Beware Banker Securities Blunders
Horn, Charles M., ABA Banking Journal
A former federal regulator answers common questions about banks' own securities and other securities that they sell
Just as bank securities activities have been growing, so has the interest of regulators and legislators. This interest has prompted bank organizations to become more sensitive to the need for sound securities compliance systems.
Banks obviously want to avoid government-and private-liability. A bewildering array of laws, regulations, and policies govern bank securities activities. Banks should be aware, for example, that violations of federal securities laws and rules can be subject to penalties under the Financial Institutions Reform, Recovery and Enforcement Act.
Here are some questions bankers frequently ask about securities compliance.
Q. What are the most sensitive areas in bank securities compliance?
A. Today's political and regulatory environment mean that all areas of bank securities activities are sensitive. However, events of the past few years have underscored the need for banks to be particularly careful in the areas of capital raising; regulatory and shareholder reporting; insider trading; and high-risk investment activities.
Q. Banks are under increased pressure to raise capital. Public markets are one source of capital. What trouble spots should banks avoid?
A. There is an obvious need to make full and accurate disclosure in the documents through which you offer securities. Apart from that, be sensitive to the fact that the new regulatory environment may delay the bringing of securities to market in an expeditious fashion.
The Securities and Exchange Commission, for instance, will be reviewing more closely the registration statements of bank holding companies, in part because it is in this process that the SEC can be proactive in promoting "full disclosure."
SEC staff will turn to bank regulators for assistance in ensuring that these documents do not omit significant financial and regulatory information by asking these agencies to independently review the documents. This process will delay bringing securities to market, which can create problems for a banking organization wanting to take advantage of favorable-but temporary-market conditions.
Q. What can an organization do to avoid such delays?
A. One alternative-especially for larger organizations-is the Rule 415 "shelf registration" process.
By having an issue "on the shelf" and ready to go, a bank "preclears" an offering through SEC and resolves potential disclosure problems in advance. However, be aware that some securities subject to Rule 415 must be sold within two years of the initial effective date of the registration.
There's another, newer alternative too. With SEC's recent adoption of Rule 144A for "private resales," the secondary market for privately placed securities is expected to increase the liquidity-and hence the attractiveness-of these kinds of securities. Therefore some banking organizations may wish to tap private capital markets, rather than make a public offering.
Q. SEC is currently engaged in major efforts to "target" the regulatory reports (such as annual reports, periodic reports, and proxy solicitation materials) of banks for review (ABA BJ, June, p.12). What is SEC looking for?
A. SEC will focus heavily on disclosures concerning the quality of bank loan loss reserves and bank loan portfolio management methods, investment portfolio activities, known trends and contingencies in the management's discussion and analysis, and information relating to insider and affiliate transactions.
Q. What securities regulatory risks are posed by bank investment activities?
A. The principal federal risk for publicly traded banking organizations is not adequately disclosing to regulators and shareholders the financial statement impact and business risks of high-risk investments. …