[Federal Register Volume 59, Number 235 (Thursday, December 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30128]
[[Page Unknown]]
[Federal Register: December 8, 1994]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-35040; File No. S7-35-94]
RIN 3235-AG24
Proposed Amendments to the Transfer Agent Rules
AGENCY: Securities and Exchange Commission.
ACTION: Notice of Proposed Rulemaking and Request for Comments.
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SUMMARY: The Securities and Exchange Commission is proposing amendments
to certain transfer agent rules regarding turnaround time,
recordkeeping, and safekeeping of funds. The Commission is proposing
these rules in light of the changes in the clearance and settlement of
corporate securities from five days after the trade (``T+5'') to three
days after the trade (``T+3'') and the proposal to establish a transfer
agent operated book-entry registration system (hereinafter referred to
as the ``direct registration system'' or ``DRS''). The proposed
amendments to the transfer agent rules are designed to minimize
disruptions, delays, and financial losses in the securities markets,
particularly in the national clearance and settlement system for
securities, that may be caused by poor turnaround performance,
substandard or inaccurate recordkeeping practices, and inadequate
safekeeping procedures. The Commission also is soliciting comment on
whether additional rules are needed in light of T+3 and DRS, including
net worth and insurance requirements.
DATES: Comments should be submitted on or before February 6, 1995.
ADDRESSES: Interested persons should submit three copies of their
written data, views, and opinions to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549. Comment letters should refer to File No. S7-35-94 and will be
available for public inspection and copying at the Commission's public
reference room, 450 Fifth St., NW., Washington, DC 20549.
FOR FURTHER INFORMATION CONTACT: Ester Saverson, Jr., Special Counsel,
or Michele J. Bianco, Attorney, at 202/942-4187, Office of Market
Supervision, Mail Stop 5-1, Division of Market Regulation, Securities
and Exchange Commission, Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Background and Summary
Transfer agents are an integral component of the clearance and
settlement process. There are approximately 1,576 registered transfer
agents that maintain the official registers of stockholders or
bondholders on behalf of the issuers of securities. Transfer agents
issue negotiable certificates evidencing security ownership,
communicate on behalf of issuers with securityholders, and record
changes in securities ownership as a result of securities transactions.
A certificate issued in the name of the securityholder is one
method of evidencing ownership of a security. The certificate is a
negotiable instrument, and the proper indorsement of the securities has
been the traditional method of transferring ownership. Because of the
desire to immobilize certificates to facilitate the clearance and
settlement of the increasingly large number of transactions that occur
every day, transfer agents began to maintain custody of securities for
which they act as transfer agent. Some transfer agents maintain custody
of certificates on behalf of securities depositories,\1\ exchange
information with the relevant depositories about position balances each
day, and issue and transmit certificates pursuant to the depositories'
instructions.\2\ Transfer agents also may function as custodian for
individual securityholders through dividend reinvestment and stock
purchase programs (``DRSPPs''), employee stock purchase programs, and
similar transfer agent book-entry custody programs.
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\1\Securities depositories are registered as clearing agencies
under Section 17A of the Securities Exchange Act of 1934.
Depositories serve as clearinghouses for the settlement of trades in
corporate and municipal securities and perform securities
safekeeping services for their participating banks and broker-
dealers.
\2\Securities Exchange Act Release No. 13342 (March 8, 1977), 42
FR 14792.
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The functions performed by transfer agents are critical to the safe
and efficient processing of securities transactions. Substandard
performance by transfer agents can affect the accuracy of an issuer's
securityholder records, interrupt the channels of communication between
issuers and securityholders, frustrate investor expectations, and cause
financial loss to investors and intermediaries such as broker-dealers,
banks, and clearing agencies.\3\
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\3\See SEC, Study of Unsafe and Unsound Practices of Brokers and
Dealers, H.R. Doc. No. 231, 92nd Cong., 1st Sess., 37-39 (1971);
Clearance and Settlement of Securities Transactions, Hearings on S.
3412, S. 3297 and S. 2551 Before the Subcomm. on Securities of the
Senate Comm. on Banking, Housing and Urban Affairs, 92nd Cong., 2d
Sess., 94-96, 105-106 (1972); Securities Processing Act Hearings on
H.R. 14567, H.R. 14826 and S. 3876 Before the Subcomm. on Commerce
and Finance of the House Comm. on Interstate and Foreign Commerce,
92nd Cong. 2d Sess., 100 (1972).
