After Enron – statement on sound practices related to structured finance activities1

In response to the involvement of financial institutions in recent corporate scandals, the main United States financial regulators have proposed a joint statement on complex structured finance activities of financial institutions under their jurisdiction.

In the statement, the regulators express concern that financial institutions do not have systems and policies for screening out inappropriate products and transactions and for identifying and monitoring all of the risks involved. It is suggested that, at a minimum, a financial institution should have the following, which were neglected in transactions such as those that brought about the downfall of Enron:

• standard procedures for approving all structured finance transactions, involving review by senior executives;
  
  
• systems to identify and evaluate new products to determine whether they fall within the structured finance category;
  
  
• an evaluation of legal and reputational risks;
  
  
• policies to ensure that the corporate client is making adequate public disclosure of its structured finance transactions;
  
  
• adequate documentation and a policy of document retention;
  
  
• regular reporting to senior management of structured financing activities;
  
  
• monitoring of activities by independent professionals;
  
  
• monitoring by internal auditors to ensure activities are carried out according to the institution’s policies; and
  
  
• training of employees in all of the above.
  

1 Source: news section of International Company and Commercial Law Review [2004] N-80 – submission by James A. Fanto, Brooklyn Law School

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