Talk about overdue. The rules governing transfer agents hasn’t been substantively updated since the early ‘80s. That’s over forty years. Given that one of the larger transfer agents in the US demonstrated that its internal control environment was shaky a few years back – and that some of the newer entrants into the field aren’t that experienced – reform in this area is sorely needed.
For those in-house, as my good friend Carl Hagberg likes to say: “Transfer agent liabilities? Ignore them at your own peril. Make sure your transfer agent has adequate assets and insurance as well as cyber protection.”
Here’s a summary of the 421-page proposing release – and this fact sheet:
1. Transfer Agents Would Get a Section 5 Gatekeeper Role: A new rule would prohibit registered transfer agents from facilitating unregistered securities transactions unless they have a reasonable basis to believe the transaction does not violate – and is not part of a chain of transactions that would violate – Section 5(a) of the Securities Act. This would place an affirmative responsibility on transfer agents when processing transactions involving potentially restricted securities.
2. New Restrictive Legend Requirements Including a Safe Harbor: A new rule would establish requirements governing the placement and removal of restrictive legends from securities – including requiring transfer agents to establish a reasonable basis for removing restrictive legends (for which there would be a new non-exclusive safe harbor to establish that reasonable basis).
There are two possible ways the safe harbor could be met: one through which a transfer agent could rely on a legal opinion rendered by “counsel who is not an affiliate, officer, director, or employee of either the issuer or the individual or entity seeking to resell shares of the issuer” – and one through which a transfer agent could use its own efforts to make the claim (which would require diligence and documentation). The proposal also talks about a transfer agent not being aware of circumstances that there might be a Section 5(a) violation to avail themselves of the safe harbor.
Given that its not uncommon for in-house counsel to issue opinions to facilitate the removal of legends – and this language suggests that might not be available if this proposal was adopted – I imagine this will be a topic mentioned in some comments sent to the SEC. See pages 204-211 of the proposing release to see what the SEC is proposing in this area.
3. New Compliance Program Requirement: A new rule would require every registered transfer agent to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with the federal securities laws and rules applicable to transfer agents.
4. Major New Risk Management Framework: One rule would be transformed from a safeguarding rule into a comprehensive risk management requirement. Transfer agents would need written policies and procedures designed both to protect securities and funds in their possession, custody, or control and to identify, measure, monitor, and mitigate material risks associated with their businesses and operations.
5. Streamlined Recordkeeping Requirements: Rule amendments would establish a single retention period for most transfer agent records and modernize requirements governing electronic recordkeeping systems and the use of third parties to maintain records.
6. Faster Posting to Securityholder Records: A rule would be revised to align the timeframe for posting transactions to master securityholder files with the modern settlement cycle and replace outdated terminology with technology-neutral language.
7. Registration and Annual Reporting Changes: Forms TA-1 and TA-2 and their instructions would be changed to extend the effective date of registration after filing Form TA-1 from 30 to 45 days and require an amended Form TA-2 within 60 days after discovering that a previously filed form contained materially inaccurate, incomplete, or misleading information when filed.
8. Separate Accounts and Business Continuity Plans: Under a revised rule, transfer agents would be required to maintain a separate bank account for issuer, securityholder, and third-party funds and establish a business continuity plan.
9. New Turnaround and Processing Requirements: Amended rules would require written policies and procedures designed to ensure timely processing, align turnaround requirements with the current settlement cycle and raise the threshold for imposing limitations on expansion from 75% to 95%.
10. New Protections for Inactive Securityholders: A rule amendment would require transfer agents and broker-dealers to provide notifications to inactive securityholders, while modernizing the rule to recognize electronic communications and electronic payments.
11. Existing Exemptions Would Be Eliminated: A rule would be rescinded, which currently provides certain exemptions from turnaround, processing and recordkeeping requirements as the SEC believes technological advances have increased operational capabilities sufficiently that these exemptions aren’t necessary anymore.
Authored by
Broc Romanek