By Colin Barr
September 17, 2010

The SEC is drawing the blinds on one of the banking industry’s shadiest practices.

Regulators on Friday issued rules aimed at ending so-called window dressing, the time-honored tradition in which bankers try to spruce up  balance sheets just before the end of a quarter.

The Securities and Exchange Commission will oblige banks and brokerages to disclose more information about their leverage levels throughout a quarter. The SEC also said it is considering issuing guidelines that would force companies to explain changes in debt levels, and limit the use of tricks like off balance-sheet financing.

“Under these proposals, investors would have better information about a company’s financing activities during the course of a reporting period — not just a period-end snapshot,” SEC Chairwoman Mary Schapiro said. “With this information, investors would be better able to evaluate the company’s ongoing liquidity and leverage risks.”

The move comes in the wake of the disclosure early this year that Lehman Brothers made its leverage ratios look better before its 2008 collapse by engaging in financing transactions that it accounted for as sales. The agency is probing whether the bank broke laws in doing so, the Financial Times reported.

The Wall Street Journal reported this spring that other banks seemed to have been manipulating their own leverage ratios, based on the observation that period-end leverage was typically lower than the quarter-long average.

The SEC said Friday it may force companies to spell out what’s behind their short-term borrowing changes, in a bid to prevent this sort of ruse from being played again.

“In order to provide context for the short-term borrowings data, we are also proposing to require a narrative discussion of short-term borrowings arrangements,” the SEC said. The narrative discussion would include, among other things, “the reasons for any material differences between average short-term borrowings for the reporting period and period-end short-term borrowings.”

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