Is there any government body having a harder time of it these days than the SEC? Sometimes it feels like someone pinned a giant “Kick me” sign to its collective back. I’ve written previously about a key factor that I think is partly responsible for its general toothlessness. But this simply can’t be the excuse for all of its failings.
One of its departments, the Division of Corporation Finance, was recently in the news because it came out and said that banks need to improve how and what they have (not) been telling us about their exposure to the sovereign and banking crisis in Europe. The Division of Corporation Finance seems just the department do this — after all, its mission is to “assist the Commission in executing its responsibility to oversee corporate disclosure of important information to the investing public.” Here’s exactly what it said:
Due to the recent uncertainties with regard to European sovereign debt holdings, we are concerned about the risks to financial institutions that are SEC registrants from direct and indirect exposures to these holdings. To date we note that disclosures about the nature and extent of these exposures that registrants, including foreign private issuers, have provided in reports filed or furnished with the Commission have been inconsistent in both substance and presentation. We believe this inconsistency may lead to disclosures that lack transparency and comparability for investors.
(Excellent observation, for we’ve noticed the same.)
Therefore, we determined that investors would benefit from our providing additional guidance to assist registrants in their assessment of what information about exposures to European countries they should consider disclosing and how they should disclose this information with the goal of greater clarity and comparability.
Great! The DCF then carries on with a list of about 19 things that it — and we all — would like to know. The items are very specific and, I would think, difficult to fudge. Many of the them seem identical to what the European Banking Authority has forced banks to publicly disclose for its stress-test purposes, but some of them go above and beyond. I particularly like the bit about the Effects of Credit Default Protection to Arrive at Net Exposure, because some observers and interested parties have been far too flippant about the actual protection that CDS will afford when push comes to shove. The DCF says that banks should disclose:
- The effects of credit default protection purchased separately by counterparty and country.
- The fair value and notional value of the purchased credit protection.
- The nature of payout or trigger events under the purchased credit protection contracts.
- The types of counterparties that the credit protection was purchased from and an indication of the counterparty’s credit quality.
- Whether credit protection purchased has a shorter maturity date than the bonds or other exposure against which the protection was purchased. If so, clarifying disclosure about this fact and the risks presented by the mismatch of maturity.
This all sounds wonderful. Certainly, we’d have to prepared for the turbulence that such transparency might cause. It may not be pretty. But despite that it may still be better to know now than to wing it and then be faced with the cliff-edge if things hit the fan. Isn’t this what the whole SiFi exercise (systemically important financial institutions) is all about? Everyone knows that the taxpayers have got the backs of the most important institutions. (Whether they want to or not.) Isn’t it time to quit the extend-and-pretend?
And yet.
Turns out this whole thing is just an exercise in dispensing parental advice. Not a single bank, financial institution or regulated “registrant” as the SEC likes to call them, is actually obligated to do this. For the Division of Corporation Finance makes an interesting disclosure of its own (emphasis mine):
The statements in this CF Disclosure Guidance represent the views of the Division of Corporation Finance. This guidance is not a rule, regulation or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content.
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