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Congress authorized federal regulation of transfer agent activities
in 1975 as one component of a regulatory scheme designed to foster a
National Clearance and Settlement System (``National System'') among
broker-dealers, issuers, exchanges, and clearing agencies.\4\ The
Securities and Exchange Commission (``Commission'') has adopted certain
rules governing the performance of transfer agent functions by
registered transfer agents to protect investors and to facilitate the
prompt, accurate, and safe transfer, clearance, and settlement of
securities transactions.\5\ For example, Rules 17AD-1 through 17AD-7
(``turnaround rules'') under the Securities Exchange Act of 1934
(``Act'') establish minimum performance standards for registered
transfer agents in connection with the timely cancellation and issuance
of securities certificates.\6\ In addition, Rules 17Ad-9 through 17Ad-
13 establish standards for registered transfer agents governing
recordkeeping practices and the safeguarding of securities and
funds.\7\ These rules were intended to promote, among other things,
accurate securityholder records.\8\
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\4\S. Rep. No. 75, 94th Cong., 1st Sess. 103, reprinted in 1975
U.S. Code Cong. & Admin. News 179, 281.
\5\A transfer agent is required to register with its appropriate
regulatory agency. Bank transfer agents register with one of the
banking agencies (i.e., the Comptroller of the Currency, the Board
of Governors of the Federal Reserve System and the Federal
Depository Insurance Corporation) and non-bank transfer agents
register with the Commission.
\6\17 CFR 240.17Ad-1 through 240.17Ad-7 (1994). See Securities
Exchange Act Release No. 13636 (June 16, 1977), 42 FR 32404.
\7\Securities Exchange Act Release No. 19860 (June 10, 1983), 48
FR 28231.
\8\17 CFR 240.17Ad-9 through 240.17Ad-13 (1994). The Commission
last amended these rules in 1986. Securities Exchange Act Release
No. 22882 (February 10, 1986), 51 FR 5703.
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The Commission believes it is appropriate to solicit comment on the
proposed amendments to the transfer agent rules. The Commission also
solicits comment on whether other changes are needed to the transfer
agent regulations in light of impending changes in the National System.
Effective in June 1995, Rule 15c6-1 will shorten the standard time
frame for settling securities transactions from T+5 to T+3. As
discussed more fully in a companion release issued today,\9\ industry
efforts are underway to develop expanded direct registration systems
that rely on account statements instead of negotiable certificates,
automated recordkeeping systems, and automated links between securities
depositories, broker-dealers and banks. In light of these developments,
the performance and operational efficiency of transfer agents
increasingly will be important to the smooth functioning of the
National System. Substandard or inefficient performance by transfer
agents could have a significant adverse impact on the functioning of
the National System.\10\
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\9\Securities Exchange Act Release No. 35038 (December 1, 1994)
(hereinafter referred to as ``companion release'').
\10\This discussion is limited to transfer agent regulation and
does not address the application of the broker-dealer registration
provisions of the Exchange Act to DRS or DRSPPs. Some of the
activities in connection with DRS or DRSPPs may raise broker dealer
registration issues under section 15 of the Exchange Act. Refer to
companion release at n. 21.
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II. Discussion
A. Turnaround of Requests for Transfer
The current turnaround rule\11\ requires a transfer agent to
process (``turnaround'') within three business days of receipt at least
90% of all routine items\12\ received for transfer during that
month.\13\ In addition, most transfer agents that transfer New York
Stock Exchange (``NYSE'') listed securities meet the more stringent
NYSE requirement that requires transfer agents to transfer NYSE-listed
securities within 48 hours of receipt.\14\
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\11\17 CFR 240.17Ad-2 (1994).
