January 07, 2007	Sunday	Zilhaj 16, 1427

WASHINGTON, Jan 6: US financial regulators on Friday issued final guidance aimed at helping banks and other institutions identify and control heightened risks from certain complex structured finance transactions, such as those that triggered the collapse of energy giant, Enron Corp, in 2001.

The final statement is substantially similar to the previous version issued for industry comment in May 2006, providing a principle-based approach to address structured finance risks, the regulators said jointly.

But it differed from temporary guidance put in place in 2004 that included stronger language describing the transactions institutions should avoid. The 2004 version also called for specific guidance on the documentation practices and the roles a financial institution's board of directors plays in preventing abusive deals.

Sen. Carl Levin, a Michigan Democrat who chairs the US Senate Permanent Subcommittee on Investigations, criticized the new guidance as weaker.

"Weakening the post-Enron protections in that 2004 guidance may backfire by re-opening the door to Enron-style abuses.

Congress needs to watch very closely to see if this weakening of the guidance results in weaker enforcement or an increase in structured finance abuse," Levin said.

The regulators' guidance says that banks engaging in complex structured finance transactions should have formal, written, firm-wide policies and procedures to identify, evaluate, and control risks associated with such deals, with a particular emphasis on those that present elevated levels of legal or reputational risk to the institution.

The regulators prescribed that banks give more scrutiny to transactions that appear to lack economic substance or business purpose or be designed or used primarily for questionable accounting, regulatory or tax objectives -- particularly at the end of a client reporting period.

They also said banks should scrutinize deals that involve circular transfers of risk that lack economic substance, or provide the financial institution with compensation that appears substantially disproportionate to the services provided or the credit or operational risk assumed by the institution.

Deals that raise questions about the client's intentions in reporting the transactions in regulatory filings or financial statements also need scrutiny.

Enron's spectacular bankruptcy in December 2001 was brought about in part by structured finance transactions with the energy trading firm's special-purpose entities that were aimed at achieving misleading earnings, revenue or balance-sheet effects.The Federal Reserve Board subsequently launched enforcement actions against several large banks that entered the deals with Enron.

Last month, the Fed ended two of these actions, against Citigroup Inc. and Canadian Imperial Bank of Commerce, both of which involved written agreements by the banks to adopt remedial policies and improve their credit risk management programmes.

Although the regulators' statement on Friday did not mention Enron specifically, it warned about deals that do not comply with laws, regulation or accounting principles.

"Indeed, in some instances CSFTs have been used to misrepresent a customer's financial condition to investors, regulatory authorities and others. In these situations, investors have been harmed, and financial institutions have incurred significant legal and reputational exposure," the statement said.

Banks that find evidence of such heightened risk should put in place a company-wide mechanism for ensuring these transactions are reviewed by appropriate management, and that those decision makers have adequate information.—Reuters