By Bill Flook
SEC Chairman Jay Clayton is slated to testify on December 10, 2019, before the Senate Banking Committee, the banking panel announced. The committee is holding the hearing as part of its oversight duties over financial regulatory agencies. Clayton will be the sole witness.
The hearing comes two months after all five members of the SEC testified before the House Financial Services Committee in a hearing that touched on a wide range of issues, including SEC enforcement trends, the commission’s Regulation Best Interest (BI) rules, and the FASB’s credit loss standard.
During the hearing, House Financial Services Committee Chair Maxine Waters, a California Democrat, blasted Clayton and the rest of the commission for “not fulfilling its mission as Wall Street’s cop.”
She took particular aim at Reg BI, rules designed to ward off conflicts of interest among broker-dealers, which she warned were inadequate to “protect retirement savers from unscrupulous financial advisers.” Democrats on the Senate Banking Committee are likely to level similar criticisms when Clayton appears before the panel next month.
In a cluster of four rules, Clayton’s SEC established a set of new obligations for broker-dealers working with retail clients, an effort to ward off conflicts of interest. Opponents of the rules argue the changes will do little to protect retail clients from being steered into inappropriate investments that most benefit their broker.
The SEC issued the rules in Release No. 34-86031, Regulation Best Interest: The Broker-Dealer Standard of Conduct ; Release No. 34-86032, Form CRS Relationship Summary; Amendments to Form ADV ; Release No. IA-5248, Commission Interpretation Regarding Standard of Conduct for Investment Advisers ; and Release No. IA-5249, Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser .
During the House hearing, Republicans lawmakers and one Democrat also pressed Clayton to request an Office of Financial Research (OFR) study of the FASB’s current expected credit losses (CECL) standard.
Rep. Blaine Luetkemeyer of Missouri, who made the push during the hearing, is a long-time opponent of CECL, which is set to go into effect for publicly traded businesses in 2020.
The standard, published in mid-2016 in Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , is widely seen as the FASB’s most significant and far-reaching response to the 2008 financial crisis, addressing criticisms that banks were far too slow to recognize souring loans on their balance sheets during the crisis.
Under the standard, banks and other financial entities will be required to forecast into the foreseeable future to predict losses over the life of a loan, and then immediately book those losses. Banks and banking industry trade groups have recently stepped up efforts to delay or scrub the standard, which they argue will force them to needlessly hold more capital and pull back on lending in a crisis, when borrowers most need the funds.
Luetkemeyer last year unsuccessfully sought to advance legislation to halt CECL until the SEC completes a study of the standard, something the market regulator has been unwilling to do on its own.
Several Republican members of the Senate Banking Committee have also sought a “stop and study” pause to CECL. In May, Sen. Thom Tillis, a Republican from North Carolina, and five GOP cosponsors introduced S. 1564, the Continued Encouragement for Consumer Lending Act, which would force the FASB to delay the implementation of CECL for further review.
This article originally appeared in the November 25, 2019 edition of Accounting & Compliance Alert, available on Checkpoint.
Subscribe to our Checkpoint Daily Newsstand email to get all the latest tax, accounting, and audit news delivered to your inbox each weekday. It’s free!