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Financial Institution Letters


[Federal Register: September 5, 1996 (Volume 61, Number 173)]
[Notices]               
[Page 46807-46809]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]

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FEDERAL DEPOSIT INSURANCE CORPORATION

 
Statement of Policy on the Use of Offering Circulars

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Revision of Statement of Policy.

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SUMMARY: The FDIC is revising its Statement of Policy Regarding Use of 
Offering Circulars in Connection with Public Distribution of Bank 
Securities. The revision updates the informational standards for the 
public distribution of bank securities by insured state nonmember 
banks, clarifies the meaning of certain standards, and provides 
references for bank management and counsel for mutual-to-stock 
conversions, public distribution of securities and private placements. 
The FDIC Board of Directors believes that the statement of policy 
enhances public confidence in the banking system by providing for full 
disclosure in offering circulars.

EFFECTIVE DATE: September 5, 1996.

FOR FURTHER INFORMATION CONTACT: Lawrence H. Pierce, Section Chief, 
(202/898-8902) or Mary S. Frank, Senior Financial Analyst, (202/898-
8903), Division of Supervision; Gerald Gervino, Senior Attorney, (202/
898-3723), Legal Division.

SUPPLEMENTARY INFORMATION:

I. Current Statement

    The current statement of policy was adopted by the FDIC's Board of 
Directors in July 1979. The policy discusses the antifraud provisions 
of the securities laws and contains a brief statement of the 
information that should be furnished when a state nonmember bank offers 
and sells equity or debt securities in a public offering.

II. Need for Revision

    The offer and sale of securities issued by financial institutions 
are subject to the antifraud provisions of the federal securities laws. 
These antifraud provisions presume certain common disclosure standards 
on the banking industry. The standards and needs of the industry have 
evolved in the 17 years since the FDIC Board of Directors issued the 
initial statement of policy. These revisions represent an update and 
clarification of the standards delineated in the initial statement of 
policy and are expected to enhance capital formation.

III. Modifications

    The primary changes to the original statement of policy pertain to 
mutual-to-stock conversions and sales of the bank's securities on bank 
premises. The revisions reflect the FDIC's expanded review 
responsibility with respect to mutual-to-stock conversions and also the 
need to enhance disclosures in response to changes in the securities 
markets.
    Other areas of change pertain to limitations on advertising 
activity, minimum requirements for subscription order forms, and 
references to regulations of the Office of Thrift Supervision and the 
Securities Exchange Commission in particular circumstances. The 
statement of policy no longer refers to the Securities Offering 
Disclosure Rules (12 CFR part 16) of the Comptroller of the Currency 
because part 16 has been cross-referenced to the regulations of the 
Securities and Exchange Commission since April 1995. The list of 
essential items of disclosure is also revised.
    Additional guidance in the areas of disclosure and advertising, 
suitability and sales practices, as well as setting and circumstances 
relating to sales activities on the premises of a depository 
institution is provided by the ``Interagency Statement on Retail Sales 
of Nondeposit Investment Products''. Portions of that statement may be 
applicable when a bank sells or distributes securities as part of the 
capital formation process.

IV. Approach

    The revised statement of policy does not impose a filing 
requirement, although the FDIC will continue to review offering 
circulars used in connection with mutual-to-stock conversions and 
deposit insurance applications. This approach provides flexibility to 
small banks and allows the banks to incorporate disclosure material 
prepared for other purposes, including state securities requirements, 
in offering circulars. The statement of policy allows for informal 
consultation with the staff in the Registration and Disclosure Section. 
This method of review has proven beneficial to small banks over the 
past few years.

V. The Statement of Policy

    The text of the statement of policy follows:

[[Page 46808]]

Statement of Policy Regarding Use of Offering Circulars in Connection 
With Public Distribution of Bank Securities

