Updating SEC Registration Requirements

Issue

Updating the federal securities laws to ensure that smaller community banking organizations are not required to register with the Securities and Exchange Commission (SEC) and comply with burdensome securities law reporting requirements that are generally intended for larger corporations.

Position Statement

Companies that have $10 million in assets and 500 shareholders of record are currently required to register with the Securities and Exchange Commission (SEC) and are thus subject, among other things, to the SEC's periodic reporting requirements. While the $10 million threshold has been incrementally increased over the years from the $1 million level initially set in 1964, the 500 shareholder of record requirement has never been updated. Now, more than 40 years later, it is time to update the 500 shareholder threshold to somewhere between 1,500 and 3,000 shareholders of record.

Explanation

Generally, a company is deemed a public corporation if it is listed on a national securities exchange or has $10 million in assets and 500 shareholders. Companies are not considered to have a large enough market presences to be subject to reporting under the Securities Exchange Act of 1934 (Exchange Act) until both the asset and shareholder thresholds are met.

For the banking industry, the $10 million asset threshold is inconsequential. Ninety-nine percent of all banking organizations have assets in excess of $10 million. Thus, the 500 shareholder parameter is the critical criterion for determining which banking organizations are subject to Exchange Act reporting requirements.

Often banking organizations do not choose to become SEC registrants, but are forced into it because of the organic growth in shareholder ownership. Without any intent to market their securities publicly, many community banks and savings associations have seen their shareholder base exceed the 500 mark as successive generations distributed their stock holdings among their descendants. As a result, small community banking organizations are required, among other things, to file annual and quarterly reports with the SEC and to comply with SEC's proxy disclosure rules, all requirements designed for large, publicly-traded institutions. In addition, company insiders are required to file various insider reports with the SEC. 

Due to the increasing cost of being a registered public company brought on by these and other SEC regulatory requirements (many of which were added by the Sarbanes-Oxley Act), a number of community banking organizations have determined that deregistration is in the best interests of their shareholders. To do so, community banks and savings associations generally must have less than 300 shareholders of record.  In order to satisfy this requirement, many organizations are forced to buy back shares from their existing investors. Doing so can have negative consequences for local communities. Besides reducing small banking organization access to capital, it deprives small communities of one of the last opportunities to invest in local business.  Nevertheless, the high cost of being an SEC registrant drives many bankers to choose this path.  Indeed, the prospect of SEC registration has led more than one banking institution to put itself up for sale to larger institutions; such action should not be driven by regulatory considerations.

Although the SEC noted its intention to consider updating this threshold back in 1996, it has not done so.  In the intervening years, the size of the investing market has grown substantially, as has the number of corporations and investing shareholders. Using change in the number of shareholders of New York Stock Exchange (NYSE) listed companies as a proxy for change in the number of shareholders in all publicly-traded companies, the number of shareholders of NYSE-listed companies has grown from approximately 20 million in 1965 to 65 million in 2005—an increase of 223 percent. Under this analysis, the 500-shareholder criterion should also be raised by 223 percent to about 1,500. 

Alternatively, comparing the market presence of 500 shareholders in 1964 with the market presence of comparable shareholders today, we find that, in 2007 dollars, after adjusting for inflation, the same market presence today that 500 shareholders would have occupied in 1964 would be six times as large. In other words, it would take approximately 3,000 shareholders today to equal the market presence of 500 shareholders in 1964. Accordingly, the shareholder threshold should be updated to some number between 1,500 and 3,000 shareholders, while the deregistration threshold should similarly be brought in line to between 900 and 1800 shareholders.

Since 2005, the ABA has urged the SEC to make this change. We were quite pleased, therefore, that, in mid-2007, SEC Chairman Cox indicated in his responses to written inquiries posed by the House and Senate Small Business Committees that the SEC staff was considering revisions to the shareholder threshold requirement. ABA has met with the staff to indicate that while the numerical shareholder threshold should be raised, we do not believe that the "held of record" requirement should be changed, as some have suggested, to "equitable" or "beneficial" owners of the shares. Expanding this definition to include equitable or beneficial owners would not only make it difficult to determine the number of shareholders for purposes of the registration requirement, but could, unintentionally, subject many smaller companies to SEC oversight, including smaller banking organizations that, heretofore, had never been subject to SEC registration requirements.

In late 2008, ABA participated in the SEC's Annual Forum on Small Business Capital Formation. During that forum, our ABA representative actively championed the ABA position that that the existing SEC 500 shareholder registration rules are outdated and act to inhibit community banks' ability to raise capital. In conjunction with ABA's participation in the forum, ABA sent a letter advocating updating the shareholder thresholds for registration and de-registration as a public reporting company. Read the letter here. As a result of the discussion at the forum, the securities regulation breakout group determined, among other things, to recommend that the SEC increase the thresholds for registration for small community banks under Section 12(g). In the months following the forum, ABA staff has continued to press for change in this area with SEC Commissioners and staff.

Contact for further information: Cecelia Calaby (202) 663-5325.