Saturday, December 30, 2006

Are SEC and Incoming Oversight Chair Off to Rocky Start?

The SEC appears to have angered its incoming House oversight chair when it amended its executive compensation rules on December 22. However plausible the reasoning behind the regulations, and it is arguably plausible to align options disclosure with FASB standards, Rep. Barney Frank was none too pleased. The new chair of the Financial Services Committee issued a press release expressing his disappointment with both the substance and the procedure used to reach the SEC’s decision to loosen reporting requirements for the pay of the top executives of public corporations. He considered it especially ironic that the SEC would relax the rules regarding stock options at precisely the time that widespread abuses of the practice are coming to light. He emphasized that backtracking by the SEC on this important matter of stock options reinforces his determination that Congress must act to deal with the problem of executive compensation that is now unconstrained by anything except the self restraint of top executives.

These are strong sentiments and may portend hearings on the issues sometime soon. Given that executive compensation was already high, if not at the top, of the chair-designate’s agenda, I believe that we can probably expect a determined legislative response. And we should not forget that going back to the creation of the Financial Services Committee, when Rep. Billy Tauzin became chair of the Energy and Commerce Committee, it is Energy and Commerce that got jurisdiction over FASB. Could incoming Energy and Commerce chair John Dingell get involved in this issue through the FASB connection? It could prove very interesting if he did get involved. That, of course, presumes that the Tauzin compromise will hold. I think that it will since I recently read somewhere, may have been the Post, that Speaker Pelosi has indicated that the respective committee jurisdictions in the area of financial regulation will remain unchanged.

Thursday, December 21, 2006

European Central Bank VP Sees "Perfect Storm" of Derivatives and Hedge Funds

A ``triangle of vulnerability’’ has been created by the convergence of the credit cycle, credit derivatives, and hedge funds, in the view of Lucas Papademos, Vice President of the European Central Bank. In recent remarks he noted that the growth in the volume and complexity of credit derivatives, coupled with the increasing presence of hedge funds, has posed the specter of systemic risk for the financial markets. The increasing participation of hedge funds in taking on credit risk exposures has worked a fundamental change in the methods for assessing the ability of the financial system to cope with unexpected credit cycle deterioration, he posited.

If a triggering event of sufficient severity were to occur, he said, it could bring about an abrupt increase in long-term yields, and credit and equity risk premiums across the capital markets. This would imply significant asset portfolio losses for banks and other financial institutions. More importantly, it could also raise the counterparty risks some banks face vis-à-vis hedge funds.
The senior official found it noteworthy that the collapse of Amaranth Advisors in September did not lead to wider turbulence, despite the fact that the total loss experienced by the fund was much larger than that incurred by LTCM in 1998. The ability of the system to absorb the shock demonstrated that the hedge fund sector has become more mature and has the ability to repair itself in the event of idiosyncratic distress. However, he cautioned that the Amaranth event occurred against a backdrop of benign market conditions. In a more challenging market environment, he concluded, the impact of such an event could have been more disruptive.

Tuesday, December 19, 2006

FSA to Consider Fund of Hedge Funds for Retail Investors

In a very important move, UK Financial Services Authority plans to consult on allowing the sale of a fund of hedge funds to retail investors, according to FSA Chair Callum McCarthy. While the form of consumer protection for such funds has not been decided, he noted, it is unlikely to involve any substantial constraint on the investment strategy that the fund managers can pursue. Instead, regulators will concentrate on structural questions, such as the functional separation between the manager of the fund and the custodian, or the pricing of the fund. The FSA may also establish principles governing the due diligence that the managers of the authorized funds should carry out in selecting the hedge funds in which they invest. It is anomalous for UK investors to be prevented from investing in an authorized fund of unregulated schemes, reasoned the chair, when the amended EU UCITS Directive authorizes collective schemes to invest more freely in derivatives.

In remarks at the European Money and Finance Forum, the regulator also called for greater transparency for hedge funds. Retail investing in hedge funds has been an extremely hot issue for some time now. The concept attracts the attention of both regulators and legislators. The U.S. Congress is looking into this aspect of hedge fund investment.

Saturday, December 16, 2006

Is It the Twilight of the Publicly-Traded Company?

