By Jacquelyn Lumb
The comment period has closed on the SEC’s concept release on the transfer agent regulations, which explores registration and reporting requirements, safeguarding of funds and securities, standards for restrictive legends, and cybersecurity. The staff also sought input on recordkeeping for beneficial owners, administration of issuer plans, and the role of transfer agents with respect to mutual funds and crowdfunding. The original comment period ended February 29, 2016, but after requests for additional time, it was extended through April 14, 2016.
Securities Transfer Association. The Securities Transfer Association, whose members maintain the records of more than 100 million registered shareholders on behalf of 15,000 issuers, wrote that a comprehensive review of the rules was needed to address all of the technological advances of the past 30 years and consolidation in the industry. Five large transfer agents lead the industry, according to STA. The association agrees with the Commission that its top priorities should be guidance or rulemaking to provide additional safeguards for monies or securities controlled by transfer agents, a requirement for written contracts, and a requirement that transfer agents engage in ongoing assessments of risks, including cybersecurity issues.
STA said that in drafting new rules, the SEC must consider the unique operations of bank versus non-bank transfer agents; transfer agents that provide services to smaller issuers, larger issuers, open-end mutual funds, and debt issuers; those that offer plan administration, paying agent or other services; and issuers that act as their own non-commercial transfer agent. Given the diversity of products and services offered by transfer agents, STA added that it is pleased that the SEC does not plan to take a one size fits all approach and urged the SEC to carefully weigh the costs and benefits of any proposed changes. STA also urged the SEC to narrowly tailor and address separately any concerns related to mutual fund transfer agents.
American Bankers Association. The American Bankers Association wrote that the SEC should exempt bank transfer agents from rules that conflict with or duplicate existing federal banking rules. In the ABA’s view, the model for broker-dealer registration is not appropriate for heavily regulated banking organizations, which are structured differently and are required to hold far more capital than broker-dealers.
In proposing new transfer agent rules, the ABA urged the SEC to identify specific risks to issuers and security holders because of inadequate or the lack of regulations; to narrowly tailor any revisions to those specific risks; and to ensure that the benefits of any new regulations outweigh the costs. ABA’s comments were directed to agents that provide services with respect to debt securities.
SIFMA. SIFMA cautioned the SEC to avoid duplicative regulations since many entities are already heavily regulated; urged that transfer agents be held to financial industry standards of fairness and transparency in their dealings with broker-dealers, clients, and shareholders; and recommended bringing the regulations on cybersecurity and business continuity planning in line with financial industry standards. SIFMA also offered additional suggestions for escheatment reporting and proxy processing activities.
While shareholder servicing, recordkeeping, and the transfer agent process have evolved to include broker-dealer participation through outsourced functions such as sub-accounting, SIFMA wrote that these activities do not pose regulatory issues or raise concerns about gaps that would require regulatory action. SIFMA urged the SEC to take into consideration the already heavy regulation that is imposed on broker-dealers, particularly with respect to the functions underlying sub-accounting.
Broadridge. Broadridge, which provides shareholder communications and proxy voting services, has a subsidiary that is a registered transfer agent. In Broadridge’s view, the existing regulatory systems for clearance and settlement, shareholder communications, and proxy voting function effectively, reliably, and efficiently, and require no changes. However, the organization agreed there are certain regulatory gaps that should be addressed and ways to reduce costs to investors, issuers and financial intermediaries.
Broadridge recommended that the SEC focus on transfer agent financial reporting, fee transparency, and technology management, while reducing costs by right-sizing the regulations. The SEC should maintain the current rules for beneficial ownership involving non-objecting and objecting beneficial owners and continue its current approach with separate and distinct roles and regulations for transfer agents and broker-dealers, according to Broadridge.
Depository Trust & Clearing Corporation. The Depository Trust & Clearing Corporation agreed that the regulation of transfer agents is critically outdated. While transfer agent failures are rare, they are bound to occur in the future, according to DTCC and their failures could potentially cause or add to a systemic crisis. DTCC said it agrees that transfer agents should be subject to reporting and substantive requirements to ensure their financial stability. This includes more robust registration and reporting requirements, new measures to safeguard against cyberattacks, and appropriate business continuity planning, DTCC wrote.
Council of Institutional Investors. The Council of Institutional Investors (CII) noted that it identified end-to-end vote confirmation as a key issue in 2010. Some market participants have undertaken voluntary efforts to implement this process, but full and precise vote conformation for all U.S. corporations remains unrealized. As part of the transfer agent modernization initiative, CII encouraged the SEC to explore how to make it a reality.
The transfer agent rules were adopted in 1977 and remain essentially unchanged, while the market in which transfer agents operate bears little resemblance to the 1977 market structure. The SEC’s release is characterized as both an advance notice of proposed rulemaking in specific areas and a concept release to address additional areas of interest.