Our Position

Community Bank Access to Capital

Position

  • ICBA supports legislative and regulatory changes that would improve the ability of community banks to raise capital.
  • Subchapter S of the tax code should be updated to facilitate capital formation for community banks by increasing the shareholder limit for Subchapter S eligibility, allowing the issuance of preferred shares, and permitting individual retirement account (IRA) shareholders.
  • The asset threshold under the Federal Deposit Insurance Corporation Improvement Act (FDICIA) for requiring an annual audit should be raised from $500 million to $1 billion, and the asset threshold for an internal control report, also required by FDICIA, should be raised from $1 billion to $5 billion.
  • SEC Regulation D should be revised so that the definition of an “accredited investor” includes individuals with a net worth of $1 million or more, including their primary residence.

Background

Since 2007, the public capital markets have often been either unavailable or unattractive to many community banks and holding companies. These community banks have had to rely more on existing shareholders, directors and insiders for capital raises and less on new investors, including institutions and private equity investors. S. 2155, enacted in 2018, included a favorable community bank provision which raised the asset limit under the Federal Reserve’s Small Bank Holding Company Policy Statement from $1 billion to $3 billion, allowing more community bank holding companies to more easily raise capital.

Various tax code changes would facilitate capital formation for Subchapter S banks. The limit on Subchapter S shareholders should be increased from 100 to 200; Subchapter S corporations should be allowed to issue preferred shares; and Subchapter S shares, both common and preferred, should be permitted to be held in individual retirement accounts (IRAs).

ICBA supports the SEC’s final rule to broaden the exemption for smaller publicly held companies so that those with a market capitalization of less than $700 million and with total annual revenues of less than $100 million are exempt from the internal control attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and also have reduced reporting requirements.

In addition, the asset thresholds for requiring both an independent annual audit of an insured depository institution and an internal control report under the Federal Deposit Insurance Corporation Improvement Act (FDICIA) should be raised to reflect industry consolidation and the overall increase in size of community banks. The asset threshold for requiring an annual audit should be raised from $500 million to $1 billion, and the asset threshold for an internal control report should be raised from $1 billion to $5 billion.

Community banks often rely on the safe harbor of SEC’s Regulation D when raising capital. However, SEC Regulation D should be revised so that the definition of an “accredited investor” includes individuals with a net worth of $1 million or more including the value of their primary residence. The current definition requires individuals to exclude their primary residence when computing their net worth.

Staff Contact

Christopher Cole

Executive Vice President, Senior Regulatory Counsel

Washington, D.C.

Email