From: Tom Allen
I consider myself to be a sophisticated private investor. I invest exclusively in bank stocks (and that of thrifts, and holding companies for same). I am not employed by any brokerage firm or anyone in the financial services industry. I have some comments on the above.
First, good job! You are taking the right approach.
My experience in going to bank annual meetings has shown that a lot of community bank executives and directors are scared of Sarbanes Oxley's requirements, and a lot of that terror has been put to them by some of their vendors--lawyers, accounting firms, etc--who are using it as an excuse to sell them on additional fee-based services. Exempting small firms from SOX should be done immediately; a lot of banks are going dark to avoid the costs, which does not help us as investors.
Banks are a special case among public companies, as they are already highly regulated by various federal (and state) agencies...and they have to have independent audits. And while SOX is about controls on financial reporting, the REAL issue for banks is controls on their financial assets--far more important.
If the bank's employees are siphoning off money and it's reported to shareholders, the SOX requirements are met. So what! The controls on their finances are much more critical.
The First National Bank of Keystone, WV was seized by the regulators in 1999 because this $1 billion (asset size) bank had half of its assets missing. Several executives of the bank are in jail as a result. As your report pointed out, in smaller businesses it is very difficult to perpetuate a significant fraud unless it's done by top management...and no amount of paperwork filed with the government is going to change that.
I have some specific comments on Part IV, the secondary recommendations:
1. Recommendation IV.S.1: Amend SEC Rule 12g5-1 to interpret "held of record" in Exchange Act Sections 12(g) and 15(d) to mean held by actual beneficial holders. IT'S ABOUT TIME!!!! You should make this your first priority. We have numerous cases of banks which claim to have few shareholders, and therefore don't give us shareholders much information, even in printed form. Proxy statements don't show holdings of insiders, ages of directors, whether they have been buying or selling stock, etc. And we have to take them at their word that they have fewer than 500 shareholders (how are we really to know?).
2. Recommendation IV.S.2: Make public information filed under Rule 15c2-11. This refers to the 211 forms from market makers. This should be very simple to implement. NASD can simply scan them and put them online on their website. Or they can go to online forms generation, and eliminate the scanning process. (One of the problems a broker told me was that the NASD insisted that the 211 filing be accompanied with paper copies of various documents....including paper copies of filings already online at EDGAR!). Go ahead with this. It will be a big help for newly listed issues.
3. Recommendation IV.S.3: Form a task force, consisting of officials from the SEC and appropriate federal bank regulatory agencies to discuss ways to reduce inefficiencies associated with SEC and other governmental filings, including synchronizing filing requirements involving substantially similar information, such as financial statements, and studying the feasibility of extending incorporation by reference privileges to other governmental filings containing substantially equivalent information.
Good idea. You might also want to have some state regulators, bankers, and some people from the banking vendor side (there are several non-Big Four accounting firms that audit a lot of banks, plus several law firms that specialize in banking, and even a few bank startup consultants, that might want to be heard). But you don't want the group to get too big, or else nothing will end up getting done!
A number of banks and bank holding companies (and especialy thrift holding companies) file "equivalent" reports with regulators other than the SEC: Federal Reserve, FDIC, OTS, OCC. But I was told by one of these agencies (I think it was the FDIC) about 10 years ago that they did not have enough different institutions filing with them to justify the cost of putting the filings online. I understand that position, and sympathize with it. But can we do something so they can be accessed through EDGAR?
4. Recommendation IV.S.4: Allow companies to compensate market-makers for work performed in connection with the filing of a Form 211, with full disclosure of such compensation arrangements.
I don't have a specific problem with this, but....
Many community banks do NOT want their stock to be traded publicly or quoted publicly. They would prefer to have no market for it, so when an investor wanted to sell, he'd have to call up the bank and talk to the president or CFO....who generally then tells the investor that the bank will buy back the stock at $X. And $X is guaranteed to be a lowball price. One bank I used to own stock in was quoted online in the Pink Sheets at about $85 a share, just under book value...while the bank was telling its holders that it was worth $38.
One of the results is that a lot of banks are not particularly cooperative with market makers who want to list the stock. Not every corporate manager has the best interests of the other shareholders at heart, believe it or not. And I have also heard from a bank president that a market maker generously "offered" to get the stock listed for a fee. On its face, it's not inherently bad or wrong for a bank to pay a market maker a nominal fee (maybe $500 or less) for his time and efforts to get the stock listed, if the idea to do so comes from the bank itself rather than from the market maker. I'd like to see more of these stocks listed and quoted somewhere!
Anything we can to do get more stocks quoted publicly rather than have them trade under the table somewhere makes the financial markets more transparent, which is good for all investors and the brokerage industry.
5. Recommendation IV.S.5: Evaluate upgrades or technological alternatives to the EDGAR system so that smaller public companies can make their required SEC filings without the need for third party intervention and associated costs.
6. Recommendation IV.S.10: Clarify the Sarbanes-Oxley Act Section 402 loan prohibition. Banks already have regulations on this.
7. Recommendation IV.S.11: Increase uniformity and cooperation between federal and state regulatory systems by defining the term "qualified investor" in the Securities Act and making the NASDAQ Capital Market and OTCBB stocks "covered securities" under NSMIA.
Good thinking again. I'd also like to see uniform Margin Loan requirements for stocks on NASDAQ vs OTCBB. Right now, as I understand it, if a company is listed on the NYSE, AMEX, or Nasdaq NM, it is automatically margnable, but on the Small Cap, OTCBB or Pink Sheets it is only marginable if the issuer applies to the Fed and the Fed approves the application. The Federal Reserve is supposed to maintain a "List of Marginable Securities", but I have not been able to find it on their website.
Thank you all for your excellent work, and I hope you can begin making these changes as quickly as possible!