12/15/2011
On November 22, 2011, the Securities and Exchange Commission (SEC) announced a settlement with Fifth Third Bancorp (Fifth Third) concerning violations of Regulation FD. The SEC found that Fifth Third selectively disclosed material information regarding its securities to a select group of investors.
In May 2008, Fifth Third along with its subsidiary, Fifth Third Capital Trust VII, issued approximately $400 million of redeemable trust preferred securities. The securities were redeemable by Fifth Third at $25 per share in May 2013 or earlier in the case of a “capital treatment event” as defined in the definitive documents. The definitive documents provided that upon a “capital treatment event,” Fifth Third could redeem securities after obtaining approval from the Federal Reserve Bank of Cleveland and instructing the trustee to notify the security holders at least 30 days before the redemption date. Under the definitive documents, the trustee was only required to give notice to the registered holder of the securities, the Depository Trust Company (DTC).
In April 2011, after determining that a “capital treatment event” had occurred, Fifth Third obtained the Federal Reserve Bank of Cleveland’s consent to redeem the securities and instructed the trustee to redeem the securities. The trustee notified DTC, which subsequently posted notice of the redemption on its Legal Notification System on May 17, 2011, at which time the securities were trading at $26.50. On May 18th, over 2,000,000 shares were traded within a two hour period as compared with under 38,000 shares for each of the two previous days. The spike in volume suggests that investors with knowledge of redemption were selling to investors without such knowledge. Fifth Third filed an 8-K after it realized that its selective disclosure may have had an impact on the market for its shares.
The SEC found that Fifth Third violated Regulation FD when it selectively disclosed the redemption to certain investors. Regulation FD prohibits issuers from selectively disclosing material, nonpublic information to securities market professionals or security holders who may trade on the basis of the information. The Adopting Release for Regulation FD cautions issuers to consider and carefully review information that may be material to investors, including “events regarding the issuer’s securities—e.g., defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, public or private sales of additional securities….”
This should serve as a reminder to companies that they should evaluate the materiality of information that is being disclosed as well as the path along which material information may be disseminated to the market.
For more information on this alert, contact Jack Bowling or any of our Corporate Finance attorneys.