Community banks would no longer be required to register with the U.S. Securities and Exchange Commission when they surpass 500 shareholders under legislation crafted by U.S. Rep. Jim Himes, D-Conn., who says raising the threshold would eliminate costly red tape and have a trickle-down effect for small business customers of the lending institutions.

From his plum post on the House Financial Services Committee, Himes co-authored a bill that would set the threshold, one that has been on the books for nearly a half-century, at 2,000 shareholders. The bill's other author is Arkansas Republican Steve Womack.

Proponents of the legislation, which the Subcommittee on Capital Markets and Government Sponsored Enterprises passed by a voice vote Wednesday, contend that it will free up small banks to raise vital capital from a larger pool of investors.

"They often are forced to go public before it is right for them to do so," Himes told Hearst Connecticut Media Group in an interview last week.

The SEC requires banks to register if they control over $10 million in assets, but the mandate does not apply to financial institutions with fewer than 500 shareholders. The $10 million trigger would still remain in effect if the bill is approved by Congress.

The community bank industry is throwing its support behind the legislation, from Himes' Fairfield County district to Washington, D.C.

"The bill would relieve the pressure on some of the community banks to register when they are not ready to do so. That would save a significant expense for those entities," Merrill Jay Forgotson, chief executive of BNC Financial Group, wrote in an email provided to the newspaper.

The holding company for the Bank of New Canaan, Bank of Fairfield and Stamford First Bank controlled $440 million in consolidated assets as of the end of the second quarter of this year, according to BNC Financial.

The trio of banks have fewer than 500 shareholders each, the company said.

"Notwithstanding this proposal, we expect to register our shares and list the same in the very near future," Forgotson wrote. "This will facilitate our growth and the acquisition of shares by residents (of) the communities we serve as a community bank."

The banks are members of the Independent Community Bankers of America, a Washington lobbying group that represents 5,000 of the nation's estimated 7,100 small lending institutions.

The organization sent a letter of support for the bill to the chairman and ranking member of the Financial Services Committee, underscoring that community banks funded 60 percent of the balance of all small business loans as of the first quarter of 2011.

Paul Merski, the organization's executive vice president and chief economist, told Hearst Connecticut Media Group that banks are facing increased pressure to secure adequate capital because of the continued tumult in the national and global economy.

"Bank regulators are forcing many banks to hold additional capital," Merski said. "You've got to have a bigger capital cushion at the bank."

In an effort to alleviate the strain on existing shareholders, Merski said banks are turning to outsider investors for that infusion of cash, known as equity capital.

Merski characterized the current registration requirement as counterproductive.

"So you're kind of hindering the ability of community banks to raise capital," Merski said. "If you have a flower shop, you don't have to raise $25 million in capital and hold $25 million to operate your flower shop."

He added that other sources of capital are fairly limited.

"The net interest margin in banks, they basically have been shrinking for about a decade now, so the amount that they can earn for a given level of capital has been shrinking," Merski said.

And then there is the issue of registering with the SEC.

"You have to have extra auditing, extra certifications, on and on and on," Merski said.

The lobbying group gave a $50,000 to $100,000 estimate for the cost of SEC compliance.

"That could be a few additional employees at the bank," Merski said.

Himes is no stranger to the legalese of banking regulations, as a former investment banker with Goldman Sachs.

"I think it's healthy for the industry as a whole," he said of the proposed change.

A Democrat from Greenwich who is in his second term, Himes is co-sponsor of a separate bill that raises the threshold for when a small company must go public from 500 to 1,000 shareholders.

"This is part of a larger effort to try to make it more comfortable for small businesses to raise capital in the most appropriate way," Himes said.

Merski envisions the two pieces of legislation working hand-in-hand.

"We're not opposed to that," Merski said. "It would be good for the community banks' small business customers -- improve their viability."

However, Himes opposes a controversial measure that would allow businesses to raise up to $10,000 in capital from individual investors via the Internet, a practice he termed "crowd-sourcing."

"To me, it just looked like an invitation to Internet scams," Himes said. "I dredged up that old New Yorker cartoon with the dog sitting at the computer terminal and another dog saying, `On the Internet, nobody knows you're a dog.' "

Staff Writer Neil Vigdor can be reached at or at 203-625-4436.