WASHINGTON -- A member of the Securities and Exchange Commission called for better disclosure of derivatives activities yesterday and predicted that the agency may have proposals out by yearend to supplement existing accounting guidelines.
"Potential investors need to know what the derivatives activities of a company are and the nature and level of risks involved in order to make an informed investment decision," SEC commissioner Richard Roberts said in prepared remarks delivered to a conference hosted by Financial Markets International Inc.
Roberts said recent disclosure guidelines released by the Financial Accounting Standards Board improve the state of derivatives dislosure, but more needs to be done.
"I am troubled by guidelines that would encourage but not require end-users to disclose quantitative information about their derivatives positions," Roberts said.
Earlier this year, SEC chairman Arthur Levitt and Federal Reserve Board governor Susan Phillips expressed the same view.
SEC staff has been considering whether to add more requirements to the accounting board guidelines that were released last month. However, as with the accounting board, the SEC has had difficulty in determining how it would shape the rules, agency officials have said.
Roberts predicted that the SEC will have proposals out by yearend or shortly thereafter that would supplement the accounting board's disclosure guidelines.
In October, the accounting board released broad disclosure standards that will be required in financial statements issued for fiscal years ending after Dec. 15 of this year.
However, entities with less than $150 million in total assets won't have to follow the guidelines for another year.
The guidelines ask companies to disclose the amounts, nature, and terms of derivatives. For derivatives held for trading purposes, the standards require disclosure of the average fair-value balance of positions during the reporting period and the net gains or losses occurring from trading and where those amounts are reported in the income statement.
With respect to the sale of derivatives, Roberts said there needs to be stringent suitability standards.
"If I could advise securities firms any one thing, that advice would be to caution those firms that actively market derivative financial instruments to take all the reasonable steps necessary to ensure that the derivative products being sold are suitable investments for the prospective purchasers," Roberts said.
Roberts said his advice would also apply to sales to institutional investors.
"Clearly, end-users of derivatives products possess different levels of sophistication, and these differences should be taken into account in considering the scope of a broker-dealer's suitability obligation," he said. "This does not mean that suitability obligations play no part with respect to derivatives products sold to institutional customers."
Roberts criticized the National Association of Securities Dealers' recently proposed suitability rules that would be applicable to derivatives securities as well as government, equity, and debt securities.
Roberts said the association's proposal would relieve members from making suitability decisions when dealing with certain large institutional investors that have their own procedures for making independent investment decisions.
"I personally am inclined to be opposed to any proposal that would sharply limit the coverage of suitability protections to customers, even institutional ones," Roberts said.