SECURITIES EXCHANGE ACT OF 1934
Release No. 49904 / June 23, 2004
ADMINISTRATIVE PROCEEDING
File No. 3-11528
In the Matter of Wilmington Trust Company, Respondent. |
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ORDER INSTITUTING CEASE-AND- DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE- AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Wilmington Trust Company ("Wilmington Trust" or "Respondent").
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order").
III.
On the basis of this Order and Respondent's Offer, the Commission finds that:
Respondent
1. Wilmington Trust is a Delaware corporation, which has been registered with the Federal Deposit Insurance Corporation ("FDIC") as a bank transfer agent since December 1, 1975.1 Wilmington Trust is a wholly-owned subsidiary of the Wilmington Trust Corporation, which is a public company. Wilmington Trust provides transfer agent services for approximately 14,000 securityholders for approximately 5,000 securities issues. These issues include, among others, one equity security listed on the New York Stock Exchange ("NYSE"), municipal and corporate bonds, equipment leasing issues, collateralized mortgage obligations and other asset-backed securities issues, and limited partnerships. Wilmington Trust is a full-service financial services company and a national provider of specialized trustee services for complex financing structures and other capital market transactions.
Summary
2. This matter involves Wilmington Trust's non-compliance with certain key recordkeeping and reporting requirements in connection with its transfer agent operations. As a recordkeeping transfer agent, Wilmington Trust is required to maintain a master securityholder file and a control book for each security issue for which it provides transfer agent services.2 Wilmington Trust utilizes two bond processing software systems to maintain the master securityholder files for the securities issues for which it provides transfer agent services, one system for the less complex securities issues (from a processing perspective) and a second system for the more complex securities issues (the "complex securities processing system"). Wilmington Trust also maintains a separate control book for each security issue, subsidiary files for many issues, and separate accounting and other operating systems that process actual cash receivables and payables with respect to the securities for which Wilmington Trust provides transfer agent services. Wilmington Trust reconciles the systems that process the actual cash receivables and payables daily. However, between at least September 2000 and July 2003, Wilmington Trust did not reconcile the master securityholder files which were maintained on the complex securities processing system with the control book and did not timely verify whether these master securityholder files accurately reflected all payments processed with respect to the securities. By January 2003, Wilmington Trust had identified recordkeeping items totaling in excess of $5.8 billion on the master securityholder files that had not been verified against the actual payments processed by Wilmington Trust. When Wilmington Trust reconciled its master securityholder files with its control book and the actual payments processed with respect to such securities, Wilmington Trust found 17 active debt issues for which the principal balances in the master securityholder files differed from the principal balances in the control book, totaling approximately $185 million. These record differences3 did not represent any actual payment errors and did not reflect any financial loss to any issuers or securityholders or to Wilmington Trust. Nonetheless, many of these recordkeeping differences were aged record differences4 that had existed for one or more years but had not been reported to the issuers or the FDIC or in Wilmington Trust's annual transfer agent reports on Form TA-2. Thus, Wilmington Trust did not maintain accurate master securityholder files, as required by Rules 17Ad-10(a) and (b) under the Exchange Act, and did not timely report aged record differences, as required by Rules 17Ad-11(b) and (c). In addition, Wilmington Trust did not provide the audit committee of its board of directors with an annual report concerning the adequacy of the internal accounting controls relating to its transfer agent functions, as required by Rule 17Ad-13.
Discussion
Wilmington Trust Did Not Maintain An Accurate Master Securityholder File
3. Wilmington Trust was aware that differences could arise between the principal balances recorded in the master securityholder files and in the control book. Such differences could arise for many reasons, including, among other things, data input errors, failures to timely update the master securityholder files with issuer changes to payment schedules that were in the control book but not input into the master securityholder files, and technical limitations with the bond processing software systems utilized by Wilmington Trust. For example, Wilmington Trust utilized bond processing software systems that could not accurately account for some of the securities issues for which Wilmington Trust provided transfer agent services, such as securities which, by their terms, permitted regularly scheduled interest payments to be deferred from time to time at the option of the issuer. In addition, in order to facilitate the processing of certain payments to third parties, such as guarantors and other credit enhancement providers, Wilmington Trust inappropriately input these payments into the master securityholder files. Such entries erroneously inflated the outstanding principal balances in the master securityholder files. On occasion, Wilmington Trust also experienced technical difficulties with its complex securities processing system that required adjustments to its master securityholder file records.
4. Prior to September 2000, Wilmington Trust periodically verified that the actual cash payments processed by Wilmington Trust were accurately posted to the master securityholder files. In September 2000, Wilmington Trust reorganized the manner in which it performed its transfer agent services. At that time, Wilmington Trust discontinued verifying that the actual payments processed by Wilmington Trust were accurately recorded in the master securityholder files.
5. By January 2003, Wilmington Trust had compiled a list of almost 2,000 recordkeeping items on its master securityholder files totaling in excess of $5.8 billion that had not been reconciled against the actual payments processed by Wilmington Trust.
6. Between at least September 2000 and January 2003, Wilmington Trust did not reconcile the principal balances in the master securityholder files with the principal balances in the control book.
7. Beginning in January 2003, after the Commission staff commenced an examination regarding Wilmington Trust's transfer agent functions, Wilmington Trust initiated a project to reconcile the master securityholder files with its control book and the actual payments processed by Wilmington Trust. Ultimately, Wilmington Trust found 17 active debt issues for which the principal balances in the master securityholder files differed from the control book. These record differences totaled approximately $185 million. This balance did not represent any actual cash payment errors or financial loss to any issuers or shareholders or to Wilmington Trust, but instead represented recordkeeping errors in Wilmington Trust's master securityholder files.