    This statement of policy concerns the use of offering circulars in 
connection with the public distribution of bank securities by insured 
state nonmember banks. The FDIC is issuing this statement in view of 
its statutory duties relating to capital adequacy, the safety and 
soundness of insured banks, and its review responsibilities with 
respect to mutual-to-stock conversions of FDIC-regulated financial 
institutions. The statement of policy also is intended to protect 
insured state nonmember banks against the risk of serious capital loss 
or litigation that could result if bank securities are sold in 
violation of the antifraud provisions of the federal securities 
laws.1
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    \1\  The FDIC recognizes the efforts of certain states in 
regulating the offering of securities by insured state nonmember 
banks and encourages the adoption of regulations and review 
procedures at the state level; however, because of a lack of 
uniformity among all states, FDIC considers the adoption of this 
statement of policy which will apply to all insured state nonmember 
banks appropriate.
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    The issuance of securities by banks is subject to the antifraud 
provisions of the federal securities laws which require full and 
adequate disclosure of material facts.2 It is the FDIC's goal to 
have banks comply with the antifraud provisions of the federal 
securities laws in a manner which meets the needs of investors, 
depositors and issuers. It is the responsibility of bank management and 
the promoters of a bank in organization to understand these 
requirements and utilize an offering circular in appropriate 
situations.3
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    \2\  Section 17(a) of the Securities Act of 1933 (15 U.S.C. 
77q(a)) and rule 10b-5 (17 CFR 240.10b-5) of the Securities Act of 
1933 (``SEC'') promulgated under section 10(b) of the Securitites 
Exchange Act of 1934 (15 U.S.C. 78j(b)).
    \3\  SEC rule 10b-5 (17 CFR 240.10b-5) makes it unlawful in 
connection with the offer or sale of a security: * * *
    (a) To employ any device, scheme, or artifice to defraud,
    (b) To make any untrue statement of a material fact or omit to 
state a material fact necessary in order to make the statements 
made, in the light of the circumstances under which they were made, 
not misleading, or
    (c) To engage in any act, practice, or course of business which 
operates or would operate as a fraud or deceit upon any person, in 
connection with the purchase or sale of any security.
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    In view of the FDIC's statutory duty to determine capital adequacy 
when passing upon an application for federal deposit insurance, the 
FDIC reviews whether public investors have been provided sufficient 
disclosure of material facts by an insured state nonmember bank in 
organization. The FDIC also reviews any offering circular used by a 
bank operating under an administrative order, or used in a mutual-to-
stock conversion as part of the application process.
    The FDIC believes that every insured state nonmember bank or bank 
in organization publicly offering its securities, including offerings 
under preemptive rights, should use an offering circular.
    (1) The offering circular should include the following statements 
in capital letters printed in boldfaced type:

    THESE SECURITIES ARE NOT DEPOSITS. THESE SECURITIES ARE NOT 
INSURED BY THE FDIC OR ANY OTHER AGENCY, AND ARE SUBJECT TO 
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
    THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE 
FEDERAL DEPOSIT INSURANCE CORPORATION NOR HAS THE FEDERAL DEPOSIT 
INSURANCE CORPORATION PASSED ON THE ADEQUACY OR ACCURACY OF THIS 
OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

    (2) The offering circular should indicate in capital letters and 
boldfaced type, if debt securities are offered:

    THESE OBLIGATIONS ARE SUBORDINATE TO THE CLAIMS OF DEPOSITORS 
AND OTHER CREDITORS AS MORE FULLY DESCRIBED IN THE OFFERING 
CIRCULAR.

