Document ID: SEC-2015-2198-0001
Agency: sec
Document Type: Proposed Rule
Title: Transfer Agent Regulations,
Posted Date: 2015-12-31T05:00Z

[Federal Register Volume 80, Number 251 (Thursday, December 31, 2015)]
[Proposed Rules]
[Pages 81947-82004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32755]

[[Page 81947]]

Vol. 80

Thursday,

No. 251

December 31, 2015

Part IV

Securities and Exchange Commission

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17 CFR Part 240

 Transfer Agent Regulations; Proposed Rules

  Federal Register / Vol. 80 , No. 251 / Thursday, December 31, 2015 / 
Proposed Rules  

[[Page 81948]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

RIN 3235-AL55
[Release No. 34-76743; File No. S7-27-15]

Transfer Agent Regulations

AGENCY: Securities and Exchange Commission.

ACTION: Advance notice of proposed rulemaking; Concept release; Request 
for comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
publishing this Advance Notice of Proposed Rulemaking, Concept Release, 
and Request for Comment on Transfer Agent Regulations (``release'') to 
seek public comment regarding the Commission's transfer agent rules. 
The first transfer agent rules were adopted in 1977 and remain 
essentially unchanged. At the same time, transfer agents now operate in 
a market structure that bears little resemblance to the structure in 
1977. The release, noting the importance of transfer agents within the 
national market structure, includes a history of transfer agent 
services and applicable regulations as well as an overview of current 
transfer agent services and activities, and requests comment on all 
topics. The release includes an Advance Notice of Proposed Rulemaking 
in specific areas, such as transfer agent registration and reporting 
requirements, safeguarding of funds and securities, and revision of 
obsolete or outdated rules, along with requests for comment, as well as 
a Concept Release and Request for Comment addressing additional areas 
of specific Commission interest, including processing of book-entry 
securities, broker-dealer recordkeeping for beneficial owners, transfer 
agents to mutual funds, and administration of issuer plans. The 
Commission intends to consider the public's comments in connection with 
any future rulemaking, and comments to the Advance Notice of Proposed 
Rulemaking will be used to further consider the sufficiency and scope 
of the rulemaking proposals described therein.

DATES: Comments must be in writing and received by February 29, 2016.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/concept.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-27-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to: Secretary, Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-27-15. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/concept.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
publicly available.

FOR FURTHER INFORMATION CONTACT: Moshe Rothman, Branch Chief, Thomas 
Etter, Special Counsel, Catherine Whiting, Special Counsel, Mark 
Saltzburg, Special Counsel, Lauren Sprague, Special Counsel, or 
Elizabeth de Boyrie, Counsel, Office of Clearance and Settlement, 
Division of Trading and Markets, Securities and Exchange Commission, 
100 F Street NE., Washington, DC 20549-7010 at (202) 551-5710.

SUPPLEMENTARY INFORMATION: 
I. Introduction
II. The National Clearance and Settlement System: History and 
Background
    A. Transfer of Certificated Securities
    B. Transfer Agent Processes for Transferring Certificated 
Securities
    C. Paperwork Crisis of the 1960s
    1. Industry Responses (1968-1970)
    2. Regulatory and Industry Responses (1971-1975)
    3. Advent of the Modern Clearance and Settlement System (1975-
Present)
III. Transfer Agent Role in Clearance and Settlement Processes
    A. Types of Security Ownership
    1. Registered Securityholders
    2. Beneficial Owners
    B. Clearance and Settlement Process
IV. Transfer Agent Regulation: Origins and Current Status
    A. Federal Transfer Agent Rules
    1. Registration and Annual Reporting Requirements
    2. Processing, Reporting, Recordkeeping, and Exemptions: Rules 
17Ad-1 through 17Ad-7 and Rules 17f-1 and 17f-2
    3. Recordkeeping and Safeguarding Rules: Rules 17Ad-8 through 
17Ad-13
    4. Issue-Specific Rules: Rules 17Ad-14 Through 17Ad-21T
    B. Bank and Internal Revenue Service Regulations
    C. SRO Rules and Requirements Applicable to Transfer Agents
    1. NYSE Requirements
    2. DTC Requirements
    D. Regulation of Transfer Agents Under State Law
V. Evolution of Recordkeeping, Transfer, and Related Transfer Agent 
Activities
    A. Recordkeeping, Transfer, Issuance, and Corporate Actions
    1. Recordkeeping: Rules 17Ad-9, 10, and 11
    2. Securities Transfers, Exchanges, and Conversions: Rules 17Ad-
9, 10, 12, and 19
    3. Securities Issuance: Rules 17Ad-1 and 2
    4. Corporate Actions and Related Services: Rules 17Ad-1, 6, 10, 
12, and 13
    B. Annual Meeting, Proxy-Related Services, and Securityholder 
Services and Communications
    C. Regulatory Compliance and Reporting
VI. Advance Notice of Proposed Rulemaking
    A. Registration and Annual Reporting Requirements
    B. Written Agreements Between Transfer Agents and Issuers
    C. Safeguarding Funds and Securities
    D. Restricted Securities and Compliance With Federal Securities 
Laws
    E. Cybersecurity, Information Technology, and Related Issues
    F. Definitions, Application, and Scope of Current Rules
    G. Conforming Amendments
VII. Concept Release and Additional Request for Comment
    A. Processing of Book-Entry Securities
    B. Bank and Broker-Dealer Recordkeeping for Beneficial Owners
    C. Transfer Agents to Mutual Funds
    1. Key Characteristics of Mutual Fund Transfer Agents
    2. Increased Complexity
    3. Compliance and Other Services
    4. Broker-Dealer Recordkeeping for Beneficial Owners Who Invest 
In Mutual Funds
    5. Discussion and Request for Comment
    D. Crowdfunding
    E. Administration of Issuer Plans
    1. Third Party Administrators
    2. Issuer Plans
    3. Potential Broker-Dealer Registration Issues
    4. Discussion and Request for Comment
    F. Outsourcing Activities and Non-Qualifying Securities Serviced 
by a Registered Transfer Agent
    G. Additional Request for Comment
* * * * *

