UNITED STATES COURT OF APPEALS

DISTRICT OF COLUMBIA CIRCUIT

John Gardner Black )

)
v. ) Case No. 10-1186
)
Securities and Exchange Commission )

APPELLANT'S BRIEF

APPENDIX

Petition for Review of Respondent Securities Exchange Commission Denial for Reinstatement

_______________________________
John G. Black, Pro Se
1446 Centre Line Road
Warriors Mark, Pa 16877
814-632-8631
jblack010@gmail.com
 TABLE OF CONTENTS

Document Page Number

Complaint.................................................................................................................1
Transcript September 26, 1997 ex parte hearing ...................................................18
Photocopy Computer Disc Supplied to Petitioner .................................................35
Petitioner Computer Model Verifying Value of CIA and
Underlying Assets with graph............................................................................36
Respondent SEC's May 1998 Administrative Proceeding....................................43
Petitioner's Indictment ...........................................................................................45
Joint Stipulated Factual Basis ................................................................................75
Transcript Plea Hearing January 24, 2000 .............................................................91
District Court Order of May 9, 2001 Investment Contract ..................................130-A
September 30, 2003 Response in Opposition .....................................................131
Letter From Richard Levan - CIA Value Never Litigated...................................133
Letter From Richard Scheff - CIA Value Never Litigated ..................................134
SEC Chief Accountant - Clarification Fair Value ...............................................136
Report to Congress on Mark to Market ...............................................................140
Financial Accounting Standards Board FAS 157-4.............................................183
SEC Order Denying Petitioner's Request for Reinstatement ...............................194
SEC Denial of Reconsideration ...........................................................................202
SEC Brief of August 31, 2010 verifying Petitioner's Model ...............................207
SEC Proposed Rule for Asset-Backed Securities ................................................213

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000035
 Valuation of the FNR G93-32S Alone
Quarterly Summary
Utilizing a Zero Volatility Assumption
Underlying Information on FNR G93-32S

Remaining Principal Factor 0.77576745

Original Principal 1,088,000
Net Coupon 7.000
Gross Coupon 7.500
Issue Date 6/25/1993
Next Payment Date 10/25/1997
Maturity 9/25/2023
Unpaid Balance 844,035
Prepayment Speed from 123
Public Securities Association

Price in 32's 1,400.00

Settle 9/25/1997
Principal 11,816,490
Accrued 0
11,815,233

Yield 13.78

Cap Rate 1,198.723

Multiplier 135.449
000036
Duration 3.483 yrs
P/V Flows 11,815,233

The formula for determining the

interest rate is:

1,198.723% - LIBOR*135.449

LIBOR today is .25% therefore

000036
 Valuation of the FNR G93-32S Alone
Quarterly Summary
Utilizing a Zero Volatility Assumption

Present Value
Date Cash Flow Factor Cash Flow

12/25/1997 881,580.87 0.977769 861,982.76

3/25/1998 839,962.11 0.944841 793,630.90
6/25/1998 797,893.33 0.913022 728,494.31
9/25/1998 756,335.09 0.882275 667,295.25
12/25/1998 711,867.71 0.852563 606,911.73
3/25/1999 682,851.36 0.823851 562,567.81
6/25/1999 659,319.06 0.796106 524,888.17
9/25/1999 634,826.85 0.769296 488,369.90
12/25/1999 606,331.87 0.743389 450,740.37
3/25/2000 587,198.79 0.718354 421,816.59
6/25/2000 569,366.44 0.694162 395,232.67
9/25/2000 549,773.64 0.670785 368,779.98
12/25/2000 526,426.12 0.648195 341,226.94
3/25/2001 510,109.35 0.626366 319,515.27
6/25/2001 494,251.17 0.605272 299,156.54
9/25/2001 476,785.37 0.584889 278,866.38
12/25/2001 455,899.14 0.565192 257,670.36
3/25/2002 441,411.55 0.546158 241,080.37
6/25/2002 427,338.08 0.527765 225,534.09
9/25/2002 411,799.30 0.509992 210,014.20
12/25/2002 393,150.40 0.492817 193,751.13
3/25/2003 380,315.66 0.476220 181,114.07
6/25/2003 366,723.27 0.460183 168,759.76 000037
9/25/2003 352,400.21 0.444685 156,707.23
12/25/2003 335,824.56 0.429710 144,307.13
3/25/2004 324,521.89 0.415239 134,754.04
6/25/2004 313,555.48 0.401255 125,815.64
9/25/2004 301,378.90 0.387742 116,857.21
12/25/2004 286,646.84 0.374684 107,401.98
3/25/2005 276,688.15 0.362066 100,179.34
6/25/2005 266,105.49 0.349873 93,103.05
9/25/2005 254,922.29 0.338090 86,186.71
12/25/2005 241,898.54 0.326704 79,029.32
3/25/2006 233,185.61 0.315702 73,617.18
6/25/2006 223,908.82 0.305070 68,307.92
9/25/2006 213,275.71 0.294797 62,872.93
12/25/2006 201,421.55 0.284869 57,378.70
3/25/2007 193,860.73 0.275275 53,365.07
6/25/2007 188,798.87 0.266005 50,221.43
9/25/2007 182,379.13 0.257047 46,879.97
12/25/2007 174,678.21 0.248390 43,388.37
3/25/2008 170,017.15 0.240025 40,808.42
6/25/2008 165,445.21 0.231942 38,373.70
9/25/2008 160,960.70 0.224131 36,076.29
12/25/2008 156,561.96 0.216583 33,908.66
3/25/2009 152,247.37 0.209289 31,863.73
6/25/2009 148,015.32 0.202241 29,934.77
9/25/2009 143,864.24 0.195430 28,115.43
12/25/2009 139,792.61 0.188849 26,399.67
3/25/2010 135,798.90 0.182489 24,781.81
6/25/2010 131,881.65 0.176343 23,256.46
9/25/2010 128,039.40 0.170405 21,818.52
12/25/2010 124,270.72 0.164666 20,463.17

000037
 3/25/2011 120,574.22 0.159121 19,185.85
6/25/2011 116,948.53 0.153762 17,982.24
9/25/2011 113,392.31 0.148584 16,848.26
12/25/2011 109,904.22 0.143580 15,780.05
3/25/2012 106,482.99 0.138745 14,773.95
6/25/2012 103,127.34 0.134072 13,826.51
9/25/2012 99,836.03 0.129557 12,934.47
12/25/2012 96,607.83 0.125194 12,094.73
3/25/2013 93,441.54 0.120978 11,304.36
6/25/2013 90,336.00 0.116904 10,560.62
9/25/2013 87,290.04 0.112967 9,860.88
12/25/2013 84,302.54 0.109163 9,202.68
3/25/2014 81,372.38 0.105486 8,583.67
6/25/2014 78,498.48 0.101934 8,001.65
9/25/2014 75,679.77 0.098501 7,454.54
12/25/2014 72,915.20 0.095184 6,940.35
3/25/2015 70,203.74 0.091978 6,457.23
6/25/2015 67,544.38 0.088881 6,003.40
9/25/2015 64,936.14 0.085888 5,577.21
12/25/2015 62,378.04 0.082995 5,177.08
3/25/2016 59,869.13 0.080200 4,801.52
6/25/2016 57,408.48 0.077499 4,449.12
9/25/2016 54,995.17 0.074889 4,118.56
12/25/2016 52,628.31 0.072367 3,808.57
3/25/2017 50,307.00 0.069930 3,517.98
6/25/2017 48,030.38 0.067575 3,245.67
9/25/2017 45,797.62 0.065300 2,990.56
12/25/2017 43,607.86 0.063100 2,751.68 000038
3/25/2018 41,460.30 0.060975 2,528.06
6/25/2018 39,354.14 0.058922 2,318.83
9/25/2018 37,288.59 0.056938 2,123.13
12/25/2018 35,262.87 0.055020 1,940.17
3/25/2019 33,276.23 0.053167 1,769.21
6/25/2019 31,327.94 0.051377 1,609.53
9/25/2019 29,417.25 0.049647 1,460.47
12/25/2019 27,543.46 0.047975 1,321.39
3/25/2020 25,705.87 0.046359 1,191.70
6/25/2020 23,903.78 0.044798 1,070.84
9/25/2020 22,136.53 0.043289 958.27
12/25/2020 20,403.45 0.041831 853.50
3/25/2021 18,703.89 0.040423 756.06
6/25/2021 17,037.22 0.039061 665.50
9/25/2021 15,402.81 0.037746 581.39
12/25/2021 13,800.06 0.036475 503.35
3/25/2022 12,228.35 0.035246 431.00
6/25/2022 10,687.09 0.034059 364.00
9/25/2022 9,175.72 0.032912 301.99
12/25/2022 7,693.66 0.031804 244.69
3/25/2023 6,240.36 0.030733 191.78
6/25/2023 4,815.27 0.029698 143.00
9/25/2023 3,417.85 0.028698 98.08

Totals 22,178,561 11,815,233

000038
 Valuation of the FNR G93-32S witn 30 Day Investments
Summary of Combined Cash Flows
Utilizing a Zero Volatility Assumption

000039
Assumed Par Amount of 30 Day Securities 400,000,000
Present Value of the Tota lCash Flow 486,784,028
Value of the Inverse 86,784,028
Reported Value 81,450,000
P/V Cash Flow at Payout Rate of 5.25%

000039
 Valuation of the FNR G93-32S witn 30 Day Investments
Summary of Combined Cash Flow
Utilizing a Zero Volatility Assumption

Present Value
Date Cash Flow 30 Day Securities Total Cash Flow Factors Cash Flow

12/25/1997 881,581 5,808,333 6,689,914 0.990692 6,627,644

3/25/1998 839,962 5,888,333 6,728,295 0.976890 6,572,803
6/25/1998 797,893 5,975,000 6,772,893 0.963279 6,524,184
9/25/1998 756,335 6,065,000 6,821,335 0.949859 6,479,303
12/25/1998 711,868 6,171,667 6,883,534 0.936623 6,447,274
3/25/1999 682,851 6,223,333 6,906,185 0.923584 6,378,439
6/25/1999 659,319 6,256,667 6,915,986 0.910714 6,298,488
9/25/1999 634,827 6,296,667 6,931,494 0.898027 6,224,665
12/25/1999 606,332 6,356,667 6,962,999 0.885512 6,165,821
3/25/2000 587,199 6,380,000 6,967,199 0.873183 6,083,637
6/25/2000 569,366 6,400,000 6,969,366 0.861015 6,000,727
9/25/2000 549,774 6,430,000 6,979,774 0.849019 5,925,962
12/25/2000 526,426 6,480,000 7,006,426 0.837188 5,865,695
3/25/2001 510,109 6,500,000 7,010,109 0.825530 5,787,057
6/25/2001 494,251 6,520,000 7,014,251 0.814026 5,709,785
9/25/2001 476,785 6,550,000 7,026,785 0.802685 5,640,298
12/25/2001 455,899 6,600,000 7,055,899 0.791500 5,584,743
3/25/2002 441,412 6,620,000 7,061,412 0.780478 5,511,279
6/25/2002 427,338 6,640,000 7,067,338 0.769602 5,439,039
9/25/2002 411,799 6,670,000 7,081,799 0.758880 5,374,238
12/25/2002 393,150 6,720,000 7,113,150 0.748305 5,322,807
3/25/2003 380,316 6,740,000 7,120,316 0.737885 5,253,976
6/25/2003 366,723 6,766,667 7,133,390 0.727602 5,190,267 000040
9/25/2003 352,400 6,800,000 7,152,400 0.717466 5,131,603
12/25/2003 335,825 6,850,000 7,185,825 0.707468 5,083,739
3/25/2004 324,522 6,870,000 7,194,522 0.697617 5,019,017
6/25/2004 313,555 6,890,000 7,203,555 0.687895 4,955,290
9/25/2004 301,379 6,920,000 7,221,379 0.678311 4,898,344
12/25/2004 286,647 6,970,000 7,256,647 0.668859 4,853,673
3/25/2005 276,688 6,990,000 7,266,688 0.659545 4,792,711
6/25/2005 266,105 7,016,667 7,282,772 0.650354 4,736,377
9/25/2005 254,922 7,050,000 7,304,922 0.641294 4,684,602
12/25/2005 241,899 7,100,000 7,341,899 0.632357 4,642,702
3/25/2006 233,186 7,120,000 7,353,186 0.623552 4,585,093
6/25/2006 223,909 7,146,667 7,370,575 0.614862 4,531,885
9/25/2006 213,276 7,186,667 7,399,942 0.606296 4,486,553
12/25/2006 201,422 7,240,000 7,441,422 0.597847 4,448,835
3/25/2007 193,861 7,260,000 7,453,861 0.589523 4,394,221
6/25/2007 188,799 7,260,000 7,448,799 0.581310 4,330,059
9/25/2007 182,379 7,273,333 7,455,712 0.573207 4,273,665
12/25/2007 174,678 7,300,000 7,474,678 0.565225 4,224,877
3/25/2008 170,017 7,300,000 7,470,017 0.557351 4,163,420
6/25/2008 165,445 7,300,000 7,465,445 0.549586 4,102,903
9/25/2008 160,961 7,300,000 7,460,961 0.541929 4,043,313
12/25/2008 156,562 7,300,000 7,456,562 0.534379 3,984,632
3/25/2009 152,247 7,300,000 7,452,247 0.526934 3,926,846
6/25/2009 148,015 7,300,000 7,448,015 0.519593 3,869,939
9/25/2009 143,864 7,300,000 7,443,864 0.512355 3,813,897
12/25/2009 139,793 7,300,000 7,439,793 0.505217 3,758,706
3/25/2010 135,799 7,300,000 7,435,799 0.498178 3,704,352
6/25/2010 131,882 7,300,000 7,431,882 0.491238 3,650,819
9/25/2010 128,039 7,300,000 7,428,039 0.484394 3,598,096
12/25/2010 124,271 7,300,000 7,424,271 0.477645 3,546,168

000040
 3/25/2011 120,574 7,300,000 7,420,574 0.470991 3,495,023
6/25/2011 116,949 7,300,000 7,416,949 0.464429 3,444,648
9/25/2011 113,392 7,300,000 7,413,392 0.457959 3,395,029
12/25/2011 109,904 7,300,000 7,409,904 0.451579 3,346,156
3/25/2012 106,483 7,300,000 7,406,483 0.445288 3,298,015
6/25/2012 103,127 7,300,000 7,403,127 0.439084 3,250,594
9/25/2012 99,836 7,300,000 7,399,836 0.432967 3,203,883
12/25/2012 96,608 7,300,000 7,396,608 0.426935 3,157,869
3/25/2013 93,442 7,300,000 7,393,442 0.420987 3,112,542
6/25/2013 90,336 7,300,000 7,390,336 0.415122 3,067,890
9/25/2013 87,290 7,300,000 7,387,290 0.409338 3,023,902
12/25/2013 84,303 7,300,000 7,384,303 0.403636 2,980,568
3/25/2014 81,372 7,300,000 7,381,372 0.398012 2,937,877
6/25/2014 78,498 7,300,000 7,378,498 0.392467 2,895,820
9/25/2014 75,680 7,300,000 7,375,680 0.387000 2,854,385
12/25/2014 72,915 7,300,000 7,372,915 0.381608 2,813,564
3/25/2015 70,204 7,300,000 7,370,204 0.376292 2,773,346
6/25/2015 67,544 7,300,000 7,367,544 0.371049 2,733,722
9/25/2015 64,936 7,300,000 7,364,936 0.365880 2,694,682
12/25/2015 62,378 7,300,000 7,362,378 0.360783 2,656,218
3/25/2016 59,869 7,300,000 7,359,869 0.355756 2,618,320
6/25/2016 57,408 7,300,000 7,357,408 0.350800 2,580,979
9/25/2016 54,995 7,300,000 7,354,995 0.345913 2,544,187
12/25/2016 52,628 7,300,000 7,352,628 0.341094 2,507,934
3/25/2017 50,307 7,300,000 7,350,307 0.336342 2,472,214
6/25/2017 48,030 7,300,000 7,348,030 0.331656 2,437,017
9/25/2017 45,798 7,300,000 7,345,798 0.327035 2,402,335 000041
12/25/2017 43,608 7,300,000 7,343,608 0.322479 2,368,160
3/25/2018 41,460 7,300,000 7,341,460 0.317986 2,334,485
6/25/2018 39,354 7,300,000 7,339,354 0.313556 2,301,301
9/25/2018 37,289 7,300,000 7,337,289 0.309188 2,268,601
12/25/2018 35,263 7,300,000 7,335,263 0.304880 2,236,378
3/25/2019 33,276 7,300,000 7,333,276 0.300633 2,204,624
6/25/2019 31,328 7,300,000 7,331,328 0.296445 2,173,333
9/25/2019 29,417 7,300,000 7,329,417 0.292315 2,142,496
12/25/2019 27,543 7,300,000 7,327,543 0.288242 2,112,107
3/25/2020 25,706 7,300,000 7,325,706 0.284226 2,082,160
6/25/2020 23,904 7,300,000 7,323,904 0.280267 2,052,647
9/25/2020 22,137 7,300,000 7,322,137 0.276362 2,023,561
12/25/2020 20,403 7,300,000 7,320,403 0.272512 1,994,897
3/25/2021 18,704 7,300,000 7,318,704 0.268715 1,966,648
6/25/2021 17,037 7,300,000 7,317,037 0.264972 1,938,808
9/25/2021 15,403 7,300,000 7,315,403 0.261280 1,911,370
12/25/2021 13,800 7,300,000 7,313,800 0.257640 1,884,329
3/25/2022 12,228 7,300,000 7,312,228 0.254051 1,857,677
6/25/2022 10,687 7,300,000 7,310,687 0.250511 1,831,411
9/25/2022 9,176 7,300,000 7,309,176 0.247021 1,805,523
12/25/2022 7,694 7,300,000 7,307,694 0.243580 1,780,008
3/25/2023 6,240 7,300,000 7,306,240 0.240186 1,754,860
6/25/2023 4,815 7,300,000 7,304,815 0.236840 1,730,075
9/25/2023 3,418 407,300,000 407,303,418 0.232469 94,685,384

Totals 22,178,561 1,134,201,667 1,156,380,228 486,784,028

000041
 Yield Comparison
Valuation Yield vs Treasury Yields
7.50

7.00

6.50

6.00

5.50
Euro Yields

000042
Treasury
5.00

4.50

4/1/1998
4/1/1999
4/1/2000
4/1/2001
4/1/2002
4/1/2003
4/1/2004
4/1/2005
4/1/2006
4/1/2007
4/1/2008
4/1/2009
4/1/2010
4/1/2011
4/1/2012
4/1/2013

10/1/1997
10/1/1998
10/1/1999
10/1/2000
10/1/2001
10/1/2002
10/1/2003
10/1/2004
10/1/2005
10/1/2006
10/1/2007
10/1/2008
10/1/2009
10/1/2010
10/1/2011
10/1/2012

Source: US Federal Reserve and Chicago Mercantile Exchange

Value of the CIA calculated with a 90 basis point spread versus Treasuries to adjust for risk such as prepayment speed on the
CMO and the fluctuation in interest rates.
000042
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

INVESTMENT ADVISERS ACT

Release No. 1720 / May 4, 1998

ADMINISTRATIVE PROCEEDING

File No. 3-9599

In the Matter of
ORDER INSTITUTING PUBLIC PROCEEDDINGS,
JOHN GARDNER BLACK and MAKING FINDINGS, IMPOSING REMEDIAL
DEVON CAPITAL MANAGEMENT, INC. SANCTIONS

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the
public interest that public administrative proceedings be instituted pursuant to Sections
203(e) and 203(f) of the Investment Advisers Act of 1940 ("Advisers Act") against Devon
Capital Management, Inc. ("Devon") and John Gardner Black ("Black").

In anticipation of the institution of these proceedings, Devon and Black have submitted
000043
Offers of Settlement ("Offers") which the Commission has determined to accept. Solely for
the purpose of this proceeding and any other proceedings brought by or on behalf of the
Commission or in which the Commission is a party, and without admitting or denying the
findings contained herein, except for those set forth below in Section II, paragraphs A. and
B., which are admitted, Devon and Black, by their respective Offers, consent to the entry of
the findings and imposition of the sanctions contained in this Order Instituting Public
Proceedings, Making Findings and Imposing Remedial Sanctions ("Order").

Accordingly, IT IS ORDERED that proceedings, pursuant to Sections 203(e) and 203(f) of

the Advisers Act, against Devon and Black be, and hereby are, instituted.

II.

On the basis of this Order and the Offers submitted by Devon and Black, the Commission
finds that: 1

A. Devon Capital Management, Inc. has been registered with the Commission as an
investment adviser from December 15, 1989 until the present. As of September 1997,
Devon managed approximately $345 million in assets for approximately 100 investment
advisory clients, the vast majority of which were local school districts seeking to invest the
proceeds of municipal bond offerings.

B. John Gardner Black was, at all times relevant to this proceeding, the president,
portfolio manager, and sole shareholder of Devon.

000043
C. On December 12, 1997, an Order of Permanent Injunction was entered against Black and
Devon by the United States District Court for the Western District of Pennsylvania, in
Securities and Exchange Commission v. John Gardner Black, et al., 97-CV-2257, pursuant
to their consent. The Order of Permanent Injunction, inter alia, enjoined Black and Devon
from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, Devon was
enjoined from future violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act
and Rule 206(4)-2 thereunder, and Black was enjoined from aiding and abetting violations
of these same provisions.

D. The Commission's Complaint alleged that Black, acting through Devon and a corporate
affiliate of Devon's, made misrepresentations and omissions of material fact in connection
with the solicitation and management of Devon's investment advisory clients' funds,
resulting in the loss of millions of dollars of municipal bond proceeds invested by school
districts and other local government units throughout Western and Central Pennsylvania.
The Complaint alleged that Black and Devon benefitted financially from their actions.

III.

On the basis of the foregoing, the Commission deems it appropriate and in the public
interest to accept the Offers submitted by Devon and Black and to impose the sanctions
specified therein.

Accordingly, IT IS HEREBY ORDERED THAT:

A. The registration of Devon Capital Management, Inc. with the Commission as an 000044
investment adviser is revoked.

B. John Gardner Black is barred from association with any broker, dealer, municipal
securities dealer, investment adviser or investment company.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

1
The findings herein are made pursuant to Devon's and Black's respective Offers and are
not binding on any other person or entity in this or any other proceeding.

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000135
FOR IMMEDIATE RELEASE 2008-234

SEC OFFICE OF THE CHIEF ACCOUNTANT AND FASB STAFF

CLARIFICATIONS ON FAIR VALUE ACCOUNTING

Washington, D.C., Sept. 30, 2008 – The current environment has made questions
surrounding the determination of fair value particularly challenging for preparers,
auditors, and users of financial information. The SEC’s Office of the Chief Accountant
and the staff of the FASB have been engaged in extensive consultations with participants
in the capital markets, including investors, preparers, and auditors, on the application of
fair value measurements in the current market environment.

There are a number of practice issues where there is a need for immediate additional
guidance. The SEC’s Office of the Chief Accountant recognizes and supports the
productive efforts of the FASB and the IASB on these issues, including the IASB Expert
Advisory Panel’s Sept. 16, 2008 draft document, the work of the FASB’s Valuation
Resource Group, and the IASB’s upcoming meeting on the credit crisis. To provide
additional guidance on these and other issues surrounding fair value measurements, the
FASB is preparing to propose additional interpretative guidance on fair value
measurement under U.S. GAAP later this week.

While the FASB is preparing to provide additional interpretative guidance, SEC staff and 000136
FASB staff are seeking to assist preparers and auditors by providing immediate
clarifications. The clarifications SEC staff and FASB staff are jointly providing today,
based on the fair value measurement guidance in FASB Statement No. 157, Fair Value
Measurements (Statement 157), are intended to help preparers, auditors, and investors
address fair value measurement questions that have been cited as most urgent in the
current environment.

* * *

Can management’s internal assumptions (e.g., expected cash flows) be used to

measure fair value when relevant market evidence does not exist?

Yes. When an active market for a security does not exist, the use of management
estimates that incorporate current market participant expectations of future cash flows,
and include appropriate risk premiums, is acceptable. Statement 157 discusses a range of
information and valuation techniques that a reasonable preparer might use to estimate fair
value when relevant market data may be unavailable, which may be the case during this
period of market uncertainty. This can, in appropriate circumstances, include expected
cash flows from an asset. Further, in some cases using unobservable inputs (level 3)
might be more appropriate than using observable inputs (level 2); for example, when
significant adjustments are required to available observable inputs it may be appropriate
to utilize an estimate based primarily on unobservable inputs. The determination of fair

000136
value often requires significant judgment. In some cases, multiple inputs from different
sources may collectively provide the best evidence of fair value. In these cases expected
cash flows would be considered alongside other relevant information. The weighting of
the inputs in the fair value estimate will depend on the extent to which they provide
information about the value of an asset or liability and are relevant in developing a
reasonable estimate.

How should the use of “market” quotes (e.g., broker quotes or information from a
pricing service) be considered when assessing the mix of information available to
measure fair value?

Broker quotes may be an input when measuring fair value, but are not necessarily
determinative if an active market does not exist for the security. In a liquid market, a
broker quote should reflect market information from actual transactions. However, when
markets are less active, brokers may rely more on models with inputs based on the
information available only to the broker. In weighing a broker quote as an input to fair
value, an entity should place less reliance on quotes that do not reflect the result of
market transactions. Further, the nature of the quote (e.g. whether the quote is an
indicative price or a binding offer) should be considered when weighing the available
evidence.

Are transactions that are determined to be disorderly representative of fair value?

When is a distressed (disorderly) sale indicative of fair value?
000137
The results of disorderly transactions are not determinative when measuring fair value.
The concept of a fair value measurement assumes an orderly transaction between market
participants. An orderly transaction is one that involves market participants that are
willing to transact and allows for adequate exposure to the market. Distressed or forced
liquidation sales are not orderly transactions, and thus the fact that a transaction is
distressed or forced should be considered when weighing the available evidence.
Determining whether a particular transaction is forced or disorderly requires judgment.

