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
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 [insert date 60
days after publication date].
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, N.W.,
Washington D.C. 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., N.W.,
Washington D.C. 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, D.C.
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
-[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
(continued...)
-------------------- BEGINNING OF PAGE #2 -------------------
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.
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]-
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
-[1]-(...continued)
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.
-[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).
-[4]- S. Report 94-249.
-[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.
-------------------- BEGINNING OF PAGE #3 -------------------
the safeguarding of securities and funds. -[7]- These rules were
intended to promote, among other things, accurate securityholder
records. -[8]-
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]-
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
-[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.
-[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.
-[11]- 17 CFR 240.17Ad-2 (1994).
-[12]- 17 CFR 240.17Ad-1(i) (1994) defines a routine item as
follows:
A 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
(continued...)
-------------------- BEGINNING OF PAGE #4 -------------------
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]- 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.
The Commission invites commenters to address whether a
shorter turnaround standard should be established for all
-[12]-(...continued)
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.
-[15]- See, e.g., N.Y. U.C.C. LAW 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.
-------------------- BEGINNING OF PAGE #5 -------------------
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.
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.
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 currently required. Although recordkeeping
transfer agents would continue to have as much as two weeks from
the transfer of ownership to update the master securityholder
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
-[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.
-[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.
-------------------- BEGINNING OF PAGE #6 -------------------
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?
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]-
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
-[21]- 17 CFR 240.10b-10 (1994).
-[22]- 17 CFR 240.17Ad-12 (1994).
-------------------- BEGINNING OF PAGE #7 -------------------
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 in 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]-
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.
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
-[23]- See Securities Exchange Act Release No. 19860 (June 10,
1983), 48 FR 28231.
-[24]- Id.
-[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).
-[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,
(continued...)
-------------------- BEGINNING OF PAGE #8 -------------------
net worth to meet potential liabilities in connection with those
functions. Although the Uniform Commerical 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.
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]-
-[26]-(...continued)
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.
-[31]- For 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
(continued...)
-------------------- BEGINNING OF PAGE #9 -------------------
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]-
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
-[31]-(...continued)
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 Judgement 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.
-[32]- The 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.
-[33]- See note 32.
-------------------- BEGINNING OF PAGE #10 -------------------
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.
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.
The Commission requests comment on whether an insurance
requirement is necessary or appropriate for the protection of
-[34]- 15 U.S.C. 78aaa-lll (1993).
-[35]- Amex 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.
-[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).
-------------------- BEGINNING OF PAGE #11 -------------------
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.
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]-
IV. Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory
Flexibility Analysis ("Analysis"), in accordance with 5 U.S.C.
-[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.
-[38]- See 15 U.S.C. 78w(a) (1993).
-------------------- BEGINNING OF PAGE #12 -------------------
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
-------------------- BEGINNING OF PAGE #13 -------------------
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 240 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.
* * * * *
2. By amending 240.17Ad-2(a) by removing the phrase
"three business days" and adding in its place "two business
days".
3. By amending 240.17Ad-2(c) by removing the phrase "four
business days" and adding in its place "three business days".
4. By amending 240.17Ad-2(e)(1) by removing the phrase "
three business days" and adding in its place "two business days".
5. By amending 240.17Ad-2(e)(2) by removing the phrase
"five business days" and adding in its place "three business
days".
6. By amending 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 240.17Ad-12 to add paragraph (b) to read
as follows:
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
-------------------- BEGINNING OF PAGE #14 -------------------
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.
By the Commission.
Jonathan G. Katz
Secretary
Dated: December 1, 1994