I. Introduction

    The United States' securities markets are indispensable to this 
country's and the world's economy. The Commission

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believes that issuers, investors, and other participants in the 
securities markets must be served by a well-functioning national system 
for the clearance and settlement of securities transactions (``National 
C&S System'') that promotes safe, efficient, prompt, and accurate 
settlement transactions.\1\ Critical to this mission is the development 
and maintenance of a comprehensive regulatory program that governs the 
functions of transfer agents and related industry segments critical to 
the proper functioning of the National C&S System, including entities 
that clear trades, provide custodial and safeguarding services, and 
perform other ``back-office'' functions within the securities industry.
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    \1\ See infra Sections II and III of this release for additional 
discussion of the National C&S System.
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    As agents for issuers, transfer agents play a critical role with 
respect to securities settlement, though they rarely receive much 
public attention. Among their key functions, they may: (i) Track, 
record, and maintain on behalf of issuers the official record of 
ownership of each issuer's securities; (ii) cancel old certificates, 
issue new ones, and perform other processing and recordkeeping 
functions that facilitate the issuance, cancellation, and transfer of 
those securities; (iii) facilitate communications between issuers and 
registered securityholders; and (iv) make dividend, principal, 
interest, and other distributions to securityholders. A transfer 
agent's failure to perform its duties promptly, accurately, and safely 
can compromise the accuracy of an issuer's securityholder records, 
disrupt the channels of communication between issuers and 
securityholders, disenfranchise investors, and expose issuers, 
investors, securities intermediaries, and the securities markets as a 
whole to significant financial loss.\2\
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    \2\ Maintenance of Accurate Securityholder Files and 
Safeguarding of Funds and Securities by Registered Transfer Agents, 
Exchange Act Release No. 19142, 2-3 (Oct. 15, 1982), 47 FR 47269 
(Oct. 25, 1982) (``17Ad-9 through 13 Proposing Release'') (noting 
examples of substandard transfer agent performance presenting 
significant potential adverse consequences). See also Processing 
Requirements for Cancelled Security Certificates, Exchange Act 
Release No. 48931 (Dec. 16, 2003), 68 FR 74390, 74391 (Dec. 23, 
2003) (``17Ad-19 Adopting Release'') (noting examples of substandard 
transfer agent performance and significant adverse consequences).
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    The securities markets and the National C&S System in which 
transfer agents operate have changed significantly since the Commission 
first began regulating transfer agents in the 1970s. The changes 
largely reflect a decades-long evolution from a manual securities 
settlement process focused on the processing of physical securities 
certificates to a highly automated electronic environment centered on 
the processing and transfer of electronic book-entry securities.\3\ The 
changes also reflect significant technological and operational 
developments in other areas, as well as broader changes in the 
securities industry and the business and regulatory environments in 
which transfer agents operate.
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    \3\ Concept Release on Equity Market Structure, Exchange Act 
Release No. 61358, 2 (Jan. 14, 2010), 75 FR 3594, 3594 (Jan. 21, 
2010). When securities are referred to as being in ``book-entry'' 
form, it means that the investor does not receive a certificate. 
Instead, a custodian, usually a broker or transfer agent, maintains 
electronic records showing that the investor owns the particular 
security. For additional discussion of book entry securities, see 
infra note 37.
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    As a result, the Commission has observed over time that transfer 
agents now perform a more diverse array of functions and services, many 
of which may not be fully addressed by the Commission's transfer agent 
rules. In addition, the Commission has observed that the manner in 
which transfer agents carry out their traditional functions may no 
longer be adequately addressed in the rules. The Commission's 
consideration of these observations has led it to include two 
interrelated approaches in this release. Under the first approach, the 
Commission believes it has identified a series of new and amended rules 
that, based on its current understanding of transfer agents and their 
functions, it intends to propose. These anticipated new and amended 
rules, which the Commission intends to propose as soon as is 
practicable, either individually or in groups or phases, and 
irrespective of any other changes to the transfer agent rules, are 
discussed in detail in the Advance Notice of Proposed Rulemaking found 
in Section VI. The Commission is soliciting public comment on the 
anticipated rulemaking proposals described in Section VI. Public 
feedback and data would assist the Commission in further refining and 
calibrating the anticipated proposals as well as other potential 
proposals.
    Under the second approach, reflected in the Concept Release and 
Request for Comment contained in Section VII, the Commission discusses 
and requests comment regarding a number of additional transfer agent 
issues that primarily arise from the diverse array of transfer agent 
functions and services which have developed over time. Public comment 
on these additional issues will allow the Commission to evaluate the 
need for, and potentially develop, additional rulemaking proposals 
appropriately tailored to these complex areas. In undertaking these 
approaches, the Commission remains sensitive to whether any 
distinctions between the actual activities of transfer agents and what 
is contemplated by the Commission's rules may create undue uncertainty 
or risks for the National C&S System and the market participants that 
rely upon it, including investors, issuers, regulators, and transfer 
agents. As transfer agents continue to evolve in their roles and 
activities, any such distinctions, and the commensurate risks 
associated with them, may also grow.
    We begin with an overview of the antecedents, advent, and 
subsequent history of the National C&S System, including a discussion 
of the ``Paperwork Crisis'' which helped precipitate the legislative 
amendments that gave rise to that system. We then describe the National 
C&S System and transfer agents' role within that system as it functions 
today, followed by a discussion of the current regulatory regime and 
the core functions performed by transfer agents. The remainder of the 
release consists of the two sections noted above: The Advance Notice of 
Proposed Rulemaking in Section VI and the Concept Release and Request 
for Comment in Section VII.
    We are mindful that the role of transfer agents in the National C&S 
System and the need to address specific risks associated with transfer 
agents have been topics of discussion and debate, both within and 
outside the Commission, for many years.\4\ We intend for this release 
to build on those discussions and therefore invite comment on the full 
range of topics and issues associated with transfer agents and their 
activities, regardless of whether and in which section those topics and 
issues are specifically addressed. Thus, while we set forth specific 
requests for comments, we welcome comments on any concerns related to 
transfer agent activities, the transfer agent regulatory program, or 
other areas of concern that commentators may have. We specifically 
invite comment on any possible regulatory actions regarding the issues 
and concerns described, including potential new rules or rule 
amendments or other reasonable regulatory alternatives, as well as any 
related evidence, quantitative and/or qualitative, relating to a 
potential

