Robert G. Beard
|
| 200X | 200X | 200X | |
| Revenues derived from off-balance sheet transactions: | |||
| [Types of transaction] | |||
Expenses derived from off-balance sheet transactions: |
|||
[Types of transaction] |
|||
Gains/losses on sale to off-balance sheet transactions: |
|||
[Types of transaction] |
|||
Effect on income before income taxes from off-balance sheet transactions: |
|||
[Types of transaction] |
Request for Comment:
Would it be appropriate under the language in Section 401(a) of the Sarbanes-Oxley Act to apply the "reasonably likely" disclosure threshold applicable elsewhere....?
Response:
No. The "remote" disclosure threshold appears to be most consistent with Sarbanes-Oxley. Off-balance sheet transactions are permitted under relatively aggressive accounting standards in that accounting recognition is not required by the obligor or guarantor even if such obligor/guarantor may be ultimately liable for a significant portion of the indebtedness of the special purpose entity. For that reason, a stricter disclosure threshold is warranted. Also, given the complex nature of these transactions, the unsophisticated investor deserves an explanation of the potential risks even if such risks appear remote at the time. The remote standard allows investors to make judgments on potentially material adverse consequences to the registrant that are not required to be recognized or possibly even disclosed in the financial statements.
Request for Comment:
Is there any basic information not required by the proposals that would be necessary to understand a registrant's off-balance sheet arrangements? If so, what additional disclosure should be required.
Response:
In addition to the comprehensive disclosure requirements outlined, I would suggest that it be clear to investors that if the registrant maintains an interest in the collateral supporting a special purpose entity and that interest is subordinated, that the registrant be required to disclose the nature of the subordination and any historical material financial impact that the registrant may have incurred as a result of such subordination (e.g., a loss on accounts receivable that were subordinate to accounts receivable sold to a special purpose entity).
Also, if there are cross-default provisions in the securitization document, the registrant should disclose that defaults under existing obligations would trigger a default under the securitization, and the consequences of those defaults (e.g., termination of the securitization, loss of extra collateral pledged, impairment of assets subordinated to the securitization).
Request for Comment:
Would a registrant be able to monitor and provide disclosure about arrangements to which it is not a party.....?
Response:
As a contingent obligor, in most cases the registrant would have adequate reporting from the third party to comply with the suggested disclosure requirements. I would suggest that if the registrant is unable to provide such disclosure, a statement to that effect must be included in the MD&A. The investor would then be able to assess whether the registrant has ample information to monitor the risks associated with its contingent liabilities.
Request for Comment:
Should the proposed rules state that no disclosure is required with respect to the issuance of notes, drafts,....with a maturity of one year or less issued in the ordinary course of the registrants' business?
Response:
Yes. The liquidity and capital resource section of the MD&A would discuss the reliance on such instruments in financing the registrant's business.
Request for Comment:
Separate Disclosure Section in the MD&A.
Response:
In favor of a separate disclosure section. As the disclosure threshold is different for off-balance sheet transactions (remote), it would be less confusing to the investor if it were a separate section.
Request for Comment:
Should we further amend the MD&A rules to require more specific disclosure about liquidity and capital resources?
Response:
If there is material reliance on off-balance sheet transactions for either the liquidity or profitability or both of a registrant, then such reliance should be disclosed. For example, many finance companies derive all of their profitability from the securitization of their assets and actually lose money on originating and servicing. Such financial dynamics might be obvious to the investor analyzing the financial statements of the registrant; however, the risks of access to off-balance sheet markets and other risk factors (interest rate, credit quality, etc.) should be disclosed in the MD&A.
Request for Comment:
Should the proposed safe harbor be expanded to apply to all forward-looking information in MD&A....?
Response:
Yes. The risks of off-balance sheet transactions are contingent on future events and extending safe harbor provisions would be consistent with the original intent of safe harbor provisions.
Thank you again for the opportunity to comment on this important topic. Good luck in implementation.
Sincerely,
Robert G. Beard
Individual Investor