    (3) The offering circular should identify the offeror and principal 
business address; state the title, number, aggregate dollar amount and 
per unit price of securities offered; describe the subscription rights 
and limitations, risk factors, business of the offeror, use of proceeds 
and capital structure, management and principal shareholders, 
compensation and business transactions, material features of the 
securities offered, dividend policy, the plan of distribution, and 
legal or administrative proceedings; provide selected financial data 
for each of the last five fiscal years and interim periods, and a 
management's discussion and analysis of the results of operation for at 
least the past two years and the interim periods; and present 
comparative financial statements, footnotes and schedules of the bank.
    The financial statements, footnotes and schedules for each fiscal 
year and interim period presented should be at least as inclusive as 
that required by the annual disclosure statement for insured state 
nonmember banks (12 CFR part 350). Banks that have an annual audit of 
financial statements by an independent public accountant, which the 
FDIC strongly encourages, should include the audited financial 
statements in the offering circular. Banks are encouraged to include an 
introductory ``plain English'' summary of the essential information 
contained in the offering circular, along with a profile of the terms 
of the offer and the telephone number of the principal executive office 
of the bank.
    Banks in organization should disclose the expected relationship 
that the institution will have with each promoter, organizer, proposed 
director and executive officer, including compensation, business 
transactions, and stock option or award plans. A balance sheet and 
statement of organizational and pre-operating expenses, a pro forma 
capitalization table and a business plan should be provided as of the 
latest practicable date for the bank in organization.
    (4) The offering circular should be accompanied by a subscription 
order form that states the maximum subscription price per share of 
capital stock, the maximum and minimum number of shares that may be 
purchased pursuant to subscription rights, the time period within which 
the subscription rights must be exercised, any withdrawal rights, any 
required method of payment, and the escrow arrangements. The 
subscription order form should provide specifically designated blank 
spaces for dating and signing. The order form should contain an 
acknowledgement by the subscriber that he or she received an offering 
circular prior to signing.
    Sales of securities issued by insured state nonmember banks should 
be conducted in a segregated area of the depository institutions' 
offices, whenever possible. Offers and sales should be conducted by 
authorized personnel, excluding tellers, in places where deposits are 
not ordinarily received. An insured depository institution should 
obtain a signed and dated certification from the purchaser confirming 
that the purchaser has read and understands the disclosures set out in 
paragraphs (1) and (2) above. The certification should contain a 
separate place where a purchaser should indicate, by initialing or by 
comparable method, that the purchaser is aware of the absence of 
deposit insurance covering the securities being sold.4
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    \4\ Sales of securities on bank premises are also subject to the 
guidance contained in the ``Interagency Statement on Retail Sales of 
Nondeposit Investment Products'' dated February 15, 1994.
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    Any written advertisement, letter, announcement, film, radio, or 
television broadcast which refers to a present or proposed public 
offering of securities covered by this Statement of Policy

[[Page 46809]]

should contain: (a) A statement that the announcement is neither an 
offer to sell nor a solicitation of an offer to buy any of the 
securities and that the offer may be made only by an offering circular, 
(b) the names and addresses of the bank and the lead underwriter, (c) 
the title of the security, the dollar amount and the number of 
securities being offered, and the per unit offering price to the 
public, (d) instructions for obtaining an offering circular and (e) a 
statement that the securities are neither insured nor approved by the 
FDIC.
    The FDIC uses the Office of Thrift Supervision's conversion 
regulations as a frame of reference in reviewing the form and content 
of offering circulars used in connection with mutual-to-stock 
conversions. Banks utilizing an offering circular in connection with a 
mutual-to-stock conversion should consult 12 CFR 563b.102 (Form OC--
Offering Circular).
    The disclosure goals of this statement of policy will be met if:
    (A) The offer and sale satisfy the information and disclosure 
requirements of SEC Regulation A--Conditional Small Issues Exemption 
(17 CFR part 230), or Regulation S-B (Small Business Issuers) (17 CFR 
part 228), or
    (B) The securities are offered and sold in a transaction that 
satisfies the requirements of SEC Regulation D (17 CFR 230.501-
230.506), relating to private offers and/or sales to accredited 
investors, or
    (C) The securities are offered and sold in a transaction that 
satisfies the informational requirements of SEC Rule 701(17 CFR 
230.701) for certain employee benefit plans, or
    (D) The securities are offered and sold in a transaction that 
satisfies the information and disclosure requirements of OTS's part 
563g--Securities Offerings (12 CFR 563g).
    Inasmuch as the statement of policy does not impose the burden of 
filing and awaiting regulatory approval, and allows for certain 
flexibility, the FDIC believes it will be beneficial to small banks.
    Banks or their legal counsel may contact the FDIC's Registration 
and Disclosure Section, Division of Supervision, for a copy of 
Suggested Form and Content for Offering Circular (Existing Bank) or 
Suggested Form and Content for Offering Circular (Bank in 
Organization). The address is Registration and Disclosure Section, 
Division of Supervision, 550 17th Street, N.W., Washington, D.C. 20429. 
(202) 898-8902.

    By order of the Board of Directors, dated at Washington, DC, 
this 13th day of August, 1996.

Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 96-22622 Filed 9-4-96; 8:45 am]
BILLING CODE 6714-01-P
Last Updated 07/17/1999 communications@fdic.gov