Friday, June 12, 2015

Transfer Agent Rules May Yet Get a Long Needed Update

By R. Jason Howard, J.D.

SEC Commissioners Luis A. Aguilar and Daniel M. Gallagher, acknowledging that the Commission’s rules governing transfer agents are anachronistic and out of sync with the industry, have released a statement regarding the need to modernize the rules that govern transfer agents; rules that have not been significantly revised in almost 30 years.

The Commissioners shared the view that a “lengthy delay in updating the Commission’s transfer agent rules would be bad for the markets, investors, and issuers.” A recent article in the Securities Regulation Daily Wrap Up, May 12, 2015 and the corresponding paper reflect the fact that industry insiders and the Commission have in the past recognized the need for change. In a separate post, covered in the Securities Regulation Daily Wrap Up, December 18, 2014, Commissioner Aguilar acknowledged that “technological advances and changes to business practices and market structure have created a significant gap between the transfer agent rules and their current activities.”

Concept release. The need to update the rules governing transfer agents has been a topic long discussed by the Commission and industry experts because the securities industry and the functions that transfer agents now provide have changed dramatically since the inception of the rules. In the most recent statement, Aguilar and Gallagher said that The Division of Trading and Markets has been working on a concept release seeking public comment on possible updates and improvements to the Commission’s regulatory framework for transfer agents.

Prior to the issue of this concept release, however, the Division had developed recommendations for proposed transfer agent rules and briefed Commissioners on those rules. The Commissioners explained that while the Division’s desire to issue a concept release is “laudable,” they believe the Division’s first inclination to propose transfer agent rules was the right one. Moreover, Aguilar and Gallagher expressed the belief that while a concept release may be valuable in gathering additional information, “there are critical reforms requiring immediate action that we can propose now.”

Reforms. The Commissioners noted that Chair White recognized the need to update the rules governing transfer agents last year when she instructed the staff to prepare a concept release addressing the need to modernize these rules. At her invitation, the Commissioners said “we have presented Chair White with our joint recommendations for proposed updates and improvements to the Commission’s transfer agent rules that we believe need not wait for a concept release.”

They explained that they hope to “catalyze” Commission action to improve the transfer agent rules and to enhance Commission monitoring of the transfer agent industry. They continued, saying that among other things, their recommendations will help to ensure that transfer agents do the following:
  • Safeguard investor assets, in part by requiring transfer agents to be appropriately insured or bonded;
  • Establish written agreements with their issuer clients, so that both parties fully understand their rights and obligations;
  • Process dividends and other payments in a timely manner, and promptly notify shareholders about the status of their payments;
  • Develop business continuity and disaster recovery procedures;
  • Prevent fraud, particularly with regard to microcap securities;
  • Avoid or properly disclose and manage conflicts of interest;
  • Develop procedures to govern their use of information technology; and
  • Disclose key information in their annual filings with the Commission, including the identities of all issuers and securities for which they perform services.
The Commissioners said they hope and expect that proposals for rule updates will be published for comment as soon as possible and the Securities Transfer Association (STA) has stated that it will comment on any rule proposals.

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