On April 10, 2026,the staff (the “Staff”) of the Division of Corporation Finance (the “Division”) of the Securities and Exchange Commission (the “SEC”) issued a no-action letter (the “No-Action Letter”) in response to an incoming letter submitted on behalf of the Bank of England (the “Incoming Letter”), which addresses the application of certain provisions of the U.S. Securities Act of 1933 (as amended, the “Securities Act”) to the exchange of securities in a UK bail-in scenario.  SEC Chair Paul Atkins also issued a statement addressing this development and directing the Division to prepare a rulemaking recommendation to the SEC regarding a potential exemption from the Securities Act registration requirements for securities issued in connection with a regulatory bail-in.

The Incoming Letter sought the Staff’s confirmation that, if the Bank of England (the “BoE”) were to direct the exchange of Bail-In Securities (as defined below) for ordinary shares (or the net proceeds thereof) in a failed or failing UK bank or designated investment firm (a “Firm”) as part of such Firm’s exit from resolution without registration under the Securities Act, the Staff would not recommend that the SEC take enforcement action.  Bail-in securities are a type of financial instrument issued by bank holding companies or banks that qualify as regulatory capital.  Depending on the particular applicable resolution scheme, should a bank fail or become likely to fail, the banking agency or prudential regulator with resolution authority may exercise its bail-in powers (in combination with other resolution tools) to write down or convert, directly or indirectly, the bank’s bail-in securities, and if needed, other unsecured liabilities of the failed institution, into equity or other securities (such process, a “Bail-In”).  Bail-Ins are intended to allow a resolution authority to recapitalize a failing financial institution without relying on taxpayer funds. 

In the immediate post-financial crisis period, it was clear that securities that were subject to bail-in should not raise any US securities law issues, given that there is no “investment decision” being made by the holder of the security (no “sale”) that is the subject of bail-in—be it a “write down,” a conversion from debt to equity, or otherwise.  Unfortunately, things appear to have gotten muddled by statements made following the failure of Credit Suisse and discussions relating to an attempted write down of that bank’s Additional Tier 1 capital securities.  Also, there followed a 2023 Financial Stability Board report that discussed the SEC’s concerns regarding a Bail-In process, which suggested, in several footnotes, that there was a lack of clarity regarding securities regulatory matters.

The PROPPs Mechanism

In the scenario described in the Incoming Letter, as part of the Bail-In, all ordinary shares of the failed Firm would be transferred to either the BoE or a third-party depositary bank, in each case with no consideration payable and without the consent of the holders of such ordinary shares. This process was distinct from Credit Suisse’s resolution, during which its Additional Tier 1 capital securities were written down despite the common stock remaining outstanding and even being entitled to receive proceeds from the sale of that bank. The voting rights pertaining to the ordinary shares of the failed Firm will be exercisable by either the “resolution administrator” of the failed Firm appointed pursuant to the “Bail-In Resolution Instrument,” or alternatively by the BoE.  The BoE would then determine a structure for how the failed Firm’s liabilities that are subject to the Bail-In, including the Bail-In Securities, would be written-down. The BoE has established a structure whereby the holders of Bail-In Securities that have been or will be written-down would be granted contingent beneficial interests, created by virtue of the Bail-In Resolution Instrument, which would entitle such holders to the delivery of ordinary shares of the Firm after the resolution, or alternatively, if applicable, the receipt of the net cash proceeds derived from the sale of the ordinary shares. These interests are referred to as Potential Rights to Onward Property or Proceeds (“PROPPs”).  Once the Bail-In process has been concluded and each class of PROPPs has been valued, some PROPPs may be converted into equity securities of the post-resolution Firm. The BoE’s question was whether the exchange or conversion process was exempt from registration under Section 3(a)(9) of the Securities Act.

Section 3(a)(9) Exemption

Section 3(a)(9) exempts from registration “any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly by or indirectly for soliciting such exchange.” The BoE was of the opinion that the exchange of ordinary shares in a failing Firm with the holders of Bail-In Securities would satisfy the requirements of Section 3(a)(9) in a case where the exchange is effectuated through the PROPPs mechanism.  TheStaff concluded that it would not recommend enforcement action if a Firm, as part of the Bail-In process, (1) exchanges its Bail-In Securities for non-transferable PROPPs; and (2) subsequently exchanges those PROPPs for ordinary shares in the resolved Firm without registration under the Securities Act, in reliance on an opinion of counsel that the exemption provided in Section 3(a)(9) is available.

Commercial implications and further SEC rulemaking

As discussed above, Chair Atkins has asked the Division to prepare a rulemaking recommendation to the Commission for a potential general exemption for securities offered and sold in connection with regulatory Bail‑Ins on the basis that:  bank issuers provide disclosures regarding the bail-in regulatory frameworks applicable to them in their offering documents, including risk factor disclosure; the mandatory mechanism for bail-in is disclosed in the offering document related to the regulatory capital instrument (or other security) that is subject to bail-in; and the bail-in power is a prudential regulatory power at the point of resolution and the holder of the instrument is not making an investment decision regarding its securities at that point in time.  We look forward to further assessing the Commission’s recommendation in due course.