Comment: SEC Is Out of Bounds In Bank Reserves Fight

The pressure the Securities and Exchange Commission put on SunTrust Banks over its loan-loss reserves is nothing short of commercial blackmail.

Simply put, the SEC's message was this: If you don't pay $100 million from your reserves, we won't clear your proxy statement to acquire Crestar Financial Corp. In other words, we'll hold your deal hostage to our view of proper reserve accounting by your banks.

Never mind that the primary federal banking regulator, the Federal Reserve Board, approved the deal between two bank holding companies. Forget that the Comptroller of the Currency, during years of examining SunTrust's constituent banks, sanctioned its reserve policies and practices. Ignore that the Federal Deposit Insurance Corp., which insures the deposits of the subsidiary banks of both parties to the transaction, voiced no concern.

Functional regulation, of course, is at the heart of this issue. What function is being regulated? The business of banking or the merger of two banking institutions?

The SEC would have us believe that whenever two companies with publicly held securities want to merge, it has exclusive jurisdiction to sanctify the marriage. But such presumptive-or presumptuous-jurisdiction has no place in the supervision of already overregulated banking institutions or their legitimate business transactions, including corporate reorganizations.

After all, the fundamental safety and soundness of the banking institutions themselves is at the heart of bank regulation. The SEC doesn't claim expertise in this area.

It has never made a single field examination of a single bank or bank holding company. It has never assessed the adequacy of an institution's capital. Or passed upon the quality of its assets, or judged the competency of its management. Woe unto the SEC staffer who "clears" a filing with that agency and fails to appreciate that such clearance doesn't mean the institution's equity or liquidity position is sound.

As U.S. public companies know, SEC "clearance" of a proxy or registration statement does not imply that the agency has judged the adequacy or accuracy or quality of the disclosures in those filings-much less the underlying safety and soundness of the institution itself. The SEC requires registrants to say so on the cover of their filings.

By contrast, the banking agencies make these assessments day in and day out. They routinely weigh and assess the capital, asset quality, management, equity, liquidity, and, more recently, risk profile of banking institutions. And they grade each institution on these factors. That's their job.

More to the point, perhaps, all federal banking agencies have developed expertise in reviewing proxy statements and offering documents by public banks-the Fed of state member banks, the OCC of national banks, and the FDIC of state nonmembers. And each does so by following the very rules laid down by the "experts" at the SEC. (Curiously, had SunTrust and Crestar been national banks only, with a host of operating subsidiaries instead of bank holding companies, the SEC would have had no jurisdiction over their merger.)

Does the SEC really believe that when it comes to bank holding companies it knows better than the banking agencies? The issue is not, as the SEC would have us believe, one of "earnings management." The financial statements of banks and their holding companies, reserves included, are published for all to see. Shareholders, both existing and prospective, can and do vote in the marketplace with their wallets.

The real issue is one of "earned management" - whether the SEC has earned the right to manage the business transactions of an industry about which it does not and cannot have the expertise and insight of the primary regulators of that industry.

The banking industry is justified in its concerns about the hostage- taking by the SEC in the SunTrust filing. It is justified to feel whipsawed between the bank regulators and the SEC. And it would be justified in seeking reform legislation to eliminate this additional example of burdensome regulation when Congress returns next session.

Editor's note: The SEC was invited to respond to Mr. Byrne's comments but declined. Mr. Byrne is chairman of the financial institutions practice in the LeClair Ryan law firm of Richmond, Va., and was general counsel of the Federal Deposit Insurance Corp. during the Bush administration.

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