SEC Targets Bank Fees As It Ramps Up SPAC Probe

The Securities and Exchange Commission (SEC) is ramping up its probe into special purpose acquisition companies (SPACs) and is targeting potential conflicts of interest regarding bank fees when the same financial institution (FI) serves as both underwriter and adviser on the same deal, Reuters reported.

The SEC is questioning if fees can serve as a motivation to underwriters to support dicey SPAC deals while also counseling on the merger, a move that could subject investors to financial risk, Reuters reported, citing unnamed sources.

SPAC underwriters Citigroup, Credit Suisse Group, Morgan Stanley and Goldman Sachs are facing requests for information by the SEC, according to Reuters.

The SEC launched an inquiry into several Wall Street FIs earlier this year and sent letters regarding how internal controls operated against possible deal pitfalls. The agency originally targeted participants of deals seen as troublesome and not only requested information but interviewed executives, Reuters reported.

The U.S. agency is especially seeking information regarding how the fees banks collect add up when they participate in a deal and serve several roles, according to Reuters.

“The big issue for the SEC is to understand if the advisers are conflicted,” an unnamed source told Reuters.

FIs usually pay sponsors of SPAC deals a 5.5 percent fee for underwriting an initial public offering (IPO). A percentage of that fee is paid upfront, while the balance is due when the merger is closed, Reuters reported. Banks that serve as underwriters can collect additional fees if they represent the merger target and assist in raising additional private investor monies for the deal.

Returns on SPACs have been behind the S&P 500, leading to accusations that disclosure information created a false impression, according to Reuters.

In May, the SEC greenlighted a request from Nasdaq to offer direct listings as an alternative to traditional IPOs.