Over the last several days, we’ve had a number of conversations with the federal banking regulators on TARP Capital applications. Although this guidance has not proved to be entirely consistent across agencies, we wanted to pass it along as we have it. We have identified the federal regulatory agency which provided us the guidance, but we generally expect some degree of uniformity across agencies.
In addition to discussing the treatment of non-exchange listed public companies, private companies, and Sub S companies, the Federal Reserve Bank of Atlanta also emphasized that the Treasury Department intends to invest only in entities that are “viable,” with viability being determined on a case-by-case basis. The OCC has separately provided guidance that, as a rule of thumb, an applicant must be viable without the TARP Capital in order to be approved to received TARP Capital. Based on our conversations with regulators last week, we continue to believe the best indicator of viability is the ability of the applicant to earn money operationally, i.e. pre-tax and pre-provision, which is also known as “pre pre” earning).
Based on a number of sources, we understand that banks that submit their applications to the FDIC are getting a request for the ratios right after they submit the information and are hearing within a couple of days whether they will, or are expected to be, eligible. If they are not eligible, banks are being given the opportunity to withdraw the applications to avoid reputational issues.
We have also been advised by the regulators that particularly high capital ratios will not be a basis for the FDIC to find a bank ineligible. From the regulator’s perspective, you cannot have too much capital.
While the Treasury Department has emphasized that it is allowing institutions to individually announce pre-approval of TARP Capital, Section 114(a) of EESA requires public disclosure of the completion of such purchases within two business days of the actual purchase. (This is also confirmed in the Treasury’s FAQ, which provides “Treasury will provide electronic reports detailing any completed transactions, as required by the Emergency Economic Stabilization Act of 2008, within 48 hours.”)
The Treasury Department has now begun publicly announcing completed transactions. As of October 29, 2008, the Treasury Report on Transactions listed only the original “Big 9.”
We understand that the FDIC is requesting that TARP Capital applicants complete (either with their application or supplementally thereafter), this Capital Ratios spreadsheet. Regardless of whether you elect to submit the spreadsheet with your initial application, we believe completing the spreadsheet is a good exercise to understand what the federal regulators, or at least the FDIC, intends to review.
What Should be Confidential?
Although the TARP Capital application form itself is simple and does not generally request information that is not otherwise publicly available or that is sensitive in nature, there are some aspects that you should consider for confidential treatment. A few examples are listed below. The first item listed (M&A and capital plan) is requested in the application, and the regulators may request the others supplementally.
- Description of anticipated mergers, acquisitions or other capital plans
- Projections, if requested by the regulators
- Contemplated use of proceeds
- Discussions of CAMELS ratings or other exam-related information
- Data that raises customer privacy concerns
How Do I Keep Information Confidential?
The TARP Capital program application form contains the following instructions:
Any applicant desiring confidential treatment of specific portions of the application must submit a request in writing with the application. The request must discuss the justification for the requested treatment. The applicant’s reasons for requesting confidentiality should specifically demonstrate the harm (for example, loss of competitive position, invasion of privacy) that would result from public release of information (5 U.S.C. 552). Information for which confidential treatment is requested should be: (1) specifically identified in the public portion of the application (by reference to the confidential section); (2) separately bound; and (3) labeled “Confidential.” The applicant should follow the same procedure when requesting confidential treatment for the subsequent filing of supplemental information to the application.
The applicant should contact the appropriate regulatory agency for specific instructions regarding requests for confidential treatment. The appropriate regulatory agency will determine whether the information will be treated as confidential and will advise the applicant of any decision to make available to the public information labeled as ‘Confidential.’
What Should My Request Include?
When requesting confidential treatment, a separate letter dealing with that issue specifically should be attached to the application. The letter should:
- reference your bank and its application;
- state that you are requesting confidential treatment of the information identified in the request under the Freedom of Information Act (5 U.S.C. 552);
- identify the nature (but not specific content) of the information for which confidential treatment is requested;
- state why confidential treatment of the identified information is necessary (see below for typical grounds); and
- repeat the identification and explanation for other categories of confidential information covered in the request.
How Do I Support My Request?
While the specific issues will vary depending on each bank’s situation, the typical grounds for confidential treatment involve competitive harm, adverse legal or regulatory consequences, or violations of privacy that could be suffered if the information were disclosed. Examples include:
Acquisition discussions: Disclosure would result in competitive harm because a fundamental competitive aspect of the bank’s strategic plan would be made public. Third parties could interfere in the negotiations, and premature disclosure could adversely affect both parties’ ability to consummate the transaction and/or the market for their stock. Disclosure will in any event likely be prohibited under a confidentiality agreement or terms of a letter of intent or definitive agreement.
Capital transactions: Disclosure would result in competitive harm because competitors would be in a position to evaluate the bank’s current and prospective capital position and future performance prospects. Competitive harm could also result from public disclosure of privately negotiated transaction terms with identified investors. Additionally, a prior public announcement of a private placement could trigger “general solicitation” concerns under federal securities laws.
Projections: Disclosure would result in competitive harm because this information reflects the bank’s own internal evaluation of its resources, future prospects and operating and growth strategies.
Use of Proceeds: Disclosure would result in competitive harm because the bank’s intended use of capital provides valuable insight into its future plans regarding acquisitions, branching, product and service expansion, and other elements of its strategic plan.
CAMELS and Exam Information: This information is required to be kept confidential under banking regulations.
Customer or Account Data: Disclosure would violate existing statutory and regulatory privacy protections and would also damage the bank’s existing and potential customer relationships.
These are just general illustrations—the key is to think about the harm that disclosure could do and describe it briefly.
Is this Really Necessary?
Applications submitted in draft form are not available publicly, so the confidential treatment request is not as critical at that stage. For final applications, it’s possible that all information will be treated as confidential under the regulators’ supervisory powers (as opposed to the applications process), but until this is confirmed, it would be prudent to request confidential treatment.
As you may know, the TARP Capital Application (Word Version) asks whether the “Institution Has Reviewed The Investment Agreements And Related Documentation On Treasury’s Website (Yes/No).”
The Investment Agreements and Related Documents have not yet been made available by the Treasury Department. When they are made available, we presume they will be made available on the Treasury’s Emergency Economic Stabilization Act page.
Until they are made available, we recommend that applying institutions indicate that they have not read the materials (either with or without a note that the materials were not available at the time of filing). Due to the FDIC’s guidance to note any structural conditions to acceptance of the Treasury’s public term sheet, we also recommend that applicants refer to our earlier articles describing potential issues for non-public financial institutions.
Update 10/29/08: We understand that the FDIC is now informing applicants that the investment agreement will not be provided to them until they are approved for participation in the TARP Capital program.
Update 10/31/08: The Investment Agreements for publicly traded companies are now available. Private and Subchapter S institutions may wish to review generally, but the Treasury is working on revised Investment Agreements for non-publicly traded companies.