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regulatory action. Comments received on either or both sections of the 
release will be considered in connection with any future rulemaking.
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    \4\ For example, in 2011 the Commission hosted a roundtable on 
the execution, clearance, and settlement of microcap securities 
which covered, among other topics, the role of transfer agents in 
the issuance and transfer of restricted securities. See transcript, 
available at https://www.sec.gov/spotlight/microcap/microcaproundtable101711-transcript.txt.
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    We are also mindful that market developments have occurred beyond 
the changes that are the focus of this release and that affect transfer 
agents. For example, transfer agents and market participants now often 
communicate with one another using structured data on electronic 
platforms. Data standardization efforts have emerged to further enhance 
these electronic communication methods, such as the international 
standards effort focusing on corporate actions, which may ultimately be 
used by transfer agents.\5\ Although these issues are not specifically 
addressed herein, comments on, and specific data about, any such 
developments are welcome.
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    \5\ See, e.g., XBLR: The Business Reporting Standards, https://www.xbrl.org/the-consortium/get-involved/corporate-actions-working-group/.
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    The Commission is sensitive to the effects that could result from 
any regulatory action, and accordingly we also seek input on the 
economic effects or tradeoffs associated with any potential regulatory 
action, including any costs, benefits, or burdens of such action, and 
any effects on efficiency, competition, and capital formation. We are 
also mindful that the various aspects of the transfer agent regulatory 
program and securities transfer process that we address in this release 
are interconnected, and that changes to one aspect may affect other 
aspects, as well as complement or frustrate other potential changes. 
Therefore, we encourage the public to consider these relationships when 
formulating comments, and invite comment on whether alternative 
approaches, or a combination of approaches, would better address the 
concerns raised.

II. The National Clearance and Settlement System: History and 
Background

A. Transfer of Certificated Securities

    Investment securities confer certain intangible rights and benefits 
upon the holder.\6\ For example, the rights and benefits represented by 
a share of stock generally include the right to share in the capital 
and surplus of the corporation and receive certain other benefits and 
specified rights. Because securities confer intangible rights, 
historically the transfer of investment securities from one person to 
another has required special rules. In the past, the most common way to 
transfer investment securities, such as shares of stock, was to 
transfer a paper certificate that represents the benefits of ownership 
(``certificated security'').\7\ Certificated securities have been 
issued in the United States since the 1700s \8\ and are evidence that 
the owner is registered on the books of the issuer (or its transfer 
agent) as a securityholder.\9\ Although the shares themselves represent 
an intangible right,\10\ the certificate is a negotiable instrument 
under state law, which allows the registered owner of the certificated 
security to transfer the bundle of intangible rights to a third 
party.\11\
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    \6\ Egon Guttman, Modern Securities Transfers Sec.  1:5 (4th ed. 
2010).
    \7\ The Uniform Commercial Code (``UCC'') defines a 
``certificated security'' as ``a security that is represented by a 
certificate.'' U.C.C. 8-102(a)(4). The UCC, which was first 
published in 1952, is a uniform act designed to standardize the law 
of sales and other commercial transactions in all 50 states. The UCC 
has the effect of law only when adopted by a state, and while it has 
been adopted by all 50 states, there are numerous state-by-state 
variations in the adopted texts.
    \8\ The first major American issue of publicly traded securities 
occurred in 1790 when the federal government issued $80 million of 
bonds to refinance federal and state Revolutionary War debt. In 
1792, five securities--two bank stocks and three government bonds--
began trading on what was to become the New York Stock Exchange. For 
a historical discussion of the development of trading on the 
exchange, see Teweles and Bradley, The Stock Market 95-119 (6th ed. 
1992).
    \9\ Guttman, supra note 6.
    \10\ Id.
    \11\ Id. at Sec.  1:12.
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    This ability to transfer the rights associated with share ownership 
helps drive the securities markets.\12\ Generally, under the UCC, 
``voluntary transfer of possession'' is all that is required to effect 
such a transfer.\13\ But in order to qualify as a ``protected 
purchaser'' under the UCC, and therefore acquire an interest in the 
security free of any adverse claim, the buyer must give value, not have 
notice of any adverse claim to the security, and obtain control of 
it.\14\ Thus, for a buyer of registered certificated securities to 
achieve protected purchaser status, the voluntary transfer of 
possession could involve a significant amount of paperwork and manual 
processing, even in a direct transaction between a seller and a buyer:

