Subject: File No. 4-573
From: William Waller, Ph.D.
Affiliation: University of Arizona

October 23, 2008

Thank you for the opportunity to provide input to your study.

There are two views on SEC/FASB guidelines for mark-to-market accounting. One view is that the guidelines provide the most appropriate, feasible valuation approach for many assets. Failure to mark to market, or mark to model, deprives users of critical information about current asset values. The opposing view is that the guidelines force issuers to re-value assets when relevant market benchmarks are lacking. Such re-valuation potentially understates the realizable future benefits from the assets over a longer time frame, and induces the issuer to take dramatic steps to meet capital requirements. These steps would be suboptimal in the absence of the SEC/FASB guidelines.

I recommend a compromise between the opposing views. My recommendation is based on three assumptions. First, the fundamental goal is to ensure satisfactory disclosure – disclosure that is clear, complete, timely, and accurate. This goal supports continuation of the SEC/FASB guidelines. Second, substance is more important than form. By substance, I mean the asset value information that is produced by implementing the SEC/FASB guidelines. This information could be disclosed to users in various ways, in particular, on the issuer's balance sheet or in accompanying footnotes. Third, the capital markets are efficient in the sense that security prices quickly reflect all publicly available information. Prices reflect information regardless of the form of disclosure.

I recommend that the SEC adopt a dual approach starting in the fourth quarter of 2008: suspend mark-to-market accounting with respect to balance sheet valuations and continue mark-to-market accounting with respect to footnote disclosure. This policy is likely to achieve three benefits: the SEC ensures satisfactory disclosure by issuers, users continue to receive critical information about current asset values, and issuers are less prone to take suboptimal steps to meet capital requirements.

Although this recommendation implies no change in the substance of publicly available information, it is likely that the SEC would need to cooperate with other regulators. The PCAOB would need to consider whether its standards for independent auditors require clarification. For example, it might be advisable to add an explanatory paragraph about mark-to-market accounting to the standard audit report as a matter of emphasis. The FDIC might need to consider whether its criteria for evaluating the capital adequacy of financial institutions require re-specification.

European policy makers recently revised their guidelines for mark-to-market accounting. The revision apparently allows banks to re-classify assets as long-term investments in a way that potentially conceals critical information about current asset values. I urge the SEC not to follow a similar path and instead consider the above recommendation.