Can transactions in an inactive market affect fair value measurements?

Yes. A quoted market price in an active market for the identical asset is most
representative of fair value and thus is required to be used (generally without adjustment).
Transactions in inactive markets may be inputs when measuring fair value, but would
likely not be determinative. If they are orderly, transactions should be considered in
management’s estimate of fair value. However, if prices in an inactive market do not
reflect current prices for the same or similar assets, adjustments may be necessary to
arrive at fair value.

A significant increase in the spread between the amount sellers are “asking” and the price
that buyers are “bidding,” or the presence of a relatively small number of “bidding”
parties, are indicators that should be considered in determining whether a market is
inactive. The determination of whether a market is active or not requires judgment.

000137
What factors should be considered in determining whether an investment is other-
than-temporarily impaired?

In general, the greater the decline in value, the greater the period of time until anticipated
recovery, and the longer the period of time that a decline has existed, the greater the level
of evidence necessary to reach a conclusion that an other-than-temporary decline has not
occurred.

Determining whether impairment is other-than-temporary is a matter that often requires

the exercise of reasonable judgment based upon the specific facts and circumstances of
each investment. This includes an assessment of the nature of the underlying investment
(for example, whether the security is debt, equity or a hybrid) which may have an impact
on a holder’s ability to assess the probability of recovery.

Existing U.S. GAAP does not provide “bright lines” or “safe harbors” in making a
judgment about other-than-temporary impairments. However, “rules of thumb” that
consider the nature of the underlying investment can be useful tools for management and
auditors in identifying securities that warrant a higher level of evaluation.

To assist in making this judgment, SAB Topic 5M¹ provides a number of factors that
should be considered. These factors are not all inclusive of the potential factors that may
be considered individually, or in combination with other factors, when considering
whether an other-than-temporary impairment exists. Factors to consider include the 000138
following:
• The length of the time and the extent to which the market value has been less than
cost;
• The financial condition and near-term prospects of the issuer, including any
specific events, which may influence the operations of the issuer such as changes
in technology that impair the earnings potential of the investment or the
discontinuation of a segment of the business that may affect the future earnings
potential; or
• The intent and ability of the holder to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in market value.

All available information should be considered in estimating the anticipated recovery

period.

* * *

Finally, because fair value measurements and the assessment of impairment may require
significant judgments, clear and transparent disclosures are critical to providing investors
with an understanding of the judgments made by management. In addition to the
disclosures required under existing U.S. GAAP, including Statement 157, the SEC’s
Division of Corporation Finance recently issued letters in March and September that are
available on the SEC’s Web site to provide real-time guidance for issuers to consider in

000138
enhancing the transparency of fair value measurements to investors. Additionally, the
SEC staff and the FASB staff will continue to consult with capital market participants on
issues encountered in the application of fair value measurements.

###
1
AU 332, Auditing Derivative Instruments, Hedging Activities, and Investments in
Securities, of the PCAOB Interim Auditing Standards also provide factors to consider
when evaluating whether an impairment is other-than-temporary.

000139

000139
 Report and Recommendations Pursuant to
Section 133 of the Emergency Economic Stabilization
Act of 2008: Study on Mark-To-Market Accounting

000140

OFFICE OF THE CHIEF ACCOUNTANT

DIVISION OF CORPORATION FINANCE

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

This is a report by the Staff of the U.S. Securities and Exchange Commission. The
Commission has expressed no view regarding the analysis, findings, or conclusions
contained herein.

000140
 TABLE OF CONTENTS
Commonly-Used Abbreviations viii

Executive Summary 1

I. Introduction 11
A. How this Study Fulfills the Statutory Mandate 11
1. Statutory Mandate 11
2. Context for this Study 11
3. Approach to this Study 12
4. Structure of this Study 14

B. The Financial Reporting Framework 15

1. Balance Sheet 16
2. Income Statement 17
3. Other Basic Financial Statements 18
4. Notes to the Financial Statements, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, and Other
Disclosures 19

C. Other Considerations 20
1. Role of Accounting in Prudential Oversight 20
2. International Considerations 20 000141

D. Background Information on Fair Value Accounting 22

1. Definition of Fair Value 22
a. U.S. GAAP 22
b. IFRS 23

2. Application of Fair Value Accounting 24

a. How Fair Value Impacts Accounting for Financial Instruments 25
i. U.S. GAAP 25
ii. IFRS 31

b. How Fair Value Impacts Accounting for Non-Financial

Instruments 32
i. U.S. GAAP 32
ii. IFRS 33

3. Historical Context for Fair Value Accounting 34

4. Other Measurement Bases 38

a. Description of Other Measurement Bases 38
b. Consideration of Measurement Attributes 40

000141
Executive Summary
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA” or the “Act”)
was signed into law.1 Section 133 of the Act mandates that the U.S. Securities and Exchange
Commission (the “SEC” or “Commission”) conduct, in consultation with the Board of
Governors of the Federal Reserve System (“Federal Reserve”) and the Secretary of the Treasury,
a study on mark-to-market accounting standards as provided by Financial Accounting Standards
Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements (“SFAS No. 157”).2

As discussed further in this study, SFAS No. 157 does not itself require mark-to-market or fair
value accounting. Rather, other accounting standards in various ways require what is more
broadly known as “fair value” accounting, of which mark-to-market accounting is a subset.
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S.
generally accepted accounting principles (“GAAP”), and requires expanded disclosures about
fair value measurements. However, to ensure that this study was responsive to the policy debate
discussed below, for purposes of this study the SEC Staff (the “Staff”) considered the issue of
fair value accounting in this larger context, including both mark-to-market accounting and SFAS
No. 157.

The events leading up to the Congressional call for this study illustrated the need for identifying
and understanding the linkages that exist between fair value accounting standards and the
usefulness of information provided by financial institutions. In the months preceding passage of
the Act, some asserted that fair value accounting, along with the accompanying guidance on 000142
measuring fair value under SFAS No. 157, contributed to instability in our financial markets.
According to these critics, fair value accounting did so by requiring what some believed were
potentially inappropriate write-downs in the value of investments held by financial institutions,
most notably due to concerns that such write-downs were the result of inactive, illiquid, or
irrational markets that resulted in values that did not reflect the underlying economics of the
securities. These voices pointed out the correlation between U.S. GAAP reporting and the
regulatory capital requirements of financial institutions, highlighting that this correlation could
lead to the failure of long-standing financial institutions if sufficient additional capital is
unavailable to offset investment write-downs. Further, they believed the need to raise additional
capital, the effect of failures, and the reporting of large write-downs would have broader negative
impact on markets and prices, leading to further write-downs and financial instability.

Just as vocal were other market participants, particularly investors, who stated that fair value
accounting serves to enhance the transparency of financial information provided to the public.
These participants indicated that fair value information is vital in times of stress, and a
suspension of this information would weaken investor confidence and result in further instability
in the markets. These participants pointed to what they believe are the root causes of the crisis,
namely poor lending decisions and inadequate risk management, combined with shortcomings in
the current approach to supervision and regulation, rather than accounting. Suspending the use
1
Pub. L. No. 110-343, Division A.
2
See Section 133(a) of the Act.

000142
of fair value accounting, these participants warned, would be akin to “shooting the messenger”
and hiding from capital providers the true economic condition of a financial institution. These
participants noted that they were aware of the arguments about the correlation between U.S.
GAAP reporting and the regulatory capital requirements of financial institutions. However, they
pointed out that adjustments to the calculation of regulatory capital, like those adjustments
currently in place for “available-for-sale” (“AFS”) securities, can be made to reduce this
correlation where appropriate.3

As the debate intensified in late September of 2008, SEC Staff and the FASB staff issued a joint
press release clarifying the application of SFAS No. 157.4 This joint release clarified the
measurement of fair value when an active market for a security does not exist. On October 10,
2008, the FASB issued FASB Staff Position (“FSP”) 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (“FSP FAS 157-3”), which further
clarified the application of fair value measurements.

Currently, the debate over fair value measurements extends beyond national borders and is being
considered internationally by the International Accounting Standards Board (the “IASB”), the
standard-setting body for international financial reporting standards (“IFRS”), and other global
market participants. To coordinate international efforts, and address issues such as fair value
measurements that have arisen from the global economic crisis, the IASB and FASB (the
“Boards”) created a global advisory group comprising regulators, preparers, auditors, and
investors.

As a result of both domestic and international concern, it has become clear that a careful and 000143
thoughtful consideration of all competing viewpoints is necessary to determine what further
action may be appropriate. The credibility and experience of parties on both sides of this debate
demand careful attention to their points and counterpoints on the effects of fair value accounting
on financial markets. Moreover, a broader understanding of the prevalence of fair value
accounting relative to other measures of fair value that do not immediately impact a financial
institution’s income or capital requirements is needed to narrow the issues to those most relevant
to the debate.

For many years, accounting standards have required measurement of financial instruments on a
financial institution’s balance sheet at fair value. In some cases, for example when securities are
actively traded, changes in fair value are required to be recognized in the income statement. This
is the specific meaning of “mark-to-market” accounting. However, in most other cases, such
changes in fair value are generally reported in other comprehensive income (“OCI”) or equity,
and these changes do not flow through to income unless an impairment has occurred.

3
AFS securities are measured at fair value on a financial institution’s balance sheet with changes in fair value
generally reported in a balance sheet line called accumulated other comprehensive income, or equity. The Staff
understands that changes in fair value reported in other comprehensive income or equity are generally excluded
from regulatory capital ratios. On the other hand, consistent with safety and soundness objectives, losses on assets
that are reflected in income and retained earnings in accordance with U.S. GAAP are generally recognized in
regulatory capital.
4
See “SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting,” SEC Press
Release No. 2008-234 (September 30, 2008).

000143
It is also important, as noted above, to clearly demarcate the difference between the accounting
standards that require measurement of financial instruments at fair value and SFAS No. 157,
which only provides guidance on how to estimate fair value. This demarcation is important
when considering the focus of this study as well as its recommendations.

Although not mandated for study by the Act, the Staff believes that it is important to recognize
what many believe to be the larger problem in the financial crisis that led to the financial distress
at financial institutions other than banks, including The Bear Stearns Companies, Inc. (“Bear
Stearns”), Lehman Brothers Holdings Inc. (“Lehman”), and Merrill Lynch & Co., Inc. (“Merrill
Lynch”). Rather than a crisis precipitated by fair value accounting, the crisis was a “run on the
bank” at certain institutions, manifesting itself in counterparties reducing or eliminating the
various credit and other risk exposures they had to each firm. This was, in part, the result of the
massive de-leveraging of balance sheets by market participants and reduced appetite for risk as
margin calls increased, putting enormous pressure on asset prices and creating a “self-reinforcing
downward spiral of higher haircuts, forced sales, lower prices, higher volatility, and still lower
prices.”5 The trust and confidence that counterparties require in one another in order to lend,
trade, or engage in similar risk-based transactions evaporated to varying degrees for each firm
very quickly. What would have been more than sufficient in previous stressful periods was
insufficient in more extreme times.

A. The Organization of this Study

As mandated by the Act, this study addresses six key issues in separate sections. Issues were 000144
studied using a combination of techniques, which are described in each of the respective
sections. Where practicable under the time constraints of this study, data was analyzed
empirically and obtained from a broad-based population that included a cross-section of financial
institutions.

For issues that did not lend themselves to empirical analysis, alternative methods were
undertaken, including Staff research of public records, analysis of public comment letters
received regarding this study, and the hosting of three public roundtables to obtain a wide range
of views and perspectives from all parties. Careful attention was given to maximize the
opportunities for both proponents and opponents of fair value measurements to be heard.

This study is organized into seven sections, beginning with an introductory section that outlines
in greater detail the mandate for this study under the Act and background information intended to
provide readers with a common base of knowledge. Each of the remaining six sections addresses
one of the issues mandated for study. The following highlights each of these six sections.

5
Testimony of Timothy F. Geithner, President and Chief Executive Officer, Federal Reserve Bank of New York,
before the Committee on Banking, Housing and Urban Affairs of the United States Senate on Actions by the Federal
Reserve Bank of New York in Response to Liquidity Pressures in Financial Markets (April 3, 2008).

000144
 1. Effects of Fair Value Accounting Standards on Financial Institutions’
Balance Sheets

This section explores the effects of fair value accounting standards on financial institutions’
balance sheets. In the debate concerning fair value accounting, some assert that accounting
standards that require fair value accounting may inappropriately affect the balance sheets of
financial institutions. This section studies those concerns by analyzing a sample of fifty financial
institutions that were selected from a broad-based population of financial institutions in our
markets.

The effects of fair value accounting standards on each financial institution was studied to gauge
the prevalence of assets measured at fair value on the balance sheet and the subset of those assets
that are also marked-to-market through the income statement. This study also evaluated, among
other items, the level within SFAS No. 157’s fair value hierarchy in which assets fell.6
Information was analyzed by type of financial institution to draw out common characteristics and
dissimilarities that may exist within each industry type.

From the sample of financial institutions studied in this section of the study, the Staff observed
that fair value measurements were used to measure a minority of the assets (45%) and liabilities
(15%) included in financial institutions’ balance sheets. The percentage of assets for which
changes in fair value affected income was significantly less (25%), reflecting the mark-to-market
requirements for trading and derivative investments. However, for those same financial
institutions, the Staff observed that fair value measurements did significantly affect financial
institutions’ reported income. 000145

2. Impact of Fair Value Accounting on Bank Failures in 2008

This section analyzes possible linkages between fair value accounting and bank failures
occurring during 2008. Some have asserted that fair value accounting contributed to the failure
of one, or more, financial institutions during 2008.

For purposes of studying this issue, banks were grouped based on asset size. Within each group,
this study evaluated banks’ use of fair value measurements over time by analyzing data over a
period of three years. The Staff also analyzed the key drivers of regulatory capital to evaluate
the impact of fair value measurements on capital adequacy relative to other factors, such as
incurred losses on loans.

The Staff observes that fair value accounting did not appear to play a meaningful role in bank
failures occurring during 2008. Rather, bank failures in the U.S. appeared to be the result of
growing probable credit losses, concerns about asset quality, and, in certain cases, eroding lender
and investor confidence. For the failed banks that did recognize sizable fair value losses, it does
not appear that the reporting of these losses was the reason the bank failed.

6
SFAS No. 157’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets
(Level 1) and the lowest priority to unobservable inputs (Level 3).

000145
 3. Impact of Fair Value Accounting on the Quality of Financial
Information Available to Investors

This section describes investors’ views related to the usefulness of fair value accounting.
Proponents of fair value accounting assert the importance of such concepts to the transparency of
financial information provided to investors. To evaluate those assertions, the Staff considered
how fair value accounting and fair value measurements are used by investors.

The Staff considered a broad spectrum of investor perspectives, including those focused on both
debt and equity analysis. The sources of information included Staff research of published
investor views, analysis of comment letters received by the Commission on this topic, and
consideration of the views expressed during a series of three roundtables hosted by the
Commission. In addition, the Staff surveyed academic research on the topic and the conclusions
of two recent federal advisory committees that addressed fair value accounting as part of their
respective mandates.

The Staff’s research on this issue reflects that, based on these sources, investors generally
support measurements at fair value as providing the most transparent financial reporting of an
investment, thereby facilitating better investment decision-making and more efficient capital
allocation amongst firms. While investors generally expressed support for existing fair value
requirements, many also indicated the need for improvements to the application of existing
standards. Improvements to the impairment requirements, application in practice of SFAS No.
157 (particularly in times of financial stress), fair value measurement of liabilities, and
improvements to the related presentation and disclosure requirements of fair value measures 000146
were cited as areas warranting improvement.

4. Process Used by the FASB in Developing Accounting Standards

This section outlines the independent accounting standard-setting process in the U.S. A key
aspect of this study mandates consideration of the viability and feasibility of modifications to
accounting standards that require fair value accounting. To properly understand the viability and
feasibility of such modifications, a complete understanding of how accounting standards are
developed and promulgated is important.

The Staff’s analysis of the FASB’s processes used to develop accounting standards reaffirms that
an independent accounting standard-setter is best positioned to develop neutral and unbiased
accounting guidance. The Staff believes that while the FASB’s process works well for this
purpose, there are several steps that could be taken to enhance the existing procedures. These
recommendations include steps that could enhance the timeliness and transparency of the
process. For example, to be responsive to the need to timely identify and address challenges
encountered in the application of standards in practice, key participants in the capital markets
need to communicate and understand these challenges as they arise. To facilitate the more
timely identification and resolution of issues, the Staff believes that it is advisable to move
quickly to implement the recommendation of the SEC Advisory Committee on Improvements to
Financial Reporting (“CIFiR”) related to the creation of a financial reporting forum (“FRF”).

000146
 5. Alternatives to Fair Value Accounting Standards

This section examines the potential alternatives to fair value measurements. During the recent
debate leading to the mandate for this study, some have considered the feasibility of suspending
SFAS No. 157. This section first addresses the specific consequences of suspending the
guidance in SFAS No. 157, which would not itself change fair value accounting requirements,
but rather remove the currently operative guidance for implementation. This section also
discusses whether it would be prudent to modify the guidance on fair value measurements that
currently exists.

This section also examines consideration of a suspension of fair value accounting itself,
including the positives and negatives of available alternatives, such as historical cost-based
measures. Valuable insights and thoughts for this section were obtained through review of
academic research, comment letters received on this study, and also from the perspectives of
participants at the three public roundtables hosted by the Commission.

Through its study of this issue, the Staff found that suspending SFAS No. 157 itself would only
lead to a reversion of practice, resulting in inconsistent and sometimes conflicting guidance on
fair value measurements. As to alternatives to fair value accounting, while such alternative
measurement bases exist, each alternative exhibits strengths and weaknesses, as well as
implementation issues. Considering evidence regarding the usefulness of fair value information
to investors, the suspension of fair value accounting to return to historical cost-based measures
would likely increase investor uncertainty. However, given the significant challenges
encountered in practice related to implementing existing standards, additional actions to improve 000147
the application and understanding of fair value requirements are advisable. Such additional
measures to improve the application should include addressing the need for additional guidance
for determining fair value in inactive markets (including examining the impact of illiquidity),
assessing whether the incorporation of credit risk in fair value measurement of liabilities
provides useful information to investors, and enhancing existing presentation and disclosure
requirements.

One of the most significant concerns expressed regarding existing fair value standards is the
current state of accounting for impairments. Currently there are multiple different models
applied in practice for determining when to record an impairment for investments in securities.
Additionally, existing impairment guidelines for securities are not consistent with the reporting
guidelines for impairment charges for other non-securitized investments (e.g., direct investments
in loans). Accordingly, investors are provided information that is not recognized, calculated, or
reported on a comparable basis. Further, under existing presentation requirements, investors are
often not provided sufficient information to fully assess whether declines in value are related to
changes in liquidity or whether declines relate to probable credit losses. In addition, subsequent
increases in value generally are not reflected in income until the security is sold. The Staff
believes that the existing impairment standards should be readdressed with the goal of improving
the utility of information available to investors.

000147
 6. Advisability and Feasibility of Modifications to Fair Value
Accounting Standards

This final section summarizes steps taken and underway to improve upon current accounting
requirements. This section also provides recommendations on the advisability and feasibility of
modifications to existing accounting standards and related financial reporting requirements,
which are discussed below.

B. Recommendations

The recommendations, and the observations leading to the related recommendations, are
described in detail in the final section of this study. For ease of reference, the following table
provides an executive summary of the recommendations based upon the observations of this
study. To facilitate an understanding for how each recommendation was developed, each
recommendation below is associated with relevant observations that indicated a need for action
or improvement.

Recommendation #1 Observations

SFAS No. 157 should be
improved, but not suspended.
• The guidance in SFAS No. 157 does not
determine when fair value should be applied.
SFAS No. 157 only provides a common
definition of fair value and a common 000148
framework for its application.
• Suspending SFAS No. 157 itself would only
revert practice to inconsistent and sometimes
conflicting guidance on fair value
measurements.
• Other recommendations address necessary
improvements to existing standards.

Recommendation #2 Observations

Existing fair value and mark-to-
market requirements should not
be suspended.
• Fair value and mark-to-market accounting has
been in place for years and abruptly removing it
would erode investor confidence in financial
statements.
• Fair value and mark-to-market accounting do
not appear to be the “cause” of bank and other
financial institution failures.
• Mark-to-market accounting is generally limited
to investments held for trading purposes and for
certain derivative instruments; for many
financial institutions, these represent a minority
of their total investment portfolio.

000148

Recommendation #3
While the Staff does not
recommend a suspension of
existing fair value standards,
additional measures should be
taken to improve the application
and practice related to existing
fair value requirements
(particularly as they relate to
both Level 2 and Level 3
estimates).
• Over 90% of investments marked-to-market are
valued based on observable inputs, such as
market quotes obtained from active markets.
• Investors generally agree that fair value
accounting provides meaningful and transparent
financial information, though improvements are
desirable.
Observations
• Fair value requirements should be improved
through development of application and best
practices guidance for determining fair value in
illiquid or inactive markets. This includes
consideration of additional guidance regarding:
o How to determine when markets become
inactive
o How to determine if a transaction or group of
transactions is forced or distressed
o How and when illiquidity should be
considered in the valuation of an asset or
liability, including whether additional
disclosure is warranted
000149
o How the impact of a change in credit risk on
the value of an asset or liability should be
estimated
o When observable market information should
be supplemented with and / or reliance
placed on unobservable information in the
form of management estimates
o How to confirm that assumptions utilized are
those that would be used by market
participants and not just by a specific entity
• Existing disclosure and presentation
requirements related to the effect of fair value in
the financial statements should be enhanced.
• FASB should assess whether the incorporation
of changes in credit risk in the measurement of
liabilities provides useful information to
investors, including whether sufficient
transparency is provided.
• Educational efforts to reinforce the need for
management judgment in the determination of
fair value estimates are needed.
• FASB should consider implementing changes to
its Valuation Resource Group.
000149
Recommendation #4
The accounting for financial
asset impairments should be
readdressed.
Recommendation #5
Implement further guidance to
foster the use of sound judgment.
Recommendation #6
Accounting standards should
continue to be established to
meet the needs of investors.
Observations
• U.S. GAAP does not provide a uniform model
for assessing impairments.
• The prominence of the measure “OCI,” where
certain impairments are disclosed, could be
enhanced by requiring its display on the income
statement.
• For many financial institutions, financial assets
marked-to-market through the income statement
represent a minority of their investment
portfolio.
• A large portion of financial institutions’
investment portfolios consist of AFS securities
or loans, subject to challenging judgments
related to impairment, which determines when
such losses are reported in the income statement.
• Current impairment standards generally preclude
income recognition when securities prices
recover until investments are sold.
Observations
000150
• SFAS No. 157 is an objectives-based accounting
standard that relies on sound, reasoned judgment
in its application.
• Sound judgment is a platform from which to
foster the neutral and unbiased measures of fair
value desired by investors.
• Requests have been made for the Commission
and the Public Company Accounting Oversight
Board (“PCAOB”) to emphasize their support
for sound judgment in the application of
accounting and auditing standards.
Observations
• Investors, and most others, agree that financial
reporting’s primary purpose is to meet the
information needs of investors.
• Most appear to agree that fair value
measurements provide useful information to
investors, meeting their information needs.
• Beyond meeting the information needs of
investors, general-purpose financial reporting
has secondary uses that may be of additional
000150

Recommendation #7
Additional formal measures to
address the operation of existing
accounting standards in practice
should be established.
Recommendation #8
Address the need to simplify the
accounting for investments in
financial assets.
utility to others, such as for prudential oversight.
• General-purpose financial reporting should not
be revised to meet the needs of other parties if
doing so would compromise the needs of
investors.
Observations
• While the existing FASB process works well,
steps could be taken to enhance the process.
• After adoption of new accounting standards,
unforeseen implementation issues often may
arise.
• An independent accounting standard-setter is
best equipped to address broadly effective
implementation issues that arise from the
adoption of a new accounting standard.
• Independent accounting standard-setters are well
served by the input received from a broad
spectrum of constituents.
• Critical to the success of an independent
accounting standard-setter is its timely
responsiveness to the information needs of 000151
investors.
Observations
• The prominence of OCI could be enhanced by
requiring its display on the income statement.
• Many investors feel that clear disclosure of the
inputs and judgments made when preparing a
fair value measurement is useful.
• While a move to require fair value measurement
for all financial instruments would likely reduce
the operational complexity of U.S. GAAP, the
use of fair value measurements should not be
significantly expanded until obstacles related to
such reporting are further addressed.
10
000151
I. Introduction
A. How this Study Fulfills the Statutory Mandate

1. Statutory Mandate

The mandate for this study comes from the Emergency Economic Stabilization Act of 2008,
which was signed into law on October 3, 2008. Section 133 of the Act mandates that the SEC
conduct, in consultation with the Federal Reserve and the Secretary of the Treasury,

a study on mark-to-market accounting standards as provided in Statement Number 157 of

the Financial Accounting Standards Board, as such standards are applicable to financial
institutions, including depository institutions. Such a study shall consider at a
minimum—

(1) the effects of such accounting standards on a financial institution’s balance

sheet;
(2) the impacts of such accounting on bank failures in 2008;
(3) the impact of such standards on the quality of financial information available
to investors;
(4) the process used by the Financial Accounting Standards Board in developing
accounting standards;
(5) the advisability and feasibility of modifications to such standards; and
(6) alternative accounting standards to those provided in such Statement Number 000152
157.7

Section 133 of the Act also mandated that the Commission

shall submit to Congress a report of such study before the end of the 90-day period
beginning on the date of the enactment of this Act containing the findings and
determinations of the Commission, including such administrative and legislative
recommendations as the Commission determines appropriate.8

2. Context for this Study

Over the last 12 to 18 months, the world economy has experienced economic conditions that
have affected financial and non-financial institutions. What at one time some viewed as an
isolated crisis in the subprime mortgage sector has spread to the global economy as a whole.
Factors that have been cited as causing or contributing to the current economic crisis include,
among others, low interest rates, rapid housing appreciation, alternative mortgage products,
relaxed underwriting standards, increased leverage, innovative new investments that were

7
Section 133(a) of the Act.
8
Section 133(b) of the Act.

11

000152
believed to be safer than perhaps warranted, and insufficient regulation.9 While financial
institutions are experiencing the brunt of increasing mortgage defaults, housing foreclosures,
bank failures, and tighter credit, other industries are experiencing losses, liquidity issues, rapid
decreases in market capitalization, layoffs, and lower consumer confidence – all underscored by
the National Bureau of Economic Research’s recent announcement that the U.S. has been in a
recession since December 2007, which is expected to “likely be the longest, and possibly one of
the deepest, since World War II.”10

While analysis of the causes of this crisis is still underway, some believe that fair value
accounting standards have contributed to or exacerbated this crisis, arguing that use of fair value
accounting, particularly when markets are illiquid, has resulted in the valuing of assets well
below their “true economic value.”11 Opponents of fair value accounting also argue that these
write-downs have caused a downward spiral, as they have triggered margin and regulatory
capital calls, “have forced rapid asset liquidation, exacerbating the loss of value, diminished
counterparty confidence, and constrained liquidity.”12 Proponents counter that fair value
accounting provides useful information to investors and its suspension would increase market
uncertainty and decrease transparency.13 It is in this context that the Staff has performed this
study of mark-to-market accounting to fulfill the Congressional mandate.

