Yesterday, on September 1, the Securities and Exchange Commission wrapped up what has been a very busy summer by proposing amendments to the rules and forms governing registered transfer agents. If adopted, this will be the first significant update to this regulatory framework in over four decades, a change many believe is long overdue. As the proposing release points out, “[t]ransfer agents are a key component of the national clearance and settlement system, performing critical functions related to the securities lifecycle that help protect investors and support the prompt and accurate processing of securities transaction;” underscoring the potential impact of the proposed changes.
Many of the rules the Commission has proposed this summer—such as Regulation E-Delivery and Regulation Crypto Assets—reflect that our technology is evolving rapidly, from “tokenization initiatives, to cloud-based systems, to AI-enabled operational tools,” and the rules and regulations relating to capital markets transactions need to keep pace. The proposed transfer agent rules are no different–as SEC Chairman Paul Atkins put it, “[t]his proposal would streamline and modernize the Commission’s rules to reflect transfer agents’ current processes and operations, including the use of electronic communications and blockchain technology in connection with securities offerings and the transfer of shares.” Commissioner Hester Pierce echoed his thoughts, “[w]hen the Commission first adopted the rules governing transfer agents, holding paper share certificates was the norm. Now few paper certificates exist, and transfer agents and other market participants are looking to a future in which many shares will be tokenized. Our rules need to reflect the new realities of how shares are held and transferred.” As you will see below, many of the proposed changes reflect this new technological reality.
Key Proposed Changes
Updated Registration and Reporting Requirements
Transfer agents file a Form TA-1 to register as a transfer agent, a Form TA-2 to provide annual disclosures, and a Form TA-W to withdraw from registration. The proposal would revise the registration process and reporting obligations for transfer agents, including extending the time from filing to effectiveness of Form TA-1 to give the Commission more time to review the Form. Transfer agents would also be required to file an amended Form TA-2 within 60 days of discovering that previously reported information was materially inaccurate, incomplete, or misleading.
The questions and instructions on both Forms TA-1 and TA-2 would be updated “to promote clarity regarding the required information and to improve the quality, consistency, and comparability of the information provided in response.” The Forms would also be updated in response to blockchain technology. For example, the Commission proposes to require registered transfer agents to report the number of issues for which distributed ledger technology was used to maintain the master securityholder file during the reporting period, a nod to the fact “that the risks associated with safeguarding physical securities certificates are vastly different than the risks associated with safeguarding book-entry securities or tokenized securities.” In addition, new question 5(a) on Form TA-2 would require disclosure of the number of service providers, including distributed ledger technology platforms, used by a transfer agent during the reporting period. Further, proposed new question 6(b) would require registrants to report the number of issues, by tokenization model and security type, serviced by the registrant as of December 31, noting that the risks to investors differ depending on the tokenization model.
Proposed Changes to Existing Rules
- Definitions (Rules 17ad-1 & 17ad-9): Modernize the terminology used in the transfer agent rules to reflect existing technologies, such as blockchains and other distributed ledger-based platforms, and also to capture new, as yet unforeseen technologies.
- Turnaround and Processing Standards; Limitations on Expansion (Rules 17ad-2 & 17ad-3): Require transfer agents to adopt written policies and procedures for timely turnaround and processing, align turnaround requirements with the current settlement cycle and reflect current technology, and raise the limitation-on-expansion threshold.
- Recordkeeping and Record Retention (Rules 17ad-6 & 17ad-7): Establish a single retention period for most transfer agent records and modernize the provisions governing recordkeeping, including updated electronic record keeping requirements and encompassing records existing solely on distributed ledgers and blockchain networks.
- Prompt Posting to Master Securityholder Files (Rule 17ad-10): Align posting timeframes to the modern settlement cycle and introduce technology-neutral terms. In a comment request, the Staff pointed out another difference in the risks associated with tokenized securities, querying whether “transfer agents that maintain the master securityholder file exclusively on an immutable blockchain network be exempt from the record deletion and retention requirement set forth in Rule 17ad-10(f), given that records created on such networks cannot be “deleted” in the traditional sense?”
- Safeguarding of Funds and Securities (Rule 17ad-12): Reframe as a comprehensive risk management provision. The release notes throughout that transfer agents provide important custody services. Currently, Rule 17ad-12 focuses on physical custody and it does not provide clear, definitive standards for safeguarding uncertificated securities. The changes would require written policies and procedures to protect securities and funds, including with regard to cybersecurity risks linked to the increasing use of uncertificated securities, such as book-entry and tokenized securities; mitigate material operational risks; segregate funds; and maintain a business continuity plan.
- Lost Securityholders, Inactive Securityholders, and Unresponsive Payees (Rule 17ad-17): Introduce a new notification requirement for inactive securityholders and update to permit electronic communications and payments.
- Rescission of Rule 17ad-4. Rule 17ad-4, which exempts certain transfer agents and securities from turnaround, processing, and recordkeeping requirements, would be rescinded because technological advances have improved the operational capacity of transfer agents of all types and sizes, making these exemptions no longer necessary.
- New Compliance and Restrictive Legend Rules. Proposed new Rule 17ad-30 would require registered transfer agents to establish, maintain, and enforce written compliance policies and procedures designed to ensure adherence with the federal securities laws. Proposed new Rule 17ad-31 would create specific requirements around restrictive legends on securities and would also require transfer agents to have a reasonable basis to believe that a transaction does not violate, and is not part of a chain of transactions that would violate, the registration requirements of the Securities Act of 1933, as amended, before facilitating it. Commissioner Peirce described these new requirements as an effort to “empower transfer agents to do a better job in combatting microcap fraud.”
Requests for Comment
In his statement in response to the proposing release, Commissioner Mark Uyeda stressed the forward-looking nature of the proposed rules, remarking that with these changes, “we can better protect investors, support innovation, and strengthen the foundation of the markets we have today and the markets we expect tomorrow.” Commenters will have the opportunity to opine on whether the proposed rules can, indeed, accomplish this goal, along with other aspects of the proposed rules. Notably, many of the requests for comment address the use of blockchain and distributed ledge technology in the context of registered transfer agent duties.
Comments are due 60 days after publication of the proposing release in the Federal Register. Read the SEC’s proposing release, press release and fact sheet. Read Commissioner Peirce’s statement here and Commissioner Uyeda’s statement here.