On Nov. 22, 2011, the SEC announced a settlement with Fifth Third Bancorp (Fifth Third) over allegations that it selectively communicated to certain investors information regarding the redemption of its trust preferred securities. The settlement marked the first Regulation FD enforcement action brought by the SEC in over a year.
In May 2011, Fifth Third elected to redeem its trust preferred securities on the basis that a "capital treatment event" had occurred by virtue of certain provisions of the Dodd-Frank Act. To redeem the securities, Fifth Third was required first to obtain approval from the Federal Reserve Bank of Cleveland, and then to instruct the trustee to issue notice to the holders of the securities at least 30 days in advance of the redemption date. The governing trust documents required that the trustee give notice only to the Depository Trust Company (DTC), which was the sole registered holder of the securities.
On May 16, Fifth Third instructed the trustee to redeem the securities and to "send all appropriate notices to the holders." The trustee sent a notice of redemption to DTC, and DTC informed the beneficial owners of the securities of the redemption by posting the redemption notice early the following morning to its Legal Notification System, an online library available to subscribers and DTC member banks and brokers. The redemption notice indicated that Fifth Third would be redeeming the securities for about $25.00 per share.
At the time, the securities were trading on the New York Stock Exchange at about $26.50 per share. After certain investors learned that the securities would be redeemed at a discount to the market price, they began selling the securities to buyers who were apparently unaware of the redemption. On May 18, the securities opened at $26.66 and closed at $25.20. Within the first two hours of trading, volume increased from a daily average of 38,000 shares to over two million shares. Fifth Third filed a Form 8-K disclosing the redemption just before 11:30 a.m. on May 18, after it had noticed the unusually heavy trading volume and realized the impact that the selective disclosure regarding the redemption had on the market.
Fifth Third submitted an Offer of Settlement, which the SEC accepted, and consented to the entry of a cease-and-desist order. The SEC did not impose a civil penalty, based in part on Fifth Third's cooperation with the SEC staff. In addition, the SEC's order noted the remedial acts promptly undertaken by Fifth Third, including its compensation of investors harmed by the timing of its disclosure and its adoption and implementation of additional policies and procedures relating to the redemption of securities.
Regulation FD applies only to communications made by an issuer or any person acting on its behalf. The enforcement action against Fifth Third is noteworthy because the SEC necessarily took the position that, at least for Regulation FD purposes, DTC was an agent of the issuer. It was therefore Fifth Third's responsibility to ensure that communications made by DTC were Regulation FD compliant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