    [E]ither the certificate or a stock power must be indorsed, the 
signature guaranteed, authority to transfer title documented, and 
the stock certificate and the other documentation delivered, not to 
mention the registration of transfer on the stockholders list, the 
destruction of the old certificate and the issue of a new one.\15\

    \12\ Generally, the UCC governs the transfer of securities. For 
further discussion of the UCC, see Section IV.D.
    \13\ Guttman, supra note 6, at Sec.  1.11, U.C.C. 1-201(b)(14).
    \14\ U.C.C. 8-303. ``Control'' over a registered security is 
achieved by obtaining control of the security indorsed to the holder 
or in blank, or if the issuer registers the holder in the 
securityholder list. See U.C.C. 8-106(b), off. cmts. 2-3.
    \15\ David C. Donald, The Rise and Effects of the Indirect 
Holding System: How Corporate America Ceded Its Shareholders to 
Intermediaries 7 (Sept. 27, 2007), available at http://ssrn.com/abstract=1017206.
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    Historically, transactions involving certificated securities 
effected on securities exchanges could be significantly more complex:

    In sales and purchases by persons other than brokers and 
specialists, the owner of the security will instruct a broker to 
sell, the broker will transfer the order to the exchange floor/
system or a market maker, where it will be matched wholly or 
partially with one or more buy orders. Once the order is executed, 
the seller will have to deliver the executed certificate(s) to his 
broker so that the selling broker can deliver it to the buying 
broker, market maker, specialist, or central counterparty. Once the 
buying broker receives delivery, she will have to deliver to the 
issuer's transfer agent with a request for registration of transfer 
on the stockholder list. The latter, after inspecting all necessary 
documentation, will register the transfer, cancel the old 
certificate, and issue a new certificate to the buyer. Thus, beyond 
indorsement of the certificate and its delivery, each stage of the 
transaction will demand the documents, guarantees and assurances 
that constitute ``good delivery'' on the respective exchange.\16\
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    \16\ Id. at 7-8.
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B. Transfer Agent Processes for Transferring Certificated Securities

    Historically, from the transfer agent's perspective, the transfer 
of certificated securities held by registered owners was a time-
consuming manual process. First, the transfer agent would receive from 
the broker a bundle of documents (the ``transfer bundle'') that 
typically included the following: (i) A ``ticket'' pinned to the bundle 
of documents that served as a transmittal letter and receipt; \17\ (ii) 
transfer instructions telling the transfer agent what action to take; 
(iii) the security certificates of the selling securityholder; (iv) a 
power of attorney; \18\ and (v) a ``guarantee,''

