SEC ISSUES NEW TRANSFER AGENT RULES FOR COMMENT – THE FIRST SUBSTANTIAL REVISITATION AND RELEASE SINCE THE 1980s

After briefly mentioning the many changes we’ve seen in technologies – and in the securities processing space in general since the ‘80s … and in what may be the understatement of the century:  “the Commission concludes that there is a disconnect between the transfer agent rules…and both the manner in which transfer agents perform their critical functions and the technology they use to do it… 

“Despite the highly sophisticated electronic and automatic systems utilized by modern transfer agents …the current rules are silent with respect to information security, cybersecurity, disaster recovery, operational risk, or other requirements related to their use of connected and automated electronic systems” …and, oh yes, the TAs’ “critical role in placing, tracking and removing restrictive legends on securities.” There are no rules, or even guidelines here either – all as we pointed out in our own lengthy comment letter in 2016 -   that, to date, largely came to naught and where a number of the specific issues we raised still remain unaddressed in the new Release.

The 418-page Release is quite a beast to wrestle with: On a first read-through it’s a good, and fairly complete job of identifying key issues. But “the big picture” - and many of what should be “guiding principles” - and the solutions in our book - are lost in the reams of details. Not until page 200 or so does the Release begin to outline the specific changes the Release proposes – mostly without explanation of exactly what they are intended to accomplish.

We will respond with detailed comments and suggestions before the November 3 deadline – based on our 50+ years of continuing activities in the transfer agency “space” - and will share a link to our comments then.

Meanwhile, here’s a list of our own top priorities for SEC action:

First and foremost, we say, the SEC needs to insist that every transfer agent BE properly ‘registered’ with them – NOW - and to spring into action immediately. We are aware of at least two entities that meet the SEC’s definition of a transfer agent – neither of which is registered with the SEC as far as we can see; one a “depository” with a NYC address that appears regularly in the tender-offer tombstones and another – the dreadful “Potemkin” that makes unsolicited tender offers to U.S. shareholders directly - by name – to buy their shares at an outrageous 37 percent discount from the current market prices. They too sport a NYC address but there is no information about their ownership, operational capabilities or financial condition that we can find on the web. This needs fixing – immediately!

Equally important, the SEC needs to establish minimum standards for capital and insurance that are commensurate with the size and nature of the TA’s customer base. The ancient system of allowing stock exchanges to set the rules here is totally useless today – when “exchanges” are competing for listings and entirely new venues and forms of trading are emerging at rapid rates.

Every registrant, we say, MUST be required to develop and keep current a detailed written statement of its official Policies and Procedures - AND the specific internal control systems and procedures that are in place for the management to regularly monitor and assess – and help the SEC to assess - every functional area in the firm. 

Such a document will very quickly give the SEC staff a good idea of the size, scope and financial condition of each TA business, and the identity of the controlling entity, its owners, officers and directors and its top managers – to help the much-needed audit process, where clearly, the SEC has a lot of work to do to be effective regulators.

At a bare minimum. Registered Transfer Agents need to quickly report to the SEC on any material changes to their Registration Statement and financial condition, on any unfavorable auditor opinions, on any losses due to theft or fraud, any and all cybersecurity breaches and on potential and pending legal actions against the TA.

Over the past few years we have noted a wide array of newcomers to the transfer agency world – and, as we’ve reported, we’ve noted a huge “knowledge gap” among many of the newbies on some of the most basic elements of the TA business. 

A few years ago we drafted a T-A Manual for a VC-backed TA startup that listed and described all of the hundreds of data elements a modern TA needs to have in its system - but which ran out of money to do so mid-way in the building phase. 

We also wrote about the newbie that bragged in print, “No need for Medallion Guarantees.”  He listened, we hope, to our advice and, we hope, read the article on our website about Transfer Agent Liabilities – Ignore Them at Your Peril.  

We also heard a few months ago about a new entrant – who we thought was trying to illegally use the name of a major financial institution, given the initial, false info they issued to shareholders of new clients they’d lured away from established agents with their reassuring brand-name - that their stock certificates had been totally supplanted by book-entry notations (!!!) 

Most serious of all, was the SEC Release on a whole series of operational failures, successful hacks by non-shareholders and failures to detect completely forged instructions to issue and sell millions of dollars of a client’s securities – and forward the funds to foreign entities – by one of the largest and longest-established TAs in the country.

We need SEC policing here more than ever! Stay tuned for more as the comments emerge.