With the surge of hedge funds and other private equity vehicles, and with some saying it is only matter of time before a private equity fund buys a $100 billion market cap public company, are we witnessing the decline and eventual marginalization of the public company. A recent article in the Financial Times heralding the FT’s Non-Public 150 raised the issue with a quote from Harvard Business School professor Michael Jensen indicating that the public company, the main engine of the US economy for a century, has outlived its usefulness. If you combine this statement, with the statement from the Carlyle Group’s David Rubinstein that private equity is now the face of American capitalism, you begin to understand my concern about the twilight of the listed company. My main problem with this trend, which may be inexorable, is that the move from public to private capital also means a move from the regulated to the unregulated, from the transparent to the opaque, and in that sense regressive.

This scenario raises the issue of whether hedge funds and alternative investment vehicles should be subject to federal securities regulation. If a may wax philosophical for a moment, allow me to posit that the listed public company is a recent invention in human history, and yes it had to be invented just like the wheel. The public company as we know it has only been around for about 300 years, which as we know is a very short time in historical terms. So I am not saying that the public company is the only or best way to collectively organize human economic activity. What I am saying is that we should examine why Congress gave private equity vehicles an exemption from SEC regulation way back in 1940, which as we all know was a totally different world, and whether those exemptions are still valid today. Again, do we really want to move from the transparent to the opaque in terms of raising capital?

If I may wax even more philosophical, perhaps we may find useful Hegel’s theory of thesis—antithesis—synthesis. Applying that to securities regulation, the Hegelian model would be public company—private company—hybrid company combining the best of both forms. Yes, I do believe private companies have benefits over public companies. The most important being the ability of private companies to focus on the long term, unhindered by the quarterly earnings reports mandated by the federal securities laws. The challenge is to amend the securities laws to create such a synthesis.

Friday, December 15, 2006

Cross-Border Cooperation Seen in Hong Kong Enforcement Action

There has been a great deal of discussion by senior securities regulators about the need for cross-border enforcement cooperation as financial markets go global. In a prime example of cross-border enforcement of the securities laws, the Hong Kong Securities and Future Commission suspended a bond trader for four months for a breach of conduct involving the use of inside information. The case involved the common practice of sounding out, under which bond underwriters sound out prospective buyers with the likely terms before the issue is publicly announced to ensure that the bond issue will sell. This usually involves disclosing inside information, which is not usually traded on. Those who do trade on the information are likely in breach of the insider trading provisions if the shares are listed in Hong Kong.

But here the trader had been contacted by another firm to sound out his views about a potential convertible bond issue by a company listed on the Tokyo Stock Exchange. In an instance of cross-border cooperation, the Japanese Securities and Exchange Surveillance Commission (SESC) referred the matter to the Commission.

The terms of the potential convertible bonds were disclosed to the trader to sound out his views about their attractiveness to investors. While in possession of this information, the trader placed orders to sell shares of the company and eventually sold 204,000 shares. The trading occurred while he was in possession of additional information confirming that the convertible bonds would be announced to the market after the market closed and the issue price would be fixed the next day. Since the trading in this case occurred on the Tokyo Stock Exchange, the trader’s conduct did not contravene Hong Kong’s securities laws. However, the SFC found that his conduct was a breach of General Principle 2 of the Code of Conduct, which requires licensed persons to act with due skill, care and diligence in the best interests of clients and market integrity, a breach of which raises issues of fitness and properness.

Wednesday, December 13, 2006

UK Rejects XBRL, Hong Kong Exploring It

The UK Financial Services Authority has announced that it will not be requiring use of XBRL. One of the reasons given was that, unlike other regulators, the FSA is not required to provide or facilitate access to such corporate disclosures. Thus, one of the main benefits of XBRL as a firm-oriented technology would not be realized. The FSA has opted to use standard XML since it is an established technology in the UK’s financial services industry and expertise is readily available in the UK.

However, the FSA said it will monitor the development of XBRL and it may become appropriate to reassess its position in relation to XBRL. The FSA is already taking steps to ensure that the XML-based architecture that it develops would support XBRL transformation should the future need arise.

