Last quarter, the Securities Transfer Association held its annual conference, where representatives from the SEC gave key updates on the industry, developments at the SEC, examination results and rule updates that will affect business in 2024. This year, the speakers were Moshe Rothman, Assistant Director from the Division of Trading and Markets with responsibility for, among other areas, transfer agents, and Eric Garvey, Assistant Director from the Division of Examinations – Broker-Dealer/Exchange Program, with responsibility for transfer agents.
General SEC Updates
While there have been some minor structural changes to the SEC, there were very few meaningful updates on the state of the transfer agent rules. However, one consistent theme is that the industry, and the staff of the SEC, are trying to fit the square peg of the current transfer agent rules into the round hole of modern technology. Rothman explained that the Trading and Markets staff is charged with the policy side of the SEC’s role. Trading and Markets writes and interprets rules, while the Division of Examinations handles the actual implementation of the rules.
Another theme is the SEC’s recent extensive rulemaking. The priority of the Commissioners are the market rules, not the specific industries the SEC oversees. The speakers highlighted that the staff has completed the new transfer agent rules and is waiting for a way to implement them through the rulemaking process. The SEC has attempted to add transfer agents into other proposed or enacted rules, specifically as it pertains to recently proposed cybersecurity and privacy rules.
The Rise of Blockchain
While there have been a few new transfer agent registrants over the past years, the overall number of registered transfer agents has declined. However, the SEC is seeing new registrants specifically in blockchain. These have been issuer-specific blockchain agents, not global agents.
Since blockchain is relatively new, the SEC has been working to determine how it fits into the existing rules. The concept of transaction data vs. the master securityholder file as it pertains to blockchain agent compliance has been a key topic. They specifically mention 17Ad-9 (definitions), 17Ad-10 (prompt posting of certificate detail to master securityholder files, control book, etc.), and 17Ad-12 (safeguarding of funds and securities).
The staff has been examining all blockchain agents to fully understand how the technology is being used, with particular attention to questions around vendor access to data, the safeguarding of funds if blockchain is being used for any fund activity and how the new technology complies with existing rules.
2023 Examinations Trends
Garvey’s part of the Division of Examinations conducted 3,100 total examinations last year (including examinations by FINRA, of broker-dealers), and that 43 of those examinations were of registered transfer agents. The most common deficiencies the examiners have identified are:
- TA-2 issues (late filings, no filings, errors) - 68% of exams
- TA-1 issues (late filing, outdated information) - 42% of exams
- Recordkeeping - 21% of exams
- Safeguarding of funds and securities - 19% of exams
- Independent audit reports (17Ad-13) - 16% of exams
- Lost securityholder searches (timing, uncashed checks) – 11% of exams
One of the most frequently asked question was regarding the lack of an express rule requiring opinions when removing restrictions, but examiners still ask for proof of the opinions. Garvey advised that the staff believes opinions provide a vital piece of protection for shareholders and issuers, which is why they are requested.