On Friday, January 6, 2012, the SEC Division of Corporation Finance issued Disclosure Guidance: Topic No. 4 (European Sovereign Debt Exposures) regarding disclosure relating to registrants’ exposures to risk of debt to certain European countries. As a result of the uncertainties with European sovereign debt holdings, the SEC reviewed disclosures of direct and indirect exposures from these holdings made by financial institutions that are SEC registrants. The SEC’s review noted that the disclosures of the exposure by registrants has been inconsistent in both substance and presentation. The SEC believes that this inconsistency may lead to disclosures that lack transparency and comparability for investors.

In reviewing the disclosures, the SEC issued comments requesting enhanced disclosure relating to the European sovereign debt exposures. The comments asked registrants to disclose for each country:

  • 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.

As a result, the SEC is providing guidance that registrants provide additional disclosure in their Management’s Discussion and Analysis ("MD&A") regarding their European sovereign debt exposures. The disclosure guidance asks registrants to determine which countries are covered focusing on those experiencing significant economic, fiscal, and/or political strains, and asks registrants to disclose the basis used for identifying the countries included in their disclosure. The disclosure guidance provides that disclosures should be provided separately by country, segregated between sovereign and non-sovereign exposures, and by financial statement category, to arrive at gross funded exposure, as appropriate. The disclosure guidance also provides that registrants should also consider separately providing disclosure of the gross unfunded commitments made, and information regarding hedges in order to present an amount of net funded exposure. The disclosure guidance provides an outline of disclosure topics for registrants to consider when analyzing their European sovereign debt exposures.