3. Approach to this Study

In order to fulfill the mandate and produce this study, the Staff has assigned meaning, as
described below, to the terms “mark-to-market accounting standards,” “financial institutions,”
and “bank failure.” When used in other contexts, these terms may have different definitions or 000153
meanings.

• For the purposes of this study, the Staff interprets “mark-to-market accounting standards” as
accounting standards under U.S. GAAP that define fair value and / or require or permit fair
value measurement in the financial statements with changes reported in income.
Accordingly, “mark-to-market accounting standards” include, but are not limited to, SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No.
115”); SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS
9
See, e.g., The President’s Working Group on Financial Markets, Policy Statement on Financial Market
Developments (March 2008); Robert Herz, Chairman, FASB, Lessons Learned, Relearned, and Relearned Again
from the Credit Crisis – Accounting and Beyond (September 18, 2008); and The Financial Stability Forum, Report
of the Financial Stability Forum on Enhancing Market and Institutional Resilience (April 7, 2008).
10
“Statement by Chad Stone, Chief Economist, on the November Employment Report,” Center on Budget and
Policy Priorities (December 5, 2008).
11
See, e.g., letter from Isaac. Comment letters (“letters”) are available on the Commission’s website (at
http://www.sec.gov/comments/4-573/4-573.shtml), and in the Commission’s Public Reference Room in its
Washington, DC headquarters. Unless otherwise noted, comment letters in this study are cited by author (using the
abbreviations in Exhibit A-1 to the comment summary, which is available at Appendix A to this study) and, if
multiple letters were submitted by the same author, also by date.
12
Joyce Joseph-Bell, Ron Joas & Neri Bukspan, Banks: The Fight over Fair Value, BusinessWeek, October 15,
2008.
13
See, e.g., letter from Joint (October 15, 2008).

12

000153
 No. 133”); SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (“SFAS No. 140”); SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments (“SFAS No. 155”); SFAS No. 156, Accounting for Servicing
of Financial Assets (“SFAS No. 156”); SFAS No. 157; and SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities (“SFAS No. 159”).

• The term “financial institutions” is defined by the EESA to include public and non-public
banks, insurance companies, and broker-dealers.14 For purposes of Section II, and given the
time constraints of this study, the Staff has limited the study sample to public companies, due
to the readily available financial data for these entities. The Staff also included credit
institutions15 and government-sponsored enterprises and similar entities (“GSEs”),16 as they
are additional institutions in the financial sector that may be affected by fair value accounting
standards.

• For purposes of Section III of this study, a “bank failure” refers to an insured depository
institution that is closed by the appropriate state or federal chartering authority in accordance
with applicable law or regulations or by the appropriate federal banking agency (“Agency”)
based on the authority provided under the Federal Deposit Insurance Act,17 entitled Prompt
Corrective Action (“PCA”).

In addition, investment companies are subject to different standards than those of non-investment
companies.18 Accordingly, the Staff determined those companies to be outside the scope of this
study and they are generally not contemplated in the remainder of this study.
000154
The methodologies used by the Staff to gather and analyze data for Sections II - VII of this study
are described in each of those sections. Broadly, the Staff gathered information for this study
through: (1) a review of publicly available financial and other information, (2) consultations with

14
Specifically, Section 3(5) of the Act defines “financial institutions” to mean
…any institution, including, but not limited to, any bank, savings association, credit union, security broker
or dealer, or insurance company, established and regulated under the laws of the United States or any State,
territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico,
Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands,
and having significant operations in the United States, but excluding any central bank of, or institution
owned by, a foreign government.
15
The Staff refers to establishments primarily engaged in providing loans to individuals as “credit institutions.”
Also included in this industry are establishments primarily engaged in financing retail sales made on the installment
plan and financing automobile loans for individuals.
16
“GSEs” refers to GSEs and other non-depository credit intermediation institutions that primarily provide federally
guaranteed loans.
17
12 U.S.C. 1811 et seq.
18
Investment companies include entities registered under the Investment Company Act of 1940 [15 U.S.C. 80a-1 et
seq. (the “Investment Company Act”)] and business development companies. Section 2(a)(41) of the Investment
Company Act defines “value” with respect to the assets of registered investment companies and business
development companies and generally requires the use of either: (1) market value when market quotations are
readily available or (2) fair value, as determined in good faith by the Board of Directors, when market quotations are
not readily available.

13

000154
the Federal Reserve and the Department of Treasury, as mandated by the Act, as well as other
federal banking regulators and the FASB, (3) a review of relevant academic research on fair
value accounting, and (4) a request for public comment19 and a series of three public
roundtables20 to obtain constituent views about fair value. Views from commenters that
responded to the Staff’s request for public comment and roundtable participants are referenced
throughout this study. A summary of comments and commenters is provided in Appendix A to
this study. A summary of the public roundtable discussions is presented in Section IV and a list
of roundtable participants is provided in Appendix B to this study.

4. Structure of this Study

The remainder of this introductory section contains the following subsections:

• Subsection B presents a short primer summarizing the financial reporting framework,

including the basic accounting concepts necessary to understand the issues discussed in this
study. Those who are familiar with the financial reporting framework may skip this
subsection of the study with no loss of continuity.

• Subsection C presents other considerations, namely the role of accounting in prudential

oversight and international developments, which necessitate consideration throughout this
study.

• Subsection D presents background information on fair value accounting, including the

definition of fair value, information about the application of fair value accounting, a 000155
historical context for mark-to-market or fair value accounting, and information about other
measurement bases used in accounting.

The remainder of this study is generally arranged according to the order of the sections in the
legislative mandate, with one exception to facilitate organization: the section describing
“Alternatives to Fair Value Accounting Standards” appears before the section describing
“Advisability and Feasibility of Modifications to Fair Value Accounting Standards.”
Specifically:

• Section II of this study is “Effects of Fair Value Accounting Standards on Financial

Institutions’ Balance Sheets.” This section examines the balance sheets of a sample of public
financial institutions to analyze total assets and liabilities that were measured at fair value
and the extent to which changes in fair value impacted those institutions’ income statements.

• Section III of this study is “Impact of Fair Value Accounting on Bank Failures in 2008.”
This section examines the extent to which public and non-public failed banks applied fair

19
See SEC Release No. 33-8975 (October 8, 2008), SEC Study of Mark to Market Accounting Request for Public
Comment.
20
Commission roundtables took place on July 9, 2008 (International Roundtable on Fair Value Accounting
Standards), October 29, 2008 (Roundtable on Mark-to-Market Accounting), and November 21, 2008 (Mark-to-
Market Accounting Roundtable). (Archived webcasts are available at: http://www.sec.gov/spotlight/fairvalue.htm.)

14

000155
 value accounting and whether fair value accounting contributed significantly to their failures.
This section also discusses the impact of fair value accounting on other distressed financial
institutions.

• Section IV of this study is “Impact of Fair Value Accounting on the Quality of Financial
Information Available to Investors.” This section discusses the views of investors and other
financial statement users on the role of fair value accounting and whether it enhances or
impairs their understanding of financial information.

• Section V of this study is “Process Used by the FASB in Developing Accounting Standards.”
This section discusses the FASB governance and processes that result in the accounting
standards U.S. public companies apply.

• Section VI of this study is “Alternatives to Fair Value Accounting Standards.” This section
examines the potential impact of a suspension of SFAS No. 157 and recent proposals
regarding alternatives to fair value accounting.

• Section VII of this study is “Advisability and Feasibility of Modifications to Fair Value
Accounting Standards.” This section outlines current actions taken and projects in process to
address and improve existing fair value accounting standards. Further, this section draws
upon the analysis and findings of the previous sections of this study and develops a list of
recommendations of additional measures to improve fair value accounting and the
accounting for financial asset impairments.
000156
B. The Financial Reporting Framework21

The objective of financial reporting is to provide information useful to investors and creditors in
their decision-making processes.22 The Commission has responsibilities under the federal
securities laws to specify acceptable standards for the preparation of financial statements that
provide this financial information.23 The Commission has, for virtually its entire existence,
looked to the private sector for assistance in this task. Currently, the body that the Commission
looks to for the setting of financial reporting standards for U.S. issuers is the FASB.24 The
FASB has promulgated accounting standards in many areas and has also created a conceptual

21
Parts of this section are excerpted, with modifications, from SEC Staff, Report and Recommendations Pursuant to
Section 401(c) of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications, Special
Purpose Entities, and Transparency of Filings by Issuers, (“Off-Balance Sheet Report”). (This report is available at:
http://www.sec.gov/news/studies/soxoffbalancerpt.pdf.)
22
See Statement of Financial Accounting Concept (“SFAC”) No. 1, Objectives of Financial Reporting by Business
Enterprises (“SFAC No. 1”), paragraph 32.
23
See, e.g., Sections 7, 19(a) and Schedule A, Items (25) and (26) of the Securities Act of 1933 (the “Securities
Act”), 15 U.S.C. 77g, 77s(a), 77aa(25) and (26); Sections 3(b), 12(b) and 13(b) of the Securities Exchange Act of
1934 (the “Exchange Act”), 15 U.S.C. 78c(b), 78l(b) and 78m(b); and Sections 8, 30(e), 31 and 38(a) of the
Investment Company Act, 15 U.S.C. 80a-8, 80a-29(e), 80a-30 and 80a-37(a).
24
See SEC Release No. 33-8221 (April 25, 2003), Policy Statement: Reaffirming the Status of the FASB as a
Designated Private-Sector Standard Setter (“2003 Policy Statement”).

15

000156
framework for accounting and financial reporting that it uses in setting accounting standards.
However, despite the Commission’s recognition of the FASB’s financial accounting and
reporting standards as “generally accepted” for purposes of the federal securities laws, the
Commission retains the authority to require U.S. issuers to apply accounting other than that set
by the FASB to ensure compliance with the securities laws and the protection of investors.25

Filings by issuers include four main financial statements: the balance sheet, the income
statement, the cash flow statement, and the statement of changes in equity.26 Each financial
statement provides different types of information, but they are interrelated in that they “reflect
different aspects of the same transactions or other events affecting an entity,” as well as
complementary in that “none is likely to serve only a single purpose or provide all the financial
statement information that is useful for a particular kind of assessment or decision.”27 A
complete set of financial statements also includes notes, which disclose quantitative and
qualitative information not in the basic four financial statements. Public filings also generally
require the inclusion of additional information, including information about the company’s
business, the risk factors it faces, and a discussion of its financial condition, results of operations,
liquidity, and capital resources.

1. Balance Sheet

Given the topic of this study, the Staff’s primary focus is on the balance sheet and the income
statement. The balance sheet portrays an issuer’s financial position at a point in time. Its basic
components include:
000157
• Assets, which are “probable future economic benefits obtained or controlled by a particular
entity as a result of past transactions or events;”28

• Liabilities, which are “probable future sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or provide services to other entities in the
future as a result of past transactions or events;”29 and

• Equity, which is “the residual interests in the assets of an entity that remains after deducting
its liabilities.”30

Under current accounting standards in the U.S., the items that are recorded on the balance sheet
are valued or measured using different measurement bases or attributes. This use of different

25
See, e.g., Sections 3(c) and 108(c) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), 15 U.S.C.
7202(c) and 7218(c).
26
See SFAC No. 5, Recognition and Measurement in Financial Statements of Business Enterprises (“SFAC No. 5”),
paragraphs 39-41 and 55-57.
27
SFAC No. 5, paragraph 23; see also paragraph 24.
28
SFAC No. 6, Elements of Financial Statements (“SFAC No. 6”), paragraph 25.
29
Ibid., paragraph 35.
30
Ibid., paragraph 49.

16

000157
measurement attributes is often referred to as the “mixed-attribute model.” Under the current
mixed-attribute model, the carrying amounts of some assets and liabilities are reflected in the
balance sheet at historical cost, some at fair value, and some at other bases, such as lower-of-
cost-or-fair-value. Financial accounting standards in the U.S. establish the basis on which items
reported in the balance sheet should be measured. Section I.D of this study more fully describes
measurement bases that the FASB considers in setting standards.

Measurement using historical cost can be done in several ways, but the general concept is to
record items on the balance sheet using the original amount paid or received, with or without
adjustments in subsequent periods for depreciation, amortization, or impairment. Accordingly,
one historical cost measure is not necessarily comparable to another historical cost measure due
to differences in when the historical cost was measured and the individual amount paid or
received, as well as differences in depreciation, amortization, and impairment techniques or
requirements.

Fair value measurement is defined by SFAS No. 157. Prior to the issuance of SFAS No. 157 in
2006, “fair value” was defined or described in various accounting standards that prescribe its use,
but the definition of fair value, and its application, were not necessarily consistent across
standards.31 SFAS No. 157 now provides a standardized definition of fair value. Section I.D of
this study further explains the definition of fair value provided in SFAS No. 157. Other
measurement bases, such as lower-of-cost-or-fair-value, are described or explained in the
accounting standards in which they are used.32 In connection with a current joint project to
improve upon their respective conceptual frameworks, the Boards are focusing on measurement
bases that are appropriate for future standard-setting. Rather than referring to “historical cost” 000158
versus “fair value,” the Boards are focusing on nine measurement bases that are related to either
past, present or future prices or amounts. The Boards’ work is discussed further in Sections I.D
and VI.B of this study.

2. Income Statement

The income statement reflects the issuer’s revenues and expenses, gains and losses, and, thus, is
intended to capture “the extent to which and the ways in which the equity of an entity increased
or decreased from all sources other than transactions with owners during a period.”33 Over the
years, there has been tremendous controversy about what should be reported in the income
statement. In large part, the controversy can be traced to the fact that net income (often
expressed as a per share measure) often receives more focus than other measures in evaluating
performance. As such, a decision or proposal to change accounting standards in a way that
would result in more volatility being reported in income has often prompted controversy.

31
See SFAS No. 157, Reasons for Issuing this Statement.
32
See, e.g., SFAS No. 65, Accounting for Certain Mortgage Banking Activities (“SFAS No. 65”), paragraphs 9-10.
33
SFAC No. 5, paragraph 30. There are several transactions that meet the criteria to be included in the income
statement, but have nonetheless been excluded from net income, and are instead categorized as OCI.

17

000158
Due to the complementary and integrated nature of the balance sheet and income statement,
choosing the accounting treatment for one statement has implications for the other.34 One of the
most critical and timely examples relates to standards that require the recognition of more assets
and liabilities on the balance sheet at their fair values. For some assets and liabilities that are
measured at fair value on the balance sheet, unrealized changes (gains and losses) in fair value
from period to period impact net income, while, for other assets and liabilities that are measured
at fair value, unrealized changes in fair value do not impact net income, but instead are recorded
through the equity section of the balance sheet by way of an accounting construct referred to as
OCI. Unrealized gains and losses related to assets and liabilities are those that occur while an
issuer holds the asset or liability, as opposed to realized gains and losses that generally occur
when an asset or liability is sold or settled.

Proponents of the “all inclusive” approach to defining net income contend that it is appropriate to
include both realized and unrealized gains and losses in net income because this information
enables users to better predict future income or cash flows. However, others point out that
recording unrealized gains and losses in the income statement may lead to increased income
volatility, which they believe results in lower predictability of future income or cash flows. As
noted above, the alternative to reporting unrealized gains and losses as part of net income is to
report these changes in OCI, which most often appears in the statement of changes in equity,35
until the gain or loss is realized generally through sale of the asset or settlement of the liability.

3. Other Basic Financial Statements

The other two basic financial statements describe, each in their own way, the changes in various 000159
balance sheet items from one period to the next.

The statement of changes in equity reflects the ways in which assets and liabilities have changed
due to transactions with owners during the period, such as declarations of dividends, issuances of
stock and options, exchanges of shares in mergers and acquisitions, and items that are classified
outside of the measurement of net income (i.e., OCI, as discussed above).

The cash flow statement reflects an entity’s cash receipts classified by major sources and its cash
payments classified by major uses during a period. This statement groups the inflows and
outflows of cash into three broad categories: operating cash flows, investing cash flows, and
financing cash flows.

Operating cash flows include: cash received from customers; cash spent on materials and labor;
cash paid for utilities, insurance, compensation and benefits; and many other types of operating
items. The other two sections of the cash flow statement report investing cash flows and
financing cash flows. Investing cash flows include: cash inflows and outflows related to
34
Historically, the relative focus of standard-setters on the balance sheet versus the income statement (or vice versa)
has varied. The balance sheet was emphasized in the early part of the 20th Century (and before), in part because
creditors had little reliable information available to them. Liquidation values and conservatism were of central
importance. By the late 1930s, the focus shifted to a shareholder orientation, the income statement and value in use
rather than liquidation value. See Elden S. Hendriksen, Accounting Theory, 257 (4th ed. 1982).
35
The statement of changes in equity is discussed further in Section I.B.3.

18

000159
purchases or sales of property, plant, and equipment; investments in equity or debt of other
entities; and other types of investments. Financing cash flows include: cash inflows from raising
capital through issuing stock or debt, cash outflows to repay mortgages and other liabilities, cash
paid for dividends, and the like.

4. Notes to the Financial Statements, Management’s Discussion and

Analysis of Financial Condition and Results of Operations, and Other
Disclosures

The basic financial statements alone cannot reasonably be expected to provide sufficient
information for investment decisions. The FASB’s concept statements note that “[s]ome useful
information is better provided by financial statements and some is better provided, or can only be
provided, by notes to financial statements or by supplementary information or other means of
financial reporting.”36 These disclosures in the notes to the financial statements are intended to
provide information that the four main financial statements cannot (or do not) provide.

In addition, although the notes provide much information that is not provided in the basic
financial statements, they generally do not provide an explanation of the business activities
underlying the numbers. Recognizing that such information may be as important to investors as
the information in the financial statements and notes, the Commission requires issuers to include
a management’s discussion and analysis of financial condition and results of operations
(“MD&A”) section in many filings. MD&A requires a discussion of known trends, demands,
commitments, uncertainties, and events that are reasonably likely to materially affect the issuer’s
financial condition, results of operations, or liquidity, as well as other information that provides 000160
context to the financial statements. As noted in Financial Reporting Release 67:

The disclosure in MD&A is of paramount importance in increasing the

transparency of a company's financial performance and providing investors with
the disclosure necessary to evaluate a company and to make informed investment
decisions. MD&A also provides a unique opportunity for management to provide
investors with an understanding of its view of the financial performance and
condition of the company, an appreciation of what the financial statements show
and do not show, as well as important trends and risks that have shaped the past or
are reasonably likely to shape the future.37

Because of the importance of the notes to the financial statements and other disclosures,
including MD&A, in providing information that is not provided by the basic financial statements
themselves, questions of whether items should or should not be included on the balance sheet
and income statement and whether sufficient transparency in reporting has been achieved must
be assessed in light of the presence and role of these other reporting tools.

36
SFAC No. 5, paragraph 7.
37
SEC Release No. 33-8182 (January 28, 2003), Disclosure in Management's Discussion and Analysis about Off-
Balance Sheet Arrangements and Aggregate Contractual Obligations.

19

000160
 C. Other Considerations

1. Role of Accounting in Prudential Oversight

Financial information is also used in prudential oversight. The primary objective of prudential
oversight is to foster safety and soundness and financial stability.38 For prudential oversight
purposes, regulatory capital requirements for banks in the U.S. start with financial information
provided in accordance with U.S. GAAP. However, in certain instances, the effects of U.S.
GAAP accounting are adjusted, thereby reflecting the important differences between the
objectives of U.S. GAAP reporting and the objectives of U.S. bank regulatory capital
requirements. These adjustments are discussed in greater detail in Section III.D.

Consistent with the Act’s mandate, the focus of this study is on financial reporting for investors,
rather than prudential supervisors. However, because of the role of prudential oversight in bank
failures and the existing relationship between U.S. GAAP and regulatory capital, where relevant,
this study also discusses such considerations.

2. International Considerations

As mandated by the Act, this study principally focuses on fair value accounting in the context of
U.S. companies reporting under U.S. GAAP. However, developments over the past few years
necessitate consideration of the international financial reporting landscape.

First, on a global basis, the number of companies that report under IFRS has increased 000161
substantially. In 2002, the European Union (“E.U.”) adopted a regulation requiring its listed
companies to report under IFRS by 2005.39 Since then, other countries have followed suit.
Approximately 113 countries around the world currently require or permit IFRS reporting for
domestic, listed companies, including the E.U., Australia, and Israel.40 The market capitalization
of exchange listed companies in the E.U., Australia, and Israel totals $11 trillion (or
approximately 26% of global market capitalization), and the market capitalization from those
countries plus Brazil and Canada, both of which have announced plans to move to IFRS, totals
$13.4 trillion (or approximately 31% of global market capitalization).41

Second, the Boards have made concerted efforts to converge U.S. GAAP and IFRS to minimize
or eliminate differences in the two bodies of accounting literature. This process began with the
signing of the “Norwalk Agreement” by the Boards in October 2002.42 In this agreement, the

38
See Basel Committee on Banking Supervision, Core Principles for Effective Banking Supervision (October 2006).
39
See Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of the European Union of 19
July 2002 on the Application of International Accounting Standards, Official Journal L. 243, November 9, 2002, at
pages 0001-0004.
40
See SEC Release No. 33-8982 (November 14, 2008), Roadmap for the Potential Use of Financial Statements
Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers (“Proposed Roadmap”).
41
Ibid.
42
See the Boards, Memorandum of Understanding, “The Norwalk Agreement,” (September 18, 2002) (the
“Norwalk Agreement”). (available at: http://www.fasb.org/news/memorandum.pdf) For further details, see IASB,

20

000161
Boards acknowledged their joint commitment to convergence. They also pledged to use their
best efforts to develop, “as soon as practicable,” high quality, compatible accounting standards
that could be used for both domestic and cross-border financial reporting. Most recently, in
September 2008, the Boards issued a progress report and a timetable for the completion of joint
major projects by 2011 in areas such as financial statement presentation, revenue recognition,
lease accounting, liabilities and equity distinctions, consolidation accounting, and pension and
post-retirement benefit accounting.43

The Commission recognizes the increasingly global nature of the capital markets and has long
expressed its support for a single set of high-quality global accounting standards to benefit both
U.S. and global capital markets and U.S. and foreign investors by facilitating comparison of
financial information.44 To further this goal, the SEC has taken the following steps:

• In December 2007, the SEC published rules to accept from foreign private issuers in their
filings with the Commission, financial statements prepared in accordance with IFRS as
issued by the IASB without reconciliation to U.S. GAAP.45

• In November 2008, the Commission published for comment a proposed roadmap for the
potential use of financial statements prepared in accordance with IFRS as issued by the IASB
by U.S. issuers for purposes of their filings with the Commission.46 This proposed roadmap
sets forth seven milestones that, if achieved, could lead to the required use of IFRS by U.S.
issuers in 2014 if the Commission believes it to be in the public interest and for the
protection of investors. In addition, the Commission also proposed to permit early use of
IFRS, beginning with filings in 2010, by a limited number of U.S. issuers where this would 000162
enhance the comparability of financial information to investors.

In light of these developments, the U.S. standard-setting process and changes to U.S. GAAP are
intertwined with those abroad. Accordingly, where relevant, this study includes discussion of
international considerations and events. For example, Section I.D of this study provides
information about fair value accounting under IFRS, while Section VII discusses the accounting
developments in response to the current global economic crisis from a global perspective and
recommends modifications that should be coordinated with the IASB, as well as national and
regional securities regulators.

A Roadmap for Convergence between IFRSs and US GAAP—2006-2008, Memorandum of Understanding between
the FASB and the IASB, February 27, 2006. (available at: http://www.iasb.org/NR/rdonlyres/874B63FB-56DB-
4B78-B7AF-49BBA18C98D9/0/MoU.pdf)
43
See the Boards’ update to the 2006 Memorandum of Understanding, Completing the February 2006 Memorandum
of Understanding: A Progress Report and Timetable for Completion, September 2008. (available at:
http://www.fasb.org/intl/MOU_09-11-08.pdf)
44
See, e.g., SEC Release No. 33-6807 (November 14, 1988), Regulation of International Securities Markets.
45
See SEC Release No. 33-8879 (December 21, 2007), Acceptance from Foreign Private Issuers of Financial
Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to U.S.
GAAP.
46
See Proposed Roadmap.

21

000162
 D. Background Information on Fair Value Accounting

The purpose of this section is to provide an understanding of the definition of fair value in
accounting, the application of fair value accounting, a historical context for fair value
accounting, and information about other measurement bases used in accounting.