Meanwhile, in recent remarks, Martin Wheatly, CEO of the Hong Kong Securities and Futures Commission, asked investors if they would support development of the tools necessary to enable Hong Kong listed companies to issue XBRL reports. If the necessary infrastructure was provided, he queried, would companies take the time and incur the costs needed to prepare financial reports in a machine-readable form

In September 2006, the SEC announced that it will invest $54 million to transform its public company disclosure system from a form-based electronic filing cabinet to a dynamic real-time search tool with interactive capabilities using XBRL.
Hedge Funds and State Securities
by Jay Fishman
Senior Writer Analyst
CCH Incorporated

Hedge funds are mentioned by state securities regulators (and appear in the CCH Blue Sky Law Reporter) primarily in no-action letters. There are, however, two Blue Sky regulations that refer to them but these provisions involve hedge fund advisers. One of them, a regulation from the District of Columbia at Section 1850, is entitled “notice filing for federal covered advisers and hedge fund advisers,” and goes on to provide the requirements for these advisers. The other, a Texas regulation at Section 109 entitled “investment adviser registration exemption for investment advice to financial institutions and certain institutional investors,” declares that there is no exemption under this Section for an investment adviser providing advisory services to a natural person or to a private fund such as a hedge fund composed partially or entirely of natural persons. This regulation then goes on to define “private fund.”

The no-action letters in the Blue Sky Law Reporter that mention hedge funds are from six states. A 2004 no-action letter from Arizona, declined to grant an investment adviser registration exemption for a Kansas privately held company proposing to create a fund to invest in a variety of instruments to be sold to accredited investors under rule 506 of federal Regulation D. The term “private fund” is used in place of “hedge fund.” An Idaho no-action letter from 1996 granted a general partner of a number of limited partnerships that invest and trade in commodity pools the right to give investment advice about commodities without registering as an investment adviser in the state. The limited partnerships that were managed (and provided with investment advice) by the general partner were referred to as first tier [commodity] pools or hedge funds that were privately placed.

Two no-action letters on hedge funds were issued from Kansas. In the first of these, from 1991, in answer to the requester’s hypothetical question regarding whether an exemption could be claimed for hedge funds, the Kansas Securities Commissioner defined a hedge fund as “a pooled fund of money engaged in some risk-managed investment hedging involving the purchase of index futures or options,” and determined that the Kansas “sales to institutional investor” exemption would apply only if the purchaser of the securities in the particular transactions qualified as an institutional investor. Also, that the term “institutional investor” being broad and ambiguous would be subject to interpretation on a case-by-case basis, and that qualification as an accredited investor under Section 2(15) of the Securities Act of 1933 would not necessarily qualify a purchaser as an institutional investor for purposes of claiming the institutional investor exemption in Kansas. The second no-action letter from 2002 granted an exemption from broker-dealer, agent and investment adviser registration for a Kansas limited liability company that managed the day-to-day operations of a hedge fund.

The Pennsylvania Securities Commission in a 1999 no-action letter declared that two limited liability companies proposing to trade securities in Pennsylvania exclusively with brokers or dealers registered under the Securities Act of 1934 fell within an exemption for persons registered as broker-dealers under the 1934 Act who do not maintain their principal place of business in Pennsylvania. The LLCs were formed under the laws of Delaware to trade a private investment fund organized under the laws of the Cayman Islands in which redeemable participating shares would be offered and sold to high net worth, financially sophisticated investors under Section 4(2) and Rule 506 of the Securities Act of 1933. A Texas no-action letter from 1997 required investment adviser registration for a private investment company, structured as a hedge fund, to provide advice to its newly formed partnership composed exclusively of individual accredited investors. The private company was a Texas limited partnership whose general partner was also a Texas limited partnership. The private company’s goal was to achieve capital appreciation through investments traded on organized domestic and international securities markets.

Lastly, a Utah no-action letter from 2001 granted an exclusion from its “broker-dealer” definition for an out-of-state securities firm whose transactions were restricted to Utah foundations and university endowments. The firm, in pushing for this exclusion, reiterated that in a no-action letter from 1995 the Utah Securities Division wrote that the intent of its “financial institution/institutional investor” exemption was to cover sophisticated buyers the Division could apply higher standards of knowledge and experience to. The firm contended that its qualification standards would be consistent with the Division’s intent for this exemption because the solicitation for investment in the types of products it would offer, including hedge funds and emerging markets private equity, would be limited to institutional buyers.

Tuesday, December 12, 2006

DOJ Revises Thompson Memorandum

Many companies faced with allegations of wrongdoing are under intense pressure to avoid indictment since an indictment, especially of a financial services firm, would probably destroy the business regardless of whether the firm ultimately is convicted or acquitted. That is what happened to Arthur Andersen & Co., which collapsed almost immediately after it was indicted, and the Supreme Court’s eventual reversal of its conviction did not undo the damage. It is thus axiomatic that a firm facing such catastrophic consequences must do whatever it can to avoid indictment.

