SEC votes to propose new rules to tighten banks, companies’ disclosure of debt levels

SEC backs rules on company debt-level disclosure

WASHINGTON — Federal regulators voted Friday to propose new rules that could make it harder for public companies to disguise their level of debt.

The Securities and Exchange Commission is proposing expanded disclosure requirements in response to companies that temporarily trim their debt at the end of quarters to make their financial statements appear stronger. The practice, especially used by big banks and sometimes called “window dressing,” is legal but regulators say it can give investors a distorted picture of a bank’s debt and level of risk.

The SEC proposal would require all public companies to report detailed information on their short-term borrowing every quarter. For financial companies, there would be a stricter layer of requirements: The average interest rate paid on the loans would have to be calculated on a daily basis and reported.

Financial firms currently are required to disclose their short-term borrowing only once a year.

The SEC commissioners voted 5-0 at a brief meeting to propose the new rules and open them to public comment for 60 days. They could be formally adopted sometime later, possibly with changes.

Lehman Brothers used so-called repurchase agreements as an accounting trick in the months before its collapse two years ago into the biggest bankruptcy in U.S. history. The demise of the Wall Street titan triggered a panic in financial markets.

Lehman had put together complex transactions that allowed the firm to sell billions in mortgage securities at the end of a quarter — wiping them off its balance sheet when regulators and shareholders were examining it — and then to quickly buy them back. The repurchase agreements, detailed in a report issued in March by a court-appointed examiner, were known as Repo 105.

SEC Chairman Mary Schapiro said before the vote on the proposed changes that “investors would have better information about a company’s financing activities during the course of a (quarter) — not just a period-end snapshot.”

Under the proposed rules, public companies would be required to report the amount outstanding of their short-term borrowings at the end of each quarter and the average interest rate they paid on the loans. They also would have to report the average amount of borrowings outstanding during the quarter and the average interest rate, as well as the maximum amount outstanding.

Commissioner Luis Aguilar said the expanded disclosure rules are helpful but won’t necessarily prevent deception by firms to make their balance sheets appear less risky than they are.

“Rules on the books are not enough; they have to be enforced,” he said.