SEC Staff Guidance for Financial Institutions Filing Proxy Statements in Connection with the TARP Capital Purchase Program

Staff Guidance for Financial Institutions Filing Proxy Statements in Connection with the TARP Capital Purchase Program

On October 3, 2008,
the President signed the Emergency Economic Stabilization Act of 2008
(EESA), which established the Troubled Asset Relief Program (TARP). The
United States Department of Treasury is responsible for establishing
and administering the TARP. As part of the TARP, Treasury established
the Capital Purchase Program (CPP) to provide funding to eligible
financial institutions. To participate, a financial institution that
receives preliminary approval for the CPP must enter into an agreement
to issue certain securities to the Treasury. For additional information
regarding the EESA, the TARP, and the requirements for participation in
the CPP, see http://www.treasury.gov/initiatives/eesa/.

In many cases, a
financial institution seeking to issue securities may be required to
solicit and obtain shareholder approval for the authorization of the
securities. To solicit shareholder approval, a financial institution
must comply with the federal securities laws and any applicable state
laws. The federal securities laws require certain financial
institutions to file a proxy statement on Schedule 14A when soliciting
shareholder approval.¹

The staff understands
that financial institutions that participate in the CPP are subject to
time constraints in obtaining shareholder approval and completing the
funding transaction with Treasury. The staff is reviewing or has
reviewed a number of preliminary proxy statements filed by institutions
seeking to participate in the CPP. In an effort to provide financial
institutions with information to aid them in preparing their proxy
statements, we are listing actual comments the staff has issued in its
filing reviews. Financial institutions may want to consider these
comments when preparing their proxy statement disclosure. It is
important to note that these comments 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.
Each financial institution should consider its own facts and
circumstances when preparing its proxy statement disclosure. Direct any
questions regarding these comments to (202) 551-3770.

Sample Comments

Discuss why you plan to participate in the Capital Purchase Program or are considering participating.

Disclose whether you
have applied to participate in the Treasury Department's Capital
Purchase Program and describe the status of your application.

Disclose the material
terms of your participation in the Capital Purchase Program. Describe
the material terms of the securities and warrants you will issue to the
Treasury Department.

Disclose the estimated
proceeds of your proposed sale of securities to the Treasury Department
and disclose how you expect to use them.

Please discuss how your participation in the Capital Purchase Program may

• 
  

  impact the holders of any outstanding senior classes of your securities;

  
  


• 
  

  impact the rights of your existing common shareholders;

  
  


• 
  

  dilute the interests of your existing common shareholders;

  
  


• 
  

  require you to expand your board of directors to accommodate Treasury Department appointments to it;

  
  


• 
  

  require you to register for resale securities you have issued to the Treasury Department; and

  
  


• 
  

  impact
  how you operate your company, for example, how the terms of
  participation will require you to restructure your executive
  compensation arrangements.

  
  

Disclose, if true,
that the Treasury Department is not obligated to accept your
application to participate in the Capital Purchase Program and that the
estimated proceeds of your proposed sale of securities to the Treasury
Department are not guaranteed.

Discuss any material
effect on your liquidity, capital resources or results of operations if
the proposal is approved and the Treasury Department 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 comment stock. See Note A to Schedule
14A and Instruction 1 to Item 13(a) of Schedule 14A.

Issues to Consider With Regard to Pro Forma Financial Statements

Although there are
a number of issues you should consider when preparing pro forma
financial statements, the following sample comments relating to a
possible sale of securities to the Treasury Department may help you
evaluate your financial statement requirements.

Where you
expect the proceeds of the sale of securities to the Treasury
Department to have a material impact on your balance sheet or income
statement, our rules require you to provide pro forma statements that
comply with Article 11 of Regulation S-X in your proxy statement. If
you expect the proceeds of the sale of securities to the Treasury
Department to have a material impact on your financial statements, you
may provide a textual discussion of the pro forma effect rather than
pro forma financial statements.

In evaluating the
impact of the potential sale of securities to the Treasury Department,
you must consider the material effect of the transaction, including:

• 
  

  how the application of the proceeds of the transaction may potentially affect your 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 your basic earnings per share, diluted earnings per share, and diluted shares outstanding.

  
  

Your assumptions
regarding the use of proceeds from the transactions, such as an
assumption regarding the pay down of existing debt or the investment of
the proceeds in federal funds sold, must be factually supportable. You
should consider only those plans for the proceeds that meet the
factually supportable criteria.

Where you determine
that the proceeds of the sale of securities to the Treasury Department
will have a material impact on your balance sheet or income statement
and elect to prepare and provide pro forma financial statements, you
should include, in your proxy statement, a pro forma balance sheet for
the most recent balance sheet date and a pro forma income statement for
the most recent annual and interim periods that address the impact of
both the minimum and maximum proceeds of the sale. If you choose to
provide a textual discussion in lieu of pro forma financial statements,
please address the minimum and maximum proceeds of the sale as well as
the other items noted in the following paragraph.

In preparing pro forma
financial statements, discuss any relevant assumptions you have made
and briefly describe any pro forma adjustments such as your assumptions
about interest savings on proceeds applied to pay down debt and
interest income earned on proceeds invested. State, if true, that you
used the treasury stock method for purposes of evaluating the effect of
the warrants on diluted shares outstanding. Describe the methodologies
you used to allocate the transaction process among the securities you
may issue to the Treasury Department (relative fair value) and to
accrete the discount on the preferred stock.

If you do not believe
the sale of the securities to the Treasury Department will have a
material impact on your balance sheet or income statement, provide us
with your quantitative and qualitative analysis supporting your
conclusion. In your analysis, discuss the impact to each of the items
noted above as well as to total shareholders' equity and your capital
ratios.

¹
In some circumstances, a financial institution may file an information
statement in lieu of a proxy statement. The staff intends for its
guidance for financial institutions filing proxy statements to apply to
the preparation of information statements as well.

http://www.sec.gov/divisions/corpfin/cffilingguidance.htm