An Empirical Investigation of Street Registration for Banking

By Sullivan, Laura L.; James, Joe et al. | Academy of Banking Studies Journal, January-July 2006 | Go to article overview

An Empirical Investigation of Street Registration for Banking


Sullivan, Laura L., James, Joe, Bexley, James, Academy of Banking Studies Journal


INTRODUCTION

The Securities and Exchange Commission ("SEC") is an independent, quasi-judicial regulatory agency with responsibility for administering federal securities laws. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). Its mission is to administer federal securities laws and protect investors by issuing rules and regulations and ensuring the securities markets are fair and honest. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). To accomplish its mission, the SEC promotes adequate and effective disclosure of information to the investing public. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). The SEC was established in 1934 by the creation of "The Securities Exchange Act of 1934." (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997).

The SEC is relevant to the banking industry in several different ways. The SEC has jurisdiction over all interstate public offerings in the amount of $1.5 million or greater. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). Before going public, all newly issued securities must be registered with the SEC. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). Once registered, the SEC ensures that publicly traded companies, including banks, maintain current information (including financial and operating results) that is available to the public. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). This reporting requirement was established by the Securities Act of 1933, which is commonly referred to as the "truth in securities" law. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). This law aims to ensure that investors are provided with material information concerning securities for public sale and prevent misrepresentation, deceit and other fraud in the sale of securities. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). The disclosure required provides the potential investor with adequate information to properly analyze the security being offered. This reporting requirement is the most cumbersome task for the majority of businesses. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). To comply with these reporting requirements set by the SEC, public companies must issue periodic reports, including 10Q's, 10K's and other informational reports, to all of its shareholders of record. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). Not only are the reporting requirements cumbersome for those who must file them, the public filings are also very costly. In addition, the registration statements are subject to examination for compliance with the disclosure. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). Although registration requirements of the SEC are thorough regarding disclosure and companies are subject to fines and penalties for noncompliance, the laws do not protect investors from the ownership of shares in nominee names.

Shares that are issued in nominee names, or street registration, are those which are issued in the name of an institutional investor or brokerage service, for example Merrill Lynch, but are actually owned by a customer of the institutional investor or brokerage service. The brokerage service holds the securities in the name of the brokerage firm and does not transfer the shares or have them issued in the name of the "true" owner of the stock. (Moyer, McGuigan, & Kretlow, 1992); ("The Work of the SEC," June 1997). For example, John Smith owns ten percent of the shares of ABC Bank through Merrill Lynch. The shares are issued in the name of Merrill Lynch where they are held in John Smith's portfolio. Since ABC Bank thinks Merrill Lynch holds its stock, it has no idea that John Smith is one of its major shareholders, and is therefore unable to disclose the correct ownership of the bank to prospective investors and current shareholders. …

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