Whitney Holding Corporation
Established 1883 - Member FDIC
228 St. Charles Avenue, Suite 626, New Orleans 70130
(504) 586-3596 Fax: (504) 619-4155 Email: firstname.lastname@example.org
Joseph S. Schwertz, Jr.
December 3, 2003
Via email to email@example.com
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. SR-NYSE-2002-33, SR-NASD-2002-141, SR-NASD-2002-77, SR-NASD-2002-80, SR-NASD-2002-138 and SR-NASD-2002-139
Dear Mr. Katz:
Whitney Holding Corporation ("Whitney") is pleased to submit the following comments to the SEC on the proposed changes to Nasdaq Rule 4200. Whitney's sole class of common stock is listed on The Nasdaq Stock Market, Inc. Whitney is a registered bank holding company, whose principal asset is Whitney National Bank (the "Bank"). The Bank considers itself a large community bank, with approximately 130 branches located primarily in coastal markets in the five Gulf Coast states.
Like most community banks, the directors serving on Whitney's and the Bank's boards (generally the two boards are identical in composition) typically have personal banking relationships with the Bank, as do their family members. Often these directors are also executive officers and shareholders of significant commercial customers of the Bank. Our directors serve as members of a classified board, a structure approved by our shareholders in 1984, which consists of five classes of directors serving five year terms.
Whitney's opposition to Rule 4200(a)(15):
Whitney opposes the proposed rule because (i) its use of the undefined term "payment" and (ii) its inclusion of Family Members' business and non-profit organizations' banking transactions will jeopardize the independence of many - if not most - directors of bank holding companies listed with Nasdaq. The most recent change to Rule 4200(a)(15)(D) - which qualifies the word "payment" by adding the words "for property or services in the current or any of the past three fiscal years" immediately thereafter, unfortunately introduces more uncertainty and increases the risk of disqualifying bank holding company directors as independent directors.
Whitney suggests that Nasdaq take the same approach with Rule 4200 as it did recently when it adopted the related party transaction rule, Rule 4350(h).1 Whitney recommends the addition of the following language to the proposed Rule 4200:
For purposes of this rule, the term "payment" shall be limited to payments arising out of transactions or relationships required to be disclosed pursuant to SEC Regulation S-K Item 404.
Reasons for recommendation:
Whitney offers the following reasons for this recommendation:
- This recommendation would align the new Nasdaq test for determining whether the Audit Committee or comparable independent body of the Board should approve a related party transaction with an identical test for determining whether a director is independent. The use of the same test reduces issuer costs for monitoring compliance with these new rules and heightens the awareness of directors to potential conflicts of interest that are sufficiently meaningful to require disclosure to the shareholders.
- This recommendation builds upon decades of SEC experience with rule making - including public comment - as to the types of insider transactions that warrant disclosure to shareholders. Since the early 1980s, S-K Item 404 has exempted many types of ordinary course banking transactions from disclosure in SEC filings, including proxy statements. For example, S-K Item 404 excludes disclosure of the following:
"The transaction involves services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services2;
"If the lender is a bank, savings and loan association, or broker-dealer extending credit under Federal Reserve Regulation T [12 CFR part 220] and the loans are not disclosed as nonaccrual, past due, restructured or potential problems (see Item III.C. 1. and 2. of Industry Guide 3, Statistical Disclosure by Bank Holding Companies), disclosure may consist of a statement, if such is the case, that the loans to such persons were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other unfavorable features."3
Whitney suggests that it makes no sense for Rule 4200(a)(15) to preclude a board's finding that a director is independent due to a transaction that the SEC deems so immaterial that S-K Item 404 exempts it from disclosure to the shareholders and the market.
