Tuesday, March 30, 2010

SEC Issues "Dear CFO" Letter Requesting Info On Repos

Yesterday, the SEC's Division of Corporation Finance posted a "Sample Letter Sent to Public Companies Asking for Information Related to Repurchase Agreements, Securities Lending Transactions, or Other Transactions Involving the Transfer of Financial Assets." Commonly referred to as a "Dear CFO" letter, the posting of a 'sample' or 'illustrative' letter by the SEC is a way for the agency to communicate to the general public (and to issuers in general) matters of focus for which the SEC is seeking particular information, or reminding registrants of particular reporting requirements.

According to the introductory paragraph above the March 29 Dear CFO Letter, the letter was sent "to certain public companies requesting information about repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets."

The sample letter, signed by staff at the level of Senior Associate Chief Accountant, requests certain information in connection with Corp Fin's review of Form 10-K (the letter specifies which year's 10-K), particularly with respect to repos treated as sales (vs. financings) and regarding repo transactions and right-of-offset.

Included among the detailed information requested by the SEC, shown in the March 29 "Dear CFO letter," is quarterly balance sheet amounts and quarterly average balance sheet amounts for the past three years for repos treated as sales (i.e., off-balance sheet) vs. financings. Refer to the "Dear CFO" letter for additional detailed disclosures and information the SEC is seeking.

Repo accounting and disclosure shot to the forefront earlier this month, with the release of the Examiner's report on the Lehman bankruptcy, which made certain allegations questioning the accounting and disclosure relating to $50 billion of repos taken off the balance sheet (i.e. treated as sales) by Lehman.

My two cents (I remind you of the disclaimer which appears on the right side of this blog): even if you believe your company did not receive this 'sample letter,' or even if you see this letter referred to in the press or otherwise as directed at specific industries, I would suggest companies, auditors, legal counsel, and audit committees consider such "Dear CFO" letters as illustrative of the SEC's general view on accounting and disclosure matters for the issue(s) addressed in the letter.

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10 comments:

Sheila said...

The SEC guidance at this point is too late to help. Even so, auditors don't need more rules. EY understood the Repo 105 transactions perfectly well, they just lacked the independence to do their job. I'd love for the SEC to start looking into auditor/independence reform instead of making up more rules.

Company Lawyer Chris Neufeld said...

What more can one say about the SEC, which has been too busy with tackling matters after the fact. Even this approach appears to be misplaced, as it will look to prosecute matters which until now may not have been illegal and for which many of these major financial institutions have taken internal actions to address so that they don't have a situation similar to that of Lehman Brothers. This would appear to be another instance where the SEC will mismanage their limited resources, being late to the party and prosecute something that doesn't require prosecution, simply because for public appearances it looks like they are doing their job. The SEC needs to focus its energies on real, substantive investigations that will protect public investors.

Anonymous said...

Maybe Sheila can explain why she believes the R105 transactions were not GAAP.

I think Chris's comments is insightful and useful - how about some clear pro-active guidance from the regulators about the rules of the road.

And to think there are those that want to adopt IFRS so we can get to "principle based" accounting.

ROFL!

Sheila said...

To address comments posted by Anonymous:

My understanding of EY's knowledge of Repo 105 transactions is that while they may not have been illegal, they served no business purpose other than to improve the balance sheet ratios.

The point of my comment was that the error occurred not because there was a lack of guidance contained in GAAP or GAAS, but rather the interpretation and application of those rules was hindered by a lack of independence between the auditors and management.

EY is not alone in that. All auditors must woo their clients in order to get the job the next year. I would suggest that auditors are hired by those served by the information. For privately held companies, the banks should select the auditor. For publicly traded companies, SOX provisions to have the audit committee select the auditors does help, though perhaps more could be done there too.

jack said...

I know your mean........

Timothy said...

I would not want to be an auditor. I have nothing to hide from auditors but I try to evade them as much as I can. After all these new regulations, now is the time for letters! What else do they have to check now!

Timothy Cassar
Webmaster - Cash Advance Loans

kristine said...

Hi there!
I agree to what Crhis Neufeld has said. SEC has many things to say to its officers. SEC should watch out on managing their limited to resources in order to avoid mismanagement. Public investors should be protected by SEC. Many things could be encountered especially on financial institutions.
SEC must take an early action for such issues.

Kristine from Purity Rings

kristine said...

One more thing, the financial institutions really has to do on SEC's progress or what SEC does.

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