\12\17 CFR 250.17Ad-1(i) (1994) defines a routine item as
follows: ``An item is routine if it does not: (1) Require
requisitioning certificates of an issue for which the transfer
agent, under the terms of its agency, does not maintain a supply of
certificates; (2) include a certificate as to which the transfer
agent has received notice of a stop order, adverse claim, or any
other restriction on transfer; (3) require any additional
certificates, documentation, instructions, assignments, guarantees,
endorsements, explanations or opinions of counsel before transfer
may be effected; (4) require review of supporting documentation
other than assignments, endorsements or stock powers, certified
corporate resolutions, signature or other common and ordinary
guarantees or appropriate tax or tax waivers; (5) involve a transfer
in connection with a reorganization, tender offer, exchange,
redemption or liquidation; (6) include a warrant, right or
convertible security presented for transfer of record ownership
within five business days before any day upon which exercise or
conversion privileges lapse or change; (7) include a warrant, right,
or convertible security presented for exercise or conversion; or (8)
include a security of an issue which within the previous 15 business
days was offered to the public, pursuant to a registration statement
effective under the Securities Act of 1933, in an offering of a
continuing nature.''
\13\An exempt transfer agent i.e., a transfer agent that during
any six consecutive months has received fewer than 500 items for
transfer and fewer than 500 items for processing does not have to
meet the three day turnaround requirement. 17 CFR 240.17Ad-4 (1994).
An exempt transfer agent that handles any depository-eligible
securities must turnaround 90% of all routine items received during
a month within five business days of receipt. 17 CFR 240.17Ad-
2(e)(2) (1994). All other exempt transfer agents must turnaround all
items promptly. 17 CFR 240.17Ad-2(e)(1) (1994).
\14\NYSE Rule 496, NYSE Guide (CCH) 2496 at 4225.
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In light of the shortening of the settlement cycle to T+3, the
Commission is proposing to amend Rule 17Ad-2 to reduce the turnaround
requirement from three business days to two business days for transfer
agents that do not qualify for the exemption under Rule 17Ad-4(b).
Although there are several ways to transfer ownership of securities in
settlement of secondary market trades,\15\ changing ownership on the
books maintained by the transfer agent can still be a critical step in
that process. The Commission also is proposing to amend Rule 17AD-2(e)
to require ``exempt'' transfer agents that transfer depository-eligible
securities to turnaround ninety percent of all routine items received
during a month within three business days of receipt.\16\ Currently,
those transfers must be completed within five business days.
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\15\See, e.g., N.Y. U.C.C. LAW Sec. 8-313(1) (McKinney 1994).
The most common method today is by book-entry notation on the
records of a securities depository, bank, or broker-dealer. See 1993
SEC Annual Report at 125.
\16\The Commission invites commenters to address whether other
time frames, such as one or two business days, would be more
appropriate.
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The Commission invites commenters to address whether a shorter
turnaround standard should be established for all transfer agents.\17\
Currently, Rule 17Ad-2 establishes different turnaround standards for
``low-volume'' transfer agents because these transfer agents are
generally small businesses and the cost associated with requiring
faster turnaround might be significant to these entities. The
Commission invites commenters to address whether the distinction among
transfer agents based on volume should be maintained. Commenters
addressing this issue are requested to provide data in support of their
views.
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\17\The Securities Transfer Association (``STA'') questioned the
validity of other distinctions of exempt transfer agents. STA's
Petition for Commission Rulemaking to Rule IVa of the Securities and
Exchange Commission's Rules of Practice to Eliminate Differential
Regulatory Standards for Transfer Agents Under Section 17A of the
Securities Exchange Act of 1934 (November 23, 1988). Those
distinctions include different exemptions for independent audit
requirements, and recordkeeping requirements. A copy of the petition
will be placed in the public file and will be available for
inspection. The Commission invites commenters to address the
continued validity of these exceptions.
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B. Accurate Securityholder Records
Rule 17Ad-10 requires all recordkeeping transfer agents
``promptly''\18\ and accurately to update the securityholders file.
Issuer transfer agents\19\ and transfer agents that employ batch
posting systems must post certificate detail\20\ to the master
securityholder file within 10 business days. Transfer agents that
qualify for the exemption under Rule 17Ad-4(b) must post certificate
detail to the master securityholder files within 30 calendar days. All
other recordkeeping transfer agents must post certificate detail to the
master securityholder files within five business days.
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\18\Promptly is defined as five business days, ten business
days, or 30 calendar days depending on the category of the transfer
agent. 17 CFR 240.17Ad-10(a)(2)(ii) (1994).
\19\Issuer transfer agents are those transfer agents which
perform transfer agent functions exclusively with respect to their
own securities or those issued by an affiliate. See 17 CFR 240.17Ad-
10(2) (1994).
\20\``Certificate detail'' is defined in 17 CFR 240.17Ad-9(a)
(1994) and generally means those data elements that identify the
owner and the certificate or positions held by that owner.
