SEC Eyes “Dear CFO” Letter to Speed TARP Loans

Small and mid-sized banks are scrambling to get shareholders to authorize preferred stock to sell to the Treasury.
David KatzNovember 19, 2008

In an effort to speed completion of applications for Troubled Asset Relief Program loans — and unfreeze credit to corporations and individuals, the Securities and Exchange Commission is busily compiling an assortment of its comments to distribute to small and mid-size banks in the form of a “Dear CFO” letter or web posting, according to the SEC’s outgoing director of its corporation finance division.

The division sends out such letters to the finance chiefs of a group of companies facing a particularly pressing financial reporting issue. In September, for instance, it sent one out on management’s discussion and analysis statements, fair-value measurements and credit risk.

Companies looking to take part in TARP’s $250 billion Capital Purchase Program must sell senior preferred shares to the treasury. In particular, many of the smaller and medium-sized banks who have applied for the funds do not contain authorization to sell preferred stock in their charters, according to John W. White, the SEC’s director of the Division of Corporation Finance, told

Thirty financial-services institutions had applied to the CPP program by November 14, the final deadline. The qualifying banks, however, didn’t need to complete all of the required authorizations by the time they submitted their applications, and those that have submitted partially completed applications have 30 days past the deadline to fulfill any outstanding requirements.

Applicants with charters that don’t authorize the banks to issue preferred shares, must ask their shareholders to authorize an amendment to the charters “to create the preferred stock so that they can have something to sell to Treasury,” said White, who is leaving the SEC at the end of 2008. Generally, that would require the banks to put out a proxy, call a shareholders’ meeting, and put the proxy to a vote.

Before a company issues a proxy, however, the company must submit a preliminary version of it to the Division of Corporation Finance for approval. “And so we have companies filing those proxies with us now as they rush to get into the [Capital Purchase] program,” said White after participating in a panel discussion at the Financial Executives International financial reporting conference in New York on Tuesday.

The SEC official said that his unit has been making “a whole slew of questions and comments” on preliminary proxies, with many concerning the effects of issuing the senior preferred shares on existing investors of common stock as well as on preferred shareholders, if there are any.

“We’re finding that rather than commenting on them one by one that it would be more efficient to put out a list of common [SEC] comments, which is what a CFO letter is,” he said, explaining that among the topics covered will be the effects on executive compensation at the companies if they participate in the program. White said that the SEC communication will come out “very soon” — certainly not as late as December.