Yesterday, the SEC’s Division of Corporation Finance announced new guidance for financial institutions that need shareholder approval to participate in Treasury’s Capital Purchase Program (CPP). The guidance notes that the Staff understands that financial institutions that participate in the CPP are under time constraints in obtaining shareholder approval for completing the transaction with Treasury.

A financial institution seeking to participate in the CPP may be required to solicit and obtain shareholder approval for the authorization of the securities to be issued to the Treasury (either to authorize preferred stock or additional shares of common stock to accommodate Treasury’s warrant) or to comply with stock exchange listing requirements. With the new guidance, the Staff seeks to provide participating institutions with a better understanding of the disclosure required in their upcoming proxies that solicit shareholder approval to permit a financial institution to participate in the CPP. In doing so, the Staff addressed several substantive areas:

  • Participation in the CPP - Financial institutions must disclose why they have chosen to participate in the CPP, the current status of their applications, and the implications if their application is denied. Further, they must also disclose that Treasury is not obligated to accept their application nor are the proceeds from the sale of securities to Treasury guaranteed.
  • Effect of participation in the CPP - Participants must disclose the material terms of participation in the CPP, as well as the material terms of the securities and warrants issued to Treasury. Also, participants must disclose the impact of participation in the program on senior class shareholders, common stock shareholders, and the board of directors. Participants are also encouraged to disclose that they may be required to change the way they operate their company. Specifically, the staff mentioned the need to disclose the possible requirement to modify executive compensation arrangements.  

The Staff also provided guidance with the regard to the requirement to provide financial information in a participant’s proxy. A proxy statement must include financial information if the issuer is seeking authorization to issue stock under certain circumstances. Additionally, if a financial institution believes that the proceeds of the sale of securities to Treasury will have a material impact on its balance sheet or income statement, the Staff has required the financial institution to provide pro forma financial statements outlining the impact.

The Division’s guidance emphasizes that the comments described in the guidance “may or may not relate to a financial institution's own particular facts and circumstances and that these comments may not address all material disclosure items it should present to its shareholders in connection with any proxy solicitation.” However, the guidance should assist companies in developing their own proxy disclosures and anticipate areas of likely Staff comment.