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typically affixed to the power of attorney or certificate, guaranteeing 
the genuineness of the signature of the selling securityholder 
indorsing the certificate over for transfer.\19\
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    \17\ Historically, the term ``ticket'' referred to a broker-
originated window ticket, which indicated the identity of the 
delivering broker, the securities, and the quantity. It would be 
prepared by a broker in triplicate and accompanied the transfer 
instructions and stock certificates when presented by the broker to 
the transfer agent for transfer. SEC, Study of Unsafe and Unsound 
Practices of Brokers and Dealers, H.R. Doc. No. 92-231, at 182 n.32 
(Dec. 1971) (``Unsafe Practices Study''). Today, a ticket may 
provide similar information, either in electronic form, or in a 
highly structured and standardized paper form capable of being 
scanned and converted to electronic form.
    \18\ A power of attorney may also be referred to as a ``stock 
power'' (or ``bond power'' with respect to debt securities) and 
grants legal authority to the registered securityholder's broker, to 
a transfer agent, or to another intermediary to transfer the 
securityholder's securities ownership on behalf of the 
securityholder. A seller may use a power of attorney rather than 
indorse the assignment and transfer form on the back of the security 
certificate. For examples of forms of transfer and assignment (i) by 
stock power; (ii) by bond power; and (iii) by execution of the 
transfer and assignment form on the back of a security certificate, 
see Mark S. Rhodes, Transfer of Stock app. A Sec.  678.3041 at forms 
1-3 (7th ed. Apr. 2015).
    \19\ North American Rockwell Information Systems Company, 
Securities Industry Overview, Final Report to the American Stock 
Exchange 47 (1969) (``Rockwell Study'').
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    As an example of the extensive process for transferring 
certificated securities, prior to 1975, for New York City transfer 
agents, nearly 90 percent of these transfer bundles were received from 
messengers at the transfer agent's ``window,'' which was a physical 
drop-off location at the transfer agent's offices, rather than through 
the mail, in which case the transfer bundles would be routed to the 
mail room.\20\ Upon receipt at the window, the transfer agent would 
perform a visual reconciliation to confirm that the number of 
securities shown on the ticket matched the number on the certificates. 
If the transfer agent found a difference, the transfer would be 
rejected as ``out of balance'' and returned to the broker, a process 
known as a ``window rejection.'' \21\ If no difference was found, the 
transfer agent would continue the process with a more detailed 
inspection, starting with a detailed review of signature guarantees, 
indorsements,\22\ and attachments in order to determine if the 
certificates were in ``good order'' for transfer.\23\ If the transfer 
agent found a deficiency, it would attach a rejection sheet to the 
certificate in question and return it to the broker, a process referred 
to as an ``examination rejection.'' \24\ If the certificates were found 
to be in good order, the transfer agent would perform ``stop 
checking,'' the process of verifying each certificate number against a 
file it maintained listing certificates reported stolen, missing,\25\ 
or with ``stop transfers'' or legal holds.\26\
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    \20\ It was estimated at the time that New York transfer agents 
only received approximately 10 percent of certificates by U.S. mail. 
The pattern was the opposite for transfer agents outside of New 
York, which were estimated to receive the vast majority of 
certificates for transfer through the mail. Id. at 51.
    \21\ Id. at 47-52.
    \22\ Transfer agents may have reviewed indorsements but 
generally did not maintain signature cards for each registered 
securityholder or otherwise verify authenticity of the signature by 
comparing it to specimen signatures. Rather, the signature guarantee 
provided by the broker was intended to provide assurance concerning 
the authenticity of the seller's signature. Today, the signature 
guarantee process has been enhanced and standardized through non-
governmental Medallion guarantee programs. For additional 
information regarding Medallion guarantees, see infra note 267.
    \23\ Rockwell Study, supra note 19, at 53.
    \24\ It was estimated that, in the mid- to late-1960s, window 
rejections were as high as 20 percent and examination rejections 
were as high as 30 percent. Id.
    \25\ Id. Today, there is a national system operated by the 
Securities Information Center (``SIC'') as the Commission's designee 
for maintaining a database concerning missing, lost, counterfeit, 
and stolen securities that ``reporting institutions'' (brokers, 
dealers, registered transfer agents, certain types of banks, and 
others) report information to and inquire into concerning the status 
of securities certificates. See Exchange Act Rule 17f-1, 17 CFR 
240.17f-1. However, transfer agents still maintain their own lists 
of securities subject to stop transfers. For additional discussion 
of reporting requirements for lost and stolen securities, see infra 
Sections IV.A.1 and IV.A.2.
    \26\ A ``stop transfer'' or a ``stop order'' is a demand made by 
a registered securityholder to an issuer that a security should not 
be transferred without the securityholder having an opportunity to 
assert a claim to the security, typically because the security has 
been destroyed, lost, or stolen. See U.C.C. 8-403; Guttman, supra 
note 6, at Sec.  B:11, form 62 (providing a form of stop transfer 
notice). Under U.C.C. 8-403, an owner's notification that a security 
certificate has been lost constitutes a demand that the issuer not 
register transfer. U.C.C. 8-403, cmt. 2 (2005). If, after a stop 
transfer demand has become effective, a certificated security in 
registered form is presented to an issuer with a request to register 
transfer (or an instruction is presented to an issuer with a request 
to register transfer of an uncertificated security), the issuer must 
promptly provide a notice with certain information to both the 
person who made the stop transfer demand and the person seeking to 
transfer the security. See U.C.C. 8-403(b). When a security has been 
destroyed, lost, stolen, or is otherwise missing, in addition to 
providing a stop transfer notice, a registered securityholder 
commonly will seek to replace the security. The process of 
replacement is described in detail infra in Section IV.A.2.
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    The next step was to prepare the transfer journal entries 
documenting the cancellation of the old certificate and the issuance of 
the new certificate.\27\ Entering information into the transfer journal 
was considered the most time consuming part of the transfer process 
because it was a manual process, requiring gathering discrete pieces of 
information from different documents in the transfer bundle.\28\ 
Concurrently, the transfer agent would cancel the old certificate and 
prepare a new certificate from the supply of blank certificates the 
transfer agent kept on hand.\29\
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    \27\ This record may also be referred to as a ``transfer 
blotter,'' or a ``transfer log,'' among other terms. As used 
throughout this release, we refer to it as a ``transfer journal.'' A 
transfer journal is a continuous record of the transfer of ownership 
of securities, including the identity of the party presenting the 
item for transfer, whether the transfer was completed, and to whom 
the securities were made available
    \28\ Rockwell Study, supra note 19, at 53.
    \29\ Id. at 53-54, 57. These blank certificates typically would 
have been ordered by a corporate officer of the issuer and been 
engraved by a bank note company before being delivered to the 
transfer agent. The engraving was both aesthetic and a security 
feature designed to prevent counterfeiting. Id. at 100. To avoid 
trading interruptions caused by running out of certificates, 
transfer agents had to carefully forecast certificate demand and 
monitor their inventory of blank certificates. Id. Today, it is the 
understanding of the Commission's staff that some certificates may 
not be engraved but are produced by transfer agents through ``print-
on-demand'' services.
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    Prior to sending certificates to a registrar, the transfer agent's 
staff would perform several audits to verify the accuracy of the 
transfer journal and new certificate.\30\ After completion of these 
audits, the transfer agent would send the certificates to a registrar, 
which would perform an additional audit or quality control check 
primarily focused on verification that the share quantities on the 
cancelled certificates and newly issued certificates matched and that 
the new certificates were not issued in a manner resulting in an 
overissuance.\31\ If the registrar was independent of the transfer 
agent, as historically required by certain stock exchange rules, the 
transfer agent would remove the window tickets from batches of 
securities to be sent to the registrar, sequence the batches of old and 
new certificates separately by security issue, and send the bundles by 
messenger to the registrar, typically overnight.\32\ The registrar 
would perform the audit described above, countersign the new 
certificates,\33\ and then return them to the transfer agent.\34\ The 
transfer agent would then need to reorganize the certificates and 
reattach them to their window tickets before sending the new 
certificates and accompanying documents to the designated receiving 
party, usually by messenger.\35\
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    \30\ Id. at 53. For additional discussion of the registrar 
function, see, e.g., infra Section II.C.1
    \31\ Id. at 53-54. For more information regarding overissuances, 
see infra note 235 and accompanying text.
    \32\ Id. at 53.
    \33\ Before the new certificate would be sent out to the 
designated receiving party, the transfer agent would also 
countersign the new certificate. Thus, new certificates typically 
would include the signature of an officer of the issuer and 
countersignatures by the transfer agent and registrar.
    \34\ Rockwell Study, supra note 19, at 53.
    \35\ Id.
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    In 1977, the concept of the ``uncertificated security'' was 
introduced in Article 8 of the UCC.\36\ This innovation allowed issuers 
to issue uncertificated (i.e., certificateless) book-entry securities, 
the transfer of which is

