FASB and SEC Accounting Update. Mutual Fund Directors Forum

Transcription

1 FASB and SEC Accounting Update Mutual Fund Directors Forum

2 Overview Key themes and trends Updates on recent FASB pronouncements Recent SEC comments on financial reporting and examinations IFRS developments to date Page 2

3 Key themes and trends Mutual fund assets at $10.6 trillion at end of August 2009, an increase of $1.0 trillion (11%) since December 2008 Total net inflows of $50.0 billion in August 2009 are comprised of: Net outflows of money market funds of $53.8 billion (distributed somewhat evenly between institutional money market funds and retail funds) Net inflows for equity and bond funds of $3.86 and $42.9 billion, respectively Exchange Traded Funds (ETFs) assets at $656.9 billion at end of August 2009, an increase of $125.6 billion (23.6%) since December 2008 Value of ETF shares issued exceeded value of shares redeemed by $5.4 billion Number of ETFs increased slightly from 728 at December 2008 to 735 at August 2009 Page 3

4 Key themes and trends (cont d) Scrutiny of leveraged ETFs Unsuitable for investors who plan to hold them longer than one day Warning from SEC and FINRA to retail investors Banning of sales by certain intermediaries M&A Activity Divestiture of asset management segments by large financial institutions (e.g., BGI to BlackRock, Columbia to Ameriprise and AIG/SunAmerica being marketed for sale) Continued pressure on profit margins prompt product rationalization Product cost/profitability analysis Risk profile of products Extinction of B and C shares Mutual fund firms launching hedge-like products Money fund variations Investor confidence/retention in current market environment Large numbers of pension funds, endowments and other investment bodies are expected to change asset managers during the third and fourth quarter Page 4

5 Key themes and trends (cont d) Counterparty risk Ability to aggregate exposures (direct and indirect) fund and enterprise level Knowing specific counterparties to determine ultimate risk exposure Operational concerns Management fees increase due to breakpoints at lower AUM Fund investors are more cost-conscious/evaluating performance relative to fees fund managers are limiting costs or waiving fees Fund complexes workforce rationalization and headcount reductions (impact to controls and infrastructure) Firms considering other cost cutting alternatives, such as outsourcing and use of subadvisory relationships ETFs attractive due to lower expense ratios; however, the saturation of funds in the marketplace may be causing investor confusion Valuation issues Evaluation of broker quotes (i.e., valuation approach/process, data used) Evergreen settlement FAS enhanced disclosure requirements Page 5

6 Key themes and trends (cont d) Regulatory scrutiny of target date funds The SEC and the Department of Labor held a joint hearing on 18 June to examine target date funds SEC areas of focus include: Whether the use of a particular target date in a fund s name is materially deceptive or misleading and should be prohibited Whether the SEC rule governing a fund s name should be revised to require clarification when a particular target date is used Re-consideration of SEC disclosure requirements to determine whether improvements can be made to enhance investor understanding of target date funds ICI testimony and recommendations Enhance understanding through disclosure, not regulation Five key areas of disclosure Page 6

7 Updates on recent FASB pronouncements Page 7

8 Derivative reporting under FAS 161 (Topic 815) Quick overview Observations Qualitative disclosures Quantitative disclosures Operational and accounting issues Page 8

9 Derivative reporting under FAS 161 (Topic 815)(cont d) Quick overview Applies to all derivatives Intended to improve financial reporting and disclosure Provide transparency Derivatives effect on financial position, results of operations and cash flows Qualitative and quantitative disclosures Other disclosures Volume/level of activity Credit risk-related disclosures Effective for any reporting period (annual or interim) beginning after 15 November 2008 Page 9

10 Derivative reporting under FAS 161 (Topic 815) (cont d) Observations qualitative disclosures Definition of derivatives Purpose of investing in derivatives Objective by risk exposure Strategy managing/hedging risks vs. speculative/exposure Common features of derivatives Risks Off-balance sheet risk Counterparty risk Net settlement SEC comments Plain English Mutual funds N-Q disclosures Page 10

11 Derivative reporting under FAS 161 (Topic 815) (cont d) Observations quantitative disclosures Tabular footnote disclosures Gross basis Reconciliation of tabular footnotes to the financial statements Futures Spot contracts Volume/level of activity Average notional value (e.g., swaps) Average contract amount outstanding (e.g., forward contracts) Derivatives with credit risk-related contingent features Credit event triggers Fair value of such derivatives Fair value of assets needed to satisfy triggered events (worst case scenario) Page 11

12 Derivative reporting under FAS 161 (Topic 815) (cont d) Operational and accounting issues Tabular footnote disclosures Categorizing and tracking all derivatives by underlying risk exposure Volume/level of activity disclosures Principles-based disclosure meaningful disclosure Credit risk-related disclosures Identifying and tracking derivatives with credit-risk-related contingencies Net liability position settlement/counterparty basis Determining cash flow impact upon trigger events Collateral Independent amounts Cross margin facilities Location and reconciliation of disclosures Page 12

13 FAS 165 Subsequent Events Establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued Applies to all entities that prepare financial statements (interim or annual) in accordance with GAAP Requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date Effective on a prospective basis for interim and annual periods ending after 15 June 2009 Page 13