According to Judge Kaplan, in his KPMG rulings, the DOJ and other federal agencies have capitalized on this, in part by altering the manner in which suspected corporate crime has been investigated, prosecuted, and, when proven, punished. The Thompson Memorandum is a part of this change. The Thompson Memorandum made clear that the failure of a business organization facing possible indictment to induce its personnel to submit to interviews by the government and to disclose whatever they know may be a factor weighing in favor of indictment.

The DOJ has announced revisions to the Thompson Memorandum. A new memorandum, under the signature of Deputy Attorney General Paul McNulty, provides revised guidance to corporate fraud prosecutors across the country. The memorandum clarifies the intent of the Thompson Memorandum in connection with how prosecutors evaluate a company’s cooperation in making their charging decisions. In remarks, Mr. McNulty clarified that attorney-client communications should only be sought in rare cases; that is, that legal advice, mental impressions and conclusions and legal determinations by counsel are protected. Before they are requested, the US Attorneys must seek approval directly from the deputy AG. He must personally approve each waiver request for attorney-client communications. Both the request for approval and his authorization will be in writing.

In addition, to support the request, prosecutors must show a legitimate need for the information. If they cannot meet that test, he will not authorize their seeking privileged information. To meet this test, prosecutors must show: (1) the likelihood and degree to which the privileged information will benefit the government’s investigation; (2) whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require waiver; (3) the completeness of the voluntary disclosure already provided; and (4) the collateral consequences to the company in requesting a waiver.

According to the senior official, the privilege is protected to such an extent that, even if the prosecutors have established a legitimate need and he approves the request for the waiver, the DOJ will not hold it against the company if it declines to provide the information. That is, he explained, prosecutors will not view it negatively in making a charging decision.
However, if the company decides to give DOJ the information, it will be considered favorably. The government wants to encourage cooperation and the production of information where requested. He believes that a company would want to receive credit for its production of privileged materials if the decision is made to waive the privilege.
Congress Clears Derivatives Netting Measure

A bill amending the derivatives netting and financial contract provisions incorporated by Title IX of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to reflect current market and regulatory practices has passed both houses of Congress and been cleared for the President. The Financial Netting Improvements Act of 2006 (HR 5585) would amend banking, bankruptcy, and securities laws related to the disposition of financial contracts in the event of insolvency. In such cases, financial contracts are processed on a net basis to reduce the systemic risk associated with activities in derivatives markets, which is that the failure of one entity will disrupt and endanger financial markets. That process, known as financial netting, involves settling mutual obligations at their net value as opposed to each obligation's gross dollar value. H.R. 5585 would update existing laws regarding netting to ensure that some of the newer forms of contractual arrangements are resolved in the same manner as other similar contracts.

Monday, December 11, 2006

McCreevy Asks PCAOB to Establish Roadmap with European Commission

EU Internal Market Commissioner Charlie McCreevy has asked the PCAOB to develop a roadmap towards future cooperation between US and EU audit oversight bodies. This has been done in the accounting field, he noted, and should also be done for auditing. The starting point for cooperation between the PCAOB and European Union should be the home country principle, he said, adding that regulatory duplication must be avoided. In remarks at the recent European Federation of Accountants conference, he indicated that the Commission will launch a consultation next year on how to deal with non-EU auditors. Similarly, a consultation might be launched on what to do about the adoption of the IAASB’s international auditing standards.

Regarding auditor liability, the commissioner mentioned that there is an increasing trend toward litigation against auditors, a shortage of insurance, and a real danger that the Big Four auditing firms could become the Big Three. These issues have to be dealt with, he emphasized, since they are not going away. The Commission is currently preparing a report on these issues.

On the subject of IFRS, the commissioner noted that their implementation has been a huge challenge for both preparers and auditors of financial statements. But he added that the investment was worth it since the benefit of IFRS outweighs the cost. That said, IFRS must develop more consistency and coherence, in his view. For example, financial stability and transparency will not be helped if there are big differences in fair value reporting across the EU.