1. Definition of Fair Value

a. U.S. GAAP

As previously mentioned, fair value measurement is defined by SFAS No. 157, which was issued
in 2006. SFAS No. 157 became effective at the beginning of 2008 for all reporting entities, with
early adoption permitted.47 Prior to the issuance of SFAS No. 157, fair value measurement
principles were not consistently defined and codified in a single accounting standard, which led
to the potential for disparate fair value measurement practices under different accounting
standards. SFAS No. 157 defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements.48 Accordingly, SFAS No. 157 was
issued to provide a single set of measurement principles to be uniformly applied for fair value
measurement when U.S. GAAP requires or permits reporting entities to measure and / or disclose
the fair value of an asset or a liability. Importantly, SFAS No. 157 did not change which assets
and liabilities are subject to fair value accounting or when fair value should be applied. As noted
in Section I.D.2 of this study, other previously existing accounting standards provide the
requirement or permission to measure assets and liabilities at fair value.
000163
SFAS No. 157 defines “fair value” as follows:

Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.49

Key principles underpinning the definition of fair value under SFAS No. 157 are as follows:

• Fair value is based upon an exchange price. Specifically, SFAS No. 157 highlights that the
concept of fair value is based on an exit price notion (the price to be received on sale of an
asset or price to be paid to transfer a liability) from a hypothetical exchange transaction.

• The exchange price is the price in an orderly transaction which allows for due diligence, and
is not from a distressed sale or a forced transaction.

47
SFAS No. 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Delayed application was permitted for non-financial assets and non-
financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. See SFAS No. 157, paragraph 36.
48
See SFAS No. 157, paragraph 1.
49
SFAS No. 157, paragraph 5.

22

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• Fair value measurement assumes that the asset is sold in its principal market or, in the
absence of a principal market, the most advantageous market.

• Fair value is determined based on the assumptions that market participants50 would use in
pricing the asset or liability. A fair value measurement should include an adjustment for risk
if market participants would include one in pricing the related asset or liability, even if the
adjustment is difficult to determine.

• Company-specific information should be factored into fair value measurement when relevant
information is not observable in the market.51

• SFAS No. 157 provides a hierarchy for inputs used in fair value measurement based on the
degree to which the inputs are observable in the market. Level 1 in the hierarchy includes
inputs that are based on quoted prices in active markets for the identical asset or liability
(“Level 1”). Level 2 includes quoted prices of similar instruments in active markets, quoted
prices for identical or similar instruments in inactive markets, and observable market
information on valuation parameters or market-corroborated information (“Level 2”), and
Level 3 represents measurements that incorporate significant unobservable inputs that reflect
the reporting entity’s own assumptions regarding valuation parameters that market
participants would use (“Level 3”). Valuation techniques used to measure fair values should
maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
When Level 1 inputs are available, those inputs should generally be used.

• Companies measuring the fair value of their own liabilities should incorporate the effect of 000164
their credit risk (credit standing) on the fair value of their liabilities. For example, declines in
a company’s own creditworthiness will generally result in a decrease in the fair value of the
company’s own liabilities, all else being equal.

b. IFRS

Currently, under IFRS, “guidance on measuring fair value is dispersed throughout [IFRS] and is
not always consistent.”52 However, as discussed in Section VII.B, the IASB is developing an
exposure draft on fair value measurement guidance.

IFRS generally defines fair value as “the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm’s length transaction” (with

50
Market participants are knowledgeable and informed buyers and sellers in the relevant market, who are
independent of the reporting entity and are able and willing to transact for the asset or liability that is subject to fair
value measurement. See SFAS No. 157, paragraphs 10-11.
51
Company-specific information factored into fair value measurement should reflect the company’s expectation
regarding market participant assumptions.
52
IASB Discussion Paper, Fair Value Measurements, Part I – Invitation to Comment and Relevant IFRS Guidance
(November 2006) (“Fair Value Discussion Paper”), paragraph 6.

23

000164
some slight variations in wording in different standards).53 While this definition is generally
consistent with SFAS No. 157, it is not fully converged in the following respects:

• The definition in SFAS No. 157 is explicitly an exit price, whereas the definition in IFRS is
neither explicitly an exit price nor an entry price.

• SFAS No. 157 explicitly refers to market participants, which is defined by the standard,
whereas IFRS simply refers to knowledgeable, willing parties in an arm’s length transaction.

• For liabilities, the definition of fair value in SFAS No. 157 rests on the notion that the
liability is transferred (the liability to the counterparty continues), whereas the definition in
IFRS refers to the amount at which a liability could be settled.54

2. Application of Fair Value Accounting

Under both U.S. GAAP and IFRS, fair value is most prevalently used to measure “financial”
assets and liabilities,55 as opposed to “non-financial” assets and liabilities, such as property or
intangible assets. Financial assets and liabilities include, but are not limited to, investment
securities, derivative instruments, loans and other receivables, notes and other payables, and debt
instruments issued. Not all of these financial assets and liabilities are required to be measured at
fair value; some are permitted to be measured at fair value because of provisions that generally
permit an entity to elect fair value accounting for financial assets and liabilities. As noted in
Section I.B.2, for those assets and liabilities that are measured at fair value, some have
unrealized changes in fair value recognized through income and some have unrealized changes 000165
in fair value recognized in OCI in the equity section of the balance sheet.

Fair value measurements that are required on a quarterly basis (or each reporting period) are
often referred to as “recurring,” while fair value measurements that are required only if assets are
considered impaired are considered to be “non-recurring.” Recurring fair value measurements
apply to certain classes of investment securities and derivatives instruments, among other items.
Non-recurring fair value measurements apply to various types of assets, both financial and non-
financial, that are required to be tested for impairment in their value and, if impaired, are
required to have their carrying amounts written down to fair value.

The discussion below further explains how fair value accounting impacts both financial and non-
financial assets and liabilities under U.S. GAAP and, as a comparison, highlights the more
53
Ibid.
54
See Ibid.
55
Under U.S. GAAP, a financial asset is defined as “[c]ash, evidence of an ownership interest in an entity, or a
contract that conveys to one entity a right (1) to receive cash or another financial instrument from a second entity or
(2) to exchange other financial instruments on potentially favorable terms with the second entity.” A financial
liability is defined as “[a] contract that imposes on one entity an obligation (1) to deliver cash or another financial
instrument to a second entity or (2) to exchange other financial instruments on potentially unfavorable terms with
the second entity” (SFAS No. 159, paragraph 6). The definition of financial assets and financial liabilities under
IFRS is substantially converged to U.S. GAAP (International Accounting Standard (“IAS”) 32, Financial
Instruments: Presentation, paragraph 11).

24

000165
significant differences in the treatment under IFRS. Others have pointed out the complexity of
the current accounting requirements.56

a. How Fair Value Impacts Accounting for Financial Instruments

i. U.S. GAAP

This section provides further information about different types of financial instruments and the
extent to which fair value measurement is applied to those instruments. The extent to which U.S.
GAAP requires financial instruments to be measured at fair value with changes in fair value
recognized in income generally depends on the characteristics of the financial instrument, the
legal form, and how the company intends to use the financial instrument. Measurement of
financial instruments at fair value is also determined in some circumstances by the industry in
which the reporting entity operates. For certain specialized industries like brokers and dealers in
securities and investment companies (including mutual funds), fair value measurement has long
been used for financial instruments.57

To the extent that financial assets are not measured at fair value each reporting period through
income, companies are required to assess whether those financial assets are impaired.
Impairment accounting can be complex, as there are different definitions of impairment and
different impairment tests for different types of financial assets. Impairment accounting is
summarized at the end of this subsection.

Equity Securities 000166

Investments in equity securities (e.g., an investment in common stock) may be accounted for in a
number of different ways. Equity investments that provide a company with controlling financial
interest generally result in the consolidation of the investee, such that the investee’s underlying
assets and liabilities are accounted for based on their nature (e.g., cash, investments, property,
and debt).58 For example, an entity that owns 80% of the equity securities of another entity and
has voting control would consolidate the accounts of the controlled entity.

Investments in equity securities of an entity over which a company has significant influence are
presented on one line and accounted under the “equity method.” Equity method accounting is
often viewed as a form of historical cost accounting in which the pro rata share of the operations
of the investment is reflected in a “one line” consolidation of the books of the investee. These
equity method investments are also subject to write-downs to fair value, but only when the

56
See, e.g., IASB Discussion Paper, Reducing Complexity in Reporting Financial Instruments (March 2008), and
Final Report of CIFiR (August 1, 2008) (“CIFiR Final Report”). (available at:
http://www.sec.gov/about/offices/oca/acifr/acifr-finalreport.pdf)
57
See American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide – Brokers and
Dealers in Securities, Chapter 7, paragraph 2 (with conforming changes as of May 1, 2007), and Section 2(a)(41) of
the Investment Company Act.
58
See Accounting Research Bulletin No. 51, Consolidated Financial Statements.

25

000166
impairment is other-than-temporary.59 Alternatively, a company has the option to measure
equity method investments at fair value, as discussed in further detail below.60

All other investments in equity securities for which fair value is readily determinable are
measured at fair value. However, changes in fair value may be recognized either in income or in
OCI, based on an election made by management. Changes in the fair value of securities that
management has classified as trading are required to be recognized in income each period.
Changes in the fair value of securities that management has classified as AFS, which represent
all other equity securities, are required to be recognized in OCI each period, until the investment
is ultimately sold or impairment in the security is determined to be other-than-temporary.61

It is possible to transfer equity securities into or out of the trading classification; however, U.S.
GAAP indicates that such circumstances should be rare.

Equity securities for which fair value is not readily determinable are generally measured at cost,
with adjustments only made when the decline in the estimated fair value below cost is considered
other-than-temporary.62

Debt Securities

Investments in debt securities may also be accounted for in a number of different ways.63
Investments classified as trading are required to be measured at fair value each period, with all
changes in fair value recognized in income each period. In rare circumstances, companies can
reclassify debt securities into or out of the trading classification. 000167

Debt securities that a company purchases with the strict intent and ability to hold until maturity
may be designated as held-to-maturity (“HTM”). In limited circumstances, companies can sell
HTM debt securities or transfer those securities out of the HTM classification. HTM securities
are recorded on the balance sheet at amortized cost. Declines in fair value are not reported in the
balance sheet or income statement, except when the security value is impaired (the carrying
amount is above fair value) and the impairment is determined to be other-than-temporary.

Investments that a company does not choose to designate as trading or HTM are classified as
AFS. AFS securities are recorded on the balance sheet at fair value; however, unrealized

59
See Accounting Principles Board (“APB”) Opinion No. 18, The Equity Method of Accounting for Investments in
Common Stock.
60
See SFAS No. 159.
61
See SFAS No. 115.
62
See FSP FAS No. 115-1 / 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments (“FSP FAS 115-1 / 124-1”).
63
See SFAS No. 115; Emerging Issues Task Force (“EITF”) Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in
Securitized Financial Assets (“EITF Issue No. 99-20”); SFAS No. 5, Accounting for Contingencies (“SFAS No. 5”);
SFAS No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS No. 114”); Statement of Position
(“SOP”) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”).

26

000167
changes in fair value are generally not recorded in the income statement. Rather, changes in the
fair value of AFS securities are required to be recognized in OCI each period, until the
investment is ultimately sold or impairment in the security is determined to be other-than-
temporary. Reclassifications from AFS to HTM are permitted, provided that the company has
the positive intent and ability to hold the security to maturity.

Securitized Assets

Some assets undergo a process, referred to as securitization, by which the assets are transformed
into securities.64 While both financial and non-financial assets can be securitized, it is more
commonly observed for financial assets. In a typical securitization, a company transfers a
portfolio of financial assets, such as mortgage loans, automobile loans, student loans, credit card
receivables, or other assets, into a trust or other form of “special purpose entity.” The special
purpose entity then issues interests in the underlying assets to investors. The interests are often
issued in different classes, with different risks and payoffs for the investors.65 A holder of an
interest in a securitization would follow the accounting requirements for either debt or equity
securities depending on the characteristics of the interest held.

One unique aspect of accounting for interests in securitized financial assets is the accounting for
impairment (summarized at the end of this subsection).

Direct Investments in Loans

The accounting for a direct investment in a loan (as opposed to a debt security) varies based on 000168
whether the loan is held-for-investment (“HFI”) or held-for-sale (“HFS”). Generally, HFI loans
are accounted for at amortized cost, with impairment recognized only for probable credit losses.
Recognition of probable credit losses differs significantly from fair value losses in that the
measurement of loss incorporates only expected delays in the timing and amount of expected
cash flows that are due to events that have been incurred as of the measurement date (incurred
credit losses).

HFS loans (e.g., loans made with the intent to package and securitize) are reported at the lower-
of-cost-or-fair-value, with declines in fair value recognized in income.66 Losses recognized for
declines in the fair value of loans include the impact of all market factors, including changes in
expected cash flows, risk premiums, and liquidity.

Companies can transfer loans into or out of the HFS classification as a result of changes in
intentions regarding whether the loans will be sold or HFI.

Alternatively, a company may elect to measure its loans at fair value, as discussed further below,
regardless of whether they are HFI or HFS.67
64
See SFAS No. 140, Glossary.
65
See Ibid., paragraphs 73-75.
66
See SFAS No. 65; SFAS No. 5; SFAS No. 114; and SOP 03-3.
67
See SFAS No. 159.

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000168
Derivative Assets and Liabilities

Derivatives, as defined in SFAS No. 133 and related guidance, are required to be reported on a
company’s balance sheet at fair value. The basis for conclusions in SFAS No. 133 states that:

The Board believes fair value is the only relevant measurement attribute for derivatives.
Amortized cost is not a relevant measure for derivatives because the historical cost of a
derivative often is zero, yet a derivative generally can be settled or sold at any time for an
amount equivalent to its fair value.68

Common types of financial instruments that are accounted for as derivatives include interest rate,
commodity, foreign exchange, and credit-default swap and forward contracts.

SFAS No. 133 also provides special accounting treatment for derivatives that are designated and
qualify as hedges. Changes in the fair value (unrealized gains and losses) of derivative contracts
that are not designated as a hedge are recorded directly in income. For derivatives that are
designated as hedges of future cash flows (“cash flow hedges”), the changes in the fair value of
those derivatives are not immediately recorded in income. Rather, changes in fair value are
initially recorded in the accumulated OCI section of the shareholder’s equity portion of the
balance sheet and then reclassified into income when the related cash flows (the cash flows being
hedged) impact income. For derivatives that are designated as hedges of changes in the fair
value of a recognized asset or liability (“fair value hedges”), changes in the fair value of the
derivative, together with the offsetting change in the fair value of the hedged item, are 000169
recognized immediately in income. Thus, to the extent that the hedge is effective, the impact in
income is offset.

Other Financial Liabilities

Currently, U.S. GAAP generally only requires derivative liabilities to be measured on a recurring
basis at fair value. However, SFAS No. 159 provides companies with an option to elect to fair
value certain financial liabilities, as discussed further below.

As fair value is defined in SFAS No. 157, if an entity elects fair value (or, in the case of
derivative liabilities, fair value is required), the fair value is measured based on a transfer notion
as opposed to a settlement notion. That is, the fair value of a liability is based on how much it
would cost a company to pay another market participant to assume its liability. The non-
performance risk (the risk of borrower default) should be the same before and after the transfer.
This measurement requires companies to include changes in creditworthiness of the borrower in
the fair value of the liability. A decline in the creditworthiness of a company results in the
recognition of a gain in the income statement as the fair value of the liability declines.

68
SFAS No. 133, paragraph 223.

28

000169
Fair Value Option

In recent years, the FASB has included a “fair value option” (“FVO”) in several standards, which
permits, but does not require, reporting entities to make elections to measure certain assets and /
or liabilities at fair value. In 2006, the FASB issued SFAS No. 155 and SFAS No. 156. Both of
these standards permit fair value elections in certain circumstances.69 In 2007, the FASB issued
SFAS No. 159. SFAS No. 159 expanded the ability of reporting entities to elect fair value
measurement for most financial assets and liabilities, with unrealized changes in fair value
reported in earnings and thereby impacting net income. The FASB stated the objective of SFAS
No. 159 as follows:

This Statement permits entities to choose to measure many financial instruments

and certain other items at fair value that are not currently required to be measured
at fair value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is expected to expand the
use of fair value measurement, which is consistent with the Board’s long-term
measurement objectives for accounting for financial instruments. In addition, it is
similar to a measurement choice permitted in International Financial Reporting
Standards.70

While SFAS No. 159 provides an “option,” the FASB set parameters around application of the
FVO. A reporting entity’s decision about whether to elect the FVO: (1) is applied on an 000170
instrument-by-instrument basis, with certain limited exceptions, (2) is irrevocable (once selected
for an individual instrument) and therefore cannot be changed subsequent to election, and (3) is
applied only to an entire instrument and not to only specified risks, specific cash flows, or a
portion of that instrument.71 When specifying that the FVO may be elected on an instrument by
instrument basis, the FASB noted that the option may be elected for a single eligible item
without electing it for other identical items, with certain limited exceptions.72

SFAS No. 159 became effective at the beginning of 2008 for calendar-year entities, with early
adoption allowed in 2007 in certain circumstances.73 Reporting entities could elect the FVO for
69
SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. SFAS No. 156 permits an entity to elect to subsequently
measure its servicing assets and servicing liabilities at fair value, by class.
70
SFAS No. 159, paragraph 1.
71
See SFAS No. 159, paragraph 5.
72
See SFAS No. 159, paragraph 12. The exceptions involve multiple advances made to one borrower pursuant to a
single contract; investments that would otherwise be accounted for under the equity method of accounting; eligible
instruments or reinsurance contracts; and insurance contracts with integrated or nonintegrated contract features or
coverages.
73
SFAS No. 159 became effective as of the beginning of each reporting entity’s first fiscal year that began after
November 15, 2007. See SFAS No. 159, paragraph 24. An entity was permitted to adopt the standard and elect the
FVO for existing eligible items as of the beginning of a fiscal year that begins on or before November 15, 2007. See
SFAS No. 159, paragraph 30.

29

000170
individual financial instruments that existed upon initial adoption of SFAS No. 159 and for new
financial instruments when acquired.

Impairments

The accounting for impairments of financial assets not subject to mark-to-market accounting
developed over many years on a standard-by-standard basis and differs depending upon the
characteristics, form, and intended use of the financial asset. For example, an HFI loan is
generally impaired when it is probable that a creditor will be unable to collect all amounts due.74
Measurement of loan impairment is based on management’s estimate of incurred credit losses
and is accounted for using a valuation allowance, often referred to as an allowance for credit
losses, with changes in the estimated valuation allowance recognized in income. In contrast, a
debt or equity security is generally considered impaired when its carrying amount (generally
based on amortized cost) exceeds its fair value.75 As noted earlier, fair value incorporates
assumptions that market participants would use in pricing the asset, including those related to
general interest rates, credit spreads, and liquidity.

For impaired debt or equity securities, only impairments that are considered to be “other-than-
temporary” (referred to as “other-than-temporary impairment” or “OTTI”) result in a
remeasurement at current fair value, with the change in fair value recognized in income.
Judgment is required in assessing whether an OTTI exists. Some of the factors that companies
consider in evaluating whether an OTTI exists include: the length of the time and the extent to
which the fair value has been less than its carrying amount; the financial condition and prospects
of the issuer; and the intent and ability of the holder to retain its investment in the issuer for a 000171
period of time sufficient to allow for any anticipated recovery in fair value.76 U.S. GAAP
generally mandates that subsequent to recording an impairment loss, further increases in the fair
value of an asset are not reflected in income until the asset is sold.

The current global economic crisis has highlighted difficulties in performing OTTI evaluations.77
As required by SFAS No. 115, a company that classifies securities as either HTM or AFS must
determine whether a decline in fair value below the amortized-cost basis is other-than-temporary.
There are basically three steps in determining if a company is required to take an OTTI charge to
income, including: (1) calculating the fair value of a security, (2) determining if a decline in fair
value is due to a credit related event, and (3) assessing whether or not the investor has the ability
and intent to hold the security until recovery. The current market environment has posed several
challenges for preparers as it relates to the calculation of the fair value of certain financial
instruments (e.g., certain Level 2 and Level 3 assets). Furthermore, preparers have struggled

74
See SFAS No. 114, paragraph 8.
75
See SFAS No. 115, paragraph 16.
76
See Staff Accounting Bulletin Topic 5M, Other Than Temporary Impairment of Certain Investments in Debt and
Equity Securities. See also FSP FAS 115-1 / 124-1.
77
See, e.g., letters from ABA (November 13, 2008), MassMutual, Citi, CAQ, Nationwide, ACLI, and FHLBC.

30

000171
with the multiple models that exist to determine if a decline in fair value is other-than-
temporary.78

Under U.S. GAAP, a debt security is subject to an assessment of OTTI under SFAS No. 115
with a subset of debt securities (interests in securitized financial assets) requiring incremental
procedures under EITF Issue No. 99-20.79 If a security is impaired for credit concerns utilizing
one of these models, the security is written down to current fair value and an expense is recorded
in the income statement. However, complexity exists regarding the determination of which
model should be utilized to determine if a credit-based impairment exists and the different
recognition thresholds required under each model.

In determining whether an impairment is other-than-temporary, EITF Issue No. 99-20 requires a

preparer to test for an adverse change in cash flows by using its best estimate of the cash flows
that a market participant would use in determining the fair value. In contrast, for securities not
within the scope of EITF Issue No. 99-20, there is no similar requirement to use a market
participant’s view. While on the surface this distinction may seem minor, EITF Issue No. 99-
20’s requirement to utilize market participant cash flows as compared to management’s own
internal estimates under SFAS No. 115, combined with the substantial decline in the fair value of
various securities in the current market environment, has resulted in substantial disparity in the
application of the models in practice and has reduced the comparability of financial statements.
To address these issues, on December 19, 2008, the FASB issued an exposure draft of FSP EITF
99-20-a, Amendments to the Impairment and Interest Income Measurement Guidance of EITF
99-20 (“FSP EITF 99-20-a”), that would remove the requirement to use market participant
assumptions for purposes of testing for OTTI. 000172

Section VII.A of this study provides further information about recent FASB activities in this
area.

ii. IFRS

As it relates to the application and use of fair value, IFRS differs from U.S. GAAP in its
accounting for financial instruments most significantly in the following respects:

• IFRS does not distinguish between investments that are in the form of debt securities and
those that are investments in loans. Under IFRS, regardless of the form, investments in
obligations with fixed or determinable payments generally can be accounted for as loans, if

78
See, e.g., letter from BDO Seidman, LLP to the FASB, dated November 17, 2008, as input to the FASB and
IASB’s November 25, 2008 Round Table Meeting on the Global Financial Crisis (available at:
http://72.3.243.42/board_handouts/11-25-08_Joint_FASB_IASB_Roundtable_Global_Financial_Crisis.pdf), which
states:
U.S. GAAP has four different impairment models for economically similar fixed income investments: FAS
5/FAS 114 for loans, SOP 03-3 for loans purchased with known deterioration in collectibility since origination,
EITF Issue 99-20 for retained interests in securitizations, and FAS 115 other-than-temporary impairment for
debt securities.
79
SOP 03-3 provides additional guidance regarding OTTI for acquired securities. The guidance in SOP 03-3
utilizes aspects of both SFAS No. 115 and EITF Issue No. 99-20.

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 the investments do not trade in an active market and the holder does not intend to sell the
investment in the near term.80 Similar to U.S. GAAP, accounting for investments not
classified as loans is based on whether the investment is classified as trading, AFS, or HTM.

• Prior to recent IASB amendments in October 2008, IFRS had more restrictive requirements
than U.S. GAAP about transferring certain financial assets. Subsequent to these
amendments, which are retroactively effective to July 1, 2008, non-derivative financial assets
held for trading and AFS financial assets may be reclassified under IFRS in particular
situations,81 as discussed in greater detail in Section VII.A.

• Under IFRS, the trigger for recognizing impairment differs from U.S. GAAP, resulting in the
potential for differences in the timing of when an impairment charge is recorded.

• Measurement of impairment losses differs under IFRS for HTM securities, which are written
down through income under both U.S. GAAP and IFRS. However, under U.S. GAAP, these
securities are written down to fair value; under IFRS, they are written down only for incurred
credit losses.

• IFRS has greater restrictions on the use of the option to elect fair value accounting.

b. How Fair Value Impacts Accounting for Non-Financial

Instruments

i. U.S. GAAP 000173

Non-financial assets and liabilities generally are not accounted for at fair value on a recurring
basis. Currently, non-financial assets and liabilities are generally initially measured at their cost
or based upon proceeds received (which many would view to be generally in line with fair
value). In addition, U.S. GAAP provides for many non-financial assets to be written down to
their current value when those assets are determined to be impaired. If the fair value of those
assets subsequently increases, the assets are generally not marked up to the new fair value. A
description of U.S. GAAP requirements that include non-recurring fair value measurements for
non-financial assets and liabilities is provided below.

Business Combinations

SFAS No. 141, Business Combinations (“SFAS No. 141”), was issued in June 2001.82 Though
this standard provides guidance on how to account for business acquisitions, it is significant from
a fair value measurement standpoint because the acquirer is required to measure many of the

80
See IAS 39, as amended, paragraph 9.
81
See “IASB amendments permit reclassification of financial instruments,” IASB press release (October 13, 2008).
82
SFAS No. 141(R), Business Combinations (“SFAS No. 141R”), was issued and will be effective for companies in
fiscal years beginning after December 15, 2008. SFAS No. 141R supersedes SFAS No. 141 and further requires the
use of fair value by requiring that most assets and liabilities acquired in an acquisition be measured at fair value. It
also requires that any non-controlling interest in the acquiree be measured at fair value.

