Academic journal article SAM Advanced Management Journal

Street Registration and Community Bank Management

Academic journal article SAM Advanced Management Journal

Street Registration and Community Bank Management

Article excerpt

Background and History

When purchasing financial securities, many buyers go through a third party or intermediary. Although functioning as agents for the buyer, the intermediaries often purchase the securities in their own name. This process is known as street registration or nominee name purchasing. Regardless of what it is called, such purchases where the actual owner is not known creates a variety of possible advantages and disadvantages.

Privacy and convenience for the buyer are two possible advantages. Most countries do not consider it criminal or illegal to use nominee name purchases as long as the buyer files the appropriate disclosure forms, normally associated with tax implications (Garnham, 1992). Therefore, transactions such as numbered Swiss bank accounts in nominee names are legal and afford an element of financial privacy.

Similarly, it may be advantageous to handle financial transactions using street registration simply for convenience. As participants in exchanges try to reduce transaction times for purchases and sales, time considerations alone may make it necessary to have brokers make your purchases using their nominee names (Goldsmith, 1994). Likewise, safe custodial services and less hassle involving dividend payments (Anon, 1995) may be appealing to some investors.

While nominee name transactions have benefits, there are also some serious concerns associated with this method of purchase. These considerations affect the issuing firm and the purchasing public as well as regulatory agencies charged with the task of protecting public welfare.

Lack of complete information regarding an investment is probably the most serious drawback for individual investors. Goldsmith (1990) discusses the farmer selling a piglet to many uninformed buyers. The farmer was then to fatten up the pig on his farm and sell it for the purchaser for a good profit. With only four pigs in the sty, the farmer was counting on fewer than four investors showing up at the same time to inspect their investments. The implication is that investment advisors holding clients' accounts in nominee name or street registration could duplicate such an unscrupulous practice.

From a company's point of view, there are also disadvantages to the use of street registration, as this type of stock ownership may hinder a company that is trying to fulfill mandatory reporting requirements to regulatory agencies. For instance, community banks are required to notify the Securities and Exchange Commission (SEC) bank regulators, or both when specific ownership percentages are attained. Nominee names make it difficult at best and often impossible to uncover true ownership (Waters & Donkin, 1990). In addition to the probable unintentional reporting dilemma, street registration may cause intentional confusion, such as masking participants in hostile take-over attempts (Randall, 1990).

Negative effects of street registration are not limited to buyers and the companies involved. Government regulators may find it difficult to ensure compliance with ownership disclosure regulations when nominee names are used. These problems may be domestic, such as the Internal Revenue Service needing information (Hume & Hattori, 1994), or international as evidenced by the problems Russia is experienceing (Kentouris, 1999).

A specific example of the type of problem that may develop involved the First American National Bank of Pennsylvania. Without management's knowledge, a shareholder acquired a substantial number of shares using street name registration. This shareholder then attempted to put the bank "in play" for sale, in effect constituting a hostile takeover.

Although the focus of this study is on community banking, the preceding example could very easily have been about any type of corporation with publicly held stock. Informal discussions with regulators, especially those with the SEC, revealed their concern. …

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