An empirical investigation of street registration for banking.

Sullivan, Laura L. ; James, Joe ; Bexley, James 等

INTRODUCTION

The Securities and Exchange Commission ("SEC") is an independent, quasi-judicial regulatory agency with responsibility for administering federal securities laws. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). Its mission is to administer federal securities laws and protect investors by issuing rules and regulations and ensuring the securities markets are fair and honest. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). To accomplish its mission, the SEC promotes adequate and effective disclosure of information to the investing public. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). The SEC was established in 1934 by the creation of "The Securities Exchange Act of 1934." (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997).

The SEC is relevant to the banking industry in several different ways. The SEC has jurisdiction over all interstate public offerings in the amount of $1.5 million or greater. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). Before going public, all newly issued securities must be registered with the SEC. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). Once registered, the SEC ensures that publicly traded companies, including banks, maintain current information (including financial and operating results) that is available to the public. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). This reporting requirement was established by the Securities Act of 1933, which is commonly referred to as the "truth in securities" law. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). This law aims to ensure that investors are provided with material information concerning securities for public sale and prevent misrepresentation, deceit and other fraud in the sale of securities. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). The disclosure required provides the potential investor with adequate information to properly analyze the security being offered. This reporting requirement is the most cumbersome task for the majority of businesses. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). To comply with these reporting requirements set by the SEC, public companies must issue periodic reports, including 10Q's, 10K's and other informational reports, to all of its shareholders of record. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). Not only are the reporting requirements cumbersome for those who must file them, the public filings are also very costly. In addition, the registration statements are subject to examination for compliance with the disclosure. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). Although registration requirements of the SEC are thorough regarding disclosure and companies are subject to fines and penalties for noncompliance, the laws do not protect investors from the ownership of shares in nominee names.

Shares that are issued in nominee names, or street registration, are those which are issued in the name of an institutional investor or brokerage service, for example Merrill Lynch, but are actually owned by a customer of the institutional investor or brokerage service. The brokerage service holds the securities in the name of the brokerage firm and does not transfer the shares or have them issued in the name of the "true" owner of the stock. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). For example, John Smith owns ten percent of the shares of ABC Bank through Merrill Lynch. The shares are issued in the name of Merrill Lynch where they are held in John Smith's portfolio. Since ABC Bank thinks Merrill Lynch holds its stock, it has no idea that John Smith is one of its major shareholders, and is therefore unable to disclose the correct ownership of the bank to prospective investors and current shareholders. The brokerage firm creates a dilemma for the bank because the bank cannot differentiate between shares held by the true owner or shares that are held in nominee names.

PURPOSE OF THE STUDY

The purpose of the study is twofold. First, the study will illustrate the dilemma that is faced by banks as a result of securities issued in nominee names. Second, the study will show through a survey the level of awareness and concern of banks regarding street registration. When a stock of a public company is issued in nominee names, the company breaks SEC regulations regarding disclosure of ownership when it files its public reports because the company cannot correctly disclose the actual owner of the shares. Many companies and banks are unaware that shares of its stock are held in nominee names, therefore are unaware that they are breaking SEC laws when filing the required reports. Current SEC laws regarding disclosure of ownership are inadequate because of this relatively new dilemma of nominee names.

SCOPE AND LIMITS OF THE STUDY

Information for this study was obtained from the SEC. Specifically, laws regarding public filing and disclosure were most valuable for the scope of the study. Surveys were sent to two hundred and fifty banks in Texas with total assets over seventy-five million to determine their knowledge and/or awareness of this dilemma of nominee names. Large, super-regional banks such as Chase, Bank of America and Wells Fargo were not included in this study. Of the two hundred and fifty surveys that were sent out, responses were received from sixty banks or twenty-four percent. Detailed information regarding these surveys and their results are contained herein.

SURVEY QUESTIONS AND RESULTS

Question number one is the basis of the study and is the question that all others are compared to in the analysis portion of this paper. Question number one asks the following: Do you perceive street registration as a concern to your bank or holding company? Fifty-nine of the sixty surveys contained an answer to this question. Eleven banks, or 18.6% of the respondents, answered this question "Yes," while forty-eight or 81.4% of the respondents answered "No." Considering the responses received to other survey questions regarding size and ownership status, this is an expected response (see the analysis section for additional detail).