- This recommendation gives a board of directors the flexibility to use S-K Item 404's common sense approach in deciding whether "payments" to or from insiders, Family Members, their businesses or other interests are material to a finding of whether a director is independent. S-K Item 404 includes the following instructions, which Whitney suggests are equally applicable to a board evaluating the independence of its members:
"The materiality of any interest is to be determined on the basis of the significance of the information to investors in light of all the circumstances of the particular case. The importance of the interest to the person having the interest, the relationship of the parties to the transaction with each other and the amount involved in the transactions are among the factors to be considered in determining the significance of the information to investors.4
"There may be situations where, although these instructions do not expressly authorize nondisclosure, the interest of a person specified in paragraphs (a)(1) through (4) in a particular transaction or series of transactions is not a direct or indirect material interest. In that case, information regarding such interest and transaction is not required to be disclosed in response to this paragraph.5
"Exclude from the determination of the amount of indebtedness all amounts due from the particular person for purchases subject to usual trade terms, for ordinary travel and expense payments and for other transactions in the ordinary course of business."6
The importance of adopting the time-tested approach of S-K Item 404 disclosure instructions for use when determining director independence can be illustrated by the following everyday examples from the banking world. In each case, there is literally a "payment" made to a director, a Family Member or an organization linked to the director or Family Member. S-K Item 404 does not require disclosure of these transactions to shareholders or the market. Whitney does not believe any corporate governance goal would be advanced if Nasdaq's listing rules stripped the director involved in each hypothetical of his or her independence.
- The issuer's banking subsidiary makes a payment of the proceeds (principal and accrued interest) from a maturing $75,000 CD to a director's parent.
- The issuer's brokerage subsidiary executes a director's son's orders to sell $30,000 in IBM stock and $40,000 of Intel stock during a 12 month period and makes payments of the proceeds to the son.
- A director's mother-in-law presents $100,000 in Series E savings bonds for payment at the issuer's banking subsidiary.
- A director's corporation has a cash management sweep arrangement, in which the corporation's excess cash deposits are swept overnight into repurchase agreements. These arrangements are very common and provide corporate customers an opportunity to earn overnight returns on cash balances and enhanced protection (beyond the $100,000 FDIC insurance coverage) against bank insolvency. Each morning, the issuer's bank re-credits - makes a payment into - the corporation's bank account in the amount of the sweep (plus interest). The aggregate amount of these "payments" over the course of a year will often exceed the higher of $200,000 or 5% of the corporation's annual revenues.
- This recommendation acknowledges the intensive safeguards against insider abuse that have long been present within the banking industry and which support S-K Item 404's exclusions for disclosures of certain banking activities. For example, more than two decades ago when the SEC added exemptions from disclosure for lending transactions for banking organizations, it acknowledged the safeguards against insider abuse inherent in the highly regulated banking environment - which were not present in less regulated businesses.7 Earlier this fall, Chairman Donaldson of the SEC acknowledged that the banking industry has long been subject to a vigorous regime of internal controls, including controls to prevent insider abuse, through FDICIA.8
- This recommendation recognizes that the goal of keeping and attracting qualified directors to serve on the boards of bank holding companies becomes harder to achieve if their ordinary course banking transactions - and those of their Family Members and business interests - can suddenly disqualify them from continued service as independent board members. Directors, their Family Members and their business interests have a well-founded expectation of financial privacy when dealing with highly-regulated financial institutions. Congress endorsed this expectation by passing the Gramm Leach Bliley Act several years ago. The SEC has for more than 20 years protected the financial privacy of bank holding company directors, their Family Members and business interests by having S-K Item 404 exempt typical banking transactions from public disclosure.
For 120 years, Whitney has recruited successful business and community leaders as its directors, and encouraged them bring their banking relationships - and those of Family Members, their businesses and other interests - to the bank; virtually every community bank or bank holding company uses the same approach in recruiting directors. Why should these directors remain willing to serve, once they realize that all of the confidential banking relationships that they and their families enjoy could be the subject of public disclosure as part of a proxy statement analysis of their independence? Why would a Family Member of a director wish to do business with his relative's bank, once he realizes that every banking transaction must be monitored - and possibly disclosed to and discussed with - his relative on the board? Why would a person agree to serve as bank holding company director, once he realizes that at any time a Family Member - or business interest of the Family Member - could open a deposit account or otherwise have a banking relationship (without any prior knowledge of the director) that suddenly destroys the director's independence and embarrasses him if he must resign as a director to preserve the independence of the board? Adoption of the recommendation resolves all of these problems.
