Top 10 Issues Facing Financial Institutions in 2017: #1 Securities Compliance (for publicly traded and privately held banks)


Top 10 Issues Facing Financial Institutions in 2017: #1 Securities Compliance (for publicly traded and privately held banks)

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Jason L. Zgliniec

Publicly traded institutions are busy preparing for their annual meeting and finalizing the related SEC filings. 2017 brings some new requirements for public filers, while other requirements that were focused on in the past are back in the spotlight. For privately held institutions, attention to and compliance with securities law matters will play a key role in the success of efforts to capitalize on market trends and raise new capital, or refinance existing TARP, SBLF, or debt.

Publicly Traded Institutions

Say on Frequency Votes. Publicly traded institutions that held their most recent “Say on Frequency” vote in 2011 (the first year that SEC Rule 14a-21(b) applied) must conduct another Say on Frequency vote in 2017 by submitting a resolution to their shareholders asking them to vote, on a non-binding, advisory basis, on whether “Say on Pay” votes should occur every one, two, or three years. Say on Frequency votes are required at least every six years. Publicly traded institutions that held a Say on Frequency vote more recently than 2011 are not required to hold another vote this year but should be mindful of the upcoming sixth anniversary of such vote. A publicly traded institution must report both the results of its Say on Frequency vote and the institution’s decision with respect to the frequency of future Say on Pay votes on Form 8-K under Item 5.07. The institution’s decision with respect to the frequency of future Say on Pay votes can be reported on the same Form 8-K on which voting results are reported (due four business days after the annual meeting) or in an amendment to that Form 8-K.  

Nasdaq “Golden Leash” Rule. Effective August 1, 2016, institutions listed on the Nasdaq stock market are required to disclose, on their websites or in their annual proxy statements, any compensation paid to their directors or director nominees by third parties in connection with their service or candidacy for service on such company’s board and the material terms of such arrangements.

Form 10-K Summary Sections. In 2016, the SEC amended Form 10-K by adding a new Item 16 to allow institutions to include an optional summary section, so long as each summary item is presented fairly and accurately and includes a hyperlink to the complete discussion located elsewhere in the Form 10-K. An institution may not include in its summary any disclosure that is not included in the Form 10-K at the time of filing. If Part III information will be included in the Form 10-K through incorporation by reference to a proxy or information statement filed after the Form 10-K, then the institution should state in the summary that it does not include Part III information because it will be incorporated by reference from a later filed proxy or information statement. An institution that elects to include a summary in its Form 10-K (including any issuer who has previously included a summary page in its Form 10-K) should take care to ensure that the summary included in its Form 10-K for fiscal year 2016, and thereafter, adheres to the requirements of new Item 16.

Pay Ratio Disclosures. The SEC’s Pay Ratio Disclosure Rule (Regulation S-K Item 402(u)), which requires a publicly traded institution to disclose the ratio of the median compensation of all of its employees to the compensation of its principal executive officer, was adopted in August 2015 and took effect January 1, 2017. The first pay ratio disclosures are to be included in annual reports or proxy or information statements for fiscal years beginning on or after that date (for calendar year filers, this will be the proxy or information statement filed in 2018). However, there is a significant amount of uncertainty concerning whether the Pay Ratio Disclosure Rule will be repealed or amended before the first pay ratio disclosures are required. On February 6, 2017, the acting chair of the SEC issued a public statement directing the agency’s staff to reconsider implementation of the Pay Ratio Disclosure Rule. Legislative action to amend or repeal the Dodd-Frank Act could repeal the Pay Ratio Disclosure Rule directly or remove the statutory basis for the Pay Ratio Disclosure Rule, leaving the door open for a repeal of the rule by SEC action. However, it is unclear how urgent a priority compensation disclosure reform is for the new administration or Congress. Until we have further clarity, publicly traded institutions should continue to prepare for the possibility that pay ratio disclosures (disclosing pay ratios for fiscal years beginning in 2017) will be required in the following proxy season.

Privately Held Institutions

Addressing an institution’s capital needs implicitly involves securities law issues. This is true for publicly traded and privately held institutions, although those involving privately held institutions may not be as prominent as a publicly traded institution’s SEC filed prospectuses and related disclosures.

Nevertheless, whenever a privately held institution considers raising capital, it needs to focus on doing so in a manner that complies with all applicable securities offering rules. Various SEC and state securities laws provide certain filing requirements as well as “safe harbors” that may be utilized by privately held institutions. Attention to these items, regardless of the type of securities a privately held institution intends to offer, is critical for planning, preparation, and execution.

Privately held institutions should attempt to comply with any available safe harbor requirements provided for under Regulation D of the Securities Act of 1933, as amended, and should comply with any “blue sky” filing or notice requirements imposed by applicable states’ laws and regulations. Doing so will ensure the privately held institution’s offering will be viewed by the SEC and state-level securities regulators as a “non-public” offering (and thus not subject to more vigorous SEC requirements), and will be more attractive to investors expecting a market-standard offering structure.

Privately held institutions may be unfamiliar with all the securities law issues related to addressing capital needs because they may arise irregularly or intermittently for them. Nevertheless, it is important for privately held institutions to be mindful of these issues, and to work with legal counsel that can help to navigate these requirements to a successful capital solution. As valuations continue to rise, and with them increased capital opportunities, understanding these securities law matters is all the more crucial.

Schiff Hardin has a dedicated team of financial institution transactional, regulatory, securities, and litigation attorneys with significant experience handling various aspects of bank and non-bank financial institution matters. Our attorneys regularly advise financial institutions on corporate matters, mergers and acquisitions, regulatory compliance, enforcement matters, and litigation throughout the United States.  

For more information, visit Schiff Hardin’s Financial Institutions Practice website or contact the authors.