Yesterday, the SEC announced a $361 million settlement with Barclays for an unprecedented over-issue that is every security lawyer’s nightmare:
The SEC’s order states that, following a settled Commission action against a BBPLC affiliate in May 2017, BBPLC lost its status as a well-known seasoned issuer (WKSI). As a result, BBPLC had to quantify the total number of securities that it anticipated offering and selling and pay registration fees for those offerings upon the filing of a new registration statement.
The SEC’s order notes that, given this requirement, BBPLC personnel understood that the firm needed to track actual offers and sales of securities against the amount of registered offers and sales on a real-time basis; yet, no internal control was established for this purpose. According to the SEC’s order, as a result of this failure, BBPLC offered and sold approximately $17.7 billion of securities in unregistered transactions.
As the SEC’s order states, BBPLC self-reported its over-issuances to regulators, provided meaningful cooperation during the SEC staff’s investigation, and subsequently commenced a rescission offer.
This all relates to notes and corporate debt offerings that the bank attempted to conduct via a shelf registration statement. Barclays announced the over-issue back in March. Since the securities weren’t registered, they had to offer to buy them back at the price they were sold for — which the bank estimated would lead to a $600 million loss. The rescission offer expired earlier this month. With this settlement, Barclays is paying another $200 million in civil penalties on top of the money it lost (plus disgorgement and prejudgment interest that are deemed satisfied by the rescission).
The order says that Barclays established a multi-person working group when it lost WKSI status. That group talked about calculating the total amount of securities that the business expected to offer and sell, in order to pay registration fees in advance. They also talked about the need to track actual offers and sales. But they didn’t create any process or assign responsibility for that task. The SEC’s order describes what must have been a rough week:
On March 8, 2022, a member of Group Treasury reached out to the member of the legal department who had been part of the Working Group, inquiring as to how many securities remained available to be offered and sold off of the 2019 Shelf because Group Treasury was planning on doing a sale of corporate debt securities.
Over the course of that day and the next, various BBPLC personnel attempted to calculate the cumulative amount of securities offered and sold from the 2019 Shelf in order to determine the amount of securities that remained available for sale. Over the course of these efforts, it became clear to all involved that there was no internal control in place to track in real time the amount of securities offered and sold against the amount of securities registered.
On or around March 9, 2022, BBPLC personnel concluded that securities had been offered and sold in excess of what had been registered on the 2019 Shelf. Shortly thereafter, BBPLC halted new offers and sales of securities from the 2019 Shelf and, on March 14, 2022, alerted regulators about the over-issuance and disclosed to the market that BBPLC did not have sufficient issuance capacity to support further sales from inventory and any further issuances of certain ETNs.
Here are the new controls that Barclays is adopting as part of this settlement — which are a good benchmarking reference for other companies. Barclays has to internally audit these processes in a few months and submit a report to its audit committee and the SEC staff:
1. The centralization of oversight of BBPLC’s SEC-registered shelves in Group Treasury;
2. The maintenance of clear minimum control requirements for BBPLC’s SEC-registered shelves, including, but not limited to, a process for reviewing any change in WKSI status for BBPLC and the tracking of offers and sales off of BBPLC’s SEC-registered shelves as appropriate; and
3. The maintenance of a data repository, with appropriate controls and governance designed to ensure reliability of the data, for the purpose of tracking offers and sales, as appropriate, off of BBPLC’s SEC-registered shelves.
In the press release, the SEC cautions non-WKSIs to make sure to have internal controls to track registration statement capacity after each takedown. That’s good advice! Check out our “Form S-3 Handbook” for how exactly to do it. I do wonder, will the Staff be tracking this more? That would be a lot of work. The release here urges self-reporting if you discover unregistered sales. Hopefully you catch it before getting to $18 billion.
— Liz Dunshee, TheCorporateCounsel.net, September 30, 2022