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The Commission is proposing to amend Rule 17Ad-10(a)(2) to require
``exempt'' registered transfer agents to update the master
securityholder file within ten business days of an issuance, purchase,
transfer, or redemption of a security instead of the 30 calendar days
current required. Although recordkeeping transfer agents would continue
to have as much as two weeks from the transfer of ownership to update
the master security holder file, their subsidiary file system must
contain records that reflect all transfers and that are readily
accessible. The Commission understands that many transfer agents
maintain systems that provide for same-day or immediate updates to the
master securityholder files, while other transfer agents update the
file periodically and direct their staff to review transfer ledgers
between updates. The Commission invites commenters to address whether
more stringent time frames should be mandated, such as same-day, next-
day, or five business days, and whether the rule should continue to
reflect differences in the automation and size of registered transfer
agents.
One of the major functions of a transfer agent is to transfer the
security from the seller to the buyer after a transaction. Typically
this is evidenced by cancelling the old certificate and issuing a new
certificate. With the growth of uncertificated recordkeeping functions
by transfer agents, an increasing number of transfers are effected by
book-entry only. Without the certificate, the integrity of the records
of the transfer agent is crucial. As discussed in the Companion
Release, under the DRS Concept and other uncertificated recordkeeping
functions, the request for transfer in many instances may no longer be
submitted in writing but will be submitted electronically. In addition,
the DRS Concept could allow an investor to direct the sale of
securities or to request a certificate by telephone. Accordingly, the
Commission invites commenters to address whether additional
recordkeeping requirements are necessary in light of the trend toward
statement-based securities ownership accounting (i.e., recording
ownership without issuing a negotiable certificate evidencing those
securities). For example, are there additional records transfer agents
should maintain concerning transfer instructions transmitted
electronically or by telephone?
The Commission also invites commenters to address the following
questions. Should the Commission require transfer agents to issue
confirmation statements every time there is a transaction that changes
an investor's DRSPP or DRS account similar to those required to be sent
by broker-dealers in Rule 10b-10.\21\ If there is no activity in an
account, how often should a transfer agent send an account statement?
What, if anything, should the Commission require to be disclosed on
such account statements?
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\21\17 CFR 240.10b-10 (1994).
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C. Investors' Funds and Securities
Currently Rule 17Ad-12 requires transfer agents that have custody
or possession of funds or securities related to their transfer agent
activities to assure that:
(1) All such securities are held in safekeeping and are handled,
in light of all facts and circumstances, in a manner reasonably free
from risk of destruction, theft or other loss; and (2) all such
funds are protected, in light of all facts and circumstances,
against misuse. In evaluating which particular safeguards and
procedures must be employed, the cost of the various safeguards and
procedures as well as the nature and degree of potential financial
exposure are two relevant factors.\22\
\22\ 17 CFR 240.17Ad-12 (1994).
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The Commission believes a transfer agent should not commingle
investor funds with other funds of the transfer agent. With the growth
of DRSPPs, it is not unusual for transfer agents to hold considerable
sums of investor funds. Although the Commission is not aware of any
losses to investors from existing practices, the Commission believes it
is appropriate to take steps to reduce the potential for such losses.
Accordingly, the Commission is proposing to amend Rule 17Ad-12 to
require every registered transfer agent to maintain with a bank or
banks at all times a ``Bank Account for the Exclusive Benefit of
Securityholders'' (hereinafter referred to as the ``Securityholders'
Bank Account'') which shall remain separate from any other bank account
of the transfer agent. The proposed amendment to Rule 17Ad-12 also
would require every registered transfer agent to maintain at all times
in such Securityholders' Bank Account all securityholders' funds in the
transfer agent's custody and possession that are related to its
transfer agent activities.
The proposed rule is intended to restrict transfer agents from
using or investing securityholders' funds for any purpose and to
protect those funds from the transfer agent's general creditors. As
proposed, transfer agents must deposit cash in a bank, as that term is
defined is Section 3(a)(6) of the Act. The Commission invites comments
on whether other financial institutions or account structures might be
used or mandated to preserve the liquidity and safety of funds.
