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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