The Securities and Exchange Commission (SEC) is considering updating its nearly 50-year-old valuation guidance for investment companies to better reflect the current state of the financial markets, SEC officials say.
“This effort, we believe, is consistent with the guiding principles that Chairman [Jay] Clayton outlined at the Economic Club of New York in July last year,” Alison Staloch, chief accountant in the SEC’s Division of Investment Management, said during a Feb. 24, 2018, presentation at the Practising Law Institute’s SEC Speaks Conference in Washington. “Most notably, as markets evolve so must the SEC.”
Staloch said the project is being undertaken by the Office of the Chief Accountant and the Division of Investment Management. SEC staffers are exploring recommendations for the update and plan to talk to investment companies, investors and other financial professionals about how the valuation guidance could be revised to reflect the current market environment.
One area the staff is examining is the Financial Accounting Standards Board’s (FASB) accounting guidance, she said.
“We thought about could the SEC guidance explicitly direct stakeholders to FASB guidance on relevant accounting and valuation matters like Topic 820, [Fair Value Measurement]?” Staloch said. “Would changes help to conform SEC guidance and FASB guidance? Is that necessary? Would there be a need to maintain any SEC guidance that’s incremental to FASB guidance?”
Auditing is another area the staff is looking into, Staloch said. “You may know that ASR No. 118 requires investment companies to have 100 percent of their holdings tested for audit purposes, unlike Public Company Accounting Oversight Board (PCAOB) standards which allow for sampling,” she said in a reference to Accounting Series Release (ASR) No. 118, Accounting for Investment Securities by Registered Investment Companies, which was issued in 1970. “We considered what changes, if any, are necessary to the SEC guidance, and what impacts the active PCAOB standard-setting project may have on auditing estimates and fair value measurements.”
The PCAOB in June 2017 issued two related proposals to strengthen auditors’ requirements for assessing the fair value measurements and actuarial forecasts for assets and liabilities that are hard to value.
If Release No. 2017-002, Proposed Auditing Standard—Auditing Accounting Estimates, Including Fair Value Measurements and Proposed Amendments to PCAOB Auditing Standards, is finalized, it would align the audit requirements for accounting estimates with the PCAOB’s risk assessment standards. Release No. 2017-003, Proposed Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists, would strengthen the requirements for auditors when they use an appraiser, engineer, lawyer or other non-accountant specialist during a review of a client’s financial statements.
Stolach said the staff is also looking into updating the guidance to reflect the extra responsibilities mutual fund directors have assumed over the years.
“Are there ways that the staff can effect changes through rulemaking or interpretive guidance to assist boards in executing their obligation under the [Investment Company] Act in a way that better aligns the evolution of markets and that better serves the investors?” she asked
SEC Chief Accountant Wesley Bricker said there has been a broad consensus among financial professionals about the meaning of fair value since the FASB’s 2006 publication of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurement, FASB ASC 820.
“That’s just one reference point where the guidance developed in 1969 and then 1970 isn’t explicit about those connections, of course, because of the difference in time in which they were written,” he said in a reference to ASR No. 113, Statement Regarding Restricted Securities, which was published in 1969, and ASR No. 118. “Focus on identifying where there could be benefits to users of the financial statements from better harmony across the reporting frameworks.”
Section 2(a)(41)(B) of the Investment Company Act of 1940 requires investment company boards to make a good faith effort to measure the securities and other assets they hold at their fair values when market quotes are not readily available. ASR No. 113 and ASR No. 118 provide valuation guidance for the Investment Company Act, but neither piece of interpretive guidance has been updated in the nearly 50 years since they were issued. But over the past five decades, accounting estimates in financial reporting have become more prevalent, and there have been significant changes related to the valuation of financial assets.
“During that period there was significant advancement in the frameworks for evaluating the effectiveness of information and communications as it moves from management or the preparation function up to a board,” Bricker said, as he explained that when ASR No. 113 and ASR No. 118 were published, neither the FASB nor PCAOB existed. “It’s useful for us to take stock of those positive developments in relation to older guidance that we have on file, and that guides practice so that our existing guidance incorporates the benefit of all of those changes.”
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