The Securities and Exchange Commission’s Division of Corporation Finance recently issued guidance for financial institutions which are required to file a proxy statement in connection with obtaining funds pursuant to the Capital Purchase Program (CPP) under the Troubled Asset Relief Program (TARP). Financial institutions participating in the CPP may be required to solicit and obtain shareholder approval for the authorization to issue securities by filing a proxy statement on Schedule 14A.  

In response to the time constraints which financial institutions are subject to in obtaining shareholder approval and completing the funding transactions with the U.S. Department of the Treasury, the Staff of the Division of Corporation Finance has provided a compilation of actual comments it issued while reviewing the preliminary proxy statements of financial institutions which had earlier sought to obtain shareholder approval for a transaction pursuant to the CPP. Some of the sample comments include:  

  • Discuss why you plan to participate in the CPP or are considering participating.
  • Disclose whether you have already applied to participate in the CPP and describe the status of your application.  
  • Disclose the material terms of your participation in the CPP. Describe the material terms of the securities and warrants you will issue to the Treasury.  
  • Disclose the estimated proceeds of your proposed sale of securities to the Treasury and disclose how you expect to use them.  
  • Discuss how your participation in the CPP may:  
    • impact the holders of any outstanding senior classes of your securities,  
    • impact the rights or dilute the interests of your existing common shareholders,  
    • require you to expand your board of directors to accommodate Treasury appointments to it,  
    • require you to register for resale securities you have issued to the Treasury, and  
    • impact how you operate your company—for example, how the terms of participation will require you to restructure your executive compensation arrangements
  • Discuss any material effect on your liquidity, capital resources or results of operations if the proposal is approved and the Treasury denies your application.  
  • Disclose whether you will modify any plans or contracts to comply with limits on executive compensation established by Section 111 of the Emergency Economic Stabilization Act of 2008.  
  • Item 13 of Schedule 14A requires you to include financial information in your proxy statement if you are seeking authorization to issue common or preferred stock under certain circumstances. If you have not included financial information in your proxy statement, please explain to us why you believe financial statements are not material in connection with issuing the warrants to purchase common stock.  

The Staff also offers guidance on issues for financial institutions to consider with regard to the inclusion of pro forma financial statements in the proxy statement. The Staff notes that if a financial institution expects the proceeds of the sale of securities to the Treasury to have a material impact on its balance sheet or income statement, it must provide pro forma financial statements that comply with Article 11 of Regulation S-X in its proxy statement or, in lieu of including pro forma financial statements, it must provide a textual discussion of the pro forma effect. The Staff states that in evaluating the impact of the potential sale of securities to the Treasury, a financial institution must consider the material effect of the transaction, including:  

  • how the application of the proceeds of the transaction may potentially affect a financial institution’s net interest margin;
  • how the accretion and dividends on the preferred stock will impact the net income available to common shareholders; and  
  • how the transaction will impact a financial institution’s basic earnings per share, diluted earnings per share and diluted shares outstanding.  

The Staff further notes that if a financial institution does not believe the sale of the securities to the Treasury will have a material impact on its balance sheet or income statement, it must provide the SEC with its quantitative and qualitative analysis supporting its conclusion.  

Financial institutions may direct any questions to the Staff at (202) 551-3770.