SEC Votes to Propose New Rules and Publish Interpretive Guidance Regarding Short-Term Borrowings Disclosure

September 17, 2010

On September 17, 2010, the Securities and Exchange Commission unanimously voted to propose rules that would require issuers to provide additional disclosures regarding short-term borrowings in filings with the Commission.  The Proposing Release is available here.


The Commission also unanimously voted to publish an interpretive release to provide guidance regarding the liquidity and capital resources disclosure required in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section (“MD&A”) of a company’s quarterly and annual reports filed with the Commission.  The Interpretive Release is available here

Proposed Rules Regarding Disclosure of Short-Term Borrowings 

Quantitative Disclosure


The proposed requirements are intended to provide the market with additional information concerning the liquidity risks faced by issuers with respect to short-term borrowings.  The proposal would add new disclosure requirements to Item 303 of Regulation S-K that would be applicable to the quarterly and annual reports of all issuers.  In effect, the proposal would apply a number of the disclosure requirements contained in Guide 3, “Statistical Disclosure by Bank Holding Companies” (“Guide 3”), to all issuers.


The proposal would divide issuers into two separate categories -- issuers “engaged in financial activities” and all other issuers -- and establish a disclosure regime for each.  The proposed rules contain an activity-based definition of the term “engaged in financial activities,” which would include issuers engaged to a significant extent in the business of lending, deposit-taking, insurance underwriting or providing investment advice, or that are broker-dealers, and includes, without limitation, banks, savings associations, insurance companies, broker-dealers, business development companies, investment advisers, futures commission merchants, commodity trading advisors, commodity pool operators, and mortgage REITs.  If an issuer’s business includes both financial activities and non-financial activities, the new requirements would permit an issuer to provide separate short-term borrowings disclosure for its financial and non-financial business operations. 


The proposal would require the following disclosure for each specified category of short-term borrowing contained in an issuer’s financial statements:




Issuers Engaged in Financial Activities

Other Issuers


Amount Outstanding at Period End

Disclose total amount of short-term borrowings outstanding as of the end of the period.

Disclose total amount of short-term borrowings outstanding as of the end of the period.


Average Amount Outstanding During Period

Disclose daily average amounts -- the amount outstanding at the end of each day, averaged over the reporting period -- of short-term borrowings outstanding during the period.

Disclose average amounts of short-term borrowings outstanding during the period -- rather than daily average amounts, may be calculated over a period of time not to exceed a month.


Maximum Amount Outstanding During Period

Disclose daily maximum amount -- the largest amount outstanding at the end of any day in the reporting period -- of short-term borrowings outstanding during the reporting period.

Disclose maximum month-end amounts -- the largest amount outstanding at the end of the last day of any month in the reporting period -- of short-term borrowings outstanding.


Weighted Average Interest Rate

Disclose weighted average interest rate of short-term borrowings for the period.

Disclose weighted average interest rate of short-term borrowings for the period.


Qualitative Disclosure


The proposed rules would require a narrative discussion of short-term borrowings to provide context for the quantitative data, including a description of:


1. short-term borrowings arrangements included in each category and the business purpose of such arrangements;

2. the importance to the issuer of short-term borrowings arrangements to its liquidity, capital resources, market-risk support, credit-risk support, etc.;

3. the reasons why the issuer was required to borrow the maximum amount for the reporting period, including non-recurring transactions or events, use of proceeds or other information that provides adequate context to the quantitative data; and

4. the reasons for any material differences between average short-term borrowings for the reporting period and period-end short-term borrowings.


Application to Foreign Private Issuers and Smaller Reporting Companies


The new disclosures would also apply to foreign private issuers.  However, as proposed, a foreign private issuer that does not utilize U.S. GAAP may base its disclosure on the types of borrowings included pursuant to the comprehensive set of accounting principles used by the foreign private issuer.


Consistent with existing MD&A requirements, smaller reporting companies would be required to include disclosure concerning short-term borrowings for the past two fiscal years (rather than the three fiscal years required for other issuers).  In addition, except for material changes, smaller reporting companies would not be required to provide full disclosure in quarterly reports or for the fourth quarter in annual reports.


Reporting and Phase-In Periods


For quarterly reports, the proposed rules would require disclosure concerning short-term borrowings for the relevant quarter, with no requirement for comparative data.  For annual reports, the proposed rules would require disclosure concerning short-term borrowings for the three most recent fiscal years and for the fourth quarter.  Issuers who are not currently subject to Guide 3 would have a yearly phase-in of the requirements for comparative data until all three years are included in the annual report.


Interpretive Guidance


The Commission’s interpretive guidance highlights its views regarding the manner in which issuers should be addressing short-term borrowings in their MD&A.  Principally, it serves to remind issuers of long-standing MD&A principles relating to:

  • the identification of material trends and uncertainties, and
  • the need to clearly communication material liquidity risks. 


In addition, the interpretative guidance identifies several important trends and uncertainties relating to liquidity for issuers to consider when preparing their MD&A, including:

  • difficulties accessing the debt markets;
  • reliance on commercial paper or other short-term financing arrangements;
  • maturity mismatches between borrowing sources and assets funded by those sources;
  • changes in terms requested by counterparties;
  • changes in the valuation of collateral; and
  • counterparty risk.


The guidance emphasizes the flexibility that issuers have in preparing their MD&A but stresses the importance of providing footnotes and narrative disclosure as supplements to tabular disclosure and addresses divergent practices for providing tabular disclosure.  In addition, the guidance includes a reminder that the use of financing structures in a manner that serves to mask an issuer’s reported financial condition is not permitted and emphasizes the requirement to calculate and present ratios in a non-obscuring manner. 


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If you have any questions regarding the proposed rules or the submission of comments to the Commission, please contact the authors of this Client Alert or any of O’Melveny & Myer’s Corporate Finance partners.