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assets and liabilities acquired in the business combination at fair value. However, there are many
exceptions under SFAS No. 141 to the use of fair value upon initial recognition. Accordingly,
while assets may be reported on a target’s books at historical cost, they are often remeasured to
fair value upon acquisition. SFAS No. 141 also requires the identification and recognition of
intangible assets at fair value. While SFAS No. 141 only requires fair value measurement on
acquisition (and not on a recurring basis subsequent to the acquisition), this statement indicates
the FASB’s view that fair value measurement is relevant not only for financial instruments, but
also for certain transactions such as business combinations and for non-financial assets such as
intangible assets that are acquired in such transactions.83

Goodwill

Although goodwill itself is not measured at fair value, it represents a residual amount after other
amounts on the balance sheet have been measured at the date of acquisition. Goodwill must be
tested for impairment annually or more frequently if certain triggering events occur. If the
carrying amount of goodwill exceeds the residual amount from recognizing all other assets and
liabilities on the balance sheet at the date of the impairment test, then goodwill must be written
down to this revised residual amount, with the loss recognized in income.84

Indefinite-Lived Intangible Assets

Like goodwill, indefinite-lived intangible assets are required to be tested for impairment annually
or more frequently if certain triggering events occur. If the carrying value of the indefinite-lived
intangible exceeds its fair value, it must be written down to the estimated fair value, with the loss 000174
recognized in income.85

Other Long-Lived Assets

U.S. GAAP requires other long-lived assets, such as property, plant, and equipment, and finite-
lived intangible assets, to be written down to fair value, in certain circumstances (e.g., when the
expected cash flows to be generated by an asset or group of assets are less than the carrying
value). In addition, long-lived assets held-for-sale must be written down to fair value less costs
to sell. These losses are recognized in income.86

ii. IFRS

IFRS differs from U.S. GAAP as it relates to the use of fair value for non-financial instruments
in two primary respects. First, IFRS provides a FVO for non-financial assets such as property,
plant, equipment, and investment property, but does not do so for mortgage servicing rights
(“MSRs”), as permitted under U.S. GAAP.87 Second, IFRS requires reversal of impairment
83
See, e.g., SFAS No. 141, paragraph B171.
84
See SFAS No. 142, Goodwill and Other Intangible Assets.
85
See Ibid.
86
See SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”).
87
See IAS 16, Property, Plant and Equipment; and IAS 40, Investment Property.

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losses (when and if the value of an asset recovers) on non-financial assets other than goodwill in
certain circumstances.88

3. Historical Context for Fair Value Accounting

Early-Twentieth Century through the Great Depression

Prior to the development of mandatory accounting standards following the Great Depression,
companies had significant latitude in selecting their own accounting practices and policies.
There is evidence that the use of “current values” or “appraised values” for assets, and the
recording of upward asset revaluations, were common in the early-twentieth century in the
period prior to the Depression. During this period, balance sheets often included upward
revaluations of long-term assets such as property, plant, equipment, and intangible assets. For
example, a survey of 208 large industrial firms between 1925 and 1934 revealed that 75% of the
sample firms recorded upward or downward asset revaluations during this period, including 70
write-ups of property, plant, and equipment, seven write-ups of intangibles, and 43 write-ups of
investments.89 Further, prior to 1938, banking organizations were required for supervisory
purposes to use market value accounting for their investment securities portfolios. Serious
concerns on the part of the U.S. Treasury and the bank regulators over how this affected the
banks’ financial performance and investment decisions led the agencies to abandon in that year
the use of this accounting concept for supervisory purposes.90

In the aftermath of the Great Depression, there was a general move toward more “conservative”
accounting. This included a move away from the use of “current values” or “appraised values” 000175
for long-lived assets such as fixed assets and intangibles.91 This move away from “current
value” accounting and towards the use of historic cost accounting for long-lived assets was
strongly supported by Robert E. Healy, the first Chief Accountant of the SEC. Healy had
participated in the Federal Trade Commission (“FTC”) investigation of business practices that
preceded the formation of the SEC. This investigation uncovered widespread use of asset write-
ups which the FTC viewed as arbitrary. Commenting on the findings of this investigation, Healy
is quoted as observing that “you can capitalize in some [s]tates practically everything except the
furnace ashes in the basement.”92 During Healy’s tenure, the newly-formed SEC strongly
88
See IAS 36, Impairment of Assets.
89
See Solomon Fabricant, Revaluations of Fixed Assets, 1925-1934, National Bureau of Economic Research
Bulletin (December 1936). As a counterpoint, however, a study by Kirsten Eli & Gregory Waymire, Intangible
Assets and Stock Prices in the Pre-SEC Era, 37 Journal of Accounting Research (Supplement) (1999), at 17-44,
found evidence of some firms adopting deliberately conservative accounting policies in this pre-regulatory period.
For example, many firms (e.g., General Electric) wrote-down their intangible assets to nominal amounts, e.g., $1.
For a further discussion, see Gregory Waymire & Sudipta Basu, Accounting is an Evolving Economic Institution,
Foundations and Trends in Accounting (2008), Forthcoming.
90
See, e.g., letter dated November 1, 1990, from Federal Reserve Chairman Alan Greenspan to SEC Chairman
Richard Breeden.
91
See R. G. Walker, The SEC’s Ban on Upward Asset Revaluations and the Disclosure of Current Values, 28
Abacus 1 (1992), at 3-35.
92
Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and
Modern Corporate Finance, 108 (3rd ed. 2003).

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endorsed historic cost accounting for long-lived assets and moved to curtail the use of “appraised
values” through the registration process. By 1940, the practice of the upward revaluation of
fixed assets – a practice that had been commonplace in the late 1920s – was virtually extinct
from financial reporting in the U.S.93

Valuation of Securities

The use of fair value measurement expanded significantly in 1975, with the issuance of
authoritative accounting literature that mandated its use in certain circumstances due to concerns
about the appropriate measurement attribute for equity securities. Prior to 1975, there was a lack
of consistency in accounting literature, which resulted in diversity in accounting practice,
specifically with respect to marketable securities. Accounting practices included carrying such
securities at cost, at market, and, in some cases, a combination of both measurements for
different classes of securities. During 1973 and 1974, there were substantial declines in the
market values of many securities. These declines, in many cases, were not reflected in financial
reports. When the market recovered in 1975, the accounting guidance was unclear on whether
securities previously written down could be written up to previous carrying amounts. As a result
of these issues, the FASB issued SFAS No. 12, Accounting for Certain Marketable Securities, in
December 1975, which required that all marketable equity securities be recorded at the lower-of-
cost-or-fair-value. Debt securities continued to be accounted for at amortized cost.

Banking and Savings and Loan Crisis

The banking and savings and loan crisis of the 1980s exposed challenges with the historic cost 000176
model of accounting for financial institutions, as:

…in the Savings and Loan Crisis in the U.S., historic cost accounting masked the [extent
of the] problem by allowing losses to show up gradually through negative net interest
income. It can be argued that a mark-to-market approach would have helped to reveal to
regulators and investors that these institutions had problems. This may have helped to
prompt changes earlier than actually occurred and that would have allowed the problem
to be reversed at a lower fiscal cost.94

Specifically, savings and loan institutions accepted short-term deposits and used these deposits to
fund long-term fixed-rate (e.g., 30-year) mortgage loans, their primary asset. In the late 1970s
and early 1980s, interest rates were driven up by high inflation. Many savings and loans were
then in a position where they had to pay a higher rate of interest on their deposits than they were
earning on their existing fixed-rate mortgage loans. If these savings and loan institutions had to
sell their mortgage assets, which yielded, for example, five percent, to repay their deposits that
were currently yielding, for example, ten percent, they would have had to severely discount their
mortgage assets (because the current market rate was ten percent rather than the five percent

93
See Stephen Zeff, The SEC Rules Historic Cost Accounting: 1934 to the 1970s, 37 Accounting and Business
Research (International Accounting Policy Forum Issue) (2007).
94
Franklin Allen & Elena Carletti, Mark-to-Market Accounting and Liquidity Pricing, 45 Journal of Accounting and
Economics, at 358-378.

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when their mortgages were originated). In some cases, the “current value” of their assets was
less than the value of their liabilities, and these institutions were economically insolvent.
However, under the historic cost accounting model, these losses were not reflected in their
financial statements, with the effect of reducing transparency surrounding the solvency position
of these institutions. This, in turn, created a moral hazard problem, whereby the management of
economically less solvent institutions then had an incentive to take-on more risky investments
(e.g., commercial real estate) in the hope that they could trade their way out of their current
economically less solvent position. In effect, the historical-cost-based financial statements
obscured underlying economic losses and allowed troubled financial institutions to go
undetected. This led to various calls in the late 1980s and early 1990s for more use of market
values in regulatory accounting for financial institutions.95

Historical-cost-based financial statements also allowed financial institutions to engage in “gains

trading.”96 With the greater interest rate volatility in the 1980s, financial institutions were
increasingly in the position of holding assets or liabilities where the current market values of
these financial instruments differed markedly from their historical cost values shown in their
financial statements. In this situation management could opportunistically choose which assets
to sell, or which liabilities to settle, in order to realize gains (or losses) in particular accounting
periods. This afforded management a powerful income statement management tool.97 In
addition, for financial institutions short of capital, this created an incentive for the management
to sell their well-performing assets in order to realize gains to boost their capital, but retain their
poorly-performing assets (which had unrealized losses).

Changes in the Banking Model During the 1980s 000177

The change in the business environment during the 1980s also provides the backdrop that is
necessary to understand the progress of fair value accounting. Historically, many financial
institutions did not have dynamic risk management strategies and would rarely sell investments
before their maturity. Deregulation of interest rates during this period caused a change in the
strategies of financial institutions, and securities positions were traded more actively. New
financial instruments were created in response to changes in the market, such as deregulation, tax
law changes, volatility, and other factors.98 U.S. GAAP for such changes in financial
instruments was being developed on an issue-by-issue basis. For example, accounting literature
issued included SFAS No. 52, Foreign Currency Translation, issued in 1981, which required fair
value accounting for certain foreign exchange contracts through the income statement and SFAS
95
See, e.g., Edward J. Kane, The Gathering Crisis in Federal Deposit Insurance (1985); Lawrence J. White, On
Measurement of Bank Capital, 13 Journal of Retail Banking 2 (1991), at 27-34; and George Benston, Market Value
Accounting: Benefits, Costs and Incentives, Proceedings of the Conference on Bank Structure and Competition,
Chicago: Federal Reserve Bank of Chicago (1989), at 547-563.
96
The FASB’s subsequent adoption of SFAS No. 115, requiring fair value accounting for most marketable securities
was motivated, in part, by the desire to curtail such “gains trading.” See James Thompson, SFAS 115: A Victory for
Fair Value Accounting, 39 National Public Accountant 10 (1994), at 21-30.
97
See testimony of Richard C. Breeden, Chairman, SEC, before Committee of Banking, Housing and Urban Affairs
of United States Senate on Issues Involving Financial Institutions and Accounting Principles (June 25, 1999).
98
See SFAS No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risks.

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No. 80, Accounting for Futures Contracts, issued in 1984, which required futures contracts that
do not qualify for hedge accounting to be measured at fair value through income.

FASB’s Financial Instruments Project

Due, in part, to the savings and loan crisis, the FASB recognized the need to develop disclosure
and accounting requirements on a broader basis for all classes of financial instruments. The
broader project was added to the FASB’s agenda in 1986 “to address financial reporting issues
that were arising, or that were given a new sense of urgency, as a result of financial
innovation.”99 A disclosure project was viewed as an interim step in addressing accounting
issues surrounding such financial instruments and off-balance sheet financing. This project
resulted in the issuance of SFAS No. 105, in March 1990, and SFAS No. 107, Disclosures about
Fair Value of Financial Instruments (“SFAS No. 107”), in December 1991.

The FASB continued its work on a second phase of the broader project of accounting for
financial instruments to address issues of inconsistent literature, the perceived greater relevance
of fair value information, gains trading practices, and the inequitable result of lower-of-cost-or-
fair-value accounting. This work resulted in the FASB issuing SFAS No. 115 in 1994. As
previously described in this study, this statement requires companies to classify their investments
in debt or equity securities as trading, AFS, or HTM, with different accounting models for each
classification.

In June 1997, the FASB issued SFAS No. 130, Reporting Other Comprehensive Income (“SFAS
No. 130”). This statement was issued in response to user concerns that changes in certain assets 000178
and liabilities were being recorded directly in equity, bypassing the income statement. In an
attempt to improve the transparency and prominence of such items, the FASB required that
changes in equity needed to be reported individually and with the same prominence as other
financial statements included in a full set of financial statements. Unrealized gains and losses on
AFS securities were one category required to be so reported. The impact of SFAS No. 130 was
to make changes in value of AFS securities – which continue to be excluded from income – more
transparent.

Expanded Use of Derivative Instruments in the 1990s

The historical cost accounting model was not well-suited to address the development and
proliferation of derivative instruments. These instruments often involve little or no initial
investment but, given the leveraged nature of the positions, subsequent changes in value can be
dramatic. The historical accounting model did not appropriately capture the associated risks and
uncertainties or subsequent changes in value. An increase in the use of derivatives, lack of
transparency around their values, and major losses incurred by various entities as a result of
investments in derivatives100 were factors that led the FASB to develop a new accounting

99
SFAS No. 133, paragraph 207.
100
See Thomas R. Weirich & Lynn E. Turner, What’s New in Derivative Regulation, 6 The Journal of Corporate
Accounting and Finance 1 (Autumn 1994) at 1-16. Exhibit 2 in the article presents, “Major Losses due to Derivative
Activity,” including $1 billion losses for Metallgesellschaft and Proctor & Gamble Co.

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standard on derivative instruments, resulting in the issuance of SFAS No. 133 in June 1998.101
As noted previously in this study, SFAS No. 133 requires that all derivatives be accounted for at
fair value on the balance sheet (with minor exceptions). Changes in the fair value of the
derivatives are to be recorded in income unless the derivatives qualify for special accounting
treatment known as hedge accounting.

4. Other Measurement Bases

a. Description of Other Measurement Bases

For the purpose of this discussion, measurement (the basis given for purposes of accounting)
refers to both the initial measurement of an asset or liability and subsequent measurement,
including revaluations, impairment, and depreciation. As noted above, fair value is only one of
several measurement bases currently used in the mixed-attribute accounting model. Other
measurement bases used in current accounting practice include:102

• Historical cost
• Current cost
• Net realizable value
• Present value of future cash flows

This list is not intended to be exhaustive. Some aspects of the measurement bases listed above
could be disputed (e.g., the present value of future cash flows could be considered a
measurement technique rather than a measurement basis per se). Other bases arguably could 000179
also be added (e.g., deprival value, which is the loss that an entity would suffer if it were
deprived of an asset), but such other bases would typically be defined by reference to or hold
attributes in common with the measurement bases listed.103

The Boards have been engaged in ongoing work to identify, define, and evaluate potential
measurement bases in order to draw conceptual conclusions regarding their appropriateness in
future standard-setting projects. Below, brief descriptions of the measurement bases listed above
as used in current practice is provided, followed by discussion of the Boards’ ongoing work
regarding potential measurement attributes. Section VI.B further discusses issues related to
identifying appropriate measurement bases.

101
See SFAS No. 133, Background Information and Basis for Conclusions, especially paragraph 212, and United
States General Accounting Office, Report to Congressional Requesters, Financial Derivatives: Actions Needed to
Protect the Financial System (May 1994)
102
See SFAC No. 5, paragraph 67.
103
See IASB Discussion Paper, Measurement Bases for Financial Accounting – Measurement on Initial
Recognition, prepared by the staff of the Canadian Accounting Standards Board (November 17, 2005), paragraphs
71, 73, and 94.

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Historical Cost

Historical cost (or historical proceeds) is the amount of cash, or its equivalent, paid to acquire an
asset or received when an obligation is incurred.104 After initial measurement, it is often adjusted
for impairment, depreciation, amortization or other allocations (e.g., historical cost less
accumulated depreciation). Some have observed that the term “historical exchange price” may
be more descriptive than “historical cost.” While such terms describe the measurement basis for
many classes of assets (e.g., most inventory, property, equipment), it is less fitting for other
classes of assets and liabilities (e.g., deferred income tax assets, warranties payable).105

Current Cost

Current cost broadly refers to the amount of cash or its equivalent currently required to replace
the asset with an identical one or one with equivalent productive capacity or service potential.106
Some inventories are reported at current cost. Variations of current cost include replacement
cost and reproduction cost.

Net Realizable Value

Net realizable value, sometimes referred to as settlement value, is the non-discounted amount of
cash, or its equivalent, expected to be derived from the sale of an asset, net of selling costs and
costs to complete, as well as the non-discounted amount of cash, or its equivalent, that is
expected to be paid to liquidate an obligation in the due course of business. Examples of items
where this measure is utilized include short-term receivables, trade payables, and warranty 000180
obligations.107

Present Value of Future Cash Flows

Present value of future cash flows refers to the present or discounted value of estimated future
net cash flows, generally as expected to arise from an asset or to satisfy a liability in due course
of business.108 Long-term receivables and payables are examples of items that incorporate the
concept of discounted cash flows. This definition is similar to the concept of fundamental value
or value-in-use,109 which would also take into account the entity’s internal information about the
likely performance of the asset, such as its ability to extract above average net cash flows from

104
See SFAC No. 5, paragraph 67a.
105
See SFAC No. 5, paragraphs 68-69.
106
See SFAC No. 5, paragraph 67b; and IASB Discussion Paper, Measurement Bases for Financial Accounting –
Measurement on Initial Recognition, prepared by the staff of the Canadian Accounting Standards Board (November
17, 2005), paragraph 320.
107
See SFAC No. 5, paragraph 67d.
108
See SFAC No. 5, paragraph 67e.
109
See SFAC No. 7, Using Cash Flow Information and Present Value in Accounting Measurements (“SFAC No.
7”), paragraph 24b; and IFRS 5A, Non-current Assets Held for Sale and Discontinued Operations (“IFRS 5A”).

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an asset. Under IFRS, value-in-use is used, for example, to determine the recoverable amount in
accounting for some impairment evaluations.110

b. Consideration of Measurement Attributes

In developing standards, accounting standard-setters typically provide some degree of

measurement guidance, including the required or permitted measurement attribute(s) to apply to
the assets and liabilities that are covered by the particular standard. Ideally, the conceptual
frameworks for the set of accounting standards would provide the standard-setter with tools to
use in deciding when to apply particular measurement attributes. However, the Boards’ staffs
have noted that measurement is one of the more underdeveloped areas in the accounting
conceptual frameworks, commenting that “[n]either of the current [conceptual] frameworks
provides any analysis of the strengths and weaknesses of the various measurement bases, nor do
they offer any guidance on choosing among the listed bases or considering other alternatives.”111

In a 2003 study on principles-based accounting standards, the Staff observed that an ideal
principles-based or objectives-oriented accounting standard would, among other things, be based
on an improved and consistently applied conceptual framework.112 The Staff also observed that
several facets of the FASB’s existing conceptual framework would need to be addressed in order
to facilitate a shift to a more principles-based regime, including the establishment of a paradigm
for selecting from among possible measurement attributes.113

Since 2004, the Boards have been engaged in ongoing work to improve, on a joint basis, their
existing respective conceptual frameworks. The project has multiple phases, with “Phase C” 000181
focusing on measurement.114 Phase C of the project seeks to identify and define possible
measurement bases (“Milestone I”), evaluate the measurement basis candidates (“Milestone II”),
and draw conceptual conclusions (such as whether use of a single measurement basis would
satisfy the needs of financial statement users or if some combination of bases is needed), as well
as address practical measurement issues that the Boards encounter when developing standards
(“Milestone III”). Milestone I was completed in Spring 2007, with the Boards agreeing to a set
of nine proposed measurement basis candidates, which differ in terminology from the
measurement bases described earlier that are currently in use.115 The nine proposed
measurement basis candidates are discussed further in Section VI.B of this study.

110
See IFRS 5A.
111
See the Boards’ staffs, Conceptual Framework Project Phase C: Measurement Milestone I Summary Report –
Inventory and Definitions of Possible Measurement Bases (“Milestone I Summary Report”). (available at:
http://www.fasb.org/project/CF_Milestone_I_Summary_Report.pdf)
112
See Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States
Financial Reporting System of a Principles-Based Accounting System, July 2003 (“Principles-Based Accounting
Study”), at Executive Summary.
113
See Ibid.
114
See information about the Boards’ joint project at:
http://www.fasb.org/project/conceptual_framework.shtml#background.
115
See Milestone I Summary Report.

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The Staff has previously observed a need for the FASB’s existing conceptual framework to more
clearly articulate how the trade-offs among relevance, reliability, and comparability of
accounting information should be made.116 Relevance, reliability, and comparability are referred
to as “qualitative characteristics” of accounting information, and have been described as
follows:117

• Relevance – the capacity of information to make a difference in a decision by helping users

to form predictions about the outcomes of the past, present, and future events or to confirm or
correct prior expectations.

• Reliability – the quality of information that assures that information is reasonably free from
error and bias and faithfully represents what it purports to represent.

• Comparability – the quality of information that enables users to identify similarities in and
differences between two sets of economic phenomena.

During January and February 2007, the Boards held roundtable discussions on measurement and
gathered views from the roundtable participants as to how well different measurement bases
satisfied these qualitative characteristics.118 The most frequent comment about historical cost as
a measurement basis was that it is reliable. The most frequent criticism of historical cost was
that it is not relevant. A few participants noted that historical cost is not comparable (i.e., it gives
different numbers for the same items).

In contrast, the most frequent comment about fair value was that it is the most relevant attribute 000182
for an asset or liability (i.e., contemporary information is more useful to financial statement users
in making decisions). However, some participants expressed concerns about fair value on the
grounds that it is not reliable. More specific comments about fair value were that it is not
objective, it is not precise, it is subject to too many assumptions, and that investors are skeptical
of mark-to-model numbers.

116
See Principles-Based Accounting Study.
117
See SFAC No. 2, Qualitative Characteristics of Accounting Information.
118
Roundtable participants included representatives of reporting entities (preparers), auditors, investors, regulators,
and other users of financial reporting. See Boards’ staffs, Summary Report of the Conceptual Framework
Measurement Roundtables, Hong Kong, London, and Norwalk (January and February 2007), paragraph 52.
(available at http://www.fasb.org/project/cf_roundtable_summary_report.pdf)

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000184
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000185
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 UNITED STATES OF AMERICA

before the

SECURITIES AND EXCHANGE COMMISSION

INVESTMENT ADVISERS ACT OF 1940

Rel. No. 3015 / April 13, 2010

Admin. Proc. File No. 3-9599

In the Matter of
ORDER DENYING IN
JOHN GARDNER BLACK and PART AND GRANTING
DEVON CAPITAL MANAGEMENT IN PART PETITION TO
1446 Centre Line Road SET ASIDE BAR ORDER
Warriors Mark, Pennsylvania 16877

John Gardner Black and Devon Capital Management ("Petitioners") have requested that
we vacate our 1998 Order Instituting Proceedings, Making Findings and Imposing Remedial
Sanctions ("Settled Order") which revoked Devon Capital's registration as an investment adviser 000194
and barred Black from associating with any broker, dealer, municipal securities dealer,
investment adviser, or investment company.1 Petitioners assert that "[t]he factual basis for the
proceeding no longer constitute violations" of the provisions alleged. The Division of
Enforcement opposes Petitioners' request. For the reasons discussed below, we have determined
to deny the requested relief in part and to grant it in part.

I.

On December 12, 1997, Petitioners settled civil injunctive proceedings by agreeing to be

enjoined from certain violations of the antifraud provisions of the securities laws.2 The
injunctive complaint alleged that Black, acting through two entities he owned and controlled,

1
John Gardner Black, Investment Advisers Act Rel. No. 1720 (May 4, 1998), 67
SEC Docket 357.
2
Although neither the injunctive complaint, SEC v. Black, 97-CV-2257 (W.D. Pa.
Sep. 26, 1997), nor the consent injunction, SEC v. Black, 97-CV-2257 (W.D. Pa. Dec. 12, 1997),
nor a related disgorgement order, SEC v. Black, 97-CV-2257 (W.D. Pa. Apr. 29, 1998), is in the
record, we take official notice of them pursuant to Commission Rule of Practice 323. 17 C.F.R.
§ 201.323.

000194
 2

Devon Capital and Financial Management Sciences, Inc. ("FMS"),3 "perpetrated . . . an on-going
fraudulent scheme" which "resulted in the loss of millions of dollars of municipal bond proceeds
invested by school districts throughout western and central Pennsylvania." According to the
complaint, Devon Capital represented to these school districts that its investment products would
pay a "specified rate of return to clients over a fixed period" and were "fully protected or
collateralized by a pool of securities equaling the amount of the client’s principal investments."
In fact, the complaint asserts, petitioners "misrepresented . . . the value of the assets held as
collateral, overstating the actual value of those assets by approximately $71 million." In
addition, the complaint alleged that Petitioners had "misappropriated a total of approximately
$2 million" of client funds "to pay personal and business expenses."

Petitioners, without admitting or denying the allegations in the complaint, consented to

the entry of the district court's order enjoining them from future violations of the antifraud
provisions alleged in the complaint. In entering this order, the district court ruled that "there is
sufficient basis herein for the entry of this Final Judgment" and prohibited Petitioners from
"contest[ing] the allegations in the Complaint" in connection with the subsequent determination
of the appropriate disgorgement and civil penalties amount. Black subsequently consented to a
court order requiring him to pay disgorgement of $3,632,031 (plus $326,883 in prejudgment
interest), and a civil money penalty of $500,000.4

On May 4, 1998, Petitioners consented to the entry of the Settled Order, in anticipation of
000195
administrative proceedings, and without admitting or denying the findings contained therein. In
issuing the Settled Order, we found that Petitioners had been enjoined and that the complaint in
the injunctive proceeding alleged that they had made material misrepresentations and omissions,
resulting in millions of dollars in losses to their clients, and that they had "benefitted financially
from their actions."

In 2000, subsequent to the issuance of the Settled Order, Black pled guilty to twenty-one
counts of investment adviser fraud, three counts of mail fraud, and two counts of making false
statements. It appears that these criminal proceedings arose from the same conduct that provided
the basis for the earlier injunctive proceeding. In connection with the criminal proceeding, Black
stipulated that he, through FMS, represented to clients and prospective clients that he would
"secure or collateralize the investments of the client with securities having a fair market value

3
FMS was a defendant in the injunctive action but is not a party to the instant
petition.
4
The Division represents that "[t]he Commission's records indicate that only
$1,500 has been paid" of the disgorgement, interest and civil penalty assessed against him; Black
maintains that he has paid $30,000.

