SEC proposes tighter debt-disclosure rules for companies

The Securities and Change Fee on Friday proposed cracking down on tactics financial firms would possibly use to conceal how much debt they have.

The measure is a response to issues amongst regulators that companies - largely notably defunct Wall Road big Lehman Brothers - have used accounting trickery to mislead investors. Lehman hid nearly $50 billion in short-time period borrowing, making it appear much less leveraged than it was within the months earlier than it collapsed, based on a March report by the agency's chapter examiner. The Lehman chapter helped fuel the 2008 monetary crisis.

The proposal would require that all corporations inform buyers extra about their quick-term borrowing in quarterly monetary disclosures. Monetary firms would face even tighter disclosure requirements. Companies usually fund their operations with brief-term loans lasting between one and 30 days, obtained by way of a variety of markets.

SEC Chairman Mary Schapiro said the company is anxious that, within the days before filing quarterly financial disclosures, companies is perhaps "window dressing" by endeavor transactions that quickly cut back their debt load.

The agency is proposing that corporations tell investors extra about their debt throughout the year, not simply instantly previous a disclosure filing. "With this data, investors could be better capable of consider the corporate's ongoing liquidity and leverage dangers," Schapiro said.

The company additionally permitted a proposal for more guidance, requiring corporations to be sincere with traders about their debt levels.

The regulator's actions are, partially, a response to its personal failings. The SEC supervised Lehman's debt levels within the years earlier than the funding bank collapsed. However the regulator failed to understand that the firm was masking its debt, in response to the report by the bankruptcy examiner.


SEC Commissioner Luis Aguilar, though voicing support for the proposal, stated requiring monetary firms to tell traders the truth will not be enough.

"People and entities will at all times have incentives to decorate up the stability sheet," he said. "Guidelines on the books are not enough - they need to be enforced. Otherwise, the fee will always be approving new rules after the latest crisis."

Lehman used an accounting method known as "Repo one hundred and five" to promote property in its portfolio to other corporations in trade for money, whereas agreeing to buy the assets back. These repurchase agreements, in essence, represented brief-time period loans to Lehman from different companies, who used the assets as collateral. But Lehman counted the repurchase agreements as sales, so it could look like it was borrowing much less cash than it really was.

This legerdemain may have misled Lehman's traders, however regulators haven't alleged that the tactic was illegal. Still, such a finding could come; the SEC is investigating Lehman Brothers' use of "Repo 105."

The agency has ordered several other companies to clarify their accounting round repurchase agreements, however it has not invalidated the approach. And at times, Schapiro stated, it is appropriate.