As we’ve mentioned here earlier, issuers are discovering that getting what they wished for, in terms of rock-bottom pricing, has fueled a level of consolidation in the industry that has “shrunk the pool” of transfer agents dramatically. And this has left many issuers yearning to be in a much smaller pond than where they are now, where, ideally, THEY would be among the much bigger fish.
Clearly, a fresh look at the Transfer Agency scene was long overdue. And just as clearly, given all the ferment in the industry, “small transfer agents” seem to have a lot more appeal than they ever had before – even where “large companies” (a list that has also been dramatically revised of late) are concerned.
Amazingly, there are still “way over 1000 transfer agents” a DTCC spokesperson told us – just for equity issues. Many of them, however, are acting for issues that are moribund if not legally dead. And currently, there are roughly 700 transfer agents that are registered with the SEC. But as you will see on our updated chart of T-A market share, the top-four agents – all of whom we’d characterize as “large agents” due to their relative size and to their emphasis on “large companies” – have an almost unbelievable 91% share of the market, when measured by “shareholders of record” – which is the basic billable unit these days.
The next three agents – which we used to think of as “small agents” – as we used to think of AST too, because of its old focus on small companies – are clearly the “middle-sized agents” these days. In the “old days” these agents were largely considered beyond the pale by name-brand companies, who insisted on buying “brand names”. And, in the really old days, brand-name companies gave extra weight to the fact that the big-boys, way back when, were all owned by big banks…which lent a note of safety and security. Well clearly, that was THEN.
These three agents are really poised for a big growth spurt, we have to say – thanks in large part to the “ownership culture” that prevails at Continental and R&T – and to the fact that the owners are there – and available to staff and to customers every day. And at National City – where competitors still seem to be telling their clients that the stock transfer business is toast – their pending acquisition by PNC will come as welcome news to their mostly mid-size clientele – and to the friends and neighbors of existing clients where Nat’l City is always on the short list of good agents. Best of all for Nat-City, the PNC connection will double their previously farmed-out geographical footprint.
So let’s look now at the “truly small agents”: Amazingly, the “next-four agents” in size that follow the top-seven serve a mere three-quarters-of-one-percent of the market in total – although, it should be noted, they have almost 10% of the market where “investment-worthy companies” are concerned. After them – when one excludes the 30-odd issuers who still serve as their own transfer agent, like AFLAC, Disney, P&G, Southern Company to name a few – the size – and the capabilities, staying-power – and overall trustworthiness of most of the remaining agents – literally fall off the cliff.
We decided to call the owner-operators of each of the four “largest of the small agents” – each of which “makes our cut” as being worthy of a look if one is shopping – to see what they have to tell us:
“We are the biggest small transfer agent that issuers have never heard of” said Jonathan Miller, the owner-operator of Stock Trans, which he has run for 37 years: “We are as technologically advanced as the biggest of the big agents. We can do everything the big ones can do. We have about 200 solid clients – everything from NYSE and NASDAQ down to some pink-sheet companies – with about 200,000 shareholders. We’ve handled billions of dollars in reorg activities, all kinds of employee ownership plans, using our own software, DRPs - the works” he told us. Miller is a 90% owner, “with no debt, no account execs” (he believes in cross-training his 16 employees to field customer and shareholder inquiries) “and no voicemail” he emphasized. “We get our business mainly from attorney and existing client referrals, and we believe that our client retention rate is the highest in the industry.”
“If you are looking for hand-holding, and really good service, you should look at us”, Robert Pearson, the owner-operator of Illinois Stock Transfer in Chicago told us: “We have no call center” he said, “and we won’t mail out a blank form to a shareholder who calls us. We’ll walk them through the process and ‘fill in the blanks’ for them before we send it, which saves us a lot of work in the end. We have about 120 clients, with about 120,000 holders when you count in employee plan owners. And we have a very strong niche with regional banks – especially in Mid-Western states like Ohio, Illinois, Wisconsin, Kentucky and Tennessee – where individualized service to issuers - and to their investors – is really valued. This has been a family owned business since 1912. My father bought it in 1974, and I took over in 1990. I’m looking to really grow the business. We recently hired a retired industry exec as a part-time salesperson” he told us, in response to our question/perception that IST was basically in a “maintenance mode”.
“Why did I wait so long?” our new customers say. “Why didn’t I find you in the first place?” Sallie Marinov, the owner-operator of First American Stock Transfer says her new clients typically tell her. First American has been in business since 1998, and currently has about 200 ‘active clients’ with about 70,000 active holders. “A lot of our business is on what we call a ‘presentment basis’ – where the brokers, or the holders themselves pay a fee for transfers and other kinds of activities, but we are moving more to issuer paid services as issuers place more and more emphasis on providing good services to their investors. Most of our new clients come from attorney and existing-client referrals, but recently, in response to what we see as increasing opportunities, we’ve been doing a lot more marketing, and selling” Sallie told us. “We like the idea of having client reps” she said, “and we are great believers in cross-training all our staff. We see our reps as ‘teaching tools’ for clients.”
“Our fees aren’t crippling”, Lori Livingston, the 97% owner operator of Portland, Oregon based Transfer Online told us in response to our request for a quick summary of her business model: “We provide full service to our clients – but we have a major edge, we think, in offering our clients access to all reports, and to all shareholder information over the Internet – plus the ability for them to create their own reports over the net, and slice and dice the info any way they want. We have a lot of banks as clients, and we are the agent for the Master Card International Class B stock, which is held exclusively by financial institutions, so we have very high standards and exceptionally high data-security levels.” (Lori provided a link to an online demo of their systems, www.transferonline.com/demo). “We have had a sudden upsurge in the number of inquiries we receive from issuers, following widespread publicity about data security and data breaches – and after one of the larger of the ‘small West Coast agents’ got a cease-and-desist order from regulators.”
This brings us to some important caveats when it comes to shopping the other 700+ “small agents”: First and foremost, we’d say; remember our remarks about the extent to which T-As literally fall off a cliff size-wise, and in many other ways too, once you dip below the top-11 that are covered here. That’s not to say there are no other good ones out there, but for sure, there are a lot of bad or barely-hanging-on agents still around. One of our favorite stories came from DTCC’s Joe Trezza , who told about visiting “a fairly large small T-A, with a fairly robust business” that was based, literally, in a garage…And the garage was also home to a large number of free-flying exotic birds, who were doing what birds do…all over the stock certificates! Another T-A Joe visited was storing live and cancelled certificates in beer coolers…that were “secured”… with bungee-cords.
On a much more serious note, we’ve heard of T-As who list themselves – for marketing purposes, we assume – as the agent for companies where they are NOT the agent! Others, reportedly, have entered into “sketchy deals” with market makers…and sometimes with sketchy issuers.
Your editor also knows, from his own personal experiences as an expert witness, that many agents are blissfully unaware of how much liability they really have, when acting as a TA… and/or as Exchange Agent…And some have gone out of business very suddenly as a result. Be sure to check the size of the Blanket Bond and the Errors and Omissions coverage your agent and any prospective agent may be carrying…or not. We were shocked to discover, a few years ago, that one of the top-ten agents had no First Class Mail Insurance coverage in force…and took a very big licking in the courthouse as a result, after they kept insisting that the holders post a huge surety bond themselves -while their stock, which had been mailed to a building that didn’t exist on the mailing date, because of the 9-11 tragedy, continued to drop like a stone. Finally, check the SAS-70s of any existing or prospective agents you may be evaluating: If they won’t show you a completely “unqualified” one – of the type-2 variety, covering more than just one small audit, or one single day, run for your lives.
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