• SEC Staff Issues Guidance on European Debt Exposure
  • January 19, 2012 | Authors: Eric A. Koontz; David I. Meyers; Vincent J. Pisano
  • Law Firms: Troutman Sanders LLP - Atlanta Office ; Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - New York Office
  • On January 6, 2012, the Division of Corporate Finance (the Division) of the Securities and Exchange Commission issued guidance to all SEC registrants, particularly financial institutions, regarding their direct and indirect exposure to European sovereign debt. The guidance also covers disclosures related to European non-sovereign debt, however, and therefore the scope of the pronouncement should be considered by all registrants.

    According to the staff, over the past year, registrants have included in their SEC filings disclosures relating to the financial stress experienced by certain European countries, and while such disclosures have improved, they are inconsistent in both substance and presentation. As a result, investors are not receiving clear and comparable information.

    The Division noted that it has recently issued comments to the periodic reports of financial institutions requesting enhanced disclosures relating to European sovereign debt. In its comments, the Division has requested that for each country, these registrants disclose:

    • gross sovereign, financial institutions, and non-financial corporations’ exposure, separately by country;
    • quantified disclosure explaining how gross exposures are hedged; and
    • a discussion of the circumstances under which losses may not be covered by purchased credit protection.

    The Division did not identify any countries that are to be covered by the guidance. Rather, it suggested that registrants should focus on those countries where the likelihood of default has increased because of significant economic, fiscal and/or political strains. Registrants should also disclose the basis for identifying the countries they used in their disclosure.

    In the guidance, the Division suggested that registrants should, when disclosing their exposure to European debt, consider providing:

    • disclosures separately by country, segregated between sovereign and non-sovereign exposures, and by financial statement category, to arrive at gross funded exposure, as appropriate;
    • disclosure of the gross unfunded commitments made; and
    • information regarding hedges.

    As a general matter, outside the guidance, registrants should be considering their exposure to all credit risks from risky economic regions. This would include loans, counterparties to hedges, general business receivables and even third parties located in those regions to fulfill contractual expectations.

    The full text of CF Disclosure Guidance: Topic No. 4, European Sovereign Debt, is available at http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic4.htm.