Recent SEC Regulation FD Enforcement Action Relevant to Redemptions


In November 2011, the U.S. Securities and Exchange Commission (SEC) issued a cease-and-desist order against Fifth Third Bancorp in connection with its redemption of a class of its trust preferred securities. While these securities and the circumstances of their redemption are unusual, this order is relevant to any company that plans to redeem any of its publicly held securities, such as utility or other energy companies that commonly have redeemable debt securities or preferred stock outstanding.

According to the order, the facts were simple. The securities in question were redeemable at the option of Fifth Third if a “capital treatment event” occurred. In April 2011, Fifth Third determined that a “capital treatment event” had occurred as a result of the Dodd-Frank Act and sought approval of the redemption from the Federal Reserve of Cleveland pursuant to federal banking regulations. The redemption was approved on Friday, May 13, 2011. On Monday, May 16, Fifth Third gave redemption instructions to the trustee, who sent a redemption notice to The Depository Trust Company (DTC) with a redemption price of $25.18. DTC posted the redemption notice on its Legal Notification System (LENS) at 2:47 a.m. on May 17. Despite DTC’s posting early on May 17, many of the investors in the trust preferred securities did not learn of the redemption until after the close of trading on May 17 or before the opening of trading on May 18. On May 16 and 17, the securities traded between $26.49 and $26.68 per security. On May 18, the securities opened at $26.66, and the volume in trading increased substantially (more than two million securities were traded in less than two hours). By 10 a.m. on May 18, Fifth Third noticed the unusually heavy trading and filed a Form 8-K shortly thereafter disclosing the redemption, which was posted to the SEC’s EDGAR system at 11:28 a.m. The securities closed that day at $25.20 per security.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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