WASHINGTON - Corporations attacked derivatives disclosure changes proposed by the SEC, saying the changes would make it harder for investors to understand a company's derivative usage.
The Securities and Exchange Commission proposed the changes late last year in order to clarify and expand financial footnote disclosure, allowing the derivatives information in annual reports to be more useful to investors, according to SEC documents.
The changes would expand derivatives disclosure in financial footnotes and require in certain instances that qualitative and quantitative information be provided on derivatives not reported within a company's financial statements.
But in responses to the SEC's request for comment, several corporations said the changes would actually make it harder for investors to understand how derivatives are used at a given company. And some wrote the changes would result in an unfair breach of competitive information for companies that use derivatives, even if they are doing so to reduce risk.
Companies that commented to the SEC include: Deere & Co., Moline, Ill.; Ford Motor Co., Dearborn, Mich.; Chrysler Corp., Auburn Hills, Mich.; General Mills Inc., Minneapolis; Hershey Foods Corp., Hershey, Pa.; Motorola Inc., Schaumburg, Ill.; and Xerox Corp., Stamford, Conn.
"This is unnecessary, overburdensome regulation," said Donald Horwitz, managing director for derivatives consulting firm The Woodward Group, Northbrook, Ill.
(Mr. Horwitz also is editor of the "Futures and Derivatives Law Report," which is expected to publish an article on the matter this week).
If the SEC's goal was to assist investors, "they failed in this regard," Mr. Horwitz said.
Bob Burns, chief counsel in the office of the chief accountant of the SEC, said the SEC doesn't comment on individual letters.
According to Mr. Burns, agency officials would like to take action on the issue before the end of the year, although that could change.
Statements by companies in letters to the SEC support the argument that the proposals would not improve understanding of how to value a company.
General Mills, in an April 24 letter, said: ".... our overall judgment is that the level of detail required under the proposal will only serve to further confound a true understanding of how an issuer uses derivative instruments to assist in the management of its assets and businesses."
Similarly, Deere & Co., in a March 29 letter, said: "The (SEC's) proposals appear to overlook the use of derivatives as a risk management tool. As a result, we feel there is greater potential for financial statement users to be misled by the proposed disclosures."
Deere's letter goes on to say that financial statement users need to combine on-balance-sheet instruments with separately disclosed derivatives.
But readers of financial statements "may be unable to correctly combine these positions or understand the risk-reducing effect of a derivative transaction used for hedging purposes" under the SEC's proposed changes.
The changes also might put unneeded emphasis on derivatives when they may be only a minor part of a company's operation, according to a McDonald's response letter dated May 7: "This amount of information is not required to be disclosed for any other financial statement item, even though other transactions may be more material to the financial statements. Adding too much additional information may only confuse investors and give them a distorted view of the impact of derivatives based on the amount of information devoted to the area."
For some companies, how they use derivatives and specific positions are considered information vital to their competitive position.
Chrysler Corp. officials said in a May 16 comment letter that the proposal "compromises proprietary information while providing limited incremental benefit to shareholders."
Likewise, at chocolate company Hershey, a fundamental part of its business involves the management of market risk in the cocoa markets, where it uses both futures and options contracts, according to a May 7 letter to the securities commission.
Hence, disclosure required by the SEC "could be used by competitors/market traders to place Hershey Foods Corp. at a competitive disadvantage. Such disclosures could also potentially disrupt trading in the cocoa market given the magnitude of (Hershey's) hedging activities as the single largest purchaser of cocoa in the United States," the letter states.
Some of the "Big Six" accounting firms also weighed in with mostly negative opinions on the changes, including Arthur Andersen, Chicago; Deloitte & Touche L.L.P, Wilton, Conn.; Ernst & Young L.L.P., New York; and Price Waterhouse L.L.P, Stamford, Conn.
Although Mr. Horwitz noted that Deloitte & Touche wrote one of the more positive comment letters.
Mr. Horwitz said a general opinion among the responses is that the SEC should let the Financial Accounting Standards Board take care of the details surrounding accounting disclosure.
"The FASB should be allowed to do its own work," he said in an interview.
The FASB released in June an exposure draft of its own derivatives disclosure proposals, bringing onto the balance sheet disclosure of non-hedging derivatives, which Mr. Horwitz said carry their own set of problems.
