29, 2005) The influence of the 2002 Sarbanes Oxley Act (SOA), which requires improved financial reporting, continues to be felt; this time at the Securities and Exchange Commission itself, where the staff recently completed an SOA-mandated report on off-balance sheet arrangements and related issues.

Among other things, the report urged corporations to upgrade financial reporting systems to improve the consistency and relevance of disclosures. It said firms need to better focus on communication with investors and not merely strive to comply with rules.

Alan Beller, who heads the SEC’s Division of Corporation Finance, said financial reporting has improved since passage of SOA but added there’s room for issuers to improve the transparency of information and analysis, “regarding their off-balance sheet activities and the impact on their income, cash flow and balance sheets.”

SEC staff also recommended reconsideration of accounting guidance for defined-benefit pension plans and other post-retirement benefit plans. It noted trusts administering the plans are now exempt from consolidation by the sponsoring issuers. That, in effect, results in the netting of assets and liabilities in the balance sheet. Issuers also have the option to delay recognition of certain gains and losses related to the retirement obligations and the assets used to fund those obligations.

Further, SEC staff wants to see issuers continue exploring the feasibility of reporting all financial instruments at fair value and said it generally believes certain disclosures could be better organized and integrated.

To read the full text of the staff study, please click here.

Securities and Exchange Commission

The SEC adopted Regulation NMS which addresses several longstanding problems primarily related to order processing on US securities markets. The regulation, which is effective August 29, includes:

• Order Protection Rules that require trading centers establish, maintain and enforce procedures to prevent execution of trades at inferior prices to those appearing on other markets. To warrant protection, quotations must be immediately and automatically accessible.
• Access Rules to require fair and nondiscriminatory access to quotations, limit access fees to harmonize pricing across trading centres, and require each national exchange and association to adopt and enforce rules prohibiting members from behavior that locks and crosses automated quotations.
• Sub-Penny Rules to prevent market participants from accepting, ranking or displaying orders, quotations or indications of interest below a one-penny increment.
• Market Data Rules to update requirements for consolidating, distributing and displaying market information.

To read the full text of Reg NMS, please click here.

Self-Regulatory Organizations

The National Association Securities Dealers (NASD) wants to expand prohibitions on non-cash compensation to include sales and distribution of any security or type of security.

The self-regulator currently restricts such compensation as it relates to direct participation programs (DPPs), variable insurance contracts, investment company securities, and public offerings of real estate investment trusts (REITs) and other securities. While that list is fairly complete, NASD says it prefers to apply a blanket restriction.

NASD also plans to nix all product-specific cash and non-cash sales contests. It currently prohibits, with only a few exceptions, internal non-cash contests in connection with the sale of variable insurance contracts or investment company securities.

To read NASD’s notice on the proposed rule change, please click here.

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com