D. Minimum Net Worth and Insurance Requirements
During its 1983 rulemaking process, the Commission sought comment
on whether it should impose minimum net worth and insurance
requirements on transfer agents registered under Section 17A of the
Exchange Act, other than federally regulated banks or transfer agents
that perform transfer agent functions exclusively for their own
securities.\23\ The Commission also requested comment on whether a
minimum net worth requirement would be necessary if an appropriate
insurance requirement were imposed. Most commenters favored a minimum
insurance requirement and many favored both minimum insurance and net
worth requirements. Commenters, however, suggested widely varying
ranges of minimum insurance and net worth levels. In June 1983, when
the Commission adopted recordkeeping rules and safeguarding procedures
for registered transfer agents, the Commission considered, but decided
to defer, promulgating rules regarding transfer agent net worth and
insurance requirements.\24\
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\23\See Securities Exchange Act Release No. 19860 (June 10,
1983), 48 FR 28231.
\24\Id.
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Thereafter, the Securities Transfer Association, Inc. (``STA'')
petitioned the Commission for changes to rules concerning transfer
agents which included, among other things, minimum insurance and net
worth requirements.\25\ As discussed below, the Commission believes it
is appropriate to reconsider the merits and costs of minimum net worth
and insurance requirements for transfer agents.
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\25\The STA's Petition for Commission Rulemaking Filed Pursuant
to Rule IVa of the Securities and Exchange Commission's Rules of
Practice to Establish Minimum Capital and Adequate Insurance
Requirements for Transfer Agents Under Section 17A of the Securities
Exchange Act of 1934 (November 23, 1988).
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1. Net Worth Requirements
The STA advocated net worth requirements for several reasons.
First, transfer agents may require a minimum amount of net worth to
permit efficient and safe transfer operations.\26\ Second, transfer
agents may require a minimum amount of net worth to meet potential
liabilities in connection with those functions. Although the Uniform
Commercial Code (``UCC'') imposes liability on issuers for damages to
securityholders and bona fide purchasers as a result, among other
things, of a refusal to register transfers,\27\ that liability is often
borne by the transfer agent (if the issuer does not perform its own
transfer agent functions) under the terms of the contract governing the
transfer agent's appointment.\28\ If, for example, inadequate
procedures, internal controls, employee errors, or defalcations result
in inaccurate records, transfer agents must have sufficient net worth
to enable them to reestablish accurate records.\29\ In addition, if
errors, omissions, or employee defalcations result in an overissuance
of securities, transfer agents may be required to purchase securities
for delivery to securityholders or bona fide purchasers who have
suffered consequential damages. Because the market value of securities
can fluctuate significantly and considerable time can elapse between
the event giving rise to liability and the discovery of that liability,
an insignificant error today can result in significant expense when it
is finally discovered.\30\ Although many transfer agents can purchase
insurance against some of these risks, many of those policies contain
deductibles, exclusions or conditions that result in the transfer agent
bearing a significant percentage of the ultimate cost.
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\26\Of course, the amount of net worth necessary to sustain
efficient operations and service levels will depend, among other
things, on the number of securities issues, the number of
securityholder accounts to be serviced, and the volume of transfers
in those securities issues.
\27\UCC 8-401 and 8-404 (Official Text, 1978).
\28\See UCC 8-406 (Official Text, 1978) and E. Guttman, Modern
Securities Transfer (revised ed. 1987) at 3-34.
\29\Record reconstruction can be very expensive, depending on
the number of accounts affected, since research and reconciliation
procedures are time-consuming and labor-intensive.
\30\For example, a transfer agent might incorrectly account for
a conversion of debentures into common stock because a conversion
tender was lost in processing at the transfer agent. Upon discovery
of the error, the transfer agent likely will be liable not only for
delivery of the number of shares pursuant to the conversion, but
also for any intervening dividends, distributions and stock splits
the securityholder would have realized if the securityholder's
instructions had not been lost.