Sunday, December 10, 2006

European Commission Extends Use of GAAP for Two Years

Against the backdrop of an SEC-EU roadmap to the convergence of accounting standards, the European Commission has extended the use of US GAAP and other non-EU accounting standards for two years. Thus, the transitional exemption extended to non-EU companies presenting financial statements based on GAAP for the issuing of securities in the EU will continue for two more years as the roadmap to convergence plays out. A decision on the equivalence of third-country GAAP with the international financial reporting standards mandated in the EU is expected to take place before the end of 2009.

Specifically, third-country issuers will not be subject to restatement obligations until the end of 2008 if their financial information is prepared in accordance with Canadian, Japanese or US GAAP. Financial information prepared by other third-country GAAP is sufficient if the country responsible for the GAAP has made a commitment to converge it with IFRS and begun progress towards such convergence

Commissioner for the Internal Market Charlie McCreevy praised the decision to give issuers more time before a final decision is made on the equivalence of accounting standards. It is also the most efficient way to promote IFRS, he reasoned, since it gives the EC leverage in its efforts to obtain the removal of the SEC’s reconciliation requirements for EU companies issuing in the US. There had been some fear that non-EU companies might be required to reconcile GAAP to IFRS as a condition of listing. But Commissioner McCreevy has been instrumental in avoiding that type of confrontational situation in favor of the roadmap’s evolutionary path to accounting standard convergence.

.The SEC has reiterated its firm commitment to work towards eliminating the need for reconciliation between IFRS and US GAAP and has a roadmap to achieve this objective by 2009. The extension thus aligns the EU timetable with the SEC’s timeline and allows European and US authorities to work in parallel towards common objectives.

Thursday, December 07, 2006

SEC Postpones Consideration of Shareholder Access

The SEC has postponed its consideration of proposed revisions to its rule concerning shareholder proxy initiatives. The consideration was originally scheduled for the Dec 13 open meeting because a federal appeals court panel recently ruled that a shareholder proposal seeking to amend a company’s bylaws to establish a procedure by which shareholder-nominated candidates may be included on the corporate ballot does not relate to an election within the meaning of SEC proxy rules and thus cannot be excluded from corporate proxy materials. (AFSCME v. American International Group, Inc., CA-2, Sept 5, 2006).

An SEC no-action letter and a federal district court ruling allowed the company to exclude the proposal based on Rule 14a-8(i)(8), which allows the exclusion of a proposal relating to an election for membership on a company’s board of directors. But the appeals court ruled that a shareholder proposal does not relate to an election under the exclusion if it simply seeks to amend the corporate bylaws to establish a procedure by which certain shareholders are entitled to include in the corporate proxy materials their nominees for the board of directors.

Wednesday, December 06, 2006

Court Enron 11(e) Ruling Also Aids Good Governance

The federal court ruling (SD Tex) awarding fees and costs under Section 11(e) of the Securities Act against the plaintiff’s law firm is also a very important opinion for corporate governance. In fact, Judge Harmon’s opinion may ultimately be best remembered for what it did to promote sound corporate governance. The court found that the fact that a financial services company employed an individual who was also an Enron outside director was not enough to establish the power to control his role as an independent director for purposes of controlling person liability under the federal securities laws. Newby v. Enron Corp., 01-cv-03624, 11-30-06,

In the post-Sarbanes-Oxley era, independent outside directors are critical to sound corporate governance and many people are concerned that there may not be enough good ones. Importantly, the court said that, if mere approval of a corporate officer’s request to serve as an outside director on another company’s board would be held to be control person liability, the effect would be to chill the willingness of qualified individuals to serve on boards of public companies as independent directors. This result would be a detriment to business, and the court could not countenance it.

In my view, this part of the ruling should be applauded in corporate governance circles. The specter of not being able to get enough qualified people to serve as outside directors of public companies haunts the corporate community. This ruling partially lifts the cloud of controlling person liability and makes it easier to get the qualified independent directors who can make the Sarbanes-Oxley reforms work.

Tuesday, December 05, 2006

Federal Court Awards Fees and Costs under 11(e) Against Plaintiff's Law Firm

In what may be a case of first impression, a federal judge (SD Tex) has assessed fees and costs under Section 11(e) of the Securities Act against the plaintiff’s law firm. The case involved an Enron outside director who was also a senior official at a financial services company. It was alleged that the director was liable under Section 11 for signing Enron’s false registration statement filed with the SEC and that the financial services company was also liable as a controlling person of the director. The court found that the fact that the financial services company employed the director was not enough to establish the power to control his role as an independent director. An award of fees and costs under Section 11(e) is conditioned on a finding that the action was without merit, that it was frivolous or brought in bad faith. Newby v. Enron Corp., 01-cv-03624, 11-30-06, Judge Harmon.

