A Quick Word on the Virtue of Stock Transfer Agents

We saw a couple of fraud cases arise not long ago against transfer agents, resulting in speculation the SEC would crack down more on this arcane industry in 2015 or 2016.  Our preliminary reaction to such noise (sorry, news) is a couple of bad apples do not represent the orchard – not even a little; indeed, if any industry does not experience a “violation” from time to time, how can it represent the real world?

The specific peccadilloes getting the SEC’s attention were Illinois Stock Transfer’s CEO admitting to use of clients’ dividend and corporate action money to fund the agent’s payroll and other business functions, and International Stock Transfer’s CEO creating and using fake stock certificates for sale to unwitting investors.  These things did happen, and the CEOs did pay the price.  But such crimes happen much less often in the stock transfer industry than we read about occurring, routinely, in other major industries within U.S. and international business.  To this point, we cannot think of any major error, let alone crime, that happened within stock transfer that resulted in a significant financial settlement – in the last 50 years!

One area that probably could use a touch more oversight is securing releases on restricted stock – primarily within the small transfer agent community.  Standard procedure is to require an “opinion of counsel” attesting to the proper vesting or similar criterion having been met with respect to a share issuance, to allow those shares to now freely trade.  And since such stock often belongs to company VIPs, there can at times be pressure on the transfer agent to lift the share restriction based on the simple word of a senior company officer – who also has the power to fire the transfer agent if he/she does not like the way it is performing!  Again, there should be a requirement an opinion of counsel is obtained, as all major transfer agents do.  A valid question is whether an opinion of outside counsel should be required, versus one from the company’s own general counsel.  We have seen most major agents allow internal counsel opinions, which makes sense to us because a general counsel will not risk being disbarred over a bogus opinion any more than an outside counsel would, and outside counsel opinions can be unjustifiably expensive.  Bottom line:  we could see the SEC making an opinion of counsel release on restricted shares mandatory, at the same time putting teeth into the consequences of a violation.

But the underlying message in this article is 99.9999% of transactions handled by U.S. stock transfer agents are done properly, and lawfully.  The same goes for how the 440 transfer agents registered with the SEC are actually run as businesses.  The risks of the industry doing anything else, including enabling individual employees to break or even stretch the rules, is suicidal…when you think about it.