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The Commission is not aware of any formal studies assessing
transfer agent losses or liabilities. Nevertheless, based on its
oversight of transfer agents since 1975 and episodic recordkeeping and
transfer difficulties, the Commission believes that financial exposure
associated with erroneous, unsafe or inaccurate transfer agent
functions can range from several thousand dollars to several hundred
thousand dollars.31
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\3\1For example, an operational crisis in the transfer agent
industry (such as the collapse of First Independent Stock Transfer
Agent, Inc. (``FISTA'') in 1981), that makes it necessary for
issuers to find an alternative means to ensure the performance of
transfer functions could significantly delay the transfer of
certificates, causing brokers, financial institutions, securities
depositories and investors to sustain financial losses. See In the
Matter of First Independent Stock Transfer Agent, Inc., Securities
Exchange Act Release No. 19608 (March 17, 1983). See also cases
cited in Securities Exchange Act Release No. 19142 (October 15,
1982), 47 FR 47269 and SEC. v. Dynapac, Inc., et al., Civ. No. C-86-
20694-RPA, NDCA (Final Judgment of Permanent Injunction and Other
Equitable Relief entered November 7, 1986) where the Commission
filed a complaint against 23 defendants alleging fraudulent
distribution of unregistered stock and numerous other violations of
the securities laws.
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The Commission requests comment as to whether minimum net worth
requirements for transfer agents are necessary or appropriate.32
Would the financial risks to shareholders and financial intermediaries
be reduced significantly if a minimum net worth requirement for
transfer agents were imposed? Would the existence of a minimum net
worth requirement cause transfer agents to make a greater commitment to
their transfer agent business? If the Commission were to establish
minimum net worth requirements, should it consider whether a transfer
agent issues negotiable certificates evidencing ownership? Should the
Commission limit any minimum net worth requirements to transfer agents
that provide the DRS services or engage in other unregistered
recordkeeping functions? Would investors have sufficient confidence in
the integrity of the proposed DRS, in the absence of either minimum net
worth or minimum insurance requirements? Does the present lack of
minimum net worth requirements for transfer agents performing transfer
functions exclusively for non-NYSE and non-Amex issues create undue
risk to investors?33
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\3\2The STA proposed that every registered transfer agent
maintain a level of net worth related to the number of issues
handled by the transfer agent. The proposed level of required net
worth for registered transfer agents is: (i) $150,000 for five or
fewer issues; (ii) $200,000 for six to 24 issues; (iii) $300,000 for
25 to 99 issues; (iv) $500,000 for 100 to 499 issues; (v) $650,000
for 500 to 999 issues; and (vi) $1,000,000 for 1,000 issues or more.
While the STA's proposal is a starting point, the Commission
believes that transfer agents that engage in uncertificated
recordkeeping functions may need more net worth than transfer agents
that do not perform such functions to adequately perform their
duties. The NYSE and the American Stock Exchange (``Amex'') impose a
$10,000,000 and a $3,000,000 minimum capital requirement,
respectively, for non-issuer transfer agents that perform transfer
functions for NYSE-listed and Amex-listed issues, respectively. See
NYSE Rule 496 and Amex Rule 891.
\3\3See note 32.
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The Commission also invites comment on whether net worth
requirements would impose undue expense on transfer agents and whether
alternatives to net worth requirements might achieve the goals of
prompt, accurate, and safe transfer, clearance, and settlement of
securities transactions. Such alternatives might include reliance on
existing market forces, such as the incentive for issuers to avoid
liability by policing transfer agent performance. Persons addressing
these issues are invited to submit data in support of their views.
2. Insurance Requirement
Unlike funds and securities held by broker-dealers, funds and
securities held by transfer agents are not covered under the Securities
Investors Protection Act of 1970 (``SIPA'').34 SIPA established
the Securities Investors Protection Corporation (``SIPC'') fund, which
insures each customer of a broker-dealer against the loss of funds and
securities at the broker-dealer in the event of the broker-dealer's
insolvency for cash and securities up to a maximum of $500,000, with a
limit of $100,000 on claims for cash. Nothing analogous exists with
respect to transfer agents, although non-issuer transfer agents that
transfer securities listed on the Amex or the NYSE are required to
obtain insurance.35 SIPC was established for broker-dealers
because they regularly handle customers' funds and securities, and,
without such protection, investors face the potential loss of funds and
securities if they fail.
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\3\415 U.S.C. 78aaa-111 (1993).
\3\5Amex Rule 891 requires a minimum of $10,000,000 of insurance
coverage and NYSE Rule 496 requires $25,000,000 of insurance
coverage for non-issuer transfer agents that transfer Amex-listed
and NYSE-listed securities, respectively. See note 32.
