SEC Proposes Measures to Enhance Short-Term Borrowing Disclosure to Investors

FOR IMMEDIATE RELEASE
2010-169

Video: Open Meeting

Chairman Schapiro discusses short-term borrowing disclosure:
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Text of
Chairman's statement

Washington, D.C., Sept. 17, 2010 — The Securities and Exchange Commission today voted unanimously to propose measures that would require public companies to disclose additional information to investors about their short-term borrowing arrangements.

The SEC's proposal would shed a greater light on a company's short-term borrowing practices, including what some refer to as balance sheet "window-dressing." The proposed rules are aimed to enable investors to better understand whether amounts of short-term borrowings reported at the end of reporting periods are consistent with amounts outstanding throughout the reporting periods.

"Under these proposed rules, investors would have better information about a company's financing activities during the course of a reporting period — not just a period-end snapshot," said SEC Chairman Mary L. Schapiro. "Investors would be better able to evaluate the company's ongoing liquidity and leverage risks."

Many financial institutions and other companies engage in short-term borrowing in order to fund operations. These financing arrangements can range from commercial paper, repurchase agreements, letters of credit, promissory notes and factoring. They generally mature in a year or less.

The additional short-term borrowing disclosure information required under the proposed rules would be presented in the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section of a company's quarterly and annual reports.

The Commission also voted to issue an interpretive release that will provide guidance about existing requirements for MD&A disclosure about liquidity and funding.


Additional Materials


Public comments on the proposed rules should be received by the Commission within 60 days after their publication in the Federal Register.

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FACT SHEET

Short-Term Borrowing and Existing Disclosure Obligations

In order to fund operations, many financial institutions and other companies engage in short-term borrowing — that is, a financing arrangement that generally matures in a year or less. Such borrowing arrangements have become increasingly common and can take many forms, including commercial paper, repurchase agreements, letters of credit, promissory notes and factoring.

Due to their short-term nature, a company's use of these kinds of financing arrangements can fluctuate significantly during a reporting period. As such, when a company reports at the end of a reporting period the amount of short-term borrowings outstanding, that amount is not always indicative of its funding needs or activities during the full period.

Currently, SEC rules require companies to disclose short-term borrowings at the end of the period. But there is no specific requirement to disclose information about the amount of short-term borrowings outstanding throughout the reporting period. The only exception is for bank holding companies, which must disclose annually the average and maximum amounts of short-term borrowings outstanding during the year. That means investors in bank holding companies can see whether the year-end amounts of short-term borrowings are lower or higher than amounts outstanding during the year. The SEC's current rules do not require comparable disclosure by other companies, nor do they require quarterly disclosure of average and maximum amounts by bank holding companies.

Investors who lack this information may not fully appreciate a company's liquidity, leverage position and funding risks. And, because there is no reporting requirement, concerns have been expressed that companies may be masking their actual liquidity and leverage position by incurring significant short-term borrowings during reporting periods and reducing those amounts just before period-end in order to show less leverage in their reported amounts.

Recent events have suggested that investors could benefit from additional transparency about companies' short-term borrowings, and, in particular, whether those borrowings vary materially during the reporting period as compared to period-end without investor appreciation of those variations.

The Proposed Rules

The proposed rules are designed to provide investors a better understanding of a company's actual funding needs and financing activities. They also will help investors evaluate the liquidity risks faced by companies during each reporting period.

Additionally, by providing transparency about variations in borrowing levels during the reporting period, the proposed disclosure requirements should help to address concerns that companies may mask their actual liquidity positions by reducing short-term borrowings shortly before reporting dates.

How does the proposed requirement define short-term borrowings?

What would companies be required to disclose?

First, a company would be required to provide quantitative information in MD&A for each type of short-term borrowings a company uses, including:

Second, to provide context for the quantitative data, companies would be required to disclose:

Would financial companies be subject to different disclosure requirements than non-financial companies?

Yes — the proposed requirements distinguish between companies that engage in financial activities as their business and all other companies:

Which companies would meet the proposed definition of "financial company"?

The proposed rules would include a new category of companies that would be "financial companies" subject to the daily average computation requirement. The purpose of the new definition is to scope in companies beyond bank holding companies for which short-term borrowings may be a significant source of liquidity and for which liquidity and leverage information is especially important.

Under the proposal, the term "financial company" would mean a company, during the applicable reporting period, that is:

How would a company that has both financial businesses and non-financial businesses be treated under the proposed rule?

A company that is engaged in both financial and non-financial businesses would be permitted to present the short-term borrowings information for its financial and non-financial businesses separately:

How do the proposed requirements address "repo" transactions?

Details of MD&A Interpretive Release

The Commission also issued an interpretive release providing guidance on existing MD&A requirements for liquidity and funding disclosure. The guidance will be effective immediately upon publication in the Federal Register.

What issues are covered by the guidance?

The interpretive release will: