[Federal Register Volume 83, Number 19 (Monday, January 29, 2018)]
[Notices]
[Pages 4083-4086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01531]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82575; File No. TP 18-08]


Order Granting Limited Exemptions From Rules 101 and 102 of 
Regulation M in Connection With Distributions of AT1 Contingent 
Convertible Securities Pursuant to Rules 101(d) and 102(e) of 
Regulation M

January 23, 2018.
    By letter dated January 23, 2018, counsel from Sullivan & Cromwell 
LLP and Davis Polk & Wardell LLP (collectively, the ``Applicants''),\1\ 
requested that the staff of the Division of Trading and Markets grant, 
on behalf of certain European financial institutions (each, an 
``Issuer''), conditional class exemptive or no-action relief from Rules 
101 and 102 of Regulation M under the Securities Exchange Act of 1934, 
as amended (the ``Exchange Act''), to permit certain transactions in 
ordinary shares underlying the contingent convertible debt securities 
qualifying as additional tier 1 capital (``AT1 Contingent Convertible 
Securities''), including ordinary shares represented by American 
depositary shares (collectively, ``Shares''), by Issuers and affiliated 
purchasers, including those acting as distribution participants, during 
a distribution of such AT1 Contingent Convertible Securities.\2\
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    \1\ Letter from John O'Connor, Sullivan & Cromwell LLP, and John 
Banes, Davis Polk & Wardell LLP, to Josephine J. Tao, Assistant 
Dir., Office of Derivatives Policy & Trading Practices, Div. of 
Trading & Mkts., SEC (Jan. 23, 2018) (the ``Request Letter''). 
    \2\ The requested relief is solely to permit transactions in 
Shares during a distribution of an Issuer's AT1 Contingent 
Convertible Securities (i.e., the Request Letter does not seek 
relief with respect to transactions in the AT1 Contingent 
Convertible Securities themselves). For purposes of this relief, the 
terms ``affiliated purchasers'' and ``distribution participants'' 
shall have the same meaning as defined in Rule 100(b) of Regulation 
M. See 17 CFR 242.100(b).
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AT1 Contingent Convertible Securities

    Over the last several years, a number of European financial 
institutions have issued various series of AT1 Contingent Convertible 
Securities that are designed to qualify as additional tier 1 capital 
(``AT1 Capital'') that can be counted by a financial institution 
towards the capital requirements mandated by European regulators.\3\
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    \3\ Applicants represent in the Request Letter that the 
qualification requirements/features for AT1 Contingent Convertible 
Securities that qualify as AT1 Capital are set forth in the European 
Union's Capital Requirements Directive IV and related Capital 
Requirements Regulation (collectively, the ``CRD IV''), which were 
issued in response to the new global regulatory frameworks on bank 
capital adequacy and liquidity adopted by the Basel Committee on 
Banking Supervision in December 2010 (generally known as ``Basel 
III''). Applicants represent that the purpose of AT1 Capital is to 
absorb future losses through conversion to common equity (or write-
down) so as to allow a financial institution to maintain sufficient 
Common Equity Tier 1 Capital to continue as a going concern. In 
addition, the basic equity-related-structure of AT1 Contingent 
Convertible Securities that qualify as AT1 Capital under CRD IV is 
summarized in the Request Letter.
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    Applicants represent in the Request Letter that the AT1 Contingent 
Convertible Securities to be offered are fundamentally fixed-income 
debt securities that are priced and traded by investors as such.\4\ 
Applicants also represent in the Request Letter that, unlike 
traditional convertible debt instruments, the AT1 Contingent 
Convertible Securities to be offered automatically convert into Shares 
only upon the occurrence of a remote, capital adequacy-related trigger 
event that is set forth in the terms of the relevant AT1 Contingent 
Convertible Security.
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    \4\ Applicants also represent that Issuers have previously 
indicated that they expect AT1 Contingent Convertible Securities to 
price and trade more like traditional fixed-income debt instruments 
than conventional convertible instruments (i.e., that investors in 
AT1 Contingent Convertible Securities are generally focused on 
receiving interest payments during the life of the AT1 Contingent 
Convertible Securities rather than any potential equity upside in 
the unlikely event of a conversion into Shares), citing to prior 
requests for relief from Rules 101 and 102 of Regulation M in 
connection with offerings of AT1 Contingent Convertible Securities: 
Letter from Josephine J. Tao, Assistant Dir., Office of Derivatives 
Policy & Trading Practices, Div. of Trading & Mkts., SEC, to Mark J. 
Welshimer, Sullivan & Cromwell LLP (Apr. 7, 2015) (ING Groep N.V.); 
Letter from Josephine J. Tao, Assistant Dir., Office of Derivatives 
Policy & Trading Practices, Div. of Trading & Mkts., SEC, to John 
Banes, Davis Polk & Wardwell London LLP (Mar. 6, 2014) (Lloyds 
Banking Group); Letter from Josephine J. Tao, Assistant Dir., Office 
of Derivatives Policy & Trading Practices, Div. of Trading & Mkts., 
SEC, to George H. White, Sullivan & Cromwell LLP (Nov. 7, 2013) 
(Barclays PLC); Letter From Josephine J. Tao, Assistant Dir., Office 
of Derivatives Policy & Trading Practices, Div. of Trading & Mkts., 
SEC, to Michael J. Willisch, Davis Polk & Wardwell Spain LLP (Nov. 
3, 2017) (Banco Bilbao Vizcaya Argentaria, S.A.).
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    Specifically, Applicants represent, among other things, the 
following:
     Relief is requested only with respect to AT1 Contingent 
Convertible Securities that automatically and mandatorily convert into 
Shares if the Issuer's Common Equity Tier 1 Capital Ratio (as 
calculated in accordance with CRD IV) falls below a pre-determined 
trigger level of 7.0% or lower; \5\
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    \5\ Applicants represent that guidance from the UK Prudential 
Regulation Authority will generally result in a 7.0% trigger level 
for AT1 Contingent Convertible Securities issued by UK financial 
institutions, which is intended to ensure that only instruments that 
will reliably absorb losses while a firm is still a going concern 
can count towards the leverage ratio under CRD IV. Applicants 
represent that the applicable 7.0% threshold is equivalent to the 
sum of the basic 4.5% minimum for Common Equity Tier 1 Capital under 
CRD IV and the additional 2.5% capital conservation buffer that is 
also required to be satisfied with Common Equity Tier 1 Capital 
under CRD IV.
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     A Common Equity Tier 1 Capital Ratio below 7.0% is 
effectively a sign of distress, and conversion of AT1 Contingent 
Convertible Securities with a trigger level of 7.0% or lower is 
unlikely to occur as a result of actions within an Issuer's control;
     Because of the perceived severity of the regulatory 
sanctions that would otherwise apply to an Issuer who allows its Common 
Equity Tier 1 Capital Ratio to fall below its Combined Buffer 
Requirement,\6\ Issuers have a strong

[[Page 4084]]

incentive to maintain capital levels, and investors expect such Issuers 
to maintain capital levels, well in excess of the pre-determined 
trigger level; \7\
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    \6\ In addition to the basic 4.5% minimum Common Equity Tier 1 
Capital Ratio under CRD IV, there is a Combined Buffer Requirement 
applicable to any institution that is incremental to the minimum 
requirement and is composed of (1) in all cases, an additional 2.5% 
capital conservation buffer (with the consequence that the sum of 
the basic minimum and the Combined Buffer Requirement is never less 
than 7.0%), and (2) at least three other potential buffers--namely, 
(i) an institution-specific counter-cyclical capital buffer (which 
may be disapplied by member states to small and medium-sized 
institutions), (ii) a member state-specific systemic risk buffer, 
and (iii) any applicable systemically important institution buffers.
    \7\ Applicants represent that the CRD IV regulatory sanctions 
include automatic limitations on distributions (such as the ability 
to pay dividends) and compensation that create significant 
disincentives for an Issuer to allow its Common Equity Tier I 
Capital Ratio to fall below the applicable Combined Buffer 
Requirement.
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     Because the risk of regulatory capital falling below the 
pre-determined trigger level is considered remote at the time of the 
issuance, the price of the Shares is not expected to have a significant 
impact on pricing or market demand for AT1 Contingent Convertible 
Securities at the time of issuance;
     Because AT1 Contingent Convertible Securities would 
convert only if Common Equity Tier 1 Capital fell below the pre-
determined trigger level of at least 7.0%, which would, effectively, 
indicate distress of the Issuer, investors do not purchase AT1 
Contingent Convertible Securities in the initial distribution of AT1 
Contingent Convertible Securities to have the possibility of acquiring 
Shares in a conversion or to increase their exposure to the Issuer's 
common equity (i.e., investors, instead, are focused primarily on 
receiving interest payments during the life of the AT1 Contingent 
Convertible Securities);
     Accordingly, trading activity in the Shares at or around 
the time of distribution is unlikely to influence the pricing or 
trading of the AT1 Contingent Convertible Securities that would be in 
distribution.

I. Rules 101 and 102 of Regulation M

    Rule 101 of Regulation M is an anti-manipulation rule that, subject 
to certain exceptions, prohibits any ``distribution participant'' 
(i.e., underwriters, brokers, dealers, or other persons who have agreed 
to participate or are participating in a distribution of securities) 
and its ``affiliated purchasers'' from bidding for, purchasing, or 
attempting to induce any person to bid for or purchase, any security 
that is the subject of a distribution until after the applicable 
restricted period, except as specifically permitted in the Rule. Rule 
102 of Regulation M includes the same prohibitions but applies to 
issuers, selling security holders, and any of their affiliated 
purchasers.
    Regulation M applies to activities in both the securities in 
distribution (i.e., activities in the ``subject securities'') and any 
``reference securities,'' such as common stock underlying an 
exercisable, exchangeable, or convertible security that is being 
distributed.\8\ Accordingly, the Issuer's Shares may be deemed to be 
``reference securities'' in relation to the AT1 Contingent Convertible 
Securities. Thus, Regulation M would prohibit Issuers and any 
affiliated purchasers from making any bids for, purchases of, or 
attempts to induce any other person to bid for or purchase the Shares 
during an applicable restricted period in connection with a 
distribution of the Issuer's AT1 Contingent Convertible Securities.
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    \8\ See Anti-Manipulation Rules Concerning Securities Offerings, 
Exchange Act Rel. No. 38067 (Dec. 20, 1996), 62 FR 520 (Jan. 3, 
1997) (stating that transactions in ``reference securities'' can 
have a direct and substantial effect on the pricing and terms of the 
security in distribution).
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Discussion

    Based on the representations and facts presented in the Request 
Letter--particularly, that a distribution of AT1 Contingent Convertible 
Securities that satisfies the conditions set forth in the Request 
Letter, as well as below, does not raise the concerns at which 
Regulation M is directed and that any bids for, purchases of, or 
attempts to induce any other person to bid for or purchase of the 
Shares by Issuers or affiliated purchasers during an applicable 
restricted period in connection with a distribution of the Issuer's AT1 
Contingent Convertible Securities would be unlikely, except in unusual 
circumstances, to affect the pricing or trading of the AT1 Contingent 
Convertible Securities \9\--the U.S. Securities and Exchange Commission 
(the ``Commission'') finds that it is appropriate in the public 
interest and consistent with the protection of investors to grant class 
exemptive relief from the requirements of Rule 101 and Rule 102, under 
paragraph (d) of Rule 101 and paragraph (e) of Rule 102 of Regulation 
M, respectively, in connection with distributions of AT1 Contingent 
Convertible Securities that satisfy the conditions set forth below to 
permit transactions involving Shares by an Issuer and its affiliated 
purchasers (including those acting as distribution participants) during 
a distribution of such AT1 Contingent Convertible Securities.\10\
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    \9\ In particular, that AT1 Contingent Convertible Securities do 
not convert to equity unless the Issuer's regulatory capital falls 
below a pre-determined trigger level, and that the price of and 
trading activity in Shares at or around the time of a distribution 
is not expected to influence or have a significant impact on pricing 
or market demand for the AT1 Contingent Convertible Securities at 
the time of issuance.
    \10\ Consistent with the limited scope of relief sought in the 
Request Letter, the relief granted herein, however, does not extend 
to transactions in the AT1 Contingent Convertible Securities 
themselves. Transactions in the AT1 Contingent Convertible 
Securities that are being distributed would need to comply with the 
requirements of Regulation M and/or qualify for one of the 
exceptions provided under Regulation M.
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    Consistent with the limited scope of relief sought in the Request 
Letter, this relief is limited to distributions of AT1 Contingent 
Convertible Securities by or on behalf of a ``foreign private issuer'' 
(within the meaning of Rule 3b-4 under the Exchange Act) and where the 
``principal market'' (as such term is defined in Rule 100 of Regulation 
M) of the underlying Shares is outside of the United States. This 
condition narrowly tailors the relief's application to Issuers who 
engage in distributions of the AT1 Contingent Convertible Securities 
that are the subject of this relief and ensures that the Issuers of 
such securities are subject to the information reporting requirements 
of the Exchange Act. Limiting the scope of the relief in this way 
should help to reduce the potential risk of transactions in Shares that 
could adversely affect U.S. markets during a distribution of a non-U.S. 
Issuer's AT1 Contingent Convertible Securities.
    This relief is also limited to distributions of AT1 Contingent 
Convertible Securities that automatically and mandatorily convert into 
Shares if an Issuer's Common Equity Tier 1 Capital Ratio (as calculated 
in accordance with CRD IV) falls below a predetermined trigger level of 
7.0% or lower. Applicants represent in the Request Letter that a Common 
Equity Tier 1 Capital Ratio below 7.0% is considered, under guidance 
from the UK Prudential Regulation Authority, to be effectively a sign 
of distress, and conversion of AT1 Contingent Convertible Securities 
with a trigger level of 7.0% or lower is unlikely to occur as a result 
of actions within an Issuer's control. As such, this condition is 
intended to further ensure the remoteness of any possibility of 
conversion of the AT1 Contingent Convertible Securities, thus also 
decreasing the likelihood of any trading activity in Shares during such 
distributions affecting the pricing or demand for the AT1 Contingent 
Convertible Securities being distributed.
    This relief also requires that, as of the date of the most recent 
calculation required to be reported to the relevant

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supervising authority under applicable regulatory capital rules prior 
to the distribution of the AT1 Contingent Convertible Securities, the 
Issuer's Common Equity Tier 1 Capital Ratio must exceed the applicable 
Combined Buffer Requirement.\11\ This condition, which conforms to 
applicable regulatory capital rules, is intended to ensure that the 
Issuer maintains capital levels that are sufficiently above the pre-
determined trigger level at the time of distribution of the AT1 
Contingent Convertible Securities.\12\ Accordingly, this condition 
helps to ensure the remoteness of any possibility of conversion of the 
AT1 Contingent Convertible Securities and, thus, to decrease the 
likelihood of any trading activity in Shares during such distributions 
affecting the pricing or demand for the AT1 Contingent Convertible 
Securities being distributed.
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    \11\ See supra note 6.
    \12\ As mentioned above, because of the perceived severity of 
regulatory sanctions that would apply to an Issuer that allows its 
Common Equity Tier I Capital Ratio to decline below the applicable 
Combined Buffer Requirement, it is expected that Issuers will 
maintain capital levels well in excess of the predetermined trigger 
level.
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    In addition, this relief applies only to AT1 Contingent Convertible 
Securities in distribution that do not include any right of the Issuer 
or holders to convert the AT1 Contingent Convertible Securities into 
Shares at their option. This condition is intended to help to ensure 
the remoteness of any possibility of conversion of the AT1 Contingent 
Convertible Securities and, thus, to decrease the likelihood of trading 
activity in Shares affecting the pricing or demand for the AT1 
Contingent Convertible Securities in distribution.
    This relief also requires that any transactions in Shares by an 
Issuer or any of its affiliated purchasers must be effected in the 
ordinary course of business and not to facilitate the distribution of 
the AT1 Contingent Convertible Securities. This condition should help 
to ensure that transactions in Shares are more customer-driven rather 
than driven by market activities that could potentially be used to 
artificially facilitate the distribution of the AT1 Contingent 
Convertible Securities or unduly impact the pricing of or demand for 
the AT1 Contingent Convertible Securities in distribution.
    To ensure adequate transparency to potential U.S. investors in the 
offering, this relief also requires that any prospectus or other 
offering document that is distributed to U.S. investors in connection 
with the offering of the AT1 Contingent Convertible Securities must 
disclose the possibility of, or the intention to engage in, 
transactions in Shares by an Issuer or its affiliated purchasers.
    This relief is also limited to Shares that qualify for the 
actively-traded securities exception under Rule 101(c)(1) of Regulation 
M because such securities are viewed by the Commission to be less 
susceptible to manipulation. This limitation should also help to reduce 
the impact of any attempt to artificially influence the price of the 
AT1 Contingent Convertible Securities that are being distributed by 
engaging in transactions in the Shares at or around the time of a 
distribution.

II. Conclusion

    It is hereby ordered, pursuant to Rule 101(d) and Rule 102(e) of 
Regulation M, that, based on the representations and facts presented in 
the Request Letter, class exemptive relief from the requirements of 
Rules 101 and Rule 102, respectively, is granted in connection with 
distributions of AT1 Contingent Convertible Securities that satisfy the 
conditions set forth below to permit transactions involving Shares by 
an Issuer and its affiliated purchasers (including affiliated 
purchasers who may be deemed to be participating in a distribution of 
such Issuer's ATI Contingent Convertible Securities) during a 
distribution of such AT1 Contingent Convertible Securities, as 
described in the Request Letter and herein, subject to the following 
conditions:
    (1) The Issuer of the AT1 Contingent Convertible Securities must be 
a foreign private issuer (within the meaning of Rule 3b-4 under the 
Exchange Act);
    (2) The principal market (within the meaning of Rule 100 of 
Regulation M) of Shares must be outside of the United States;
    (3) The AT1 Contingent Convertible Securities in distribution must 
only automatically and mandatorily convert into the Issuer's Shares if 
the Issuer's Common Equity Tier 1 Capital Ratio (as calculated in 
accordance with CRD IV) falls below a pre-determined trigger level of 
7.0% or lower;
    (4) As of the date of the most recent calculation that is required 
to be reported to the relevant supervising authority under applicable 
regulatory capital rules prior to the distribution of the AT1 
Contingent Convertible Securities, the Issuer's Common Equity Tier 1 
Capital Ratio must exceed the applicable Combined Buffer Requirement;
    (5) The AT1 Contingent Convertible Securities in distribution must 
not include any right of the Issuer or holders to convert the AT1 
Contingent Convertible Securities into Shares at their option;
    (6) Any transactions in Shares by the Issuer or any of its 
affiliated purchasers must be effected in the ordinary course of 
business and not for the purpose of facilitating the distribution of 
the AT1 Contingent Convertible Securities;
    (7) Any prospectus or other offering document that is distributed 
to U.S. investors in connection with the offering of the AT1 Contingent 
Convertible Securities must disclose the possibility of, or the 
intention to engage in, transactions in Shares by the Issuer or its 
affiliated purchasers;
    (8) Shares must have an ADTV (within the meaning of Rule 100 of 
Regulation M) value of at least $1 million during the two full calendar 
months immediately preceding, or any consecutive 60 calendar days 
ending within the 10 calendar days preceding, the determination of the 
offering price, and Shares must be issued by an Issuer whose common 
equity securities have a public float value (within the meaning of Rule 
100 of Regulation M) of at least $150 million; and
    (9) Except as otherwise exempted herein, the issuance of the AT1 
Contingent Convertible Securities shall remain subject to the 
provisions of Regulation M.
    In the event that any material change occurs in the facts or 
representations in the Request Letter, the Applicants shall promptly 
present for consideration the facts to staff in the Division of Trading 
and Markets. This exemption is subject to modification or revocation at 
any time the Commission determines that such action is necessary or 
appropriate in furtherance of the purposes of the Exchange Act. In 
addition, persons relying on this limited exemption are directed to the 
anti-fraud and anti-manipulation provisions of the Exchange Act, 
particularly Sections 9(a) and 10(b), and Rule 10b-5 thereunder. 
Responsibility for compliance with these and any other applicable 
provisions of the federal securities laws must rest with the persons 
relying on this exemption.
    This Order should not be considered a view with respect to any 
other question that the proposed transactions may raise, including, but 
not limited to the adequacy of the disclosure concerning, and the 
applicability of other federal or state laws to, the proposed 
transactions.


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Brent J. Fields,
Secretary.
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    \13\ 17 CFR 200.30-3(a)(6) and (9).
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[FR Doc. 2018-01531 Filed 1-26-18; 8:45 am]
 BILLING CODE 8011-01-P


