On September 17, 2010, the SEC proposed rules to require public companies to disclose more information about their short-term borrowings to give investors a clearer picture of the company’s ongoing liquidity and leverage risks.

Under the proposed rules, “short-term borrowings” would mean 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
  • any other short-term borrowings reflected on the registrant’s balance sheet

It would not include “off-balance” sheet loan arrangements, which are covered by the SEC’s existing disclosure rules.

The proposed amendments would create a new management’s discussion and analysis (MD&A) section for all companies to make quarterly and annual disclosures about each type of short-term loan they use. Companies would be required to include tabular information as well as a discussion and analysis of these short-term borrowings. The requested information includes the amount outstanding at the end of the reporting period, and the weighted average interest rate on those borrowings.

To give context to the quantitative disclosures, companies also would be required to give a short qualitative description, in narrative form, of the loan and its business purposes, and the reasons for any material variations between average short-term borrowings and period-end short-term borrowings.

The proposed amendments differentiate between financial and nonfinancial companies by requiring financial companies to provide averages for short-term loans calculated on a daily average basis and to disclose the maximum amount outstanding on any day in the period. Nonfinancial companies, on the other hand, would be allowed to calculate averages using an averaging period not to exceed one month, and to disclose the maximum month-end amount during the period.

Repurchase arrangements (Repos), which usually are accounted for as financings on the balance sheet, would be covered by the proposed disclosure requirements. Repos that are accounted for as sales, and therefore not reflected on balance sheets, must be evaluated under existing rules for off-balance sheet arrangements.