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To cover liabilities that might arise in connection with the
transfer process, many transfer agents have purchased insurance similar
to insurance coverage obtained by broker-dealers and banks. Insurance
currently available to transfer agents is designed to protect the
transfer agent against financial loss resulting from liabilities for
substandard transfer agent performance, including, but not limited to
premises loss, in transit loss, breach of duty of fidelity, and
fraudulent transfers.\36\ In addition, many transfer agents already are
subject to self-regulatory organization insurance requirements.
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\36\On Premises Loss insurance covers loss of funds or
securities through criminal acts of other than employees and through
unexplained causes while on the insured's premises. In Transit Loss
insurance covers all methods of shipping securities and to any
destination or addressee (e.g., mail, overnight delivery service,
messenger, or armored carrier). Fidelity insurance covers losses
through any dishonest, fraudulent, or criminal act of any employee
of the insured. Fraudulent Transfers insurance covers losses when a
security is registered to a person because of a wrongful transfer.
This usually occurs because the signature of the person authorizing
the transfer is fraudulent or the person signing the transfer
request does not have the authority to make such transfer. Such
insurance is generally available to transfer agents under a blanket
bond coverage. See E. Guttman, Modern Securities Transfer (revised
ed. 1987).
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The Commission requests comment on whether an insurance requirement
is necessary or appropriate for the protection of investors or to
further other statutory goals.\37\ For example, requiring transfer
agents to maintain an adequate amount of insurance or bonding might
reduce the risks posed by transfer agents to investors and other
participants in the clearance and settlement system.
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\37\The STA proposed that every registered transfer agent
maintain a level of insurance that will reasonably protect the
transfer agent in the event it incurs liabilities in performing its
transfer activities. The STA recommended that the Commission expand
the Annual Study and Evaluation of Internal Accountant Control
(``Internal Control Report''), under Commission Rule 17Ad-13, to
require the auditor to determine the appropriate level of insurance
to cover those liabilities. Specifically, the STA recommended that
the Internal Control Report cover insurance or bonding protection
including whether such coverage is adequate in light of its
operational capability, level of net worth, nature and degree of
financial exposure from its transfer activities, and cost of various
insurance and bonding alternatives. The STA also recommended
requiring bank and issuer transfer agents to comply with Rule 17Ad-
13 and to the proposed insurance requirements.
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The Commission invites commenters to address whether an insurance
requirement for registered transfer agents would be necessary if a net
worth requirement is adopted. Should an insurance requirement be
imposed as an alternative to a net worth requirement? Assuming a net
worth requirement is not adopted, are there safeguards other than an
insurance requirement that might be appropriate?
The Commission invites commenters to address the type and amount of
insurance they believe should be required. Commenters addressing these
issues also might consider the following questions. What criteria
should be considered in determining the appropriate amount of insurance
(e.g., volume of business, types of securities)? Should there be some
minimum amount of insurance coverage coupled with subsequent increases
reflecting the transfer agent's potential financial liability based on
the dollar value of securities for which the transfer agent performs
transfer functions? Is an insurance requirement necessary in light of
NYSE and Amex rules? Should the Commission rely on the insurance
requirements in the NYSE and Amex listing standards?
III. Request for Comment
The Commission is interested in receiving comment on all aspects of
transfer agent regulations in light of the upcoming change in
settlement time frames. The Commission also invites comment on whether
new transfer agent recordkeeping systems, as discussed in the Companion
Release, justify new or different regulations to promote prompt,
accurate, and safe transfer of securities. The Commission also invites
commenters to address the costs associated with the proposed
amendments, whether the proposed amendments would impose a burden on
competition, and whether such a burden, if any, is necessary or
appropriate to achieve the purposes of the Act.\38\
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\38\See 15 U.S.C. 78w(a) (1993).
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IV. Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``Analysis''), in accordance with 5 U.S.C. 603, as amended by
the Regulatory Flexibility Act (``RFA'') regarding the proposed
amendments to Rules 17Ad-2, 17Ad-10, and 17Ad-12.
The Analysis notes that the proposed rule changes would affect
approximately 393 low volume transfer agents that qualify as ``exempt
transfer agents'' within the meaning of Rule 17Ad-4(b). Furthermore,
the Analysis notes that the proposed rule changes would affect 174
transfer agents that perform transfer functions for depository eligible
securities. The proposals would affect all transfer agents, including
issuer, bank and small mutual fund transfer agents, that handle book-
entry securities.
