WASHINGTON -- The Securities and Exchange Commission has quietly resurrected a deregulation project from the George W. Bush administration, one with the potential to shift the American economic landscape in favor of big companies.
The initiative was originally launched in 2008 by then-SEC Director of Corporate Finance John White, but had to be abandoned as the festering financial crisis embarrassed deregulation proponents. It is now being spearheaded by White's wife, SEC Chair Mary Jo White, who has been the target of heated criticism from Sen. Elizabeth Warren (D-Mass.) and liberal groups for backing Wall Street-friendly policies.
"This is bullshit," said former SEC Chief Accountant Lynn E. Turner, referring to the agency's latest moves. "This is just absolute bullshit. It reeks."
The deregulation agenda makes subtle changes to obscure rules with potentially dramatic ramifications. By tweaking a few definitions, the SEC could curtail how much information the public receives about the internal operations of corporate conglomerates and their tax-avoidance efforts, while simultaneously shielding big firms from shareholder lawsuits.
The recent push has infuriated investor advocates. Last week, members of the agency's Investor Advisory Committee grilled SEC Chief Accountant James Schnurr over potential changes to what constitutes a "material" corporate event that must be disclosed in public filings. Schnurr has authority over the Financial Accounting Standards Board, which proposed the changes in late September. A day after the plan was released, the SEC announced it would also be rethinking disclosures on corporate mergers, alerting financial watchdogs to the prospect of significantly curtailed information on major deals.
"The feeling of this body is that more disclosure is better than less, in general," Investor Advisory Committee member Damon Silvers said at the meeting. "The clear drift of this is in the other direction." Silvers is a top attorney for the AFL-CIO, the nation's largest federation of labor unions.
Schnurr insisted that the new rules did not actually change anything, but only made the existing standards "more clear" to help companies avoid clogging up reports with minor details. A big company with a very small pension plan, he said, shouldn't have to tell its shareholders about pension accounting errors, since they wouldn't add up to much in the firm's overall financial position.
"You'd have to be brain dead to believe the FASB when it says they aren't changing anything," said Turner, referring to the Financial Accounting Standards Board. "Because if that were the case, then they wouldn't be doing anything."
Currently, a company has to report all errors it makes in public filings unless the firm's independent auditors conclude the error was "immaterial" to overall operations. The new FASB proposal would reverse the burden of proof, forcing auditors to definitively prove that any error was in fact "material" before requiring firms to disclose them. It's the same standard used for what constitutes a "material" event in securities fraud statutes. Investors, of course, generally want to keep tabs many kinds of company activities -- not just those that are strictly fraudulent.
"Management is given tremendous discretion in judging this, and it will make it very difficult for auditors to say, 'You don't think this is material, but we do, so put it in,'" said Joseph Carcello, head of the Department of Accounting and Information Management at the University of Tennessee's Haslem College of Business. Carcello is a member of the Investor Advisory Committee.
The bigger the company, of course, the harder it is to prove that a financial error is "material." Massive firms have massive balance sheets, where multimillion-dollar slip-ups can have relatively small effects on quarterly earnings. That doesn't mean investors don't want to know about them. And the less information a company discloses, the harder it is to bring lawsuits if executives mislead their shareholders.
"The only reason you'd be happy with these changes would be if you thought American corporate life suffered from excessive accountability," said Jeff Hauser, director of the Revolving Door Project at the Center for Effective Government.
The new plans also have significant implications for the public's understanding of corporate taxes. Big companies almost never pay the full 35 percent tax rate on profits, but use a variety of complicated tactics to lower their tax burden. Limiting disclosures in tax reporting may make it more difficult for watchdogs to monitor the ways in which corporations exploit loopholes to dodge taxes.
John White was the chief advocate for the materiality change during the George W. Bush years, helping with an SEC report recommending the overhaul and giving multiple speeches calling for it to be implemented. He is moderating a panel with Schnurr at a securities law conference in New York next week. Mary Jo White is delivering the keynote address.
John White's deregulatory effort on materiality fizzled after the Lehman Brothers bankruptcy. At the time, the SEC was under heavy fire over very public failures under then-Chairman Christopher Cox. The agency missed the Bernie Madoff scandal, and Cox skipped an emergency Bear Stearns rescue meeting for a birthday party, after flubbing oversight of major investment banks.
The so-called toxic assets at the heart of the crash were essentially an accounting debacle -- companies were claiming that they owned securities worth billions of dollars, when in fact they were worth far less. Acknowledging those losses created huge holes in bank balance sheets that were only filled by taxpayer bailouts.
In that environment, efforts to restrict investor access to corporate accounting problems from one of Cox's top lieutenants became politically untenable. When President Barack Obama named Mary Schapiro to head the SEC in early 2009, the entire project was dropped.
But Schapiro's successor, Mary Jo White, has been more sympathetic, bemoaning "disclosure overload." Corporate accountability advocates view the brimming conflict as the first volley in a battle to limit corporate disclosures to items that only affect a company's bottom line. Congress has required companies to release information tied to human rights objectives and other areas of the public good that may not have a direct impact on corporate profits. Mary Jo White has, however, been instrumental in blunting or delaying some of those efforts during her tenure at the SEC.
White has slow-walked congressionally mandated disclosures on executive pay and attempted to scuttle disclosures on blood diamonds and human rights abuses in the Democratic Republic of the Congo. Such "societal pressure," White has argued, is irrelevant to company finances and investment decisions. Such comments sparked outrage from Warren and others, but the Obama administration has defended White from her liberal critics.
The SEC was not immediately available for comment.
Zach Carter is The Huffington Post's Senior Political Economy Reporter, and a co-host of the HuffPost politics podcast, So That Happened. Listen to the latest episode:
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