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SEC Speaks 2013 - A First Impression

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SEC Speaks was held at the Reagan Auditorium in Washington on February 22 and 23, 2013. The theme from this year’s program that leaps to mind is ‘leveraging limited resources through risk analytics.’ Or, perhaps, learning to leverage limited resources…. The theme began with the selection of the program co-chairs Carlo di Florio of OCIE and Craig Lewis, director of the Division of Risk, Strategy and Financial Innovation (“RSFI” as former Commissioner Casey knowingly referred to it in one question.) OCIE is collecting more data and RSFI is crunching the numbers as fast as they can. Every panel by every division had a segment on what they were doing with data and how they were using risk analytics to better inform their deployment of scarce resources.

In no particular order, here are some thoughts about the presentations of several divisions:

The Division of Corporation Finance now has several years worth of XRBL data in a database and is beginning to analyze the data to identify financial reporting and accounting issues that need more attention. Interestingly, only GAAP filers are in the database as there is no current requirement that reporting companies who use international accounting standards file their periodic reports with XRBL coding. No XRBL taxonomy has yet been established for IFRS financial statements. Corp. Fin’s big rule-making project now concerns the JOBS Act and data about the use of various exemptions from registration is being used to direct the rule-making to the entities and activities that are already in the marketplace. The RSFI presentation on XRBL, contrary to recent literature, focused on the utility of XRBL to the SEC despite the general public not getting much use from it yet. RSFI hoped for the development of better XRBL tools so that it could gain wider public use and so that the XRBL tagging could be done in the financial report itself, rather than in a separate report filed with the Q or K as is currently the case.

That naturally leads to the Office of the Chief Accountant whose presentation focused on several ‘convergence’ projects currently on-going by FASB to harmonize GAAP and IFRS accounting standards on revenue recognition, leasing and reserves. My takeaway, limited as it is with regard to accounting standards, is that the SEC is unlikely to take up the question of mandatory adoption of international accounting standards until the main convergence projects are completed by FASB/IASB in 2014 or 2015. The revenue recognition piece is likely to be finished this summer.

The Division of Enforcement is obviously using both the XRBL database and its new database of current trading to inform its decisions of what cases to pursue. The day after freezing of assets of the Heinz trader indicates that the trading database will be useful and will hasten Commission action in certain insider trading cases. Whether the trading database will prove effective in other areas remains to be seen. Similarly, Enforcement is using the XRBL database to identify potential areas of accounting fraud by a comparison of the results of similarly situated corporations. Given the length of most accounting investigations, it will probably take several years to see what impact the use of data will have on enforcement case selection. Not to be forgotten is the new Tips, Complaints and Referrals database created within Enforcement to coordinate the use of tips received from whistleblowers and other outside sources. While the Office of the Whistleblower took part in the Enforcement panel, no new whistleblower statistics were provided. However, a report published by Bloomberg on SEC Enforcement statistics adds to the concern that even good whistleblower tips sent to the Commission may not be acted upon due to limited resources.

The article published on February 22, 2013, points out that nearly half of the SEC’s 734 cases in 2012 were either follow-on proceedings or related to delinquent corporate filing (12j) cases. http://www.bloomberg.com/news/2013-02-22/sec-boosts-tally-of-enforcement-successes-with-routine-actions.html When those matters are factored out of the case total, it appears that the Commission filed fewer cases in 2012 than in 2009, the year before the Division was reorganized. If the Division only has resources to complete 380 or so cases per year and investigations take an average of more than 20 months, how will it deal with the influx of nearly 1,000 good, new whistleblower complaints it is receiving each year? We will have to wait for several years to see the answer.

The OICE presentation also focused on data and the need for the exam staff to collect more of it in targeted ways. Most striking, however, was OCIE’s publication of its 2013 exam priorities the day before the conference. http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2013.pdf] While OCIE noted that these were the current priorities, they reserved the ability to add or subtract new topics as issues emerged and new problems presented themselves. What also emerged from the OCIE presentation and others was that with the focus on data analytics there was also more cooperation and sharing of information with other Divisions and Offices.

The RSFI presentation focused on the use of data to better inform rule-making, a necessary topic to avoid having new rules cast aside for failing to do an adequate job setting forth the costs and benefits of a new rule. What was instructive was how RSFI and each of the other divisions was using selected data sets to analyze new rules and quantify the costs and benefits of a new rule. This bespeaks greater cooperation between the divisions than has been the case historically. Whether it will result in better rules or only protect new rules for being overturned remains to be seen. RSFI did make a specific plea to commenters on new rules: to be sure to specify with data the costs and benefits of a new rule as the commenter sees it.

I will have some more specific comments on other SEC Speaks topics in the next few days, particularly concerning some recent appellate decisions.

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