Cox Disclosure Initiative: window dressing?

Strategic Finance, August, 2008 by Stephen Barlas

Securities & Exchange Commission (SEC) Chairman Chris Cox won't be around when a new President takes office next January 20, so it's reasonable to wonder if some of the financial reporting initiatives he recently announced will ever develop into anything worth talking about. On the plus side, the SEC finally has its full complement of five commissioners, three of whom were confirmed by the Senate in June, meaning they will be at the SEC after Cox departs. The two new Democratic commissioners are Luis Aguilar and Elisse Walter. Tony Paredes takes the seat being vacated by Republican Paul Atkins. Cox and Kathleen Casey are the other two Republicans.

That means at least four of those commissioners will be around to see the completion of the 21st Century Disclosure Initiative, which Cox announced in June--that is, if it's ever completed. One wonders whether Cox is simply trying to look busy. He already has recommendations from the Advisory Committee on Improvements to Financial Reporting (the Pozen Committee), made last February, sitting in his lap. Why not act on those rather than start this new study, upon whose completion Cox said a new advisory committee would be appointed?

Effort to Improve Corporate Bond Ratings

The SEC proposed three separate rules in June altering its requirements concerning credit rating agencies. The one likely to have the most impact on corporate financial executives would require rating agencies to differentiate between structured products and corporate bonds, disclose past ratings, and prohibit anyone who participates in determining a credit rating from negotiating the fee that the issuer pays for it. Some have argued that the ratings agencies give bonds higher ratings than deserved because the ratings agency is being paid by the same company asking for the rating.

It was just two years ago that Congress passed the Credit Rating Agency Reform Act (CRARA), which created the Nationally Recognized Statistical Rating Organization (NRSRO) designation--bestowed by the SEC--in hopes of both investing the three major credit rating agencies with additional credibility and also opening the door to competition for Moody's, Standard & Poor's, and Fitch Ratings. The three agencies were blamed in some quarters for the Enron-era corporate debacles. The SEC subsequently designated those three plus a handful of others as NRSROs. But that designation didn't prevent the mortgage-backed security ratings debacle that unfolded long after CRARA passed.

STEPHEN BARLAS, EDITOR