Becoming an exchange-listed security means more exposure to SEC reporting requirements, compliance with Dodd-Frank legislation, additional regulatory scrutiny, the threat of activist shareholders, hostile takeovers and the rigid policies of proxy advisory firms that can impact your institutional shareholder voting patterns. Simply establishing an over-the-counter market for your bank's securities triggers a higher level of disclosure, reporting requirements and additional oversight from federal or state regulators. All of which can be a scary to tackle.
With all this on the table, remaining privately held often looks appealing to many institutions. It's your comfort zone and we get it. But as a private bank (including non-exchange listed and non-SEC reporting institutions) it is imperative that you invest in the upkeep of shareholder records. Some of your shareholders or Board members may want to ensure that records are maintained by an independent party, such as a registered transfer agent. Poorly maintained or inaccurate records can lead to big problems down the road, such as extending voting rights to – or withholding them from – the wrong people or subject shareholder accounts to abandoned property reporting and escheatment. These situations could present some serious concerns with your banking regulator and service issues with your shareholders and you don't want either of those to occur.
A good forensic examination of your shareholder list is something that you need to consider, if you have not done so recently. There is significant risk exposure to your enterprise if shareholder records fall into disarray. More often than not, a single person at these smaller institutions maintains the records, typically using little more than a spreadsheet saved on a laptop. That is not a best practice. Think outside the box and delegate the everyday responsibilities of maintaining your shareholder records to an independent resource whose core business is compliant shareholder records management – this will ensure your records are spot on.
In reviewing your private shareholder records consider the following important factors to pay close attention to:
- Overall share balance. Does the number of shares held on the share register match the number of shares outstanding as reported by your finance team? Often enough there is a disconnect between the share register and the finance team's records because these may be maintained on two different systems. Changes in shares outstanding (where there is an increase or decrease in this overall figure) don't happen very often, but it is critical to keep your financial reporting system and the share registry in sync and up-to-date.
- Share issuance discrepancies. When a share transfer takes place, the transaction must be recorded for both the transferor and transferee. Private bank shares are often not liquid and transfers may not happen often. Given this rarity, it's important to take special care to properly record transfers on the books of the company. Errors can be hard to find later down the road especially when someone retires. It's best to avoid any discrepancies, but the reality is they happen. Resolve them NOW and avoid a messy accounting issue much later on.
- Special attention for executive stock options. It's usually not a good idea, or a good career move, to keep improper and inaccurate records of stock option positions for officers and directors. Pay special attention to executive stock options to ensure accuracy because the last thing you need is your executives and directors having unnecessary tax or regulatory issues.
- Data security. Keeping accurate shareholder records is important. Safeguarding the personal information therein is even more important. This means protecting from both outside intrusion and weak internal processes that could threaten your data and create risk exposure. Data security and security breach notifications are also legal matters that need to be addressed to comply with state and federal law.
- Investor relations. Part of the C-suite's business is to continue to attract investors to the company both to help boost the demand for the stock but also to provide some degree of liquidity as well. Maintaining accurate shareholder records will ensure delivery of financial reports, proxy materials and other shareholder communications in a timely manner, keeping your investors happy. Demonstrating good corporate governance practices is also important to the financial markets.
- Regulatory compliance. Companies that file with the SEC need to follow strict SEC reporting guidelines. But even those that don't report to the SEC need to comply with state and/or federal banking regulations regarding governance and investor relations.
- Your company charter and by-laws. Your counsel needs to review these documents from time to time and make updates that support your business objectives. For shareholder recordkeeping, consider the elimination of paper stock certificates if they are specifically required in the by-laws. Making this update allows for shares to be held in book-entry, facilitates more modern communications and use of proxy voting technology, including electronic delivery of annual meeting materials and online voting – all of which provide greater security and convenience for your shareholders while reducing corporate expenses. Your counsel can review applicable banking regulations to determine whether these options are available for your institution.
- Lost certificates. As mentioned above, the use of book-entry form of ownership in lieu of a stock certificate has one critical benefit: you can't "lose" the shares. Shareholders who need to replace a lost stock certificate must purchase bond of indemnity insurance, which can prove expensive in many cases. Using book-entry ownership and forgoing the use of stock certificates can mitigate this problem, making ownership that much easier for your investors. It also facilitates trading if you have a market maker for your shares.
While there are many differences between public and private or non-exchange listed financial institutions, one thing is true for both: Proper shareholder recordkeeping will reduce opportunities for mistakes and headaches down the road.