SEC Signals It’s Time to Fix a Cross-Border Bank Resolution Gap

A bank can collapse over a weekend—the demise of Silicon Valley Bank proved that. But the US securities registration process takes months.

For years, that gap has been one of the quietly unresolved tensions in cross-border bank resolution. On April 10, the Securities and Exchange Commission took a meaningful step toward fixing it.

The Division of Corporation Finance issued a no-action letter to the Bank of England confirming that a UK bank can implement a bail-in resolution without registering the resulting securities exchange. At the same time, SEC Chairman Paul Atkins announced that his staff is drafting a broader exemption covering foreign bail-in transactions generally.

Taken together, these developments give cross-border resolution practitioners the regulatory clarity they’ve been waiting for and flag a live issue for anyone advising on international bank financing.

Speed Meets Registration

Bail-in is an emergency tool. When a UK bank or regulated investment firm is failing, the Bank of England can direct an immediate resolution. The entire process—write-downs, conversions, restructuring—can be completed over a single weekend. US securities law doesn’t pause for any of that.

The SEC confirmed in the letter what practitioners had long assumed: Exchanging bail-in instruments for ordinary shares is an “offer” and “sale” of securities under Section 2(a)(3) of the Securities Act. That means registration would be required, absent an available exemption.

But registering a securities offering takes months of SEC review. When a resolution is underway at midnight on a Friday, that process isn’t available.
The stakes are real. Global banks have global investors. US holders of the bonds being written down or converted have US securities law rights.

Without regulatory certainty, executing a cross-border resolution cleanly, at the speed that resolution demands, is a genuine legal problem.

Two-Step Structure

The Bank of England’s updated bail-in approach introduces an interim step designed specifically to fit within an existing Securities Act exemption. It works in two stages.

First, when resolution is triggered, bail-in securities are written down and exchanged for non-transferable contingent beneficial interests, called PROPPs (for potential rights to onward property or proceeds), pursuant to a published bail-in resolution instrument. You can’t trade PROPPs; they carry no certificate. They only go to existing holders of the bailed-in securities and represent a potential right to shares—or the proceeds from the sale of shares—once resolution concludes.

Second, PROPP holders exchange those interests for ordinary shares in the resolved firm, at a ratio set out in a supplemental bail-in resolution instrument. The issuer of the bail-in securities, the PROPPs, and the resulting shares must be the same entity or a wholly owned, fully guaranteed subsidiary.

That structure isn’t accidental. Every feature of it—restriction to existing holders, no certificate, non-transferability, same issuer—is designed to fit within the Section 3(a)(9) exemption under the Securities Act, which covers exchanges by an issuer exclusively with its own existing security holders.

SEC Staff Position

The SEC staff indicated it wouldn’t recommend enforcement action where the structure is used without registration, based on the staff’s opinion that Section 3(a)(9) applies.

The division staff confirmed it also wouldn’t recommend enforcement action when a firm implements this two-step exchange without registration, in reliance on an opinion of counsel that Section 3(a)(9) applies.

Two caveats apply. The position is limited to the facts presented—different circumstances could yield a different answer. And it’s an enforcement position only, not a legal conclusion. The letter provides practical cross-border comfort but doesn’t create a new exemption.

Why It Matters

The UK’s framework under the Banking Act 2009 sits within a broader global architecture. The EU’s Bank Recovery and Resolution Directive and similar systems around the world share the same core design.

Contractual recognition of bail-in—the requirement that instruments governed by non-UK law expressly acknowledge they may be subject to resolution powers—is a live drafting issue in every cross-border bank financing. Getting that language right, and understanding how US securities law interacts with it when resolution happens, isn’t a theoretical exercise.

The broader exemption that Atkins has directed staff to undertake will be worth watching. If it moves quickly, it could provide a more durable and general solution than fact-specific no-action relief.

Whether that exemption can accommodate the full range of global resolution structures beyond the Bank of England model will be the next test.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Ariadne M. Clinton is a partner at Spencer West and a securities and fintech regulatory counsel who previously served as a senior attorney in the SEC’s Enforcement Division.

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