Do-It-Yourself Shareholder Management: 5 Common Mistakes Banks Make

Many community banks manage their shareholder recordkeeping in-house. The reasons make sense: The bank maintains direct communication with shareholders — most of whom are also deposit holders — while keeping control of communications and, sometimes, costs.

At first glance, shareholder recordkeeping appears straightforward. Banks routinely track far more complex assets for their clients. What’s more, shareholders tend to invest for a lifetime, handing shares down from generation to generation. With so little apparent fuss, why not go the do-it-yourself route?

Like many an ill-fated do-it-yourself project, the problem is that the task is only deceptively simple, and one usually doesn’t realize that until it’s too late. There is much more at play than commonly meets the eye, and community bankers — who specialize in banking and not transfer agent services — often expose themselves to risk without even realizing it.

The reality is that issuing stock and servicing shareholders is a highly nuanced, dynamic and, at times, ambiguous undertaking which deserves careful attention and specialization. For banks that choose to keep shareholder services in-house, here are five common mistakes worth avoiding:

1. Incorporating Too Few Controls
Many banks rely on Excel spreadsheets, basic ledgers or retrofitted software to maintain shareholder records. The problem isn’t the tool used but the absence of controls that prevent errors. Consider how easy it is to accidentally delete a cell in a spreadsheet. One keystroke can inadvertently change the number of shares a shareholder owns. Without audit trails, approval layers and system-level controls, the margin for error is wide, and the consequences can be significant.

2. Processing Incomplete Transfer Requests
Banks are often unaware of what makes a transfer in good form for processing. This is especially true with complex situations such as inherited shares, court ordered transfers or contested divorces.

But even when the transfer requirements are known, another common and costly pattern is when a VIP shareholder such as a board member or a longtime friend of the bank requests a transfer, and the bank accommodates without requiring proper documentation. Transfers honored on verbal instructions alone, without proper endorsement or without surrender of the original certificate, expose the bank to significant liability, particularly under Uniform Commercial Code (UCC) Articles 8 and 9.

3. Replacing Lost Certificates Without a Surety Bond
Every time a certificate is duplicated, a new liability is created. Each certificate represents a legal claim to shares, and duplicate certificates mean duplicate claims to the same shares. If the original turns up later as loan collateral or becomes part of a legal dispute, the bank’s exposure can be substantial.

Whenever a lost certificate is replaced, the shareholder should be required to post a surety bond to protect and indemnify the bank against future claims. Banks often skip this step, either because they don’t know it exists, or because they don’t want to inconvenience the shareholder. Either way, the bank assumes all the risk.

4. Issuing Shares in Ambiguous Account Names
Banks often title shareholder accounts the same way they title deposit accounts. An account registered to John Smith or Jane Smith or simply J. Smith may seem harmless, but it creates real ambiguity about who the legal owner actually is.

Under UCC Article 8, the account title on a stock certificate is authoritative. The best practice is to register shares using “and” rather than “or,” define the type of joint tenancy clearly (e.g., John Smith and Jane Smith JTWROS) and always use the shareholder’s complete first name. These small details carry legal weight.

5. Printing Money
A bank would find it unthinkable to print its own money. But when a bank creates new shares and prints stock certificates without regard to federal securities regulations and without the necessary restrictions, it is doing something remarkably similar. This is by far the riskiest DIY failure and, unfortunately, the most common.

New share issuances must always be issued restricted unless the shares are registered with the Securities and Exchange Commission (SEC) or qualify for a specific exemption to registration. Too often, bank holding companies issue shares free-trading and without restriction, completely unaware of important regulations they are bypassing that can allow shares to be sold improperly in the secondary market.

The Bottom Line
DIY projects can be a brave and rewarding endeavor or the bane of one’s existence. When it comes to shareholder recordkeeping, banks who opt the DIY route should consider these safeguarding measures, which will minimize risk and ensure that shareholders are taken care of — both now and well into the future.