March 6, 2009

Last night, U.S. Reps. Ed Perlmutter (D-CO) and Frank Lucas (R-OK), members of the House Financial Services Committee, introduced HR 1349, which is important legislation designed to help ease future economic downturns.

The legislation creates a new Federal Accounting Oversight Board to oversee the application of Generally Accepted Accounting Principles (GAPP) to the financial markets. The Board will include five influential members of the federal regulatory community, the Chairman of the Federal Reserve, the Sec. of Treasury, the Chairman of the SEC, the Chairman of the FDIC, and the Chairman of the Public Company Accounting Oversight Board. Currently only SEC plays a role in how GAAP applies to financial markets

This new board fits into responsible regulatory reform because a broader group of individuals with a view of the greater economy should be in charge of applying GAAP.

“As we work to stabilize financial markets and rebuild the economy, we must look closely at the regulatory structure to see what is helping and what is making things worse,” said Perlmutter. “If someone is ill, you don’t want a doctor to look at just one symptom and prescribe a remedy that could make the patient worse. The doctor must consider the overall health of the patient, and that’s what this bill does.”

Rep. Lucas commented, “By establishing safeguards like this oversight board to monitor accounting practices within the financial system, we are striving to provide greater flexibility in an ever-changing economic environment.”

The Perlmutter-Lucas bill creates a framework to review the application of current and future GAAP. Regulators must have some discretion in applying accounting standards to take into consideration different types of assets and different types of market conditions.

For the safety and soundness of the American financial system, regulators must have the tools to judge the value of assets being held to maturity. Arbitrarily decreasing capital levels of financial institutions puts our communities at risk by causing some financial institutions to show an artificial undercapitalization which prevents them from lending money to businesses and individuals. However, it is critical for investors to have data regarding the assets held by these financial institutions. This legislation allows for both.

“We intend these changes to provide the accountability and transparency necessary for investors to assess their investments in financial institutions. At the same time, the bill provides regulators with the flexibility they need to work with financial institutions to keep credit flowing to Main Street,” said Perlmutter.

“Not only will this provide five of the key members of the federal regulatory community with an enhanced ability to modify the regulatory framework of the financial system, it will also create a channel of debate and an exchange of ideas that will hopefully ensure a more stable marketplace in the future,” said Lucas.

Below are some of the provisions contained in the legislation. Mark to Market, an accounting principle under steady criticism, will be the subject of a Capital Markets, Insurance, and Government Sponsored Enterprises Subcommittee hearing in the House Financial Services Committee on Thursday, March 12. The Perlmutter-Lucas legislation will be a topic for discussion at the hearing.

· Creates a new oversight board, the Federal Accounting Oversight Board (FAOB) comprised of the Federal Reserve, Treasury, the FDIC, and the SEC, to approve the standards set by the independent Federal Accounting Standards Board (FASB).

· Instructs the FAOB to look beyond current accounting standards and balance sheets to consider broad national and international financial markets and economic conditions when applying GAAP.

· The Federal Accounting Standards Board (FASB) is an independent board with the authority to set GAAP. The legislation does not change GAAP, but it creates an environment where FASB will have the tools and flexibility it needs to adjust GAAP for future economic conditions. The legislation provides for discretion in the regulatory community to consider the overall condition of the financial markets in applying GAAP so the principles are not applied in a way that exaggerates or multiplies cycles in the markets.

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