A new government rule requiring banks and other companies to disclose more information about their derivatives portfolios was blasted at a Senate Banking subcommittee hearing Tuesday.
Thomas D. Logan, chairman of the Treasury Management Association, said compliance with the Securities and Exchange Commission rule will cost much more than the government's estimate of $8,000 a year per company.
Actual costs will "exceed SEC estimates by a factor range of 10 to over 100 times," he said.
Sen. Phil Gramm, Senate Banking's securities subcommittee chairman, said the rule will discourage corporations from using derivatives to manage risk.
"By setting into regulation the procedures now, we're going to discourage innovative usages that ... might have reduced risk," the Texas Republican said. "American business is just now really beginning to understand how to use this financial vehicle."
Sen. Gramm said he has not decided whether to introduce legislation overturning the rule, but after the hearing a subcommittee aide said "a strong case was made for modifying the rule."
Republicans and Democrats alike focused their criticism on a provision requiring financial institutions to use one of three specific methods to disclose risk in their financial statements.
Several senators charged the rule is an overreaction to well-publicized problems like the 1994 Orange County bankruptcy. Sen. Christopher Dodd, D- Conn., noted that irresponsible financial management, not derivatives, caused these disasters. Sen. Robert Bennett, R-Utah, said SEC's push to issue the rule despite hundreds of critical comment letters stemmed from a "desire to cover your bureaucratic tail."
However, SEC Commissioner Steven M.H. Wallman defended the new rule, saying it will protect derivatives' reputation as a useful risk-management tool.
If the disclosures are not required and companies experience large losses from derivatives, "companies will be sued for failing to explain adequately the risks they are incurring, and there will again be cries to reduce or outlaw the use of derivatives," Mr. Wallman said.
But even former SEC chief economist Kenneth Lehn criticized the disclosure regulation.
"The commission's rule indisputably increases costs for public companies that use derivatives, without creating any obvious countervailing benefits for investors," said Mr. Lehn.
