US securities regulators voted unanimously on Friday to propose that companies disclose more about their debt after it was revealed some banks were “window dressing” loans as sales, masking the risk levels involved. The Securities and Exchange Commission (SEC) is trying to crack down on financial companies that use accounting gimmicks to bolster balance sheets. The issue was highlighted when a court-appointed examiner revealed that Lehman Brothers used a “Repo 105” accounting technique to hide its true financial picture. The SEC then looked into the matter, after which Bank of America Corp, Citigroup Inc and American International Group Inc disclosed that they classified billions of dollars in loans as sales in 2009, which had the effect of masking risk at the end of a quarter. Under the SEC's proposal, companies would disclose items such as the average interest rate on their borrowings rather than just a snapshot of their financial positions before the end of a filing period. It also would require companies to report the maximum amount they had outstanding during a reporting period. The proposed rules differentiate between companies that are financial in nature and other companies. Financial companies would have to disclose the maximum amount outstanding daily. “Under these proposals, 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 Schapiro. “With this information, investors would be better able to evaluate the company's ongoing liquidity and leverage risks.” Commissioner Luis Aguilar cautioned that new rules alone will not address concerns about information released by financial companies. “Rules on the books are not enough. They have to be enforced,” he said. Much of the controversy involves repurchase agreements. Repurchase agreements, or repos, are a form of financing that allows a borrower to opt for cash loans once they have given financial securities to the lender as collateral. The borrower would then buy back the collateral from the lender at a later date to close out the loan. Classifying repo transactions as a sale instead of showing them as borrowings masks the leverage of a company because the assets would be removed from the balance sheet. Schapiro said the new proposal is not only about thwarting attempts to game the system. She said it should also give investors more useful information overall. “Investors should have the tools to better understand how companies finance their businesses and how much risk they take on through borrowings that, simply because of timing, do not show up on the balance sheet,” she said. The SEC also voted on Friday to provide financial firms with more guidance on liquidity and capital resources disclosures. Schapiro said the new guidance was issued to make sure these disclosures keep up “with the increasingly diverse and complex financing alternatives available to companies” and to emphasize that companies cannot use financing structures “that are designed to mask the registrant's reported financial condition.”
