On September 17, 2010, the SEC unanimously voted to propose rule and form amendments that would require enhanced short-term borrowings disclosure by all companies that provide MD&A disclosures in response to Item 303 of Regulation S-K in annual and quarterly reports, proxy or information statements that include financial statements, and '33 and '34 Act registration statements.

According to Chairman Schapiro, the proposed amendments are unrelated to the Dodd-Frank Act financial reforms, but nevertheless result from issues that were "brought into focus as a result of the financial crisis," such as the practice sometimes referred to as "balance sheet window dressing." According to Chairman Schapiro, the proposed amendments would provide investors with "better information about a company's financing activities during the course of a reporting period - not just a period-end snapshot. With this information, investors would be better able to evaluate the company's ongoing liquidity and leverage risks."

Among other things, the proposed amendments would expand the MD&A to include a new section that contains both quantitative and qualitative information regarding short-term borrowings similar to that currently required of bank holding companies pursuant to SEC Industry Guide 3, except that such information would be required to be provided on a quarterly as well as annual basis. The proposed amendments would subject foreign private issuers to similar disclosure requirements by amending the "Operating and Financial Review and Prospects" item in Form 20-F, but without the requirement for quarterly reporting.

Proposed Quantitative Information. The proposed quantitative disclosure would include, in tabular format, for each specified category of short-term borrowings:

  • the amount outstanding at the end of each reported period, and the weighted average interest rate on those borrowings;  
  • the average amount during each reported period and the weighted average interest rate on those borrowings;  
  • for registrants meeting the proposed definition of "financial company," the maximum daily amount outstanding during each reported period; and  
  • for all other registrants, the maximum month-end amount outstanding during each reported period.

The proposed amendments would define a "financial company" to mean a registrant that, during the relevant reported period, is engaged to a "significant" extent in the business of lending, deposit-taking, insurance underwriting, or providing investment advice, or is a broker or dealer. The SEC's proposing release does not define "significant," but it does contain a non-exclusive list of financial companies that would be affected by the proposed amendments. These include an entity that is, or is the holding company of, a bank, a savings association, an insurance company, a broker, a dealer, a business development company, an investment adviser, a futures commission merchant, a commodity trading advisor, a commodity pool operator, or a mortgage real estate investment trust.

"Short-term borrowings" would include amounts payable for short-term obligations that are:

  • federal funds purchased and securities sold under agreements to repurchase;
  • commercial paper;
  • borrowings from banks;
  • borrowings from factors or other financial institutions; and
  • any other short-term borrowings reflected on the registrant's balance sheet.

The proposed amendments would require each registrant to present information for each of the categories relevant to its short-term financing activities even if that category is not required to be reported as a separate line item on its balance sheet under Regulation S-X. The proposed amendments would permit companies that engage in financial and non-financial businesses to provide separate short-term borrowings disclosure for its financial and non-financial business operations.

Proposed Qualitative Information. The proposed amendments also would require qualitative information about a company's short-term borrowings designed to highlight short-term financing activities and complement other MD&A disclosures. The topics to be addressed would include:

  • a general description of the short-term borrowings included in each category (including any key metrics or other factors that could reduce or impair the company's ability to borrow under the arrangements and whether there are any collateral posting arrangements) and the business purpose of those arrangements;  
  • the importance to the company of its short-term borrowings arrangements to its liquidity, capital resources, market-risk support, credit-risk support or other benefits;  
  • the reasons for the maximum outstanding amount for the reporting period, including any non-recurring transactions or events, use of proceeds or other information that provides context for the maximum amount; and  
  • the reasons for any material differences between average short-term borrowings for the reporting period and period-end short-term borrowings.  

Proposed Reporting Periods. The proposed amendments would require comparative annual data for the three most recent fiscal years for annual reports and registration statements with audited full-year financial statements. In addition, fourth quarter information would be required for annual reports and interim information would be required for registration statements for any subsequent interim periods consistent in each case with general MD&A requirements and instructions applicable to the requirements of the relevant registration statement form. Quarterly reports would need to present information for the relevant quarter but without comparative period data.

Transition Period. The proposed amendments would provide a transition period to allow a yearly phase-in for the comparative annual data until all three years are included in the annual presentation. The transition period does not apply to registrants that are already subject to SEC Industry Guide 3 requirements.

Comments Requested. The proposing release seeks comment on a number of aspects of the proposal including, among other things, the burdens and costs to non-bank financial companies of tracking and calculating short-term borrowings information computed on a daily basis, and whether all non-bank registrants should be required to provide leverage ratio disclosures.

Costs to Insurance Companies. According to the proposing release, the proposed amendments could impose significant incremental costs for the collection and calculation of data, particularly for companies that are not already reporting this type of data voluntarily or to their primary regulators. The Commission noted by way of example that "insurance companies may find it difficult to produce daily balances for each day that is necessary for the average and maximum short-term borrowing disclosures applicable to them."  

Companion Release. The SEC also unanimously voted to provide interpretive guidance to improve the overall discussion in the MD&A of liquidity and capital resources.