000195
 3

equal to or greater than 100% of the clients' investments . . . ."5 Black also stipulated that "[a]t no
material time as of January 1, 1995, did the collateral accounts hold collateral at a ratio of 100%
of the fair market value of client funds invested . . . ."6 The Stipulation provided further that,
even though Black used collateralized mortgage obligations ("CMOs") to provide the promised
collateral for the clients' accounts, he "failed to disclose that client funds had . . . been invested in
[CMOs]" when clients or their auditors asked him if there were CMOs in their accounts.7 The
Division represents that Black was sentenced to forty-one months' imprisonment, three years'
supervised release, and was ordered to pay $61,300,000 in restitution.8

II.

Petitioners argue in support of their requested relief that the Commission and the
Financial Accounting Standards Board ("FASB") have revised the applicable valuation method
for securities of the type at issue in this case, so that the Commission's approach is now
consistent with that used by Petitioners during the relevant period, between 1995 and 1997.
According to Petitioners, "[h]ad the Commission used the current fair value methods now
required, the fair value of the CMO derived using present value analysis would have supported
the valuations supplied to clients in monthly statements." In light of this change, Petitioners
contend, "there can no longer be a public purpose nor [sic] in the public's interest to enforce the
[Commission's] orders."
000196

5
As part of his guilty plea, Black signed a "Joint Stipulated Factual Basis Pursuant
to FRCRP 11(f)" ("Stipulation"). United States v. Black, 99-CR-203 (W.D. Pa. Jan. 24, 2000).
There is an appendix attached to the Stipulation listing all the counts of the indictment to which
Black pled guilty. Petitioners attached a copy of the Stipulation to their reply.
6
Black further stipulated that "[t]he solicitation materials . . . at times stated to
potential clients that their funds would not be pooled." In fact, however, according to the
Stipulation, "[i]n January, 1996, the collateral accounts were merged."
7
Black stipulated that the clients' inquiries about CMOs were prompted by an
August 1996 letter to Pennsylvania school districts from Pennsylvania's Auditor General raising
"grave concerns" about investing in CMOs.
8
Black's conviction could have provided an independent basis for administrative
sanctions under the Advisers Act. 15 U.S.C. §§ 80b-3(e) and (f). The Settled Order, however,
precedes Black's conviction and reflects only the entry of the consent injunction against him.
According to information from the Federal Bureau of Prisons website, John Gardner Black,
inmate register number 10984-0068, was released from prison on June 13, 2003. U.S. Fed. Bur.
of Prisons, Inmate Locator, http://www.bop.gov/iloc2/LocateInmate.jsp. The extent to which
Black paid restitution is unclear.

000196
 4

The Division argues in response that Petitioners are making a collateral attack on the
injunction to which they agreed. According to the Division, there is "no value in re-opening
these proceedings simply to entertain conclusory assertions regarding Black and Devon
[Capital]'s valuation [of the securities at issue] more than a decade ago, assertions that are
unsupported by any evidence whatsoever and are similar to those rejected on other occasions by
the courts." The Division argues further that Petitioners take too narrow a view of the conduct at
issue in the injunctive proceeding, specifically ignoring the fraud in connection with the
marketing and management of their clients' funds as alleged in the injunctive complaint. The
Division argues in conclusion that Petitioners have not "demonstrated the compelling facts or
circumstances that would support a grant of relief."

III.

As noted most recently in Kenneth W. Haver, CPA,9 we have a "strong interest" in the
finality of our settlement orders.10 In Haver, the petitioner sought reconsideration of a
Commission order suspending him from practicing as an accountant before the Commission.
The order had been entered with Haver's consent, in settlement of administrative proceedings that
were brought based on Haver's consent to an injunction against future violations of the antifraud
provisions of the securities laws. Haver sought relief because he had recently obtained access, in
a separate class action, to "compelling new evidence" that, according to Haver, raised doubts
about whether the allegations made in the underlying injunctive proceeding were true.
000197
In rejecting Haver's petition, we noted that he "misconceive[d] the basis for our
suspension."11 Our decision was based not on any finding of violation but "on the district court's
injunction and Haver's offer of settlement." We held that Haver, in consenting to the injunction,

9
Kenneth W. Haver, CPA, Securities Exchange Act Rel. No. 54824 (Nov. 28,
2006), 89 SEC Docket 1237.
10
"Public policy considerations favor the expeditious disposition of litigation, and a
respondent cannot be permitted to [follow] one course of action and, upon an unfavorable
[result], to try another course of action." Id. at 1240 n.11 (quoting with indicated alterations
David T. Fleischman, 43 S.E.C. 518, 522 (1967) (finding that "the failure of a respondent to
testify and adduce available evidence to meet the charges against him . . . does not entitle him to
have the proceedings reopened after the issuance of an adverse decision")). Appellate courts
have found that "[i]f sanctioned parties easily are able to reopen consent decrees years later, the
SEC would have little incentive to enter into such agreements. There would always remain open
the possibility of litigation on the merits at some time in the distant future when memories have
faded and records have been destroyed." Haver, 89 SEC Docket at 1241 (quoting Miller v. SEC,
998 F.2d 62, 65 (2d Cir. 1993) (affirming Commission order denying a petition to set aside a
censure imposed with respondent's consent)).
11
Id. at 1241.

000197
 5

was "presumed . . . to have been enjoined by reason of the misconduct alleged in the
complaint."12 Because "follow on" administrative proceedings presume that the allegations of the
injunctive complaint are true, we did not, and were not required to, make any findings of
misconduct. Consequently, because we made no misconduct findings in sanctioning Haver, there
was no basis for considering the evidence that, Haver claimed, refuted the allegations made in the
underlying injunctive proceeding.

Similarly, there is no warrant here for considering Black's assertion that the basis for the
injunctive action in this case is no longer valid. As we have repeatedly held, Petitioners, like any
parties to a follow-on proceeding, are collaterally estopped from challenging before us the district
court's findings or, as here, in a settled proceeding, the allegations made in the complaint in that
proceeding.13 Like Haver, Black settled the underlying injunctive action and remains bound by
the allegations in the injunctive complaint unless and until the district court modifies the
injunction.14

12
Id. 000198
13
See, e.g., Michael Batterman, 57 S.E.C. 1031, 1039 n.18 (2004) (precluding
respondents from challenging in administrative proceeding findings of underlying injunctive
action). We note that it is, and was in 1998, our policy "not to permit a defendant . . . to consent
to a judgment . . . or order that imposes a sanction while denying the allegations in the
complaint . . . ." 17 C.F.R. § 202.5. We reaffirmed our policy in Marshall E. Melton, 56 S.E.C.
695, 712 (2003). In any event, Black's collateral attack is not persuasive. Although Petitioners
assert that changes in applicable securities valuation methods exonerate them, they do not
provide any evidentiary support for their claim nor do the briefs explain what differences the use
of the alternative valuation method would have made in the district court's evaluation of
Petitioners' conduct.
14
As we noted in Haver, Petitioners could request that the district court vacate the
injunction against them on the grounds of "mistake" or "any other reason" pursuant to Rule 60(b)
of the Federal Rules of Civil Procedure. See Fed. R. Civ. P. 60(b) (entitled "Grounds for Relief
from a Final Judgment, Order, or Proceeding"). We do not intend to suggest in this order any
view regarding such a petition and observe that, it appears, Black's earlier efforts to persuade the
courts to reconsider his case were unsuccessful. See SEC v. Black, 262 Fed. Appx. 360, 362 (3d
Cir. 2008) (denying relief from consent injunction outside direct appeal process); Black v. United
States, 84 Fed. Cl. 439, 440 (2008) (asserting civil claims against United States). Black has also
attempted, again without success, to have his criminal sentence vacated, set aside, or corrected.
United States v. Black, 2001 US Dist. LEXIS 26296 (W.D. Pa. 2001), aff'd 85 Fed. Appx. 875
(3d Cir. 2003) (unpublished).

000198
 6

Although we will not permit collateral attacks on court decisions providing the basis for
follow-on proceedings, we have held that the sanctions imposed in such proceedings may be
modified based on a consideration of certain factors related to the public interest involved,
including

the nature of the misconduct at issue in the underlying matter . . . the time that has
passed since issuance of the administrative bar; the compliance record of, and any
regulatory interest in, the petitioner since issuance of the administrative bar; the age
and securities industry experience of the petitioner, and the extent to which the
Commission has granted prior relief from the administrative bar; whether the
petitioner has identified verifiable, unanticipated consequences of the bar; the
position and persuasiveness of the Division of Enforcement, as expressed in response
to the petition for relief; and whether there exists any other circumstance that would
cause the requested relief from the administrative bar to be inconsistent with the
public interest or the protection of investors.15

In applying these factors, it is our general policy that bars should "remain in place in the usual
case and be removed only in compelling circumstances."16

Petitioners' arguments that the above-quoted factors favor the requested relief are
misplaced. Petitioners focus on Black's asserted compliance with the bar and his thirty years of
000199
experience in the industry (before the bar) as reasons to grant the requested relief. We note first
that for almost three and one-half years of the time following imposition of the bar, Black was
imprisoned. As for the remainder of the time since the bar was imposed, we expect financial
industry professionals to comply with our orders.17

15
Haver, 89 SEC Docket at 1240.
16
Id. at 1240 n.9.
17
In general, a clean disciplinary record is not determinative in our consideration of
sanctions. Marshall E. Melton, 56 S.E.C. at 708 (imposing bar based on antifraud injunction
despite clean disciplinary record); Martin R. Kaiden, 54 S.E.C. 194, 209 (1998) (same); see also
Robert Bruce Lohman, 56 S.E.C. 573, 582 (2003) (imposing bar in insider-trading proceeding
despite clean disciplinary record). Although the bar was imposed eleven years ago, we have held
that periods substantially longer than eleven years are not unduly long in considering requests to
modify sanctions. See, e.g., Stephen S. Wien, 57 S.E.C. 162, 172 (2003) (stating that "[i]t has
been twenty-one years since the consent order issued, a time frame that is not unduly lengthy and
does not weigh significantly in favor of relief"); Ciro Cozzolino 57 S.E.C. 175, 183 (2003)
(passage of twenty-nine years since bar "does not, standing alone, weigh significantly in favor of
relief"); Mark S. Parnass, Exchange Act Rel. No. 50730 (Nov. 23, 2004), 84 SEC Docket 727,
729 (same); see also Victor Teicher, Exchange Act Rel. No. 58789 (Oct. 15, 2008), 94 SEC
(continued...)

000199
 7

Petitioners were enjoined in connection with a fraudulent scheme that lasted for two years
and defrauded clients, mostly rural school districts investing the proceeds from bond issues, of
millions of dollars. After Petitioners agreed to the sanctions imposed by the Settled Order, Black
pled guilty to criminal charges arising, it appears, out of the same conduct which led to the
injunction and was imprisoned and ordered to pay more than $61 million in restitution. Before
now, Black has not requested or received from the Commission any relief from the sanctions to
which he agreed. Black does not identify any unforseen consequences or hardship resulting from
the sanctions and, indeed, represents that he has "no interest and is not planning on becoming
involved in the investment advisory business again." Nor is there any evidence that Black, who
exhibits no remorse for his actions, has learned from his misconduct or is unlikely to engage in
future misconduct if permitted to re-enter the industry.18

In sum, we find that Petitioners have not identified any compelling circumstances to
justify the requested modification of sanctions. Taking due account of our precedent and our
policy not to allow collateral attacks on consent injunctions, we decline to vacate the revocation
of Devon Capital's registration or the bar prohibiting Black's association with any investment
adviser or investment company.

While we do not believe that circumstances generally favor modification of the sanctions
agreed to in the Settled Order, we nevertheless have determined to vacate that portion of the
order prohibiting Black from association with a broker, dealer, or municipal securities dealer.
000200
We do this in light of precedent issued subsequent to the Settled Order questioning the validity of
so-called "collateral bars" such as those involved here.19

Accordingly, IT IS HEREBY ORDERED THAT the petition of Devon Capital

Management, Inc. to vacate the revocation order entered against it on May 4, 1998, be, and it
hereby is, DENIED; and it is further

17
(...continued)
Docket 10810, 10812 (stating "when an unqualified bar has been imposed, as is the case here,
this 'evidences [our] conclusion that the public interest is served by permanently excluding the
barred person from the securities industry . . . .'") (quoting Unqualified Bar Orders, Exchange
Act Rel. No. 34720 (Sept. 13, 1994), 57 SEC Docket 1941, 1941 (emphasis in original)).
18
We note in this connection that Black has paid very little of the amounts assessed
against him by the district court in the injunctive proceeding. See supra note 4.
19
Victor Teicher v. SEC, 177 F.3d 1016 (D.C. Cir. 1999) (vacating collateral bar);
see also Salim B. Lewis, Exchange Act Rel. No. 51817 (Jun. 10, 2005), 85 SEC Docket
2472 (same); Peter F. Comas, Exchange Act Rel. No. 49894 (Jun. 18, 2004), 83 SEC Docket
251 (same).

000200
 8

ORDERED that the petition of John Gardner Black to vacate the bar order entered against
him on May 4, 1998, as it applies to the bar from association with any investment adviser or
investment company, be, and it hereby is, DENIED; and it is further

ORDERED that the bar order entered against John Gardner Black on May 4, 1998 be, and
it hereby is, VACATED insofar as it bars John Gardner Black from association with any broker,
dealer, or municipal securities dealer.

By the Commission.

Elizabeth M. Murphy
Secretary

000201

000201
 UNITED STATES OF AMERICA

before the

SECURITIES AND EXCHANGE COMMISSION

INVESTMENT ADVISERS ACT OF 1940

Rel. No. 3040 / June 18, 2010

Admin. Proc. File No. 3-9599

In the Matter of
ORDER DENYING
JOHN GARDNER BLACK RECONSIDERATION
1446 Centre Line Road
Warriors Mark, Pennsylvania 16877

John Gardner Black seeks reconsideration of an April 2010 Commission order (the "April
Order") 1 denying in part his petition to vacate a 1998 settlement with the Commission (the "Settled
Order") 2 which, among other things, barred Black from associating with any broker, dealer,
municipal securities dealer, investment adviser, or investment company.3 For the reasons discussed
below, we have determined to deny Black's motion.4
000202

1
John Gardner Black, Investment Advisers Act Rel. No. 3015 (Apr. 13, 2010), __
SEC Docket ____. Although the April Order denied Black's request to vacate the entire Settled
Order, it did vacate the broker, dealer, and municipal securities dealer bars that had been imposed
"in light of precedent issued subsequent to the Settled Order" regarding so-called "collateral bars."
See Teicher v. SEC, 177 F.3d 1016 (D.C. Cir. 1999) (vacating collateral bar).
2
John Gardner Black, Investment Advisers Act Rel. No. 1720 (May 4, 1998), 67
SEC Docket 357.
3
The April Order also declined to vacate the Settled Order's registration revocation of
Devon Capital Management ("Devon"), an investment advisory firm which Black controlled.
Although Black makes no specific reference to Devon in his current motion (other than in the
caption and his discussion of the facts), it is not clear whether his request includes Devon. To the
extent that Devon requests reconsideration of the April Order, its request is also denied as not
meeting the requirements set by our Rules of Practice. See 17 C.F.R. § 201.470(b) (requiring that
the reconsideration motion "specifically state the matters of record alleged to have been erroneously
decided, the grounds relied upon, and the relief sought").
4
Our Rule of Practice 470(b), 17 C.F.R. § 201.470(b), provides that "[n]o response to
a motion for reconsideration shall be filed unless requested by the Commission." We did not request
the views of the Division of Enforcement on Black's motion. The Division opposed Black's original
(continued...)

000202
 2

I.

A. Background. In 1997, Black settled civil injunctive proceedings (the "Injunctive

Action") by agreeing to be enjoined from certain violations of the antifraud provisions of the
securities laws. The injunctive complaint alleged that Black, acting with two entities he owned and
controlled (Devon and Financial Management Sciences, Inc., an affiliate of Devon's),
"perpetrated . . . an on-going fraudulent scheme" which "resulted in the loss of millions of dollars of
municipal bond proceeds invested by school districts throughout western and central Pennsylvania."
Black sold the school districts Collateralized Investment Agreements ("CIAs") which were
agreements between clients and Devon pursuant to which the clients were guaranteed a specified,
fixed, rate of return. The CIA purported to collateralize fully each account with securities. The
complaint alleged that Black fraudulently overstated "the value of the assets held as collateral . . . by
approximately $71 million." According to the complaint, Black made other fraudulent
misrepresentations and also misappropriated approximately $2 million of client funds to pay
personal and business expenses. Black, without admitting or denying the allegations in the
complaint, consented to the entry of an injunction against future violations of the antifraud
provisions and an order requiring him to pay disgorgement of $3,632,031 (plus $326,883 in
prejudgment interest), and a civil money penalty of $500,000.

On May 4, 1998, Black consented to the entry of the Settled Order, in anticipation of follow-
on administrative proceedings, and without admitting or denying its findings. In issuing the Settled 000203
Order, we found that Black had been enjoined and that the complaint in the injunctive proceeding,
which Black was prohibited from contesting, alleged that he had made material misrepresentations
and omissions, resulting in millions of dollars in losses to his clients and ill-gotten gains for himself
and his affiliated companies.5

B. Motion to Vacate. On May 26, 2009, Black petitioned to vacate the Settled Order.
Black argued that sanctions were no longer warranted because a recent change in applicable
accounting standards purportedly approved the valuation method that Black used in valuing the
collateral at issue, which method had been challenged in the Injunctive Action. According to Black,
"[h]ad the Commission used the current fair value methods now required, [it] would have supported
the valuation supplied to clients . . . ." As a result, Black argued, "there can no longer be a public
purpose nor [is it] in the public's interest to enforce the [Commission's] order." The April Order

4
(...continued)
motion to vacate the Settled Order.
5
As described in the April Order, in 2000, Black pled guilty to twenty-six counts of a
federal indictment apparently in connection with the same conduct that provided the basis for the
injunctive proceeding. As part of his guilty plea, Black signed a written stipulation that provided
factual support for his guilty plea. As noted in the April Order, Black was sentenced to forty-one
months' imprisonment, three years' supervised release, and was ordered to pay $61,300,000 in
restitution.

000203
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rejected Black's argument and denied most of the relief he requested on the grounds that he "settled
the underlying injunctive action and remains bound by the allegations in the injunctive complaint
unless and until the district court modifies the injunction."6 The April Order also noted that Black
provided no evidence to support, or examples to illustrate, his claim that the newly approved
valuation method would exonerate him. Nor did Black address the other fraudulent misconduct
which provided additional bases for the various proceedings against him.

II.

We consider Black's motion under Rule of Practice 470.7 Reconsideration is an

extraordinary remedy designed to correct manifest errors in law or fact or permit the introduction of
newly discovered evidence.8 Motions for reconsideration are not to be used to reiterate arguments
previously made or to cite authorities previously available.9 Black's motion does not meet the
rigorous standard applied in our cases.

Black identifies no manifest factual or legal errors in the April Order, nor does he offer any
newly discovered evidence to support his motion. Rather, he seeks to challenge the April Order by
questioning the validity of the Settled Order which, he claims, the "Commission had already
breached . . . by its failure to disclose . . . the value of the Collateralized Investment Agreement."
According to Black, the government has stipulated that "the assets in the CIA program were
generating approximately $23 million per year in profits" with the result that "[a]ny owner of the 000204
CIA could have sold the CIA for the value represented in monthly statements." Black also contends
that the Commission misled him into believing that the CIA was a "two-party contract" rather than a
security. Black suggests that the Commission's alleged mischaracterization of the CIA allowed it to
assert jurisdiction over this case improperly. In the alternative, Black claims that "the Commission
knew in 1998 [the date of the Settled Order] that the CIA was an investment contract with value to
be determined by an expectation of profits and

6
As noted in the April Order, it appears that Black's earlier efforts to persuade the
courts to reconsider his case were unsuccessful.
7
17 C.F.R. § 201.470. See supra n.3.
8
The Rockies Fund, Securities Exchange Act Rel. No. 56344 (Aug. 31, 2007),
91 SEC Docket 1418, 1420 (denying reconsideration).
9
Id.

000204
 4

withheld that determination from Black, deceiving him into executing the settlement."
Consequently, Black asserts, the Settled Order was issued either "fraudulently or without
jurisdiction; or . . . Black entered into [the Settled Order] without full knowledge of the facts."

We find no merit in Black's contentions. There is no basis for his claim that we lacked
jurisdiction to issue the Settled Order. The Investment Advisers Act expressly provides for
administrative proceedings (and the imposition of sanctions) against investment advisers and persons
associated with them based on the entry of an injunction related to investment advisory activities, the
situation presented here.10 Nor is there any basis for finding that Black was deceived into settling
these administrative proceedings. Black provides no evidence, and there otherwise is no indication,
that he was in any way limited in his ability to challenge the allegations of fraud that were made
against him in the various proceedings to which he was subject as a result of the misconduct at issue
here. As indicated, the allegations of fraud against Black provided the basis for not only these
administrative proceedings but also civil and criminal proceedings and substantial sanctions.
Moreover, we have repeatedly rejected efforts to reopen proceedings in which the petitioner "elected
to settle the matter and did not develop the record further" and thus could not subsequently
"complain that the record is inaccurate or incomplete."11

In any event, as indicated, this administrative proceeding was based on the Injunctive
Proceeding. As discussed in the April Order, to the extent that Black seeks to challenge the basis for
his industry bars — the allegations of fraud made in the Injunctive Proceeding (which are
000205

10
15 U.S.C. § 80b-3(e)(4).
11
Edward I. Frankel, 52 S.E.C. 1237, 1239 n.5 (1997); see also Kenneth W. Haver,
CPA, Exchange Act Rel. No. 54824 (Nov. 28, 2006), 89 SEC Docket 1237, 1242 (denying motion
to vacate or reopen proceedings where petitioner settled, thereby "forfeiting his opportunity to
adduce his evidence"). Cf. Gleason v. Jandrucko, 860 F.2d 556 (2d Cir. 1988) (refusing to set
aside a settlement on the basis of allegations that defendants had perjured themselves and concealed
evidence because plaintiff "voluntarily chose to settle the action" and could not "be heard now to
complain that he was denied the opportunity to uncover the alleged fraud" where "nothing prevented
plaintiff during the pendency of the prior proceeding" from attempting to obtain the evidence that
plaintiff believed impeached defendants' testimony).

000205
 5

deemed true as a result of his consent to the injunction) — he is collaterally estopped from doing so
before us.12

Accordingly, IT IS ORDERED THAT Respondent's Request for Reconsideration Of The

Commission's April 13, 2010 Order Granting In Part And Denying In Part Petition To Set Aside
Bar Order be, and it hereby is, denied.13

By the Commission.

Elizabeth M. Murphy
Secretary

000206

12
We have repeatedly held that a party may not collaterally attack the factual
allegations in an injunctive complaint brought by the Commission when, as is the case here, the
party has consented to the entry of an injunction on the basis of such allegations. Martin A.
Armstrong, Investment Advisers Act Rel. No. 2926 (Sep. 17, 2009), 96 SEC Docket 20556,
20560; Schield Mgmt. Co., Exchange Act Rel. No. 53201 (Jan. 31, 2006), 87 SEC Docket 848,
859 (precluding respondents from disputing allegations in injunctive complaint after consenting to
entry of injunction); cf. Gary M. Kornman, Exchange Act Rel. No. 59403 (Feb. 13, 2009), 95 SEC
Docket 14246, 14257 (finding criminal conviction based on guilty plea has collateral estoppel effect
precluding relitigation of issues in Commission proceedings).
13
We have considered all of the contentions advanced by the parties. We reject or
sustain them to the extent that they are inconsistent or in accord with the views expressed in this
opinion.

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 240 and 249

Release Nos. 33-9148; 34-63029; File No. S7-24-10

RIN 3235-AK75

DISCLOSURE FOR ASSET-BACKED SECURITIES REQUIRED BY SECTION 943

OF THE DODD-FRANK WALL STREET REFORM AND CONSUMER
PROTECTION ACT

AGENCY: Securities and Exchange Commission

ACTION: Proposed rule.

SUMMARY: Pursuant to Section 943 of the Dodd-Frank Wall Street Reform and

Consumer Protection Act1 we are proposing rules related to representations and warranties in

asset-backed securities offerings. Our proposals would require securitizers of asset-backed

securities to disclose fulfilled and unfulfilled repurchase requests across all transactions. Our
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proposals would also require nationally recognized statistical rating organizations to include

information regarding the representations, warranties and enforcement mechanisms available

to investors in an asset-backed securities offering in any report accompanying a credit rating

issued in connection with such offerings, including a preliminary credit rating.

DATES: Comments should be received on or before November 15, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments:

• Use the Commission’s Internet comment form

(http://www.sec.gov/rules/proposed.shtml);

1
Pub. L. No. 111-203 (July 21, 2010).
1

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 • Send an e-mail to rule-comments@sec.gov. Please include File Number S7-24-10 on

the subject line; or

• Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the

instructions for submitting comments.

Paper Comments:

• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and

Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-24-10. This file number should be included

on the subject line if e-mail is used. To help us process and review your comments more

efficiently, please use only one method. The Commission will post all comments on the

Commission’s Internet website (http://www.sec.gov/rules/proposed.shtml). Comments are

also available for website viewing and printing in the Commission’s Public Reference Room, 000214
100 F Street, NE, Washington, DC 20549, on official business days between the hours of

10:00 am and 3:00 pm. All comments received will be posted without change; we do not edit

personal identifying information from submissions. You should submit only information that

you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Rolaine Bancroft, Attorney-Advisor, in

the Office of Rulemaking, at (202) 551-3430, Division of Corporation Finance, U.S.

Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-3628 or,

with respect to proposed Rule 17g-7, Joseph I. Levinson, Special Counsel, at (202) 551-5598;

Division of Trading and Markets, U.S. Securities and Exchange Commission, 100 F Street,

NE, Washington, DC 20549-3628.

