Pub. 10 2019 Issue 3

www.wvbankers.org 20 West Virginia Banker O ne recurring issue for privately held community banks is how to provide market liquidity to share- holders. If a bank without an active market proac- tively addresses a lack of liquidity through direct involve- ment in shareholder trading, it risks violating federal and state securities laws. If a bank seeks to facilitate liquidity by implementing a periodic stock repurchase program, regula- tory requirements and restrictions also apply. In developing a liquidity program strategy, banks should strive to limit their involvement to administrative and minis- terial activities. Too much direct involvement could expose the bank to liability for failing to register as a broker dealer under the Securities Act. Generally, the bank should not: • Directly handle shareholder funds or securities during shareholder trades; • Make recommendations on purchases or sales or rep- resentations regarding the value of the stock; and • Accept any commissions or compensation in connection with purchases or sales. With these caveats in mind, there are ways for a bank to structure liquidity programs that minimize the risks and comply with regulatory requirements and securities laws. Stock Repurchase Programs Privately held bank holding companies and community banks may implement a periodic stock repurchase program to provide liquidity to their shareholders. To implement a stock repurchase program, the Board of Directors must ap- prove resolutions specifying the maximum number of shares to be repurchased, the time period during which repurchas- es may be made, the price to be paid for each share, and the source of funds. From a securities law standpoint, the bank’s repurchase program is subject to federal and state Shareholder Liquidity By Sandra M. Murphy and Amy J. Tawney, Bowles Rice, LLP Strategies for Community Banks insider trading laws. Accordingly, repurchases should not be made while the bank is in possession of material, non-public information. In addition, the bank should not make rep- resentations to a selling shareholder about the value of the bank’s stock. The bank also must comply with stock repurchase require- ments promulgated by the Federal Reserve (bank holding companies) or by the Federal Deposit Insurance Corpora- tion and State of West Virginia (state banks without a bank holding company). Shareholder Matching Another alternative for private community banks and holding companies to assist shareholders with liquidity is a shareholder matching program. Handled properly, this approach tends to involve lower risk to the bank. In its simplest form, the bank maintains a list of shareholders who have expressed an interest in purchasing additional shares of stock. When shareholders interested in selling contact the bank regarding potential liquidity, the bank provides the list of potential purchasers. The interested seller then deals directly with the interested purchaser. As discussed above,