February 15, 2008
SEC Commissioner Atkins Speaks Out on SAB 99
Posted by: Paul Rose
At last week's "SEC Speaks" conference, Commissioner Paul Atkins addressed, among other things, the "age-old" question: What does it mean to be material? Of particular interest were his comments on Staff Accounting Bulletin No. 99, which gives the SEC staff's view that the use of percentages as a numerical threshold for determining materiality is not acceptable:
The SEC allowed the waters to be muddied on the issue of materiality in 1999 with Staff Accounting Bulletin 99. Anyone who has tried to apply SAB 99 is left with little certainty. . .. Would it surprise you to learn that SAB 99 does not necessarily represent the views of the Commission? As the title implies, it is a Staff Accounting Bulletin. The process of issuing Staff Accounting Bulletins is organized to avoid "complications" with the Administrative Procedure Act. Is that how a full-disclosure agency should operate? The Commission never voted on the views espoused within any SAB, so it does not and cannot represent the views of the SEC. Worse yet, SEC staff developed SAB 99 without public input. Substantive policy ought not to be made by the staff in private meetings, and ought not to be made based solely on the wisdom and experiences of SEC staff.
Moreover, since SAB 99 was released, a lot has changed. We now have Sarbanes-Oxley and new case law and regulations. Some persons are promoting new disclosure requirements on topics such as state sponsors of terrorism, climate change, and global warming. As the Advisory Committee on Improvements to Financial Reporting will discuss at its meeting next week, the issue of materiality may need to be revisited. I support the work of that committee and appreciate Bob Pozen's leadership. When the SEC takes up this issue, we must approach it by returning to "first principles" — that materiality is determined based upon the objective "reasonable investor" standard. The Commission itself — after proceeding with public notice and comment — should clear up this issue with the full input of the investor, legal, accounting, academic, and business communities.
The Report of the Advisory Committee referenced by Commisioner Atkins came out yesterday, and as expected addressed concerns with the materiality approach used in SAB No. 99. First, the report notes that, in accord with SAB No. 99, surveyed investors stated that bright lines are not really useful in making materiality judgment. Both qualitiative and quantitative factors should be considered in determining if an error is material. Second, the report notes in practice, SAB No. 99 works in only one direction--to expand the scope of materiality. As a result, disclosure often becomes cluttered as issuers attempt to respond to the demands of SAB No. 99. The report offers a "sliding scale" approach that could help alleviate this problem:
Just as qualitative factors may lead to a conclusion that a quantitatively small error is material, qualitative factors also may lead to a conclusion that a quantitatively large error is not material. The evaluation of errors should be on a 'sliding scale.' On this scale, the higher the quantitative significance of an error, the stronger the qualitative factors must be to result in a judgment that the error is not material. Conversely, the lower the quantitative significance of an error, the stronger the qualitative factors must be to result in a judgment that the error is material.
February 13, 2008
SPACs: Is Europe Following the U.S. Trend?
Posted by: Paul Rose
Last year 68 special purpose acquisition vehicles (SPACs) were listed in the US. Last week saw the listing of continental Europe's second SPAC ever, Liberty International. The Financial Times reports that there are perhaps five or six SPACs in line to list on Euronext, perhaps making Liberty the start of a trend.
SPACs in general have their problems, as Steve Davidoff has noted. Further, SPAC offerings in Europe must overcome the fact that many of the cash shells listed on the UK's AIM market have performed poorly. However, the Liberty International SPAC has a couple of points to its credit that may provide a model for easing European concern about the use of SPACs. First, Liberty has sufficient proceeds--600 million euros--to make a play for larger companies without having to be leveraged by significant debt (as stated in the firm's press release, "The listing of Liberty International provides us with a highly versatile and efficient way of employing capital without relying on today's precarious debt markets"). Second, and perhaps more importantly, the management of Liberty is both relatively experience and successful, having used a US SPAC to bring GLG Partners, a hedge fund, to the NYSE last year. The units in the US SPAC were sold at $10, and now are worth about $16.
While the SPAC looks to have a strong year in Europe and the U.S., the short history of SPACs is a reminder that it is often the intangibles provided by management, and not merely or even primarily the structure or governance policies of the investment vehicle, that determines the success of an enterprise. The FT quotes a Citi banker (Citi was the lead underwriter on the Liberty listing) as saying: "SPACs and their potential returns are only as good as the management teams running them and their ability to source and acquire businesses at attractive values. It is a young asset class and it is still too early to tell how many will achieve good returns."