SEC Cracks Down on Balance Sheet ‘Window-Dressing’

The Securities and Exchange Commission voted unanimously on Friday to propose requiring public companies to disclose more information to investors about their short-term borrowing arrangements.

The SEC's proposal aims to shed more light on the short-term borrowing practices of companies, including what some refer to as balance sheet "window-dressing." The proposed rules are aimed to enable investors to better understand whether amounts of short-term borrowings reported at the end of reporting periods are consistent with amounts outstanding throughout the reporting periods.

"Under these proposed rules, 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 L. Schapiro in a statement. "Investors would be better able to evaluate the company's ongoing liquidity and leverage risks."

Many financial institutions and other companies engage in short-term borrowing in order to fund their operations. The financing arrangements can range from commercial paper, repurchase agreements, letters of credit, promissory notes and factoring. They generally mature in a year or less.

The additional short-term borrowing disclosure information required under the proposed rules would be presented in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of a company's quarterly and annual reports.

The SEC also voted to issue an interpretive release that will provide guidance about existing requirements for MD&A disclosure about liquidity and funding.

Public comments on the proposed rules should be received by the Commission within 60 days after their publication in the Federal Register.