Fifth Third Bank 2010 Annual Report Download - page 135

Fifth Third Bancorp 133
implemented a privacy policy. The Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (the “Patriot Act”),
designed to deny terrorists and others the ability to obtain
access to the United States financial system, has significant
implications for depository institutions, brokers, dealers and
other businesses involved in the transfer of money. The Patriot
Act, as implemented by various federal regulatory agencies,
requires financial institutions, including the Bancorp and its
subsidiaries, to implement new policies and procedures or
amend existing policies and procedures with respect to, among
other matters, anti-money laundering, compliance, suspicious
activity and currency transaction reporting and due diligence on
customers. The Patriot Act and its underlying regulations also
permit information sharing for counter-terrorist purposes
between federal law enforcement agencies and financial
institutions, as well as among financial institutions, subject to
certain conditions, and require the FRB (and other federal
banking agencies) to evaluate the effectiveness of an applicant
in combating money laundering activities when considering
applications filed under Section 3 of the BHCA or the Bank
Merger Act. The Bancorp’s Board has approved policies and
procedures that are believed to be compliant with the Patriot
Act.
Certain mutual fund and unit investment trust custody and
administrative clients are regulated as “investment companies”
as that term is defined under the Investment Company Act of
1940, as amended (the “ICA), and are subject to various
examination and reporting requirements. The provisions of the
ICA and the regulations promulgated there under prescribe the
type of institution that may act as a custodian of investment
company assets, as well as the manner in which a custodian
administers the assets in its custody. As a custodian for a
number of investment company clients, these regulations
require, among other things, that certain minimum aggregate
capital, surplus and undivided profit levels are maintained by
the Bancorp’s subsidiary bank, and also require the Bancorp to
manage and retain certain information about investment
company clients pursuant to specific ICA requirements that are
in addition to the Bancorp’s management and retention
responsibilities under other applicable federal and state laws.
Additionally, our arrangements with clearing agencies or other
securities depositories must meet ICA requirements for
segregation of assets, identification of assets and client
approval. New legislation or regulatory requirements could
have a significant impact on the information reporting
requirements applicable to the Bancorp and may in the short
term adversely affect the Bancorp’s ability to service
investment company clients at a reasonable cost.
The GLBA amended the federal securities laws to
eliminate the blanket exceptions that banks traditionally have
had from the definition of “broker” and “dealer.” The GLBA
also required that there be certain transactional activities that
would not be “brokerage” activities, which banks could effect
without having to register as a broker. In September 2007, the
FRB and SEC approved Regulation R to govern bank securities
activities. Various exemptions permit banks to conduct
activities that would otherwise constitute brokerage activities
under the securities laws. Those exemptions include conducting
brokerage activities related to trust, fiduciary and similar
services, certain services and also conducting a de minimis
number of riskless principal transactions, certain asset-backed
transactions and certain securities lending transactions. The
Bancorp only conducts non-exempt brokerage activities through
its affiliated registered broker-dealer.
Emergency Economic Stabilization
On October 3, 2008, in response to the stresses experienced in
the financial markets, the Emergency Economic Stabilization
Act (“EESA”) was enacted. EESA authorizes the Secretary of
the Treasury to purchase up to $700 billion in troubled assets
from financial institutions under the Troubled Asset Relief
Program or TARP. Troubled assets include residential or
commercial mortgages and related instruments originated prior
to March 14, 2008 and any other financial instrument that the
Secretary determines, after consultation with the Chairman of
the Board of Governors of the Federal Reserve System, the
purchase of which is necessary to promote financial stability.
Capital Purchase Program
Pursuant to its authority under EESA, Treasury created the
TARP Capital Purchase Program (“CPP”) under which the
Treasury Department was authorized to invest up to $250
billion in senior preferred stock of U.S. banks and savings
associations or their holding companies. Qualifying financial
institutions could issue senior preferred stock with a value equal
to not less than 1% of risk-weighted assets and not more than
the lesser of $25 billion or 3% of risk-weighted assets.
In connection with the issuance of the senior preferred,
participating institutions were required to issue to Treasury
immediately exercisable 10-year warrants to purchase common
stock with an aggregate market price equal to 15% of the
amount of senior preferred.
On December 31, 2008, the Bancorp entered into a Letter
Agreement (including the Securities Purchase Agreement—
Standard Terms incorporated by reference therein, the
“Purchase Agreement) with Treasury pursuant to which the
Company issued and sold to Treasury for an aggregate purchase
price of approximately $3.4 billion in cash: (i) 136,320 shares
of the Company’s Fixed Rate Cumulative Perpetual Preferred
Stock, Series F, having a liquidation preference of $25,000 per
share (the “Series F Preferred Stock), and (ii) a ten-year warrant
to purchase up to 43,617,747 shares of the Company’s common
stock, no par value per share, at an initial exercise price of
$11.72 per share.
In the Purchase Agreement, the Bancorp agreed that, until
such time as Treasury ceases to own any debt or equity
securities of the Bancorp acquired pursuant to the Purchase
Agreement, the Bancorp would take all necessary action to
ensure that its benefit plans with respect to its senior executive
officers comply with Section 111(b) of EESA as implemented
by any guidance or regulation under the EESA that had been
issued and was in effect as of the date of issuance of the Series
F Preferred Stock and the Warrant, and agreed to not adopt any
benefit plans with respect to, or which covers, its senior
executive officers that do not comply with the EESA.
On February 2, 2011 the Bancorp repurchased the Series F
Preferred Stock issued to the Treasury pursuant to TARP. The
Bancorp notified the U.S. Treasury on February 17, 2011, of its
intention to negotiate for the purchase of the warrants issued to
the U.S. Treasury.
Supervisory Capital Assessment Program
On February 10, 2009, the U.S. Treasury announced a new
financial stability plan (the “Financial Stability Plan”), which
built upon existing programs and earmarked the second $350
billion of unused funds originally authorized under EESA.
Pursuant to the CAP, the Bancorp, along with the other
domestic bank holding companies with assets of more than
$100 billion at December 31, 2008, was subject to a forward-
looking stress test called the Supervisory Capital Assessment