Sarbanes-Oxley Spurs Second Thoughts on SEC Registration

By Stoneman, Bill | American Banker, November 12, 2003 | Go to article overview

Sarbanes-Oxley Spurs Second Thoughts on SEC Registration


Stoneman, Bill, American Banker


Accountants advising founders of Greater Rome Bancshares Inc. in Rome, Ga., estimated when it opened in February 1996 that bookkeeping, financial reporting, and other jobs associated with Securities and Exchange Commission registration would cost about $25,000.

"We thought we could live with that," said Thomas D. Caldwell III, the president and chief executive of the $125 million-asset company. So incorporators had no qualms about SEC registration, which was required when they sold stock to more than 500 investors.

By last year, however, the estimated cost of SEC registration had risen to $53,000. And with the passage of federal legislation requiring big changes in corporate accounting and auditing, the bill appeared sure to climb higher.

"Because of Sarbanes-Oxley, because of more stringent corporate governance, our accountants said they wouldn't be surprised if that $53,000 grew to $100,000 in three or four years," Mr. Caldwell said.

The company averted the extra cost by buying back shares from its smallest shareholders early this year, cutting their ranks enough that it could withdraw its SEC registration, which it also did, effectively converting from a public company to a private one.

Though the number of institutions making similar moves is not great, Greater Rome's action appears to reflect consideration that dozens, if not hundreds, of community banks are giving right now to the relative merits of maintaining SEC registration and being a public company.

Foremost in the minds of executives and directors considering withdrawing SEC registration is the cost of preparing quarterly and annual filings, including auditing of financial statements and legal review of just about everything companies say in and about their filings.

More than historical legal and accounting expenses, public companies are facing increased burdens under the Sarbanes-Oxley Act, enacted last year in response to a series of financial reporting scandals. Among other things, SEC-reporting companies have to take steps to protect the independence of board audit committees, which many observers believe will be difficult for community banks. And chief executives and chief financial officers will have to certify financial statements filed with the SEC, possibly increasing their personal liability for any problems that surface.

But in addition to the quantifiable cost of SEC registration, community bankers are questioning traditional assumptions behind registration and public ownership.

The logic, accepted by hundreds of community banks for many years, is that SEC registration and public ownership provides maximum access to capital markets. In addition, an active market for a company's stock, which in theory goes hand in hand with SEC registration and a sizeable number of owners, may provide currency for acquisitions.

Maybe so. But bankers and their advisers increasingly note that publicly traded community banks are more likely these days to raise capital by issuing trust-preferred securities through pools organized by investment banks (which does not require SEC registration) than to undertake a secondary stock offering. They also say that many community banks have next to no interest in making acquisitions.

Community bankers also counted on shareholders to bring them business. But Greater Rome's Mr. Caldwell and others say owners of a few shares bring much less to the table than larger owners.

Most public community banks seem to be standing pat, at least for now. In fact, some are downright enthusiastic about their current position.

"Being a public company is wonderful," said David T. Taber, the president and CEO of the $356 million-asset American River Holdings in Sacramento, "in that it provides each of our investors with flexibility when they want to buy more or when they want to sell."

That is important, Mr. Taber said, because closely held companies can be forced to sell themselves when a significant owner needs to sell a large block of stock for reasons having nothing to do with the company's performance. …

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