by Cydney Posner

Here’s a novel pairing: SEC Commissioners Aguilar and Gallagher, both of whom are scheduled to leave their posts at the SEC, today issued a joint statement about the need to modernize the SEC’s transfer agent rules, which govern the approximately 450 U.S. transfer agents. This may be one of the few topics they could find to agree on.

The statement observes that, notwithstanding “sweeping changes in the securities industry, particularly in transfer agents’ activities,” the SEC has not significantly revised its transfer agent rules in almost 30 years. Apparently, the SEC’s Division of Trading and Markets had originally developed recommendations for proposed transfer agent rules, but then opted instead to develop a concept release.  Because of the likelihood of delay involved in a concept release, the two Commissioners “believe the Division’s first inclination to propose transfer agent rules was the right one.” They indicate that Chair Mary Jo White invited them to present to her their joint recommendations for proposed updates and improvements, and they each met with her separately to discuss their ideas. The proposal has not yet been published.

Transfer agents can have important roles as gatekeepers, particularly with regard to potential fraud involving microcap stocks. According to this article in Reuters, SEC Enforcement has recently been looking at smaller transfer agents that typically handle microcap stocks and have the potential to thwart some microcap fraud schemes. According to the article, “[t]ransfer agents are able to remove restrictions on private stock so that they can be freely tradable in public markets. Those planning on committing stock fraud can lie to or mislead transfer agents so they can get restrictions on the shares illegally removed and sold publicly. Once the stock is freely tradable, the fraudsters pump up the price with promotional material, including phony claims about the company’s prospects, to dupe unsuspecting investors, and then they dump it before the price tanks.”

The two Commissioners’ joint recommendations are designed to help 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.”


Posted by Cydney Posner