Question number two asks the respondent the size of the bank in assets. All sixty respondents answered this question. All of the banks surveyed were over one hundred million in assets. Thirty-two banks, or 53.3%, ranged from one hundred million to two hundred and forty-nine million in assets. Twenty banks, or 33.3%, ranged from two hundred fifty million to five hundred million in assets. Eight banks, or 13.3%, are over five hundred million in asset size. The percentage of respondents under five hundred million in asset size almost corresponds with the percentage of banks that do not perceive street registration to be a problem for their bank (question number one).

Question number three is used to determine what type of corporation the respondents are. Specifically, it asks if the bank is a multi-bank holding company, a bank holding company or an individual bank. All sixty respondents answered this question. Eleven, or 18.3%, of the respondents are multi-bank holding companies. Forty or 66.7% are bank holding companies. Nine of the respondents or 15% are individual banks.

Question number four asks the respondent the number of shares that are outstanding. All sixty respondents answered this question. Forty, or 66.7%, have less than one million shares outstanding. Fifteen, or 25%, have between one and five million shares outstanding. Two or 3.3% have between six and ten million shares outstanding. An addition two banks, or 3.3% have between eleven and twenty million shares outstanding, and one bank or 1.7% has over twenty million shares outstanding. The response to this question is consistent with the size of the banks that have responded. Over 90% of the banks that responded to our survey have less than five million shares outstanding, which would also be expected given the number of banks who do not perceive street registration to be a problem. According to the SEC rules regarding public filing, there are certain exemptions such as the "small issue" used to aid small businesses. This law provides that offerings of certain sizes may be exempt from full registration, subject to provisions designed to protect investors. The size of our respondents indicates that the majority may not be subject to full disclosure laws and regulations.

Question number five asks what the percentage of shares owned by institutional investors is. All sixty respondents answered this question. Fifty-one banks or 85%, have less than 5% of their shares owned by institutional investors. Two banks, or 3.33%, have between 5% to 15% while seven banks or 11.7%, have over 15% of their shares owned by institutional investors. This answer is also consistent with the size of our respondents. Institutional investors will typically not invest in smaller size companies. While it is unknown which banks responded to our survey, one can conclude that the majority of the respondents are small community banks.

Question number six asks the percentage of shares that are owned by corporate officers or employees of the bank. Fifty-seven out of the sixty surveys contained an answer to this question. Nine banks or 15.8%, have less than 5% of their shares owned by officers or employees. Ten banks or 17.6%, have between 5% and 10% of its shares owned by officers and employees. Eight banks or 14%, have between 11% and 15%, while thirty banks or 52.6% of the respondents have over 15% of its outstanding shares owned by officers and employees of the company. Considering that most of the respondents to our survey are not publicly traded (see question number seven) and have less than five million shares outstanding, this is an expected response.

Question number seven asks if the bank is publicly traded, which requires SEC reporting if there are over five hundred shareholders. Fifty-nine respondents answered this question. Ten banks or 17% answered "Yes" (publicly traded), while forty-nine or 83% answered "No" (privately held). Perception of street registration and awareness of the problem that is can create is most likely related to the bank being publicly traded or privately held. One would expect that public companies would have more concern with securities being issued in nominee names. Since most of our respondents do not have the perception of street registration being a problem, the answer to this question is consistent with expectations.

Question number eight was only answered by those respondents who answered "Yes" to question number seven, therefore, there were only ten responses. The question asks who manages the bank's SEC and FED regulatory reporting. Eight of the banks indicate that a bank officer handles the reporting, while two banks have staff legal counsel who manages the SEC and FED reporting. None of the respondents have an outside firm manage the reporting requirements.

Question number nine was also only answered by those respondents who answered "Yes" to question number seven. This question asks who tracks and records the investors that buy and sell the bank's stock. Two of the banks have a bank employee who tracks and records investors, seven of the banks employ an outside firm, and one bank has no one tracking and recording investors.

