SEC staff provides no-action relief for UK bank bail-in, Chairman anticipates broader rulemaking

The staff (the Staff) of the Securities and Exchange Commission (SEC) recently issued a no-action letter (the Letter) to the Bank of England stating that the Staff would not recommend enforcement action if a UK banking organization subject to resolution under the Bank of England’s statutory bail-in powers[1] exchanges its bailed-in debt securities for ordinary shares without registering the exchange under the Securities Act of 1933 (Securities Act). This no-action relief would avoid requiring a UK banking organization that has U.S. shareholders to go through a full SEC registration process in the midst of a banking failure.

The Letter partially addresses the issues identified in the Financial Stability Board’s report on the 2023 bank failures, which noted that, according to the Staff, there could be legal challenges relating to U.S. securities laws in executing a foreign bank bail-in, particularly with respect to compliance with Securities Act registration requirements.[2] According to the Staff’s position, a bail-in would involve an “offer” and “sale” of securities for purposes of the Securities Act, which would require that such offer and sale of securities be registered with the SEC or qualify for an exemption from the registration requirements of Section 5 of the Securities Act. A requirement that a foreign bank go through a full SEC registration process in the midst of a banking failure would be impracticable. Contrast this with U.S. bank holding companies that fail under the U.S. Bankruptcy Code, which benefit from an exemption from the U.S. securities laws that is not available to foreign banking organizations.[3] The Staff position thus creates misalignment between U.S. bank holding companies and their foreign counterparts.

Assuming the Staff’s position is correct, market practitioners had understood that the exemption provided by Section 3(a)(9) of the Securities Act,[4] which exempts from registration “any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly by or indirectly for soliciting such exchange” would be available in most bail-in situations. The Letter provides some clarity by confirming that the Staff would not object to the position that a UK-style bail-in would qualify for the exemption in Section 3(a)(9) of the Securities Act.[5] Notably, a UK-style bail-in includes an interim step where holders of the bailed-in debt receive interim certificates before receiving equity securities. The Letter confirms that the Staff does not believe that interim step precludes reliance on Section 3(a)(9). The Letter, however, does suggest that the Staff’s position is dependent on the fact that the interim certificates are not transferable, so the relief may not apply to a number of other countries with large banking organizations with bail-in procedures that create interim certificates that are transferable and tradable.

As a practical matter, generally only the largest foreign banks, mostly globally systemically important banks (G-SIBs), have U.S. shareholders and they are the only ones affected by the Staff’s view that a bail-in would involve an offer and sale of securities. However, these are the same institutions that are most likely to impact financial stability where speed and certainty in a resolution are key.

In recognition of the fact that the Letter only provides relief for certain foreign bank bail-ins, simultaneously with the issuance of the Letter, Chairman Atkins issued a statement that he has directed the Staff to prepare a rulemaking regarding a potential exemption from the Securities Act’s registration requirements for securities offered and sold in connection with a foreign bank regulatory bail-in. This solution had previously been foreshadowed in a speech by Travis Hill, then Acting Chairman of the Federal Deposit Insurance Corporation.[6] We assume that the rulemaking will also exempt other foreign jurisdictions where the temporary certificates created as part of the bail-in procedure are transferable and tradable.

The overhang caused by delays due to the risk of an SEC registration has caused concern among foreign banking authorities, especially after the events of 2023, that the U.S. securities laws might adversely impact the cooperative international resolution planning that has occurred for G-SIBs since the financial crisis. Together with the Letter, Chairman Atkins’ accompanying statement shows that the SEC is serious in its intent to address concerns regarding the applicability of the Securities Act’s registration requirements in connection with all types of foreign bank regulatory bail-ins. It is clear that the SEC understands the need for cooperation with foreign banking regulators and banking organizations to ensure that U.S. securities laws do not impede the application of foreign bail-in powers, particularly in the fast-moving context of the failure of a G-SIB, where satisfying any Securities Act registration requirements in a timely fashion would be difficult and could preclude the use of an otherwise viable resolution mechanism.