In an increasingly rare display of unity among members of the Securities and Exchange Commission, Democrats Kara Stein and Luis Aguilar, and Republicans Daniel Gallagher and Michael Piwowar, say the Commission needs to dust off decades-old transfer agent rules.
“The Commission has not significantly revised its transfer agent rules in almost 30 years, a period that has witnessed sweeping changes in the securities industry, particularly in transfer agents’ activities,” Aguilar and Gallagher wrote in a joint statement released on June 11. “As a result, the Commission’s anachronistic transfer agent rules and the services that the nation’s roughly 450 transfer agents provide today are out of sync.”
Companies that have publicly traded securities typically rely upon transfer agents as an intermediary to keep track of the individuals and entities that own their stocks and bonds. They record changes of ownership, maintain the issuer's security holder records, cancel and issue certificates, and distribute dividends. Transfer agents may also act as proxy agent (sending out proxy materials), exchange agent (exchanging a company’s stock or bonds in a merger), tender agent (tendering shares in a tender offer), and mailing agent (mailing the company’s quarterly, annual, and other reports). Most are banks or trust companies, although sometimes a company acts as its own transfer agent.
One issue, as flagged by Commissioners, is that these intermediaries (registered with the SEC, or if the transfer agent is a bank, with a bank regulatory agency) are lightly regulated and, therefore, could be exploited by fraudsters.
Aguilar and Gallagher noted that the Division of Trading and Markets has been working on a concept release seeking public comment on possible updates and improvements to that regulatory framework, but call for that process to be expedited. “A lengthy delay in updating the Commission’s transfer agent rules would be bad for the markets, investors, and issuers,” they wrote. “A concept release may be warranted to gather additional information and viewpoints on certain topics, but there are critical reforms requiring immediate action that we can propose now.”
Among their goals for modernizing transfer agent rules:
Safeguarding investor assets by requiring transfer agents to be appropriately insured or bonded;
Establishing written agreements between transfer agents and their issuer clients, so both parties fully understand their rights and obligations;
Processing dividends and other payments in a timely manner, and promptly notifying shareholders about the status of their payments;
Developing business continuity and disaster recovery procedures;
Preventing fraud, particularly with regard to microcap securities;
Properly disclosing and managing conflicts of interest;
Developing procedures to govern transfer agents’ use of information technology; and
Disclosing key information in their annual filings with the Commission, including the identities of all issuers and securities for which they perform services.
“We agree that the issue of transfer agent regulation is pressing and timely,” Stein and Piwowar wrote in a brief concurring statement.