[[Page 81952]]

greatly simplified compared to the transfer of certificated securities 
because transfer can be effected and protected purchaser status can be 
achieved by simply registering the transferee's name on the books of 
the issuer.\37\
---------------------------------------------------------------------------

    \36\ See U.C.C. 8-102(a)(18) (defining new term uncertificated 
security as ``a security that is not represented by a 
certificate''); U.C.C. 8-101 (citing ``Reasons for 1977 Change,'' 
and introducing the subject of uncertificated securities). See also 
Egon Guttman, Toward the Uncertificated Security: A Congressional 
Leap for States to Follow, 37 Wash. & Lee L. Rev. 717, 729-32 
(1980).
    \37\ Guttman, supra note 6, at Sec.  6:4. Book-entry securities 
are discussed in more detail throughout the release, including in 
Sections III.A and VII.A.
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C. Paperwork Crisis of the 1960s

    Prior to 1968, individual clearing brokers \38\ found it necessary 
to maintain a relationship with a separate clearing agency for each 
securities exchange.\39\ In the over-the-counter (``OTC'') market,\40\ 
most securities transactions were settled without going through a 
clearing agency or were cleared by small user-owned clearing 
corporations. In either instance, brokers had to settle most 
transactions by physical delivery or receipt of certificates, and had 
to maintain an office or establish a correspondent relationship with an 
entity with an office near the clearing agency.
---------------------------------------------------------------------------

    \38\ For further information on introducing and clearing 
brokers, see Figure 1 and accompanying text, infra.
    \39\ A clearing agency may be referred to as a clearing 
corporation or a depository, depending on its functions. Clearing 
corporations typically compare member transactions, clear, net and 
settle trades, and provide risk management services, such as trade 
guarantees. Depositories immobilize securities by holding them on 
deposit for their participants and effect transfers of interests in 
those securities through book-entry credits and debits of 
participants' accounts at the depository. For additional discussion, 
see infra Section III. See also, e.g., Exchange Act Section 
3(a)(23)(A), 15 U.S.C. 78c(a)(23)(A) (defining the term ``clearing 
agency''); Clearing Agencies, SEC, https://www.sec.gov/divisions/marketreg/mrclearing.shtml (last visited Nov. 25, 2015). Currently, 
DTC is both the only CSD in the United States and the only CSD 
registered with the Commission as a clearing agency. See Exchange 
Act Section 3(a)(23)(A), 15 U.S.C. 78c(a)(23)(A) (requiring CSDs to 
register with the Commission as a clearing agency).
    \40\ The term ``OTC'' refers generally to securities that are 
not listed on a national securities exchange. Many equity 
securities, corporate bonds, municipal securities, government 
securities, and certain derivative products are traded in the OTC 
market. The OTC Bulletin Board (``OTCBB''), which is a facility of 
FINRA, for example, is an electronic inter-dealer quotation system 
that displays quotes, last-sale prices, and volume information for 
many securities that are not listed on a national securities 
exchange, including domestic, foreign and American depository 
receipts (ADRs). For additional discussion, see, e.g., Over the 
Counter Market, SEC, https://www.sec.gov/divisions/marketreg/mrotc.shtml (last visited Nov. 20, 2015).
---------------------------------------------------------------------------

