Now, banks with fewer than 1,200 shareholders can deregister under a provision of the Jumpstart Our Business Startups, or JOBS, Act. Since the threshold rose in April, 101 banks have rushed to take advantage of it — more than the total number of deregistrations for the previous 21 quarters combined, according to an analysis by SNL Financial. Eighteen of the banks are based in Virginia, the highest number of any state.
Most of the firms are small community banks with less than $500 million in assets. The banks say that reporting to the SEC is a time-consuming and expensive process that eats into thin profit margins without any meaningful benefit to the public. The industry remains heavily regulated even without SEC oversight, bankers say.
“I’m the happiest person in the bank because we’ve deregistered,” said Alan Dickerson, chief financial officer of the Bank of Floyd, a state-chartered bank southwest of Roanoke that is the sole subsidiary of Cardinal Bankshares Corp. But “I still have a lot of people looking over my shoulder.”
Critics of the higher thresholds say it’s true that some banks may be regulated by several institutions, including the Federal Deposit Insurance Corp., the Federal Reserve and state entities. But those regulators serve different constituencies whose interests do not always overlap, they said. The SEC is tasked with looking out for investors.
Making it easier for firms to avoid issuing key disclosures to the investing public will only lead to more fraud, investor advocates and lawmakers said.
“Shareholders should always be concerned when companies they invest in are allowed to operate behind a veil,” said Amy Borrus, deputy director of the Council of Institutional Investors.
The industry has been lobbying for years to get rid of the thresholds, which were put in place in 1964. The premise of that law is that companies with stock that’s widely held should disclose basic information about themselves, even if they’re private.
Over time, the older banks kept bumping up against that 300-shareholder limit. As longtime customers died, their stock was parceled out to heirs and other people. The shareholder count ballooned, forcing some banks to make public disclosures.
The issue was of such great concern to so many banks that they would often go to smaller shareholders and buy back the stock to keep from going over the limit, said Chris Cole, a senior vice president at the Independent Community Bankers of America.
Recognizing that banks already report to several regulators, the JOBS Act carved out an exception allowing them to deregister if the shareholder count fell below 1,200. All other companies must still abide by the old 300-shareholder limit.