The Analysis notes the Commission's belief that the majority of the
174 transfer agents performing transfer functions for depository
eligible securities affected by the proposed rule change to Rule 17Ad-2
will not incur significant additional compliance costs because many of
these registered transfer agents currently comply with the proposed
rule changes. Moreover, many transfer agents performing transfer
functions for issues listed on the NYSE are presently required to
transfer securities within 48 hours of receipt. The Analysis,
therefore, notes the Commission's belief that the new transfer
turnaround time frames will have a practical effect only on those
transfer agents that are currently not subject to the NYSE requirement.
The Analysis states that the proposed amendment to Rule 17Ad-10, to
require that exempt transfer agents update the master securityholder
files every 10 days of transfer instead of 30 days, will not impose
significant cost on exempt transfer agents because these exempt
transfer agents are low volume transfer agents (i.e., transfer agents
that process fewer than 500 items in a six month period). The
Commission believes that 10 days is sufficient time to allow such small
transfer agents to update their master securityholder files. The 10 day
updating requirement is the same requirement for transfer agents that
employ batch posting systems and thus should not significantly effect
small transfer agents that employ such systems. In addition, the
Commission believes that the benefits to investors outweigh any
additional cost to comply with the 10 day updating requirement.
The Analysis also notes the Commission's belief that the additional
requirements to have a Securityholders' Bank Account in Rule 17Ad-12
will not impose significant cost on registered transfer agents,
including exempt transfer agents, because most registered transfer
agents that currently handle dividends, interest, or funds involving
DRSPPs currently maintain accounts at banks similar to the
Securityholders' Bank Account. For those registered transfer agents
that do not have such accounts, the Commission stated that it believes
that establishment and maintenance of such an account will not impose
significant cost on registered transfer agents.
The Commission has considered alternatives to the proposed rule
changes consistent with the requirements of the RFA. The alternatives
have been fully considered as to their economic impact and compliance
with the statutory objectives. The Commission has not found an
acceptable alternative to the proposed rule changes. Accordingly, the
Commission does not believe that the proposal would impose undue costs
on small transfer agents, and that any costs incurred by transfer
agents who do not currently comply with these proposed rules would be
outweighed by the benefits that would accrue to the securities
industry.
A copy of the Analysis may be obtained by contacting Michele
Bianco, Attorney, Division of Market Regulation, U.S. Securities and
Exchange Commission, 450 5th Street, N.W., Washington, D.C., 20549, at
202/942-4187.
V. Text of the Amendments
List of Subjects in 17 CFR Part 240
Transfer agents; Reporting and recordkeeping requirements;
Securities.
For the reasons set out in the preamble, the Commission proposes to
amend Part 240 of Chapter II of Title 17 of the Code of Federal
Regulations to read as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 24D continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
Sec. 240.17Ad-2 [Amended]
2. By amending Sec. 240.17Ad-2(a) by removing the phrase ``three
business days'' and adding in its place ``two business days''.
3. By amending Sec. 240.17Ad-2(c) by removing the phrase ``four
business days'' and adding in its place ``three business days''.
4. By amending Sec. 240.17Ad-2(e)(1) by removing the phrase ``three
business days'' and adding in its place ``two business days''.
5. By amending Sec. 240.17Ad-2(e)(2) by removing the phrase ``five
business days'' and adding in its place ``three business days''.
Sec. 240.17Ad-10 [Amended]
6. By amending Sec. 240.17Ad-10 by removing paragraph (a)(2)(i) and
redesignating paragraphs (a)(2)(ii) and (a)(2)(iii) as paragraphs
(a)(2)(i) and (a)(2)(ii).
7. By amending Sec. 240.17Ad-12 to add paragraph (b) to read as
follows:
Sec. 240.17Ad-12 Safeguarding of funds and securities.
* * * * *
(b) Reserve account for the exclusive benefit of securityholders.
Every registered transfer agent shall maintain with a bank or banks at
all times a ``Bank Account for the Exclusive Benefit of
Securityholders'' (hereinafter referred to as the ``Securityholders'
Bank Account''), and it shall be separate from any other bank account
of the transfer agent. Every registered transfer agent at all times
shall maintain in such Securityholders' Bank Account all
securityholders' funds in its custody and possession that are related
to its transfer agent activities.
Dated: December 1, 1994.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30128 Filed 12-7-94; 8:45 am]
BILLING CODE 8010-01-P-M