We live in the world where yore not guilty till your caught. With a corporate scams history like us, we don’t have to look overseas for examples. Like, you might think you hold tight a blue-chip name and you like what you see printed in the financials and then one fine sunny day, snap! You wake up to newspaper reports performing a surgery on those very financial [mis] statements, leaving you either furious [read desperate] to quit and book a loss or wait with Buddha’s patience to see where the Government or some other cash rich corporate takes the scrip in sweet time.
The Wall Street seems to be now [finally!] full with such and SEC plans to come down heavily on the ‘window dressed’ financials. The American market regulator recently voted 5-nil on the new proposed amendment to the securities law adding further disclosures to financial statements for the caterpillars [i.e. financial intermediaries] now butterflies for the last two years [i.e. Bank Holding/ Financial Holding Companies].
More about the back drop:
This comes from the US regulators alongside the backdrop of a few failing financial intermediaries causing an industry pressure leading into a pack of falling cards like crash for the industry during the fall of 2008.
Here a few failed ‘dressed’ balance sheets seemed understated on debt just before the Q. end wherein a few billion Dollars showed as sales instead of financing thanks to a repo transaction. Hence the strong looking balance sheet could not come to rescue the firm from bankruptcy.
The Proposal:
These added disclosures aim to create more transparency around ‘short-term’ borrowing arrangements. Under the proposal, all companies would have to reveal in their regulatory filings both the average and maximum amount of debt they had each quarter.
The FIs would be required to provide, in a separately captioned subsection of Management’s Discussion an analysis of financial conditions and operations w.r.t. its short-term borrowings, including both quantitative and qualitative information.
The proposed amendments would be applicable to annual and quarterly reports, proxy or information statements that include financial statements, registration statements under the Securities Exchange Act of 1934, and registration statements under the Securities Act of 1933.
This means companies would have to disclose debt more frequently and reveal more information about borrowing arrangements they use. They would also have to inform the investors of business conditions that may make it difficult for them to borrow and why debt levels fluctuated during the financial period reported.
Conforming amendments are also proposed to Form 8-K so that the Form would use the terminology contained in the proposed short-term borrowings disclosure requirement.
SEC has taken this proposal for public views for 60 days considering the feedback, SEC will re-vote to see this proposal through legislation.
Not just that…….
SEC has also gotten even more investor friendly by intending to issue interpretive guidance to investors to better understand the disclosures on liquidity and capital resources, analysis of financial conditions and impact of operations on liquidity and funding risks facing the companies.
Guidelines on implementations have also been planned for the companies to aid them in adhering to the said rules for disclosing debt. With a bottom line aim is to convey that financing arrangements can no more be used to mask financial engineering.
What this really changes:
Regulatory changes more often than not, follow any financial fiasco to build future immunities.
Like all others in the real world, the regulators convey to understand that disclosures to do not eliminate the act, unless penal provisions are attached, but would indeed make it difficult.
This move globally once in vogue, will impact though to limited extent local subsidiaries and will provide investors across the globe with more first hand information, so even more reads for the savvy guys…. ‘Vigilance is the price of liberty’ they say… that explains.
