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March 29, 2010

SEC probes US companies on repurchase accounts

The US Securities and Exchange Commission (SEC) is looking into how certain US public companies account for repurchase agreements and other securities lending transactions.

The SEC’s Division of Corporation Finance has sent a letter to an undisclosed number of public companies requesting information on whether companies account for any repurchase agreements as sales for accounting purposes in their financial statements.

The request follows allegations made by US court-appointed investigator Anton Valukas into Lehman Brother’s use of repurchase transactions, known as Repo 105, in late 2007 and early 2008, in the lead up to the investment bank’s collapse.

Valukas alleged Lehman Brothers used Repo 105 transactions to temporarily move $50 billion off its balance sheets in May 2008.

In addition, the bank did not disclose its use of Repo 105 to the US Securities and Exchange Commission.

The SEC said if companies do account for repurchase agreements as sales it wants to know the answers to 11 questions, including:

  • The quantity of repurchase agreements qualifying for sales accounting at each quarterly balance sheet date for each of the past three years;
  • The average quarterly balance of repurchase agreements qualifying for sales accounting for each of the past three years;
  • All the differences in transaction terms that result in repurchase agreements qualifying as sales versus collateralised financings;
  • The business reasons for structuring the repurchase agreements as sales transactions versus collateralised financings;
  • How the companies’ use of sales accounting for repurchase agreements impacts any ratios or metrics they use publicly, provide to analysts and credit rating agencies, disclose in filings with the SEC, or provide to other regulatory agencies;
  • The basis for non-disclosure of repurchase transactions in management’s discussion and analysis (MD&A) if this was not included in the MD&A.

The SEC said companies have ten business days to respond to their request.

 

Related story

Schapiro admits ‘flawed’ Lehman oversight

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