    As trading volume increased throughout the 1960s and early 1970s, 
the burdensome manual process associated with transferring certificated 
securities created what came to be known as the Paperwork Crisis. It 
was, at the time, ``the most prolonged and severe crisis in the 
securities industry'' \41\ since the Great Depression and to this day 
is one of the largest challenges the U.S. securities markets have 
faced. The manual settlement processes for certificated securities 
could not keep up with increasing trading volumes, deliveries to 
customers of both cash and securities were frequently late, and stock 
certificates were lost in the rising tide of paper. The substandard 
performance of transfer agents was ``a significant contributing 
factor'' to the Paperwork Crisis.\42\ At times during 1967 and 1968, 
the New York Stock Exchange (``NYSE'') closed early on some days and 
during a substantial portion of 1968 closed entirely on Wednesdays to 
attempt to allow the brokerages and other firms to keep up with the 
volume.\43\
---------------------------------------------------------------------------

    \41\ Unsafe Practices Study, supra note 17 at 1.
    \42\ Id. at 37-8.
    \43\ Id. at 219, n. 4. See also New York Stock Exchange, Inc., 
Crisis in the Securities Industry, A Chronology: 1967-1970 10-16 
(1971) (report prepared for the Subcommittee on Commerce and Finance 
of the Committee on Interstate and Foreign Commerce of the U.S. 
House of Representatives).
---------------------------------------------------------------------------

    In the immediate aftermath of the Paperwork Crisis, more than 100 
broker-dealers went bankrupt or were acquired by other firms and 
``[t]he inability of the securities industry to deal with its serious 
operational problems . . . contributed greatly to the loss of investor 
confidence in the efficiency and safety of [the U.S.] capital 
markets.'' \44\ However, other consequences of the Paperwork Crisis 
were deeper and longer lasting. As discussed below, over the next years 
and decades, Congress, federal and state regulators, and industry 
participants, including brokers, dealers, banks, and securities 
exchanges, worked together to drastically reshape critical operational 
aspects of the securities industry, ultimately leading to major 
revisions to both federal and state securities laws, and the advent of 
the modern national market system and National C&S System as they exist 
today.
---------------------------------------------------------------------------

    \44\ S. Rep. No. 94-75, at 3-4 (1975) (``Senate Report on 
Securities Act Amendments of 1975'') (report prepared by the Senate 
Committee on Banking, Housing, and Urban Affairs on the Securities 
Act Amendments of 1975). For additional information about the 
Paperwork Crisis, see also Unsafe Practices Study, supra note 17, at 
13-30; Securities Transaction Settlement Concept Release, Exchange 
Act Release No. 49405 (Mar. 11, 2004), 69 FR 12922 (Mar. 18, 2004).
---------------------------------------------------------------------------

1. Industry Responses (1968-1970)
Formation of the Central Certificate Service (1968)
    In immediate response to the Paperwork Crisis, regulators and 
industry participants studied and adopted alternative settlement 
systems and other potential options which might reduce or eliminate the 
problems associated with the traditional process for transferring 
certificated securities. First, in June 1968, the NYSE established the 
Central Certificate Service (``CCS'') as a division of the Stock 
Clearing Corporation. Broker-dealers and banks who were members of the 
NYSE were permitted to deposit their certificated securities with CCS, 
which would hold the certificates in custody and transfer them into the 
name of a CCS nominee.\45\ The certificated securities deposited by 
that member would be represented by an appropriate book-entry credit 
reflected in that member's account at CCS. Because all securities held 
by CCS were registered in its nominee's name, deliveries of securities 
between CCS members could be effected by appropriate credits and debits 
to the members' securities accounts rather than by physical delivery of 
certificates. In this manner members' accounts would be debited and 
credited to reflect transactions among them, but the registered owner 
of the securities--CCS's nominee--would never change. Movement of 
certificates was thus eliminated, resulting in their 
``immobilization.'' \46\ At the time, CCS was the most prominent 
example of the central securities depository model discussed below in 
Section II.B.2. In 1970, CCS opened its services to members of the 
American Stock Exchange,\47\ and in 1973 CCS changed its name to the 
Depository Trust Company (``DTC'').\48\
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    \45\ Unsafe Practices Study, supra note 17, at 184. The 
registration of securities into the name of a nominee rather than 
the name of the investor is commonly referred to as ``street name'' 
registration, which stands for ``Wall Street name.'' See The Stock 
Market, supra note 8, at 249-251, 307. A nominee is usually a 
partnership formed exclusively to act as the record holder of 
securities and thereby to facilitate their transfer. See Preliminary 
Report of the Securities and Exchange Commission on the Practice of 
Recording the Ownership of Securities in the Records of the Issuer 
in Other than the Name of the Beneficial Owner of Such Securities 2-
15 (Dec. 4, 1975) (``Preliminary Street Name Study'') (providing 
extensive discussion of the history of the practice of nominees and 
street name ownership, the scope of the practice, the concept of 
beneficial ownership and then-current practices). For further 
discussion of registered ownership and street name ownership (or 
beneficial ownership), see infra Section III.A. See also infra note 
87, regarding DTC's nominee, Cede & Co.
    \46\ Unsafe Practices Study, supra note 17, at 184.
    \47\ The American Stock Exchange, a major New York securities 
exchange founded in 1908, operated for a century before being 
acquired by the New York Stock Exchange and ceasing operations as an 
independent entity in 2008.
    \48\ For further discussion of DTC, see infra Sections II.C.3, 
III.B, IV.C.2.
---------------------------------------------------------------------------