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SUPPLEMENTARY INFORMATION: We are proposing amendments to Items 1104 and

11212 of Regulation AB3 (a subpart of Regulation S-K) under the Securities Act of 1933

(“Securities Act”).4 We also are proposing to add Rules 15Ga-15 and 17g-76 and Form ABS-

15G7 under the Securities Exchange Act of 1934 (“Exchange Act”).8

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2
17 CFR 229.1104 and 17 CFR 229.1121.

3
17 CFR 229.1100 through 17 CFR 229.1123.

4
15 U.S.C. 77a et seq.

5
17 CFR 240.15Ga-1.

6
17 CFR 240.17g-7.

7
17 CFR 249.1300.

8
15 U.S.C. 78a et seq.

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 TABLE OF CONTENTS

I. Background
II. Discussion of Proposals
A. Proposed Disclosure Requirements for Securitizers
1. Definition of Exchange-Act ABS for Purposes of Rule 15Ga-1
2. Definition of Securitizer for Purposes of Rule 15Ga-1
3. Disclosures Required by Proposed Rule 15Ga-1
4. Proposed Form ABS-15G
5. Offshore Sales of Exchange-Act ABS
B. Proposed Disclosure Requirements in Regulation AB Transactions
C. Proposed Disclosure Requirements for NRSROs
III. Transition Period
IV. General Request for Comments
V. Paperwork Reduction Act
A. Background
B. PRA Reporting and Cost Burden Estimates
1. Form ABS-15G
2. Rule 15Ga-1
3. Forms S-1and S-3
4. Form 10-D
5. Regulation S-K
6. Rule 17g-7
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7. Summary of Proposed Changes to Annual Burden Compliance in
Collection of Information
8. Solicitation of Comments
VI. Benefit-Cost Analysis
A. Benefits
B. Costs
C. Request for Comment
VII. Consideration of Burden on Competition and Promotion of Efficiency,
Competition and Capital Formation
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Regulatory Flexibility Act Certification
X. Statutory Authority and Text of Proposed Rule and Form Amendments

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I. Background

This release is one of several that the Commission is required to issue to implement

provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”)

related to asset-backed securities (“ABS”). In this release, we propose rules to implement

Section 943 of the Act, which requires the Commission to prescribe regulations on the use of

representations and warranties in the market for asset-backed securities:

(1) to require any securitizer to disclose fulfilled and unfulfilled repurchase

requests across all trusts aggregated by securitizer, so that investors may

identify asset originators with clear underwriting deficiencies; and

(2) to require each nationally recognized statistical rating organization

(“NRSRO”) to include, in any report accompanying a credit rating for an

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asset-backed securities offering, a description of (A) the representations,

warranties and enforcement mechanisms available to investors; and (B)

how they differ from the representations, warranties and enforcement

mechanisms in issuances of similar securities.9

The Act requires us to adopt these rules within 180 days of enactment of the Act.

In April of 2010, we proposed rules that would revise the disclosure, reporting and

offering process for asset-backed securities (the “2010 ABS Proposing Release”).10 Among

other things, the 2010 ABS Proposing Release proposed new disclosure requirements with

respect to repurchase requests. Specifically, we proposed that issuers disclose in

9
See Section 943 of the Act.
10
See Asset Backed Securities, SEC Release No. 33-9117 (April 7, 2010) [75 FR 23328] (the “2010
ABS Proposing Release”).
5

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prospectuses the repurchase demand and repurchase and replacement activity for the last

three years of sponsors of asset-backed transactions or originators of underlying pool assets if

they are obligated to repurchase assets pursuant to the transaction agreements.11 These

disclosure requirements would apply to offerings of ABS registered under the Securities Act

or ABS offered and sold without registration in reliance upon Securities Act rules, which

includes both offerings eligible for Rule 144A resales and other offerings conducted in

reliance on exemptions from registration. We also proposed that issuers disclose the

repurchase demand and repurchase and replacement activity concerning the asset pool on an

ongoing basis in periodic reports.12 As described in Section II.B. below, we are re-proposing

the disclosure requirements with respect to repurchase requests in Regulation AB in order to

conform the disclosures to those required by Section 943 of the Act.

In the underlying transaction agreements for an asset securitization, sponsors or

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originators typically make representations and warranties relating to the pool assets and their

origination, including about the quality of the pool assets. For instance, in the case of

residential mortgage-backed securities, one typical representation and warranty is that each

of the loans has complied with applicable federal, state and local laws, including truth-in-

lending, consumer credit protection, predatory and abusive laws and disclosure laws.

Another representation that may be included is that no fraud has taken place in connection

with the origination of the assets on the part of the originator or any party involved in the

origination of the assets. Upon discovery that a pool asset does not comply with the

11
Depending on the transaction, the originator of the assets or, most typically, the sponsor of the
securities — who could also function as the originator — would be the obligated party. See previously
proposed Items 1104(f) and 1110(c) of Regulation AB in the 2010 ABS Proposing Release.
12
See previously proposed Item 1121(c) of Regulation AB in the 2010 ABS Proposing Release.
6

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representation or warranty, under transaction covenants, an obligated party, typically the

sponsor, must repurchase the asset or substitute a different asset that complies with the

representations and warranties for the non-compliant asset. The effectiveness of the

contractual provisions related to representations and warranties has been questioned and lack

of responsiveness by sponsors to potential breaches of the representations and warranties

relating to the pool assets has been the subject of investor complaint.13

II. Discussion of Proposals

A. Proposed Disclosure Requirements for Securitizers

We are proposing to add new Rule 15Ga-1 to implement Section 943(2) of the Act.

This proposed rule would require any securitizer of asset-backed securities to disclose

fulfilled and unfulfilled repurchase requests across all trusts aggregated by securitizer, so that

investors may identify asset originators with clear underwriting deficiencies. Under our
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proposals, a securitizer would provide the disclosure by filing new proposed Form ABS-15G.

13
As we noted in the 2010 ABS Proposing Release, transaction agreements typically have not included
specific mechanisms to identify breaches of representations and warranties or to resolve a question as to
whether a breach of the representations and warranties has occurred. Thus, these contractual agreements have
frequently been ineffective because, without access to documents relating to each pool asset, it can be difficult
for the trustee, which typically notifies the sponsor of an alleged breach, to determine whether or not a
representation or warranty relating to a pool asset has been breached. In the 2010 ABS Proposing Release, the
Commission proposed a condition to shelf eligibility that would require a provision in the pooling and servicing
agreement that would require the party obligated to repurchase the assets for breach of representations and
warranties to periodically furnish an opinion of an independent third party regarding whether the obligated party
acted consistently with the terms of the pooling and servicing agreement with respect to any loans that the
trustee put back to the obligated party for violation of representations and warranties and which were not
repurchased. See Section II.A.3.b. of the 2010 ABS Proposing Release. See also the Committee on Capital
Markets Regulation, The Global Financial Crisis: A Plan for Regulatory Reform, May 2009, at 135 (noting that
contractual provisions have proven to be of little practical value to investors during the crisis); see also
Investors Proceeding with Countrywide Lawsuit, Mortgage Servicing News, Feb. 1, 2009 (describing class
action investor suit against Countrywide in which investors claim that language in the pooling and servicing
agreements requires the seller/servicer to repurchase loans that were originated with “predatory” or abusive
lending practices) and American Securitization Forum, ASF Releases Model Representations and Warranties to
Bolster Risk Retention and Transparency in Mortgage Securitizations, (Dec. 15, 2009), available at
http://www.americansecuritization.com. It has been reported that only large ABS investors, such as Fannie Mae
and Freddie Mac, have been able to effectively exercise repurchase demands. See Aparajita Saha-Bubna,
“Repurchased Loans Putting Banks in Hole,” Wall Street Journal (Mar. 8, 2010)(noting that most mortgages put
back to lenders are coming from Fannie Mae and Freddie Mac).
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 1. Definition of Exchange Act-ABS for Purposes of Rule 15Ga-1

The Act amended the Exchange Act to include a definition of an “asset-backed

security” and Section 943 of the Act references that definition.14 The statutory definition of

an asset-backed security (“Exchange Act-ABS”) is much broader than the definition of an

asset-backed security in Regulation AB (“Reg AB-ABS”).15 The definition of an Exchange

Act-ABS includes securities that are typically sold in transactions that are exempt from

registration under the Securities Act, such as collateralized debt obligations (“CDOs”), as

well as securities issued or guaranteed by a government sponsored entity, such as Fannie

Mae and Freddie Mac.16 Similarly, if a municipal entity issues securities collateralized by a

self-liquidating pool of loans that allow holders of the securities to receive payments that

depend primarily on cash flow from those loans, that security would fall within the definition

14
Section 3(a)(77) of the Exchange Act provides that the term “asset backed security”: 000220
(A) means a fixed-income or other security collateralized by any type of self-liquidating financial asset
(including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of
the security to receive payments that depend primarily on cash flow from the asset, including— (i) a
collateralized mortgage obligation; (ii) a collateralized debt obligation; (iii) a collateralized bond
obligation; (iv) a collateralized debt obligation of asset-backed securities; (v) a collateralized debt
obligation of collateralized debt obligations; and (vi) a security that the Commission, by rule,
determines to be an asset-backed security for purposes of this section; and (B) does not include a
security issued by a finance subsidiary held by the parent company or a company controlled by the
parent company, if none of the securities issued by the finance subsidiary are held by an entity that is
not controlled by the parent company. Section 3(a)(77) of the Exchange Act, as amended by the Act.
15
In 2004, we adopted the definition of “asset-backed security” in Regulation AB. The definition and
our interpretations of it are intended to establish parameters for the types of securities that are appropriate for
the alternate disclosure and regulatory regime provided in Regulation AB and the related rules for Form S-3
registration of ABS. The definition does not mean that public offerings of securities outside of these
parameters, such as synthetic securitizations, may not be registered with the Commission, but only that the
alternate regulatory regime is not designed for those securities. The definition does mean that such securities
must rely on non-ABS form eligibility for registration, including shelf registration. See Section III.A.2 of
Asset-Backed Securities, SEC Release 33-8518 (January 7, 2005) [70 FR 1506] (the “2004 ABS Adopting
Release”) and Item 1101(c) of Regulation AB [17 CFR 1101(c)].
16
Government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac purchase mortgage
loans and issue or guarantee mortgage-backed securities (MBS). MBS issued or guaranteed by these GSEs
have been and continue to be exempt from registration under the Securities Act and reporting under the
Exchange Act. For more information regarding GSEs, see Task Force on Mortgage-Backed Securities
Disclosure, “Staff Report: Enhancing Disclosure in the Mortgage-Backed Securities Markets” (Jan. 2003)
available at http://www.sec.gov/news/studies/mortgagebacked.htm.
8

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of an Exchange Act-ABS.17 Since Section 943 uses the broader Exchange Act-ABS

definition, our proposed Rule 15Ga-1 would require a securitizer to provide disclosures

relating to all asset-backed securities that fall within the statutory definition, whether or not

sold in Securities Act registered transactions. However, as we discuss further below, even if

a security meets the definition of an Exchange Act-ABS, the new disclosure requirement

would not be triggered if the underlying transaction agreements do not contain a covenant to

repurchase or replace an asset.

Request for Comment:

1. Is it clear what types of securities a securitizer would have to provide representation

and warranty repurchase disclosure about under proposed Rule 15Ga-1? If not,

please identify which securities are not clearly covered and the reasons why those

securities are not clearly included or excluded by the proposal.

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2. Should we provide further guidance regarding the application of proposed Rule

15Ga-1 to securities issued by municipal entities that would fall within the definition

of Exchange Act-ABS? Is it clear what types of municipal securities a municipal

securitizer would have to provide representation and warranty repurchase disclosure

about under proposed Rule 15Ga-1? If not, please identify those types of municipal

securities that are not clearly covered and explain why they are not clearly included or

excluded by the proposal.

17
For a discussion of municipal ABS, see generally Robert A. Fippinger, The Securities Law of Public
Finance vol. 1, §1:6.2[B], 1-70- 1-72 (2d ed., Practicing Law Institute 2009).
9

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 2. Definition of Securitizer for Purposes of Rule 15Ga-1

Section 943 and proposed Rule 15Ga-1 impose the disclosure obligation on a

“securitizer” as defined in the Exchange Act. The Act amended the Exchange Act to include

the definition of a “securitizer”. Under the Exchange Act, a securitizer is either:

(A) an issuer of an asset-backed security; or

(B) a person who organizes and initiates an asset-backed securities transaction by

selling or transferring assets, either directly or indirectly, including through an

affiliate, to the issuer.18

The definition of securitizer is not specifically limited to entities that undertake

transactions that are registered under the Securities Act or conducted in reliance upon any

particular exemption. Consequently, we believe it is intended to apply to any entity or

person that issues or organizes an Exchange Act-ABS as specified in Section 15G(a)(3) of

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the Exchange Act. As a result, proposed Rule 15Ga-1 would require any entity coming

within the Section 15G(a)(3) definition of securitizer, including government sponsored

entities such as Fannie Mae, Freddie Mac, or a municipal entity, to provide the proposed

disclosures. Further, as noted above, Section 943 and Section 15G(a)(3) do not distinguish

between securitizers of Exchange Act-ABS in registered or unregistered transactions, and our

proposed Rule 15Ga-1 would apply equally to registered and unregistered transactions.

With respect to registered transactions and the definitions of transaction parties in

Regulation AB, sponsors and depositors19 both fall within the statutory definition of

securitizer. A sponsor typically initiates a securitization transaction by selling or pledging to

18
See Section 15G(a)(3) of the Exchange Act, as amended by the Act.
19
Securities Act Rule 191 [17 CFR 230.191] generally defines an issuer as the depositor.
10

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a specially created issuing entity a group of financial assets that the sponsor either has

originated itself or has purchased in the secondary market.20 In some instances, the transfer

of assets is a two-step process: the financial assets are transferred by the sponsor first to an

intermediate entity, often a limited purpose entity created by the sponsor for a securitization

program and commonly called a depositor, and then the depositor will transfer the assets to

the issuing entity for the particular asset-backed transaction.21 Because both sponsors and

depositors fit within the statutory definition of securitizers, both entities would have the

disclosure responsibilities under proposed Rule 15Ga-1. However, if a sponsor filed all

disclosures proposed to be required under Rule 15Ga-1, which would include disclosures of

the activity of affiliated depositors, Rule 15Ga-1 would provide that those affiliated

depositors would not have to separately provide and file the same disclosures. Such

disclosure would be duplicative and would not provide any additional useful information,
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since as noted above, the depositor usually serves as an intermediate entity of a transaction

initiated by a sponsor.22

20
A sponsor, as defined in Regulation AB, is the person who organizes and initiates an asset-backed
securities transaction by selling or transferring assets, either directly or indirectly, including through an affiliate,
to the issuing entity. See Item 1101(l) of Regulation AB [17 CFR 229.1101(l)]. Sponsors of asset-backed
securities often include banks, mortgage companies, finance companies, investment banks and other entities that
originate or acquire and package financial assets for resale as ABS. See Section II. of the 2004 ABS Adopting
Release.
21
A depositor receives or purchases and transfers or sells the pool assets to the issuing entity. See Item
1101(e) of Regulation AB [17 CFR 229.1101(e)]. For asset-backed securities transactions where there is not an
intermediate transfer of assets from the sponsor to the issuing entity, the term depositor refers to the sponsor.
For asset-backed securities transactions where the person transferring or selling the pool assets is itself a trust,
the depositor of the issuing entity is the depositor of that trust.
22
There may be other situations where multiple affiliated securitizers would have individual reporting
obligations under proposed Rule 15Ga-1 with respect to a particular transaction. Therefore, we propose that if
one securitizer has filed all the disclosures required in order to meet the obligations under Rule 15Ga-1, which
would include disclosures of the activity of affiliated securitizers, those affiliated securitizers would not be
required to separately provide and file the same disclosures.
11

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Request for Comment:

3. Is it clear which entities or persons would have disclosure responsibilities under

proposed Rule 15Ga-1? If not, please identify those possible entities or persons,

describe their role in the transaction, and explain why they are not clearly included or

excluded by the definition of a securitizer.

4. Should we provide further guidance regarding the application of proposed Rule

15Ga-1 to municipal issuers that are within the definition of securitizers? Is it clear

which municipal entities would have disclosure responsibilities under proposed Rule

15Ga-1? If not, please identify those municipal entities that are not clearly covered

and explain why they are not clearly included or excluded by the proposal.

3. Disclosures Required by Proposed Rule 15Ga-1

In accordance with Section 943 of the Act, we are proposing new Rule 15Ga-123 to
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require any securitizer of an Exchange Act-ABS to disclose fulfilled and unfulfilled

repurchase requests across all trusts aggregated by securitizer, so that investors may identify

asset originators with clear underwriting deficiencies. We are proposing that, if the

underlying transaction agreements provide a covenant to repurchase or replace an underlying

asset for breach of a representation or warranty, then a securitizer would be required to

provide the information described below for all assets originated or sold by the securitizer

that were the subject of a demand for repurchase or replacement with respect to all

outstanding Exchange Act-ABS held by non-affiliates of the securitizer. If the underlying

agreements of an Exchange Act-ABS do not contain a covenant to repurchase or replace an

23
We propose to adopt this rule as an Exchange Act rule because of the relationship with other
requirements under the Exchange Act and other statutory requirements we are implementing.
12

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underlying asset, then no transaction party would be entitled to demand repurchase or

replacement. Requiring securitizers to report the activity of those Exchange Act-ABS with

no demands might give an incorrect impression of sound underwriting. As discussed further

below, initially, we are proposing that a securitizer provide the repurchase history for the last

five years by filing Form ABS-15G at the time a securitizer first offers an Exchange Act-

ABS or organizes and initiates an offering of Exchange Act-ABS, registered or unregistered,

after the effective date of the proposed rules, as adopted. Going forward, a securitizer would

be required to provide the disclosures for all outstanding Exchange Act-ABS on a monthly

basis by filing Form ABS-15G. Information would not be required for the time period prior

to the five-year look back period of the initial filing.

Section 943(2) requires disclosure of fulfilled and unfulfilled repurchase requests. It

does not limit the required disclosure to those relating only to demands successfully made by
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the trustee. Therefore our proposal would require tabular disclosure of assets subject to any

and all demands for repurchase or replacement of the underlying pool assets as long as the

transaction agreements provide a covenant to repurchase or replace an underlying asset. For

instance, we note that demands for repurchase may not ultimately result in a repurchase or

replacement pursuant to the terms of the transaction agreement, either because of withdrawn

demands or incomplete demands that did not meet the requirements of a valid demand

pursuant to the transaction agreements.24 Furthermore, it may be the case that a repurchase

or replacement may occur whether or not it is determined that the obligated party was

24
See e.g., comment letters of ASF, Bank of America, Community Mortgage Banking Project, CRE
Finance Council and Mortgage Bankers Association on the 2010 ABS Proposing Release. The public
comments are available at http://www.sec.gov/comments/s7-08-10/s70810.shtml.
13

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required to repurchase the asset pursuant to the terms of the transaction agreement.25

Securitizers would be permitted to footnote the table to provide additional explanatory

disclosures to describe the data disclosed. We also note that investors have demanded that

trustees enforce repurchase covenants because transaction agreements do not typically

contain a provision for an investor to directly make a repurchase demand.26 As we stated

earlier, Section 943(2) does not limit the required disclosures to those demands successfully

made by the trustee; therefore our proposals would require investor demands upon a trustee

be included in the table, irrespective of the trustee’s determination to make a repurchase

demand on a securitizer based on the investor request. We are concerned, however, that

initially a securitizer may not be able to obtain complete information from a trustee because

it may not have tracked investor demands. Because securitizers may not have access to

historical information about investor demands made upon the trustee prior to the effective
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date of the proposed rules, we are proposing an instruction that a securitizer may disclose in a

footnote, if true, that a securitizer requested and was able to obtain only partial information

25
See Section XI.C.2. of the 2010 ABS Proposing Release where we note that disclosures about an
originator’s or sponsor’s refusal to repurchase or replace assets put back to them for breach of representations
and warranties might create incentives for originators to agree to repurchase or replace such assets even in cases
where these assets were not in breach. We explained that if investors regard such disclosures as indicative of a
willingness to comply with representations and warranties in the future, then originators and sponsors might try
to preserve their reputation by taking back assets even when they do not have to do so. This might create an
incentive for sponsors and possibly trustees to ask for repurchase or replacement of poorly performing assets
that represent no breach of representations and warranties. However, a commentator on the 2010 ABS
Proposing Release stated that in certain situations, it may have the opposite effect, where the threat of a
disclosure requirement may make a sponsor worry that a large number of successful repurchase claims could
indicate that its initial due diligence, or the originator’s loan quality was poor. See letter from Commonwealth
of Massachusetts Attorney General.
26
See Jody Shenn, “BNY Won’t Investigate Countrywide Mortgage Securities,” Bloomberg Business
Week (Sep. 13, 2010) available at http://www.businessweek.com/news/2010-09-13/bny-won-t-investigate-
countrywide-mortgage-securities.html (noting the difficulties that investors are facing to enforce contracts with
respect to repurchase demands) and Al Yoon, “NY Fed joins other investors on loan repurchase bid,” Reuters
(Aug. 4, 2010) available at http://www.reuters.com/article/idUSTRE6736DZ20100804 (noting that investors
have been frustrated with trustees and servicers and are banding together to force trustees to act on repurchase
requests). See also Kevin J. Buckley, “Securitization Trustee Issues,” The Journal of Structured Finance
(Summer 2010) (discussing investors demands upon trustees to enforce sellers’ repurchase obligations).
14

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 or unable to obtain any information with respect to investor demands to a trustee that

occurred prior to the effective date of the proposed rules and state that the disclosures do not

contain all demands made prior to the effective date.27

We are proposing that securitizers provide the information in the following tabular

format in order to aid understanding:

Name of Check if Name of Assets That Were Assets That Were Assets That Were Assets Pending
Issuing Entity Regis- Originator Subject of Demand Repurchased or Not Repurchased Repurchase or
tered Replaced or Replaced Replacement
(#) ($) (% of (#) ($) (% of (#) ($) (% of (#) ($) (% of
pool) pool) pool) pool)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o)
Asset Class X
Issuing Entity A X Originator 1
CIK #
Originator 2
Issuing Entity B Originator 3
Total # $ # $ # $ # $

Asset Class Y 000227

Issuing Entity C Originator 2
Originator 3
Issuing Entity D X Originator 1
CIK#

Total # $ # $ # $ # $

A single securitizer may have several securitization programs to securitize different

types of asset classes. Therefore, in order to organize the information in a manner that would

be useful for investors, we are proposing that the securitizer disclose the asset class and

group the information in the table by asset class (column (a)). We are also proposing that

27
This situation, as well as others, may arise where the disclosures required by proposed Rule 15Ga-1
alone may necessitate the disclosure of additional information in order to render the information not
misleading. Securitizers would need to consider the antifraud provisions under the federal securities laws to
determine what other information, if any, may need to be provided in offering materials given to an investor.
15

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securitizers list the names of all the issuing entities28 of Exchange Act-ABS, listed in order of

the date of formation of the issuing entity in column (a) so that investors may identify the

securities that contain the assets subject to the demands for repurchase and when the issuing

entity was formed.29 Because the Act requires disclosure with respect to all Exchange Act-

ABS, Rule 15Ga-1 would require securitizers to provide disclosure for all Exchange Act-

ABS where the underlying agreements include a repurchase covenant, regardless of whether

the transaction was registered with the Commission. Additionally, if any of the Exchange

Act-ABS of the issuing entity were registered under the Securities Act, the Central Index

Key (“CIK”) number of the issuing entity would be required so that investors may locate

additional publicly available disclosure, if applicable.

So that investors may distinguish between transactions that were registered, and those

that were not, we are also proposing that securitizers check the box in column (b) to indicate
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whether any Exchange Act-ABS of the issuing entity were registered under the Securities

Act. We believe this indicator would provide important information so an investor may

locate additional publicly available disclosure for registered transactions, if applicable.

The Act also provides that the disclosure is required “so that investors may identify

asset originators with clear underwriting deficiencies.”30 Therefore, we are proposing that

28
Issuing entity is defined in Item 1101(f) of Regulation AB [17 CFR 229.1101(f)] as the trust or other
entity created at the direction of the sponsor or depositor that owns or holds the pool assets and in whose name
the asset-backed securities supported or serviced by the pool assets are issued.
29
In a stand-alone trust structure, usually backed by a pool of amortizing loans, a separate issuing entity
is created for each issuance of ABS backed by a specific pool of assets. The date of formation of the issuing
entity would most likely be at the same time of the issuance of the ABS. In a securitization using a master trust
structure, the ABS transaction contemplates future issuances of ABS by the same issuing entity, backed by the
same, but expanded, asset pool. Master trusts would organize the data using the date the issuing entity was
formed, which would most likely be earlier than the date of the most recent issuance of securities.
30
See Section 943(2) of the Act.
16

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securitizers further break out the information by originator of the underlying assets in column

(c).

