SEC and FASB Issue Comfort Letter on Warrants Issued under Treasury Capital Purchase Program

The SEC and FASB have issued what is essentially a no-action letter on warrant accounting under the Treasury’s program to purchase securities from troubled financial institutions under the Emergency Economic Stabilization Act. The letter, which was requested by David G. Nason, Assistant Secretary for Financial Institutions, was signed by SEC Deputy Chief Accountant James Kroeker.

The Capital Purchase Program was designed to encourage U.S. financial institutions to build capital to increase the flow of financing to businesses and consumers. Under the program, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms. Treasury will not only own shares, but also will receive warrants for common shares in participating institutions.

The SEC staff and FASB staff have analyzed the terms and conditions of the warrants for common stock under the program and would not object if the warrants, as defined in the Treasury documents, were to be classified as permanent equity under applicable U.S. GAAP, provided that the issuer of the warrants has sufficient authorized but unissued shares of the class of stock that may be required upon settlement and any other necessary shareholder approvals have been obtained.

If an issuer does not have required shareholder approval, including shareholder approval for sufficient authorized but unissued shares of the class of stock that may be required for settlement, the SEC would also not object to classification of such warrants as permanent equity provided that the issuer takes the necessary action to secure sufficient approvals prior to the end of the fiscal quarter in which the warrants are issued.

The SEC and FASB emphasized that their positions solely apply to the warrants described in the Capital Purchase Program and are based solely on staff review of the documents provided by Treasury and analysis of applicable U.S. GAAP that has been issued as of the date of the letter.