Smaller Banks Start Feeling the Heat From the SEC

First Republic Bank, Silicon Valley Bank and Signature Bank may have crashed months ago, but the fallout from their implosions continues to reverberate across the financial sector. Regulators are now examining potential links between the collapsed financial institutions and smaller banks across the country in hopes of identifying any effects still lingering over the banking sector.

Since the banks failed earlier this year, companies in a variety of sectors have started disclosing the potential consequences for their own health. But apparently not enough are taking the initiative for the Securities and Exchange Commission’s liking. The agency has zeroed in on banks with a maximum of $100 billion in assets, issuing requests for more information from some of their holding companies. Notably, the SEC has used companies’ registration statements to prompt the inquiries.

The Wall Street Journal reported earlier this month on the SEC’s fact-finding initiative. The WSJ noted that the commission identified San Diego-based Southern California Bancorp as one such bank in need of further disclosure. The company responded to the agency’s request with more details about its risk exposures and its oversight processes.

Apparently, the SEC has taken a keen interest in how banks are managing interest-rate risks. The topic came up in Southern California Bancorp’s revised disclosures, as well as additional filings from Colony Bank and BV Financial, according to the WSJ report.

Meanwhile, the SEC appears to be taking greater interest in executive compensation at banks. Specifically, are compensation incentives encouraging executives to sign off on overly risky moves by their institutions?

The Corporate Counsel blog has noted that the SEC’s Spring 2023 Reg Flex Agenda includes reference to a measure in the Dodd-Frank Act calling for regulatory agencies to create guidelines for incentive-based compensation that can be used by financial institutions with at least $1 billion in assets. The new rule would aim to eliminate practices that encourage “inappropriate risks by a financial institution by providing excessive compensation or that could lead to a material financial loss.”

The rulemaking project may ring a bell for longtime corporate-governance aficionados. In 2011, the SEC joined six other regulatory agencies in crafting proposed rules to put the Dodd-Frank measure, which is contained in Section 956 of the legislation, into effect. The proposed rules for Section 956 must have lost steam in the aftermath of the release because it took five years for them to resurface. Likewise, when the proposal came up again in 2016, it went nowhere.

Not surprisingly, financial services companies have pushed back on implementing regulations along the lines of what Section 956 would entail. After sitting on the shelf for seven years, this year’s run of bank failures may turn into the catalyst to move the proposal forward.


The Intelligize blog is on hiatus for the Independence Day holiday and will return on Thursday, July 6, 2023

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