Ted Kaufman - United States Senator for Delaware

Lawmakers Push SEC's Schapiro For New Off-Balance Sheet Rules

Source: The Bureau of National Affairs

August 18, 2010

Six Democratic senators Aug. 6 urged Securities and Exchange Commission Chairman Mary Schapiro to seek greater transparency from public companies about their off-balance sheet activities in addition to investigating possible past misconduct in this area.

In a letter published Aug. 13, the senators—Robert Menendez (N.J.), Ted KAUFMAN (Del.), Carl Levin (Mich.), Diane Feinstein (Calif.), Barbara Boxer (Calif.), and Sherrod Brown (Ohio)—told Schapiro, “We hope that, in addition to aggressively investigating and prosecuting past misconduct, you will put in place … new rules that will make it harder for companies to mislead investors and creditors in the future.”

The new rules, the senators explained, should require public companies to provide details about all their off-balance sheet activities—not only those “reasonably likely” to impact their financial health—and daily leverage ratios. In addition, the senators said that the SEC should push the Financial Accounting Standards Board to improve its rules related to off-balance sheet activities and “to monitor FASB's efforts to prohibit off-balance sheet financing.”

SEC Spokesman John Nester declined to comment on the senators' letter, but noted in an Aug. 16 e-mail to BNA that the agency “share[s] the Senators' interest in high-quality disclosure and accounting."

Repurchase Agreements.

For their part, the senators' linked their concern to off-balance sheet activities chronicled in a March report on the collapse of Lehman Brothers (47 DTR K-3, 3/12/10). According to the report, prepared by a court-appointed examiner, the one-time Wall Street giant used repurchase agreements to shift certain liabilities off its balance sheet, thus making the company appear well-capitalized, when in fact it was drowning in debt.

The SEC since then has been investigating whether the practice is widespread. Indeed, in June, the staff issued letters to chief financial officers at several large financial institutions and insurance companies requesting details about their use of repurchase agreements, securities lending transactions, and other transactions involving the transfer of assets. Additionally, in May, senior staff said that new guidance or rulemaking in this area may be forthcoming (100 DTR G-2, 5/26/10).

While the senators agreed that the SEC must uncover and punish past misconduct, they called for preventative measures as well. Disclosure of “daily average leverage ratios,” they contended, would allow investors to judge whether a firm is well-capitalized, rather than solely relying on “carefully-staged quarterly and annual snapshots.”

The letter is available on Menendez's website at http://menendez.senate.gov/imo/media/doc/20100806ltr_schapiro.pdf.

Print this Page E-mail this Page