The court went on to award fees and costs to the financial services company related to the summary judgment stage of the litigation because it appeared that the summary judgment briefing should not have been necessary and the continuance of the claim at that point was without merit. The court also reasoned that an award of fees and costs under Section 11(e) should be borne by counsel because non-attorney clients more likely than not would not have the ability to determine at what point, based on what evidence, an action becomes legally frivolous, while its counsel should.

This opinion is also important on another level. In the post-Sarbanes-Oxley era, independent outside directors are critical to sound corporate governance and there is concern that there may not be enough good ones. Importantly, the court said that, if mere approval of a corporate officer’s request to serve as an outside director on another company’s board would be held to be control person liability, the effect would be to chill the willingness of qualified individuals to serve on boards of public companies as independent directors. This result would be a detriment to business, and the court could not countenance it.

Monday, December 04, 2006

Expert Group Seeks Changes to PCAOB Internal Control Standard

Against the backdrop of impending SEC-PCAOB proposed revisions, the report of the Committee on Capital Markets Regulation emphasized that reform of the Sarbanes-Oxley section 404 internal control regime should begin with a revision to the materiality standard in Auditing Standard No. 2. While acknowledging that the PCAOB and SEC are already moving down this path, the committee noted that many commenters trace the root of the problem with the internal controls mandates to the standard set for auditor attestation in AS2 which, in the absence of direct SEC guidance for issuers, is also the de facto standard for management reviews under sec. 404.

Although the SEC and PCAOB have issued guidance on 404 audits encouraging auditors to adopt a top-down, risk-based approach, noted the report, these principles have not been implemented due to the breadth and vagueness of AS2. In the committee’s view, the material weakness standard in AS2 establishes a low threshold. Currently, a material weakness exists if there is more than a remote likelihood that a misstatement of the company’s financial statements will not be prevented or detected. This is a PCAOB definition, but the SEC staff has indicated that they will apply the PCAOB definition when interpreting SEC internal control rules.

The committee suggests a revision so that a material weakness will exist if it is reasonably possible that a material misstatement in the financial statements will not be prevented or detected. The committee said that changing the probability threshold for the detection of control weaknesses from the current more than remote likelihood standard to a reasonably possible standard conforms to SEC Chairman Cox’ wish that the PCAOB adopt a reasonably possible standard.

Friday, December 01, 2006

SEC-PCAOB Relationship Drives Internal Control Changes

We are approaching the time when the long-awaited SEC and PCAOB interpretations and guidance on the internal control mandates of section 404 of the Sarbanes-Oxley Act will attempt to provide relief to a long-suffering corporate community. Many have refrained from proposing legislative amendments to section 404 out of respect for what the SEC and the Board are expected to accomplish in ameliorating the internal controls mandate of that statute. The SEC and the Board have promised to coordinate their efforts.

Recently, at the fall meeting of the ABA’s Business Law section, John White, Director of the SEC’s Division of Corporation Finance, said one of the amendments to the PCAOB’s Auditing Standard No. 2 on internal controls will remove all of the guidance for management since the SEC has taken that issue back. The format may include both interpretive guidance and rules, he said, but the “guts” of the release will be interpretive.

Companies will not have to comply with the interpretive guidance, according to White. They can continue to follow the processes that they established since they began to comply with the management’s assessment requirement of section 404. The goal for the management guidance release is to have it proposed and adopted for companies to use in 2007. The PCAOB has the same goal with respect to the amendments to AS2.

These momentous happenings are coming against the backdrop of a SEC-PCAOB relationship that has not been adequately defined, in the view of some. In a recent speech, SEC Commissioner Paul Atkins said that the Sarbanes-Oxley Act made the PCAOB the Commission’s ward. Former PCAOB Chair William McDonough described the Board-SEC relationship as one of cousins. This issue is more than semantics. Because the Board is a ward, said Atkins, the Commission is overseeing the AS2 rewrite. In the past, he said, the SEC has taken too light a hand in the drafting of PCAOB audit standards. In his view, it is incumbent that the SEC ensures that the PCAOB does the job right on AS2 and to insist on modifications if it is not done right. He warned that getting AS2 right could involve the SEC's invoking as yet untried and somewhat unwieldy oversight powers.