SEC Backs Derivatives Accounting Plan

Securities and Exchange Commission Chairman Arthur Levitt Jr. has endorsed the Financial Accounting Standards Board's controversial proposal on derivatives accounting and urged prompt consideration of the plan.

The FASB rule proposal, which would require companies to report derivatives in their financial statements rather than in footnotes, has stirred opposition from several banks, securities firms, and influential congressmen.

Many critics have urged a yearlong study of the proposal, which they describe as overly complex, while others have urged the SEC to intervene to soften the plan.

"These delaying tactics are inconsistent with the way the standard- setting process should be conducted," Mr. Levitt told the Economic Club of Detroit on Tuesday. "There is much more at stake here than derivatives accounting-it is the process by which the private sector sets accounting standards in the United States."

The FASB is a professional body that writes accounting rules for the private sector.

It has been seeking for five years to require companies to record derivatives on their books at fair market value, arguing that investors will be better able to judge the potential impact of derivatives.

"That strikes me as an eminently reasonable position," Mr. Levitt said.

Many critics have argued, however, that some derivatives contracts have no available, standardized measure of fair market value.

"Senator Gramm will not be persuaded," said Larry Neal, a spokesman for Phil Gramm, a Texas Republican. "He and Chairman Levitt have agreed to disagree on derivatives rules."

The Senate banking securities subcommittee, chaired by Sen. Gramm, asked the FASB last month to study the proposal further and reopen it for public comment.

Sen. Gramm has been joined in this request by Rep. Mike Oxley, R-Ohio, who heads the House commerce subcommittee on finance and hazardous materials, and about 20 other congressmen of both parties. Other supporters include Citicorp, the nation's second-largest banking company, and about a dozen other large banks, and securities firms such as Lehman Brothers Holdings Inc. and Salomon Inc.

Derivatives are financial contracts linked to underlying assets, such as stocks, bonds, or currencies, and are used to hedge risks or make leveraged bets. Their volatility has helped contribute to huge losses in recent years by companies such as Procter & Gamble Co. and localities such as Orange County, Calif.

Last June, the FASB issued its rule proposal for public comment, with plans for a final decision to be made next month.

The board postponed that decision at least until September or October, when it will decide whether to adopt the plan or reissue it for public comment-a process that could delay a final decision by another year.

"We appreciate the support from the SEC," said the FASB's outgoing chairman, Dennis Beresford. "Many people are lobbying us, and we haven't made a decision yet."

Among those lobbying the Norwalk, Conn.-based FASB are Citibank, which wrote the board this month to say its revised approach "still does not work and therefore remains unacceptable."

Salomon Brothers also has pitched in, telling the FASB its approach "distorts economic results and provides potentially misleading information to financial statement users." Critics calling for a reexamination of the plan have argued in part that the original proposal was modified and should be subject again to public review.

In its recent revision, the FASB tried to reduce the potential for artificial earnings volatility by requiring derivatives gains and losses to be recorded in the same income statement.

Mr. Levitt has tried several times during the past year to try to protect the FASB from undue influence by Congress and U.S. businesses.

"I am determined not to let that happen," he said Tuesday.

The trustees who oversee the FASB bowed to his pressure last summer and agreed to fill half their seats with public members.

Sen. Gramm also has led a congressional assault on the SEC's new rules requiring banks, thrifts, and companies to disclose potential derivatives losses in an attempt to give investors a better idea of the possible risks.

The SEC decided to review its new rules a year after they are to be implemented rather than in three years.

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