- Finally, adoption of this recommendation would remove a real incentive for Nasdaq- listed bank holding companies to transfer to the New York Stock Exchange. The NYSE listing standards retain a compensation concept when judging disqualifying payments and provide more flexibility for boards to determine director independence.
Based on Whitney's discussions during October and November with several banking trade groups and a few Nasdaq-listed bank holding companies, Whitney believes that most bank holding companies listed on Nasdaq have not yet recognized the severe impact created by Nasdaq's adoption of the term "payment" and the possibility that ordinary course banking transactions producing "payments" to insiders could disqualify most of their long-standing board members. Many bank holding company boards will meet this month or in January to select nominees, in anticipation of mailing proxy statements during the first quarter. Whether these boards identify this issue prior to selecting their nominees - or realize the problem only after proxy statements are in the mail, this rule change will create massive disruption in the corporate governance of an important sector of our economy. It is ironic that the sector most hurt - the banking sector - was cited by the SEC's chairman earlier this Fall as being ahead of the curve in the implementation of internal controls regulating financial reporting and insider transactions.
Thank you for your consideration of these comments. I would be pleased to answer any questions or provide further information that you may find helpful.
/s/ Joseph S. Schwertz, Jr.
Joseph S. Schwertz Jr.
cc: Mary M. Dunbar, Esq. - Nasdaq
Sara Bloom, Esq. - Nasdaq
|1|| SEC Release 34-48137; File no. SR-NASD-2002-80, July 8, 2003. This release added the following sentence to the end of Rule 4350(h): "For purposes of this rule, the term "related party transaction" shall refer to transactions required to be disclosed pursuant to SEC Regulation S-K, Item 404."
|2|| S-K Item 404, instruction 7B to paragraph (a).
|3|| S-K Item 404, instruction 3 to paragraph (c) .
|4|| S-K Item 404, instruction 1 to paragraph (a).
|5|| S-K Item 404, instruction 9 to paragraph (a)
|6|| S-K Item 404, instruction 2 to paragraph (c)
|7|| Release Nos. 33-6261, 34-17301, 35-21792, IC-11440, 45 FR 76982, November 21, 1980. In this release, which addressed the expansion of the exemption from disclosure for bank loans, the SEC considered comments suggesting loans made to insiders by non-banks be exempted from disclosure as well:
"The Commission has adopted as proposed an amendment to Item 4(e) which expands the exception relating to indebtedness incurred in the ordinary course of business to savings and loan associations and to broker-dealers extending credit under Federal Reserve Regulation T. This proposal was generally supported by the commentators.
"Under the amendment, the specified entities will not have to furnish detailed disclosure with regard to loans extended to management if a statement is included that the loans to such persons: (1) Were made in the ordinary course of business; (2) were made on substantially the same terms, including interest and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons; and (3) did not involve more than the normal risk of collectibility or present other unfavorable features. n39 In the Commission's view, the same policy considerations regarding bank loans to management should apply to these other regulated industries."
" n39 One commentator suggested that the exception be expanded to include finance companies. The Commission is not convinced that the same sort of regulation as to insider loans exists for finance companies and therefore has not expanded upon the proposal. (emphasis added)"
|8|| Testimony Concerning Implementation of the Sarbanes-Oxley Act of 2002, by William H. Donaldson, Chairman, U.S. Securities and Exchange Commission, Before the Senate Committee on Banking, Housing and Urban Affairs, September 9, 2003, published at http://www.sec.gov/news/testimony/090903tswhd.htm. Chairman Donaldson noted that "Since 1993, larger depositary institutions or their bank holding companies have been subject to similar requirements under the FDIC Improvement Act of 1991 (FDICIA)." Note 12; Although FDICIA focuses on financial accounting internal controls, it does include testing for compliance with regulations restricting insider loans. This element of FDICIA is codified at 12 USC 1831m(b) and (c). The FDIC published 12 CFR Part 363 (58 FR 31332, June 2, 1993) to implement FDICIA, including the designation of laws regulating lending to insiders as "designated laws" under FDICIA. Thus, FDICIA institutions must have ongoing management oversight of, and auditor review, of internal controls, including controls regulating loans to insiders.