Banks fear SEC rule may limit access to capital markets

• Key takeaway: Banking trade groups are urging the Securities and Exchange Commission not to change Form S-3 eligibility rules, arguing that the proposed restrictions would disproportionately harm banks versus other publicly reporting companies.
• Expert quote: "The proposed expansion and escalation of the consequences associated with 'ineligible issuer' status would introduce a significantly more severe restriction on capital markets access that is not necessary to achieve the SEC's investor-protection objectives." — Joint comment letter from ABA and BPI
• What's at stake: Banking groups argue that banks' extensive regulatory oversight makes them more likely to face actions that could trigger "ineligible issuer" status. If adopted, the proposal could make it harder for affected banks to access funding by limiting their ability to use Form S-3.

WASHINGTON — The Securities and Exchange Commission wants to make it easier for public companies to raise capital, but banking industry groups say one provision of the agency's proposal would have the opposite effect for some banks.

In a comment letter filed July 27, the American Bankers Association and the Bank Policy Institute said they support the SEC's broader effort to reform the process for establishing a "registered offering." However, they argued that the proposal's changes to Form S-3 eligibility would make it more difficult for certain bank holding companies to access the public capital markets.

Specifically, the groups objected to the proposal's elimination of Form S-3 eligibility for certain "ineligible issuers." They argued the change would disproportionately affect banks because they are among the most frequent users of Form S-3 shelf registrations to raise capital and, as one of the most heavily regulated industries, are more likely to be subject to the types of enforcement or regulatory actions that can trigger "ineligible issuer" status.

"They are also extensively regulated at both the issuer and subsidiary levels," the trade groups wrote in their letter. "The proposed expansion and escalation of the consequences associated with 'ineligible issuer' status would introduce a significantly more severe restriction on capital markets access that is not necessary to achieve the SEC's investor-protection objectives and that is not appropriately calibrated to the underlying conduct."

The S-3 shelf registration is a way for eligible public companies to register securities with the SEC in advance and then sell them later to investors when they need to raise capital.

The groups said banks rely on shelf registrations to obtain funding on short notice, including to refinance maturing obligations, meet regulatory expectations and respond to changing market conditions. That flexibility becomes especially important during periods of market stress, when access to the capital markets may be available only for a limited time, they said. 

The Securities Industry and Financial Markets Association, or SIFMA, also submitted a letter echoing similar concerns.

In its July 27 letter, SIFMA urged the SEC to retain the existing Form S-3 eligibility framework, arguing that disqualifying certain "ineligible issuers" would impose unnecessary restrictions on companies that have long relied on the current rules. 

"The offering reform proposal does not identify any specific investor protection concern relating to 'ineligible issuers' that are currently eligible to use Form S‑3 that would justify imposing additional restrictions on their continued use of Form S‑3," SIFMA wrote.

Whether the agency is considering making changes to the proposal remains unclear. The SEC declined to comment Thursday.

The offering reform proposal is one of several initiatives the SEC has advanced over the past year to encourage companies to access and remain in the public markets. SEC Chairman Paul Atkins has said this is a priority for the agency.

Another proposal would allow public companies, including banks, to choose between quarterly financial reporting and a semiannual reporting schedule. 

That idea has drawn mixed reactions. Many investors argue that quarterly reporting should remain mandatory to preserve transparency, though some business groups representing public companies say reducing reporting requirements would ease compliance costs and regulatory burdens.  

If the proposal is finalized, the largest banks are expected to continue reporting quarterly to avoid potential stigma associated with moving to semiannual reporting, while smaller institutions facing greater burdens from compliance costs may be more likely to opt in.