ANALYSIS

The analysis of the surveys will center around whether or not the respondents think that street registration is a problem. This allows a profile to be made about banks in regards to street registration.

Of the eleven banks that see street registration as a program, three ranges in size from one hundred million to two hundred forty-nine million, six are two fifty million to five hundred million and two are over five hundred million in assets. Four of the banks are multi-bank holding companies, while seven are bank holding companies.

A majority of the respondents have less than five million shares outstanding. Out of the eleven, five have less than one million shares outstanding, four have between one and five million shares outstanding, one has six to ten million shares outstanding and one has between eleven and twenty million shares outstanding. Eight banks report that less than five percent of their outstanding shares are owned by institutional investors. Two banks have between five and ten percent of its shares owned by institutional investors, while only one bank has over fifteen percent. Of the eleven banks who perceive street registration to be a problem, two banks have less than five percent of its shares owned by officers/employees. Four banks have between five and ten percent of its shares owned by officers/employees, two banks have between eleven and fifteen percent and two banks have greater than fifteen percent (one of the banks who perceive street registration to be a problem did not answer this question).

Of the eleven banks that perceive street registration to be a problem, only four are publicly traded, while the other seven banks are privately held. Three of the four publicly traded banks have a bank employee manage the bank's SEC and FED regulatory reporting, while the other has a staff legal counsel manage regulatory reporting. Three of the four also have an outside firm track and record the investors who buy and sell its stock, while the other has a bank employee track its investors.

SUMMARY

Although street registration can pose a significant problem for the banking industry, if our survey results are consistent with the industry, awareness of this relatively new potential hazard is minimal. Not only does street registration cause a bank to improperly disclose its ownership, but it also can subject the bank to being bought out because significant shareholders can remain unknown to the bank. Improper disclosure also subjects the bank to disciplinary action taken against it by the SEC even though the bank is unaware of the correct ownership. Brokerage companies that, in many cases, own a significant number of shares of a company or bank actually can cause the company or bank to break the SEC rules regarding disclosure by holding their customers' shares in nominee names.

Most respondents to our survey do not perceive street registration to be a problem for their bank. The majority of those who do not consider street registration to be a problem have the following characteristics: they are less than two hundred fifty million in asset size, they have less than one million shares outstanding, they have more than fifteen percent of their shares owned by officers or employees of the bank and most of them are not publicly traded. The responses of those who do perceive street registration to be a problem are more varied. Asset size varies from the lowest range of one hundred million to two hundred forty-nine million to over five hundred million. There is also more variation of outstanding shares, although most are under five million. Ownership among officers and employees is also varied among the respondents and although most of those who think street registration is a problem are not publicly traded (seven), some are publicly traded (four).

If our survey results are consistent with the banking industry, small banks that are privately held are the most likely to perceive that street registration is not a problem. This perception is not exclusive, however, to small, privately held banks. Out of the nine publicly traded banks that answered the question, five think that street registration is not a problem, while four do perceive it to be a problem. Even though the largest concentration of those who do not perceive street registration to be a problem is within smaller, privately held banks, over fifty percent of publicly traded banks share the same response. The reason for this lack of concern must be uncovered. Some banks may not realize the impact that street registration can have on their institutions and shareholders. Some may understand the impact but are not concerned because they believe that they have taken the proper precautions against such a problem. Some banks may not even be aware of what street registration is. Whatever the reason, bank officers and directors must be fully aware of this relatively new problem called street registration. It is hoped that this study of nominee names, or street registration, will stimulate further study into this potentially harmful practice.

REFERENCES

Moyer, C. R., McGuigan, J., & Kretlow, W. (1992). Contemporary Financial Management. (5th ed.). St. Paul, MN: West Publishing.

"The Work of the SEC." Retrieved June 1997 from the World Wide Web: http://www.sec.gov

Laura L. Sullivan, Sam Houston State University

Joe James, Sam Houston State University

James Bexley, Sam Houston State University