Because the Act requires disclosure of all “fulfilled and unfulfilled” repurchase

requests, we are proposing in Rule 15Ga-1 that securitizers disclose the assets that were

subject of the demand, the assets that were repurchased or replaced and the assets that were

not repurchased or replaced. In order to provide investors with useful information about the

repurchase requests in relation to the overall pool of assets, we are proposing that securitizers

present the number, outstanding principal balance and percentage by principal balance of the

assets that were subject of demand to repurchase or replace for breach of representations and

warranties (columns (d) through (f)); the number, outstanding principal balance and

percentage by principal balance of assets that were repurchased or replaced for breach of

representations and warranties (columns (g) through (i)); and the number, outstanding
000229
principal balance and percentage by principal balance of assets that were not repurchased or

replaced for breach of representations and warranties (columns (j) through (l)).31

Additionally, we are proposing to require disclosure of the number, outstanding

principal balance and percentage by principal balance of the assets that are pending

repurchase or replacement and proposing an instruction to include a footnote to the table that

provides narrative disclosure of the reasons why repurchase or replacement is pending

(columns (m) through (o)). For example, the securitizer would indicate by footnote if

31
If the ABS were offered in a registered transaction, an investor may be able to locate additional
detailed information. In the 2010 ABS Proposing Release, the Commission also proposed that issuers be
required to provide loan-level disclosure of repurchase requests on an ongoing basis. Under the proposal, an
issuer, with each periodic report on a Form 10-D, would have to indicate whether a particular asset has been
repurchased from the pool. If the asset has been repurchased, then the registrant would have to indicate whether
a notice of repurchase has been received, the date the asset was repurchased, the name of the repurchaser and
the reason for the repurchase. See previously proposed Item 1(i) of Schedule L-D [Item 1121A of Regulation
AB] in the 2010 ABS Proposing Release.
17

000229
pursuant to the terms of a transaction agreement, assets have not been repurchased or

replaced pending the expiration of a cure period. Without these additional columns, the

disclosures about fulfilled and unfulfilled repurchase requests of a securitizer alone may not

provide clear and complete disclosure about the repurchase request history. For instance,

some transaction agreements specify a cure period that typically lasts 60-90 days.32

Including those repurchase requests that are within a cure period as assets that were not

repurchased or replaced (columns (j) through (l)) would provide inaccurate disclosure about

the current pending status of those repurchase requests.

Lastly, we are proposing that the table include totals by asset class for columns that

require numbers of assets and principal amounts (columns (d), (e), (g), (h), (j), (k), (m) and

(n)).33

The Act does not specify when the disclosure should first be provided, or the
000230
frequency with which it should be updated. We are proposing to require that securitizers first

be required to file Form ABS-15G at the time a securitizer first offers an Exchange Act-ABS

or organizes and initiates an offering of Exchange Act-ABS, registered or unregistered, after

the effective date of the proposed rules, as adopted.34 The initial filing would include the

32
In response to our ABS 2010 Proposing Release, some commentators expressed concern about the
timing of providing repurchase disclosures, noting that the person preparing repurchase disclosures may not be
in a position to know what percentage of demands made in a period did not result in repurchase due to cure
periods provided in the transaction agreements that typically last 60-90 days. See letters from the American
Securitization Forum (“ASF”) and Wells Fargo & Company on the 2010 ABS Proposing Release.
33
See letter from Association of Mortgage Investors on the 2010 ABS Proposing Release (requesting that
disclosure of information regarding claims made and satisfied under representation and warranties provisions of
the transaction documents be broken down by securitization and then aggregated).
34
Filing proposed Form ABS-15G would not foreclose the reliance of an issuer on the private offering
exemption in the Securities Act of 1933 and the safe harbor for offshore transactions from the registration
provisions in Section 5 [15 U.S.C. 77e]. However, the inclusion of information beyond that required in
proposed Rule 15Ga-1 may jeopardize such reliance by constituting a public offering or conditioning the market
for the ABS being offered under an exemption.
18

000230
repurchase demand and repurchase and replacement history of all outstanding Exchange Act-

ABS of the securitizer with respect to which the underlying transaction agreements provide a

covenant to repurchase or replace an underlying asset for breach of a representation or

warranty for the last five years. The initial filing would be required to include all of the

information in proposed Rule 15Ga-1, even if there had been no demands to repurchase or

replace assets to report with respect to any issuing entity of an Exchange-Act ABS

securitized by a securitizer. We believe that the ability to compare all issuing entities and the

originators of the underlying pools would provide useful information for investors by making

the disclosures comparable across securitizers, so that consistent with the purposes of Section

943, an investor may identify originators with clear underwriting deficiencies.

While Section 943 does not limit the time period for disclosure, we have proposed in

Rule 15Ga-1 to limit the disclosure to Exchange Act-ABS that remain outstanding and are
000231
held by non-affiliates because we believe securitizers would more likely have ready access to

this information, and it is more likely to be relevant to investors than information about

securities that are no longer outstanding and held by non-affiliates. While we believe that

Congress intended to provide investors with historical information about repurchase activity

so that investors may identify asset originators with clear underwriting deficiencies,35 we also

recognize that securitizers may not have historically collected the information required under

our proposal.36 We are proposing that the initial disclosures be limited to the last five years

of activity in order to balance the requirements of Section 943 and the burden on securitizers

35
See letter from Securities Industry Financial Markets Association (“SIFMA”) on the 2010 ABS
Proposing Release (noting that their investor members believe that issuers should be required to make
disclosures about repurchase requests regardless of the date of the securitization).
36
See e.g., comment letters from ASF, Bank of America, Financial Services Roundtable and the
Mortgage Bankers Association on the 2010 ABS Proposing Release.
19

000231
to provide the historical disclosures. Therefore, any demand, repurchase or replacement that

had occurred within the five years immediately preceding the initial filing, as of the end of

the preceding month, would need to be disclosed in the table. 37

We are also proposing that securitizers file proposed Form ABS-15G, periodically on

a monthly basis with updated information so that, consistent with the purpose of Section 943

of the Act, an investor may monitor the demand, repurchase and replacement activity across

all Exchange Act-ABS issued by a securitizer.38 For registered transactions, most ABS

distribute payments monthly and file Forms 10-D on a monthly basis. Similarly, given the

established frequency of reporting, we believe proposed Rule 15Ga-1 disclosure should be

provided to investors on a monthly basis and filed on Form ABS-15G on EDGAR within 15

calendar days after the end of each calendar month. 39

Under the proposal, securitizers would be required to continue periodic reporting

000232
through and until the last payment on the last Exchange Act-ABS outstanding held by a non-

affiliate that was issued by the securitizer or an affiliate. We are also proposing that

securitizers be required to file Form ABS-15G to provide a notice to terminate the reporting

obligation and disclose the date the last payment was made.

37
For the initial filing, we recognize that demands may have been made prior to the initial five-year look
back date and that resolution may have occurred after that date. In this case, a securitizer would need to
disclose that a demand was made, even though it occurred prior to the five-year look back date.
38
See letter from Prudential Fixed Income Management on the 2010 ABS Proposing Release (noting that
claims made against a sponsor should be included in offering materials and regularly reported, together with
detail that clarifies the number of such claims that were accepted by the sponsor and the number of claims that
were and were not approved).
39
Form 10-Ds are required to be filed within 15 days of each required distribution date on the asset-
backed securities. See General Instruction A.2. of Form 10-D [17 CFR 249.312]. Because securitizers may
sponsor various asset classes, we believe it would be difficult to tie the timing requirements of Rule 15Ga-1
disclosure to the timing of payments on the securities.
20

000232
Request for Comment:

5. Is the proposed requirement to require that any securitizer of an Exchange Act-ABS

transaction disclose fulfilled and unfulfilled repurchase requests in a table

appropriate? Would another format be more appropriate or useful to investors?

6. Should we require, as proposed, that securitizers list all previous issuing entities with

currently outstanding ABS where the underlying transaction agreements include a

repurchase covenant, even if there were no demands to repurchase or replace assets in

that particular pool? Should we require, as proposed, that securitizers with currently

outstanding Exchange Act-ABS held by non-affiliates list all originators related to

every issuing entity even if there were no demands to repurchase or replace assets

related to that originator for that particular pool? Put another way, would it be useful

for investors to compare all the issuing entities and originators, related to one
000233
securitizer, listed in the table, so that investors may identify asset originators with

clear underwriting deficiencies, as provided in the Act?

7. Would it be appropriate for securitizers to omit the table if a securitizer had no prior

demands for repurchases or replacements? If so, how would an investor be able to

know why the securitizer omitted the disclosure? In lieu of a table that displayed no

demands for repurchases or replacements, would it be appropriate for a securitizer to

provide narrative or check box disclosure stating that no demands were made for any

asset securitized by the securitizer?

8. Is it appropriate to limit disclosure to Exchange Act-ABS that remain outstanding and

held by non-affiliates, as proposed? Would such a limitation be consistent with the

Act? Alternatively, should disclosure be required with respect to Exchange Act-ABS

21

000233
 that are no longer outstanding? Would such disclosure reveal potentially important

information? Would it be appropriate to require disclosure regarding Exchange Act-

ABS that were outstanding during a recent period, such as one, three, or five years?

9. Should the disclosure requirement only be applied prospectively, i.e., disclosure

would be required only with respect to repurchase demands and repurchases and

replacements beginning with Exchange Act-ABS issued after the effective date of the

rule? Should disclosure only be required with respect to repurchase activity after the

effective date? If so, please explain why limiting disclosure to activity regarding

Exchange Act-ABS issued after the effective date would be consistent with the Act,

as it specifies that the disclosure be provided by any securitizer across all trusts.

10. In implementing the requirements of Section 943, should the disclosure requirement

initially be limited to the last five years, as proposed? Would a different time frame
000234
be more appropriate, e.g., the last three, seven or ten years of activity? Underwriting

standards of originators may change over time. While information regarding

repurchases within a recent time period may assist investors in identifying originators

with current underwriting deficiencies, is older information, such as information

about repurchases within a time period of ten years, less useful in identifying current

underwriting deficiencies?40 Would information that covers the last three, five, seven

or ten years of repurchase activity provide investors with the information they need so

that they “may identify asset originators with clear underwriting deficiencies”? To

40
In a response to our 2010 ABS Proposing Release, the ASF noted in its comment letter that “the
requirement to report three years worth of repurchase activity would potentially result in a flood of unhelpful
disclosure about transactions involving unrelated asset classes, particularly with respect to sponsors or
originators that are large, diversified financial institutions engaging in securitization and sales of multiple asset
classes through affiliated but often separately managed business units.”
22

000234
 what extent would disclosure older than such a period add significant burdens and

costs and produce information that would be of marginal utility to investors?

11. Is our proposed instruction to permit securitizers to omit disclosure of investor

demands made upon the trustee prior to the effective date of the proposed rules if the

information is unavailable and provide footnote disclosure, if true, that the table omits

such demands and that the securitizer requested and was unable to obtain the

information appropriate? If not, how would securitizers obtain the information about

investor demands upon a trustee prior to the effective date of the proposed rules, as

adopted?

12. Should the requirement only cover the last three, five, seven or ten years of

repurchase requests on an ongoing basis? Would this format on an ongoing basis

provide information in a more easily understandable manner? Would it still allow an

000235
investor to “identify asset originators with clear underwriting deficiencies”?

13. Are there any other agreements, outside of the related transaction agreements for an

asset-backed security that provide for repurchase demands and repurchases and

replacements? If so, please tell us what those agreements are and why securitizers

should be required to report the information, including why that information would be

material to an investor in a particular asset-backed security.41

14. Is the information proposed to be required in the table appropriate? Is there any other

information that should be presented in the table that would be useful to investors? Is

the proposed disclosure regarding pending repurchase requests appropriate? Should

41
See comment letter from Massachusetts Office of Attorney General on the 2010 ABS Proposing
Release (noting that side letter agreements between a sponsor and an originator may contain early payment
default warranties and that the existence of such warranties often have an effect upon the performance of a
securitization).
23

000235
 we specify that securitizers provide more detail about the reasons why the assets were

not repurchased or why the assets are pending repurchase or replacement? For

example, should we require more detail such as the date of claim, the date of

repurchase, whether claims have been referred to arbitration, whether the claims are

in a cure period, and the costs associated and expenses born by each issuing entity?42

Should we require securitizers to provide narrative disclosure of the reasons why

repurchase or replacement is pending, as proposed? If so, should we specify the level

of detail to be provided regarding pending asset repurchase or replacement requests?

For instance, should we specify categories for the reasons why the request is pending,

e.g., cure period, arbitration, etc.

15. Section 943 of the Act requires that “all fulfilled and unfulfilled repurchase requests

across all trusts” be disclosed. Should we require, as proposed, that all demands for
000236
repurchase be disclosed in the table? Some commentators on the 2010 ABS

Proposing Release expressed concerns about disclosing demands for repurchase that

ultimately did not result in a repurchase or replacement pursuant to the terms of the

transaction agreement, either because of withdrawn demands or incomplete demands

that did not meet the requirements of the transaction agreements.43 In order to

address commentator’s concerns, should we also require, by footnote to the table,

disclosure of whether the repurchase or replacement was required by the transaction

agreements or whether it occurred for some other reason? Should the disclosure

42
See e.g., comment letters of Metropolitan Life Insurance Company and the SIFMA on the 2010 ABS
Proposing Release.
43
See e.g., comment letters of ASF, Bank of America, Community Mortgage Banking Project, CRE
Finance Council and Mortgage Bankers Association on the 2010 ABS Proposing Release.
24

000236
 indicate the type of representation or warranty that led to the repurchase or

replacement?

16. Is our proposal to require a securitizer to file its initial Form ABS-15G at the time it

first offers Exchange-Act ABS or organizes and initiates an offering of Exchange

Act-ABS after the implementation date of the proposed rules appropriate? What are

other possible alternatives to trigger the initial filing obligation?

17. Is our proposal to require the disclosure on a monthly basis appropriate? If not, what

would be the appropriate interval for the disclosures, e.g., quarterly or annually?

18. Is our proposal to require that Form ABS-15G be filed within 15 calendar days after

the end of each calendar month appropriate? If not, would a shorter or longer

timeframe be more appropriate, e.g., four days or twenty days? Please tell us why.

19. We note that the transaction agreements for certain types of ABS, such as CDOs, may
000237
not typically contain a covenant to repurchase or replace an underlying asset. Is it

appropriate to exclude, as proposed, those Exchange Act-ABS with transaction

agreements that do not contain a covenant to repurchase or replace the underlying

assets?

20. Should the data in the table be tagged? If so, should the tagging be in XML or is a

different tagging schema appropriate? If tagging is appropriate, would a phase-in

period in which the disclosure would be provided without tagging pending

completion of necessary technical specifications be appropriate? In order to tag the

data, we would need to develop definitions that would result in consistent and

comparable data across all issuing entities of all securitizers. For instance, how

should we specify that securitizers tag the identity of an originator to provide

25

000237
 consistency across disclosures provided by all securitizers? Should we assign codes

that would specifically identify each originator? Or would text entry of the name of

the originator be sufficient? Similarly, should we specify a unique code for all the

issuing entities? For example, registered transactions would have a CIK number

assigned for the issuing entity; however, unregistered transactions may not have a

unique method of identification. What other definitions or responses would we need

to specify in order to make the disclosure comparable across originators and

securitizers?

4. Proposed Form ABS-15G

The disclosures required by proposed Rule 15Ga-1 do not fit neatly within the

framework of existing Securities Act and Exchange Act Forms because those forms relate to

registered ABS transactions and unregistered ABS transactions are not required to file those
000238
forms.44 Therefore, we are proposing new Form ABS-15G to be filed on EDGAR so that

parties obligated to make disclosures related to Exchange Act-ABS under Rule 15Ga-1 could

file the disclosures on EDGAR. As discussed above, proposed Rule 15Ga-1 would require

securitizers to disclose repurchase demand and repurchase and replacement history with

respect to registered and unregistered Exchange Act-ABS transactions for as long as the

securitizer has ABS outstanding and held by non-affiliates. Consistent with current filing

practices for other ABS forms,45 we are proposing, for purposes of making the disclosures

44
However, a portion of the information required by proposed Rule 15Ga-1 would be required in a
registration statement and in periodic reports. We discuss those proposals below.
45
The Form 10-K report for ABS issuers must be signed either on behalf of the depositor by the senior
officer in charge of securitization of the depositor, or on behalf of the issuing entity by the senior officer in
charge of the servicing. See General Instruction J.3. of Form 10-K [17 CFR 249.310] In addition, the
certifications for ABS issuers that are required under Section 302 of the Sarbanes-Oxley Act of 2002 [15 U.S.C.
7241] must be signed either on behalf of the depositor by the senior officer in charge of securitization of the
26

000238
required by Rule 15Ga-1, that Form ABS-15G be signed by the senior officer of the

securitizer in charge of the securitization.

Request for Comment:

21. Is our proposal to require proposed Rule 15Ga-1 disclosures on new Form ABS-15G

appropriate?

22. Securitizers would be required, as proposed, to file Form ABS-15G on EDGAR. If a

securitizer has already been issued a CIK number, we would expect Form ABS-15G

to be filed under that number. However, a securitizer may already be a registrant that

has other reporting requirements under the Securities Act or the Exchange Act.

Should we assign a different file number to Form ABS-15G filings in order to

differentiate Form ABS-15G filings made by a registrant in its capacity as a

securitizer, from other filings made pursuant to its own reporting requirements under
000239
the Securities Act and the Exchange Act? Should we also provide on the SEC

website the ability to exclude, include or show only Form ABS-15G for a particular

CIK number in order make it easier to locate these filings on EDGAR?

23. Instead of requiring, as proposed, that securitizers provide the Rule 15Ga-1

disclosures on Form ABS-15G, should we instead require that securitizers provide all

the disclosures required by Section 943 of the Act in a manner consistent with

disclosures in prospectuses and ongoing reports in a registered transaction? For

instance, for registered offerings, would it be appropriate to permit issuers to satisfy

depositor if the depositor is signing the Form 10–K report, or on behalf of the issuing entity by the senior officer
in charge of the servicing function of the servicer if the servicer is signing the Form 10-K report. In our 2010
ABS Proposing Release, we also proposed to require that the senior officer in charge of securitization of the
depositor sign the registration statement (either on Form SF-1 or Form SF-3) for ABS issuers. See Section II.F.
of the 2010 ABS Proposing Release.
27

000239
 their disclosure obligation by including all of the information required by proposed

Rule 15Ga-1 in prospectuses and periodic reports on behalf of the securitizer for all of

the affiliated trusts of a securitizer? Assuming that some securitizers offer several

ABS across many asset classes, would taking this approach result in a prospectus that

would be unwieldy considering the volume of information that would be required? If

we took this approach, then how would that information be conveyed to investors in

unregistered offerings, both initially and on an ongoing basis? Would securitizers be

able to identify all of the investors that would be entitled to receive the information

pursuant to Section 943 of the Act? How often should the information be conveyed

to investors? What method would be used to convey the information to investors?

Would securitizers post the disclosures on a website?

24. We are proposing that for purposes of making the disclosures required by Rule 15Ga-
000240
1 that Form ABS-15G be signed by the senior officer in charge of the securitization

of the securitizer. Is there a more appropriate party to sign the form? If so, please tell

us who and why.

5. Offshore Sales of Exchange-Act ABS

The market for Exchange Act-ABS is global.46 Securitizers in the United States may

sell ABS to offshore purchasers as part of a registered or unregistered offering. Under the

proposal, these transactions would be subject to the requirements of proposed Rule 15Ga-1.

In addition, U.S. investors may participate in offerings of ABS that primarily are offered by

46
Indeed, the International Organization of Securities Commissions (IOSCO) cites the recent crisis in the
subprime markets, stemming from defaulted mortgage loans in the United States and affected by issues related
to liquidity and transparency, as evidence of the interrelation of today’s global markets. See the Report on the
Subprime Crisis – Final Report, Report of the Technical Committee of IOSCO, May 2008, available at
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD273.pdf
28

000240
foreign securitizers to purchasers outside of the United States. For example, a small

proportion of a primarily offshore offering of ABS may be made available to U.S. investors

pursuant to Section 4(2) of the Securities Act47 or Securities Act Rule 144A.48

We recognize that Section 943 does not specify how its requirements apply to

offshore transactions. As noted, consistent with Section 943, proposed Rule 15Ga-1 would

require securitizers to disclose information about unregistered transactions, including those

sold in unregistered transactions outside the United States. Securities that are sold in foreign

markets and assets originated in foreign jurisdictions may be subject to different laws,

regulations, customs and practices which can raise questions as to the appropriateness of the

disclosures called for under Form ABS-15G. Although our proposed rules are required by

the Act, and we believe the added protections of our rules would benefit investors who

purchase securities in these offerings, we are mindful that the imposition of a filing
000241
requirement in connection with private placements of ABS in the United States may result in

foreign securitizers seeking to avoid the filing requirement by excluding U.S. investors from

purchasing portions of ABS primarily offered outside the United States, thus depriving U.S.

investors of diversification and related investment opportunities.

Request for Comment:

25. Are there any extra or special considerations relating to these circumstances that we

should take into account in our rules? Should our rules permit securitizers to exclude

information from Form ABS-15G with respect to “foreign-offered ABS,” and if so,

47
15 U.S.C. 77d(2). Section 4(2) provides an exemption from registration for transactions by an issuer
not involving any public offering.
48
Securities Act Rule 144A [17 CFR 230.144A] provides a safe harbor for a reseller of securities from
being deemed an underwriter within the meaning of Sections 2(a)(11) and 4(1) of the Securities Act for the
offer and sale of non-exchange listed securities to “qualified institutional buyers” (QIBs), as defined in Rule
144A.
29

000241
 should foreign-offered ABS be defined to include Exchange Act-ABS that were

initially offered and sold in accordance with Regulation S, the payment to holders of

which are made in non-U.S. currency, and have foreign assets (i.e., assets that are not

originated in the U.S.) that comprise at least a majority of the value of the asset pool?

For this purpose, should the foreign asset composition threshold be higher or lower

(e.g., 40%, 60%, or 80%)? Would another definition be more appropriate?

26. Should our rules require securitizers that are foreign private issuers49 to provide

information on Form ABS-15G for those Exchange Act-ABS that are to be offered

and sold in the United States pursuant to an exemption in an unregistered offering, as

proposed? Instead should our rules only require disclosure about Exchange Act-ABS

as to which more than a certain percentage (e.g., 5%, 10% or 20%) of any class of

such Exchange Act-ABS are sold to U.S. persons?

000242
B. Proposed Disclosure Requirements in Regulation AB Transactions

The requirements in Section 943 of the Act are in many ways quite similar to the

Commission’s proposal for additional disclosure regarding fulfilled and unfulfilled

repurchase requests. In our 2010 ABS Proposing Release,50 we proposed expanded

disclosure regarding originators51 and sponsors,52 such as information for certain identified

originators and the sponsor relating to the amount of the originator's or sponsor's publicly

securitized assets that, in the last three years, has been the subject of a demand to repurchase

49
17 CFR 240.3b-4.
50
See Section V.A. of the 2010 ABS Proposing Release.
51
See previously proposed Item 1110(c) of Regulation AB in the 2010 ABS Proposing Release.
52
See previously proposed Item 1104(f) of Regulation AB in the 2010 ABS Proposing Release.
30

000242
or replace.53 However, the Commission’s proposals would only apply to registered offerings

and would only require disclosure about other registered offerings, if material. In contrast, as

we discuss in our proposals above, Section 943 of the Act requires similar but expanded

disclosure by requiring that any securitizer of Exchange Act-ABS disclose fulfilled and

unfulfilled repurchase requests across all trusts aggregated by securitizer, so that investors

may identify asset originators with clear underwriting deficiencies.54 In order to conform our

2010 ABS proposals to the rule proposed today to implement Section 943 of the Act, we are

re-proposing our previous proposals for Regulation AB with respect to disclosures regarding

sponsors in prospectuses and with respect to disclosures about the asset pool in periodic

reports, so that issuers would be required to include the disclosures in the same format as

required by proposed Rule 15Ga-1(a).55 Under our revised proposals, issuers of Reg AB-

ABS would need to provide disclosures in the same format as proposed Rule 15Ga-1(a)
000243
within a prospectus and within ongoing reports on Form 10-D as described below. As we

53
The proposal would amend Regulation AB to require sponsors and originators (of greater than 20% of
the assets underlying the pool) to disclose the amount, if material, of publicly securitized assets originated or
sold by the sponsor that were the subject of a demand to repurchase or replace for breach of the representations
and warranties concerning the pool assets that has been made in the prior three years pursuant to the transaction
agreements on a pool by pool basis as well as the percentage of that amount that were not then repurchased or
replaced by the sponsor. Of those assets that were not then repurchased or replaced, disclosure would be
required regarding whether an opinion of a third party not affiliated with the sponsor/originator had been
furnished to the trustee that confirms that the assets did not violate the representations and warranties. See
proposed Items 1104(f), 1110(c) and 1121(c) of Regulation AB in the 2010 ABS Proposing Release.
54
See Section 943 of the Act. We note that several commentators on the 2010 ABS Proposing Release
expressed concerns about the difficulty of producing data to comply with the proposed requirement to report
three years of repurchase activity. See e.g., letters of ASF, Bank of America, Financial Services Roundtable
and Mortgage Bankers Association. However, in light of the requirements of Section 943 of the Act, we
continue to believe that the information is important to include in prospectuses.
55
As discussed above, in the 2010 ABS Proposing Release, we proposed to amend Item 1110(c) of
Regulation AB to require originators (of greater than 20% of the assets underlying the pool) to disclose the
amount, if material, of publicly securitized assets originated or sold by the sponsor that were the subject of a
demand to repurchase or replace for breach of the representations and warranties concerning the pool assets that
has been made in the prior three years pursuant to the transaction agreements on a pool by pool basis as well as
the percentage of that amount that were not then repurchased or replaced by the sponsor. That proposal remains
outstanding.
31

000243
Item 1.02 Periodic Filing of Rule 15Ga-1 Representations and Warranties Disclosure

Each securitizer that was required to provide the information required by Item 1.01 of this

form, shall provide the disclosures required by Rule 15Ga-1 (17 CFR 240.15Ga-1) as of the

end of each calendar month, to be filed not later than 15 calendar days after the end of such

calendar month.

Item 1.03 Notice of Termination of Duty to File Reports under Rule 15Ga-1

If any securitizer has no asset-backed securities outstanding (as that term is defined in

Section 3(a)(77) of the Securities Exchange Act of 1934) held by non-affiliates, provide the

date of the last payment on the last asset-backed security outstanding that was issued by or

issued by an affiliate of the securitizer.

SIGNATURES
000244
Pursuant to the requirements of the Securities Exchange Act of 1934, the reporting entity has
duly caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.

__________________________________________ (Securitizer)

Date _________________________________________________

______________________________________________________ (Signature)*
*
Print name and title of the signing officer under his signature.

* * * * *

By the Commission.

Elizabeth M. Murphy
Secretary

Dated: October 4, 2010

71

000244