Wilmington Trust Did Not Timely Report Aged Record Differences
8. Rule 17Ad-11(b) requires recordkeeping transfer agents to report aged record differences to issuers on a monthly basis if the amount of the record difference exceeds certain monetary thresholds that vary based upon the issuer's capitalization. All record differences over $2 million for debt securities must be reported; however, record differences of lesser amounts may have to be reported to issuers with capitalizations of less than $150 million.
9. At least 10 of Wilmington Trust's 17 record differences exceeded the thresholds set forth in Rule 17Ad-11(b) and should have been reported to the issuers each month.5 Wilmington Trust did not report these aged record differences to the issuers.
10. Recordkeeping transfer agents also must report aged record differences on a quarterly basis to their appropriate regulatory agency if the aggregate aged record differences exceed certain monetary thresholds that vary based upon the number of issues for which the transfer agent provides recordkeeping services. Rule 17Ad-11(c). As a transfer agent performing recordkeeping functions for approximately 5,000 issues, Wilmington Trust must report aggregate aged record differences if they exceed $5.6 million.
11. Wilmington Trust's aged record differences exceeded $5.6 million no later than January 2001 and continued to exceed that amount until July 2003. Thus, Wilmington Trust should have reported its aggregate aged record differences to the FDIC, Wilmington Trust's appropriate regulatory agency, each quarter. Wilmington Trust did not report its aggregate aged record differences to the FDIC quarterly.
12. Recordkeeping transfer agents also must file an annual report on Form TA-2. Rule 17Ac2-2. Question 8 on Form TA-2 asks the transfer agent to identify aged record differences that existed at the end of each calendar year. Reports of aged record differences on Form TA-2 are not limited by any monetary thresholds. Thus, any aged record difference existing at the end of the reporting period must be disclosed.
13. Nine of Wilmington Trust's 17 aged record differences existed at the end of 2001 and should have been reported on Wilmington Trust's 2001 Form TA-2. Seven additional aged record differences arose during 2002 for a total of 16 aged record differences6 that should have been reported on Wilmington Trust's 2002 Form TA-2. Wilmington Trust did not report any aged record differences on its 2001 or 2002 Forms TA-2.
Wilmington Trust Did Not Report to Its Audit Committee Regarding the Adequacy of Its Internal Accounting Controls for Its Transfer Agent Services
14. A bank transfer agent, which is subject to regulation by the FDIC, must conduct an annual study and evaluation and provide a report to the bank's board of directors or the audit committee of the bank's board of directors concerning the adequacy of the transfer agent's system of internal accounting controls, as required by Rule 17Ad-13(d)(3). If it does not, it is required to file with the Commission and its appropriate regulatory agency a report prepared by an independent accountant concerning its system of internal accounting controls and related procedures for the transfer of record ownership and the safeguarding of related securities and funds, as required by Rule 17Ad-13(a).
15. Although Wilmington Trust conducted annual studies of its internal accounting controls for its transfer agent functions, those studies failed to identify as a weakness that Wilmington Trust did not reconcile the actual payments processed by it against the master securityholder files or the principal balances in the master securityholder files with the principal balances in the control book.
16. Wilmington Trust also did not provide its board of directors or the audit committee of the board of directors with a report concerning the adequacy of the internal accounting controls for its transfer agent functions, as required by Rule 17Ad-13(d)(3), nor did it file with the Commission and the FDIC, it appropriate regulatory agency, a report prepared by an independent accountant concerning its system of internal accounting controls and related procedures for the transfer of record ownership and the safeguarding of the majority of the securities for which it provided transfer agent services, as required by Rule 17Ad-13(a), for 2000 or 2001.7
New Procedures Implemented by Wilmington Trust
17. During July of 2003, Wilmington Trust implemented new policies and procedures regarding timely reconciliation of the master securityholder files, reporting aged record differences and reporting to the audit committee of the board of directors concerning the annual study and evaluation of the internal accounting controls for its transfer agent functions to address the issues described above.
Violations
18. As a result of the conduct described above, Wilmington Trust violated Section 17A(d)(1) of the Exchange Act and Rules 17Ac2-2, 17Ad-10(a), 17Ad-10(b), 17Ad-11(b), 17Ad-11(c) and 17Ad-13.
19. Wilmington Trust violated Rules 17Ad-10(a) and (b) by failing to maintain true and accurate master securityholder files. In addition, Wilmington Trust violated Rule 17Ad-11(b) and (c) by failing to timely report to issuers and the FDIC the existence of aged record differences. Wilmington Trust also violated Rule 17Ac2-2 by failing to report the aged record differences on its Forms TA-2 for 2001 and 2002. Finally, Wilmington Trust violated Rule 17Ad-13 by failing to either report to the board of directors or audit committee of board of directors concerning its annual studies and evaluations of the adequacy of Wilmington Trust's internal accounting controls in connection with its transfer agent operations or file with the Commission and the FDIC, a report prepared by an independent accountant concerning its system of internal accounting controls and related procedures for the transfer of record ownership and the safeguarding of the majority of the securities for which it provided transfer agent services.
IV.
In view of the foregoing, the Commission deems it appropriate to impose the relief specified in Respondent Wilmington Trust's Offer.
According, it is hereby ORDERED that Respondent Wilmington Trust Company cease and desist from committing or causing any violations and any future violations of Section 17A(d)(1) of the Exchange Act and Rules 17Ac2-2, 17Ad-10(a), 17Ad-10(b), 17Ad-11(b), 17Ad-11(c) and 17Ad-13 thereunder.
By the Commission.
Secretary
Endnotes