The SEC vs. Repo 105

By Cydney Posner

The SEC today voted to propose rules that would require a public company to provide additional disclosures about its short-term borrowings in its filings with the SEC. While these rule proposals are not a result of the DFA, they are a response to the financial crisis, most particularly the practice of investment banks like Lehman to engage in short-term borrowing transactions at the end of each quarter (known as Repo 105) reportedly to pretty up their balance sheets for end-of-period reporting. The proposal would require companies, both financial and non-financial, to disclose short-term borrowings during the quarter, not just a snapshot at the end, so that shareholders can better understand the companies' liquidity positions and intra-period borrowing practices. (Chair Schapiro emphasized that, for many companies, short-term borrowing activities may well be best practices and that there was no condemnation necessarily implied by the new requirements.)

The proposal would add new quantitative and qualitative disclosure requirements to MD&A requiring companies to disclose information, on an annual and quarterly basis, regarding the level of short-term obligations outstanding at the end of the quarter, the average outstanding, maximum outstanding and weighted average interest rate during the period. This information would be calculated daily for financial companies and monthly for non-financial companies and could be presented separately for non-financial companies with a financial component. The proposal would also require a narrative discussion describing the reasons for use of short-term borrowing financing techniques and the drivers for the variations in amounts.

The SEC also voted to publish an interpretive release to provide guidance regarding the SEC's current MD&A disclosure requirements relating to liquidity and capital resources. The new guidance cautions companies not to mask their disclosure regarding known trends in liquidity or to calculate leverage ratios to obscure information. The guidance also addresses the variations that have appeared in the way companies present their tables of contractual obligations in MD&A.

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