SEC Continues Transfer Agent Audits

If you have wondered who primarily regulates stock transfer agents (TAs) operating in the United States, it is the Securities and Exchange Commission (SEC).  The SEC licenses a TA upon the latter’s submission of an acceptable TA-1 form, and the SEC annually monitors the TA through the latter’s submission of acceptable TA-2 activity reports.  The SEC also performs random audits of TAs, especially those reporting any unusual TA-2 activity or which the SEC suspects are exposed to unusual risk or otherwise not in full regulatory compliance.

53 TA audits were performed by the SEC in 2015, and we gather a similar number will happen in 2016.  Since there are just under 400 TAs operating in the U.S. today, that means roughly an eighth of U.S. TAs are audited every year.  We have not heard of any TA failing to pass an audit lately; i.e., having deficiencies that were not curable in a satisfactory period of time.

We understand the particular focus of the SEC today is on the following four areas:

  • Data security, including cyber-security against foreign and domestic hackers.
  • Paying agency functions, especially where there might be improper comingling of client, shareholder and TA funds.
  • Abandoned property due diligence, for example following searches relating to SEC Rule 240.17Ad-17.
  • Crowdfunding investor record keeping, following passage of the JOBS Act.

This is consistent with a broader review of TA activities in the 21st Century, which will result in substantial revisions and additions to TA regulations expected from the SEC in the next three to nine months.  They were last overhauled no less than 40 years ago!  We will report on new regulation specifics as soon as their enactment is imminent.