14 FAS 167 implications to asset managers On 12 June 2009, the FASB published FAS 167, Amendments to FASB Interpretation No. 46(R). Asset managers will need to re-evaluate their consolidation status for reporting as of 1 January Some of the significant changes are: The entity with a variable interest and power consolidates, versus prior methodology of calculating which party would absorb the majority of risks and rewards. In order for kick-out rights to be substantive, they must be held by one party. This may lead to a significant increase in consolidated hedge and private equity funds. Money market funds may require consolidation due to previous support provided. This support could lead to money market funds becoming VIEs and the support provided could be viewed as a significant implicit/explicit interest. Page 14

15 FAS 168 FASB Accounting Standards Codification On 29 June 2009, the FASB issued FAS 168, which replaces FAS 162, The Hierarchy of Generally Accepted Accounting Principles Establishes the Codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities Change from a standards-based model to a topics-based model The FASB s goals: Simplify user access by codifying all authoritative US GAAP in one spot Ensure that the codified content accurately represented authoritative US GAAP as of 1 July 2009 Create a codification research system that is up to date for the released results of standard-setting activity Effective for interim and annual periods ending after 15 September 2009 For public companies, relevant portions of authoritative content issued by the SEC and selected SEC staff interpretations and administrative guidance have been included for reference in the Codification (e.g., Regulation S-X) Page 15

16 Recent SEC comments on financial reporting and examinations Page 16

17 Financial reporting comments SEC Comments on recently effective disclosure requirements: FSP FAS (Topic 815) and identification of counterparties Timing of presentation Importance of identification FSP FAS (Topic 820) disaggregation by major category Use of identified categories or other groupings FAS 165 (855) subsequent events Timing and dating considerations Page 17

18 Financial reporting comments SEC (cont d) Other observations Securities lending disclosures Valuation of collateral Disclosures Recent experience in relation to accounting policy footnotes N-14 general comments Accounting survivor reminders Disclosures Distressed securities Disclosures XBRL Risk return summary Page 18

19 Financial reporting comments SEC (cont d) Expense-related observations Expenses Prospectus disclosures Performance fees and related disclosures Computation and disclosures where negative expenses possible Expense recapture plan disclosures Fee waivers and expense recapture programs Subsequent changes to recapture programs Page 19

20 Regulatory action due to current market conditions SEC new examination approach Enhancing examiners training and expertise in fraud detection Enhancing examiners expertise in complex financial products, trading and other areas Conducting focused examinations and an exam sweep of firms with higher potential fraud risk profiles Improving the tools available to examiners to detect fraud, and leveraging the work performed by the firm s independent auditor Improving surveillance and risk-based targeting Improving handling of tips and complaints inside the SEC SEC Custody Rule proposed amendments SEC no-action letters TALF loans American Capital, Ltd. Page 20

21 SEC money market rule proposal Portfolio quality Changes to definition of eligible securities Asset-backed securities Portfolio maturity Weighted average maturity Weighted average life Maturity limits on government securities Maturity limits on other portfolio securities Page 21

22 SEC money market rule proposal (cont d) Portfolio liquidity Limitation on acquisition of illiquid securities Cash and securities that can be readily converted to cash New requirements at time of acquiring securities New requirements for cash and securities that can be readily converted to cash General liquidity requirements will call for funds to know your customer Challenge to understand risk characteristics of shareholders that hold securities through omnibus accounts or other access to funds with limited transparency Page 22

23 SEC money market rule proposal (cont d) Portfolio liquidity (cont d) Stress testing of portfolio Challenges with stress testing Existing guidance which may be used as a start Diversification Guarantor and demand feature diversification Industry concentration Repurchase agreements Page 23

24 SEC money market rule proposal (cont d) Portfolio holdings disclosure Monthly public website posting Monthly reporting to SEC Amendments to Rule 30b1-5 Transaction processing Board required to determine that the fund (or its transfer agent) has the capacity to redeem and sell its securities at a price based on the current Net Asset Value (NAV) per share Would need to have capacity to process transactions at other than stable NAV (i.e., concern that some systems are hard-wired ) Determination to be performed at least annually Page 24

25 SEC money market rule proposal (cont d) Affiliate purchase exemption Expanded exemptive relief New reporting requirement Fund liquidation Proposed new Rule 22e-3 SEC seeking comment on other possible regulatory changes Next steps Additional comments requested for possible future reforms Comments due on or before 8 September 2009 Page 25

26 IFRS developments to date Page 26

27 IFRS developments to date April 2005 SEC publishes roadmap on possible elimination of US GAAP reconciliation for foreign private issuers August 2007 SEC distributes concept release on use of IFRS by US issuers, including request to comment on investment companies November 2007 SEC eliminates requirement of US GAAP reconciliation for foreign private issuers December 2007 to August 2008 SEC holds roundtable discussions August 2008 SEC approves for public comment proposed roadmap, including mandatory reporting under IFRS beginning in 2014, 2015 or 2016 depending on the size of the issuer Page 27

28 Questions and answers Page 28