Rockwell Study (1969)
    Around the same time, the American Stock Exchange hired the North 
American Rockwell Information

[[Page 81953]]

Systems Company to study and appraise the securities industry's 
operations. In 1969, it produced the Rockwell Study. Among other 
things, the Rockwell Study found that the securities industry's 
operations were unnecessarily complicated and had not kept pace with 
technology and recommended that the actual physical movement of 
securities be reduced.\49\
---------------------------------------------------------------------------

    \49\ Rockwell Study, supra note 19.
---------------------------------------------------------------------------

    To address unnecessary complexity, for example, the Rockwell Study 
focused on whether more efficient clearance and settlement of 
securities could be achieved by allowing single entities to perform 
both registrar and transfer agent functions. If so, the entity would 
need to function in a way that still would preserve the independent 
audit and shareholder protection function that a registrar historically 
was viewed, by many participants in the securities industry, as 
providing.\50\ However, at the time when the Commission adopted the 
majority of its transfer agent rules in 1977 and 1983, independent 
registrars were still present in the marketplace and indeed were 
required by the NYSE until 1984.\51\
---------------------------------------------------------------------------

    \50\ See, e.g., Rockwell Study, supra note 19, at 101.
    \51\ However, at that time, the American Stock Exchange did not 
require an independent registrar. Rockwell Study, supra note 19, at 
101. In 1984, the Commission issued an order that approved an NYSE 
rule change that eliminated the requirement to use a separate 
transfer agent and registrar, subject to certain conditions. 
Securities Exchange Act Release No. 21499 (Nov. 19, 1984) (File No. 
SR-NYSE-84-33).
---------------------------------------------------------------------------

    To reduce the physical movement of securities, the Rockwell Study 
recommended the establishment of individual transfer agent depositories 
(``TADs''), which was, at the time, a theoretical proposal that had not 
been implemented in any market.\52\ As proposed, the TAD model would 
have established a national clearing system together with a 
decentralized network of individual transfer agent depositories. 
Securityholders would immobilize their certificated securities by 
depositing them for custody with the transfer agent for the issuer, 
effectively making each transfer agent an independent depository for 
its respective issuers. The transfer agent would maintain the issuer's 
register, or records of registered shareholders, in electronic form on 
behalf of the issuer and would settle transactions by debiting and 
crediting the securities accounts of the respective parties to the 
transaction on the issuer's register instead of delivering physical 
certificates.\53\ Thus, the account on which transfers took place would 
also be the issuer's register, which would allow transfers to be 
effected by simply removing the seller's name from the register (i.e., 
debiting the seller's securities account) and adding the buyer's name 
(i.e., crediting the buyer's securities account). The national clearing 
system proposed under the TAD model would settle all securities 
transactions, both exchange and OTC trades, by receiving the compared 
trades \54\ directly from the floor of the exchange and receiving OTC 
trades by messenger or other delivery service.\55\ Compared trades 
would then be transmitted to the appropriate TAD, where, as noted 
above, the respective accounts of the parties would be credited and 
debited.\56\ As with the CCS system established by the NYSE, the 
movement of certificates would be eliminated, resulting in their 
immobilization.
---------------------------------------------------------------------------

    \52\ Rockwell Study, supra note 19, at 3, 9, 14, 31, 39, 43, 77, 
98.
    \53\ Rockwell Study, supra note 19, at 39-43.
    \54\ Trade comparison, resulting in a compared trade, is the 
post-execution act of matching the two sides of a trade and 
confirming the existence of a contract and the trade's exact terms 
(security, parties, time of trade, number of units, and price), 
usually by the exchange. It is generally regarded as the first step 
in the clearance and settlement process. See The October 1987 Market 
Break, A Report by the Division of Market Regulation, 10-2, 10-4 
(1988) (``October 1987 Market Break Report'').
    \55\ Unsafe Practices Study, supra note 17, at 180.
    \56\ Id.
---------------------------------------------------------------------------

Arthur Little Study (1969)
    From July 1968 to April 1969, Arthur D. Little & Co. conducted a 
study for the National Association of Securities Dealers (``NASD'') on 
the problem of settlement fails,\57\ titled, ``The Multiple Causes of 
Fails in Stock Clearing in the United States With Particular Emphasis 
in Over-The-Counter Securities'' (``Arthur Little Study''). Among other 
things, the Arthur Little Study compared the performance of two 
different types of clearing systems: (a) The ``balance order system'' 
used by the New York, American, and National OTC Clearing Corporations, 
and (b) the ``net by net'' or ``continuous netting system'' used by the 
Pacific Coast Stock Clearing Corporation and the Midwest Stock Exchange 
Clearing Corporation.\58\ The study showed that the balance order 
system could reduce securities movement by approximately 25 percent and 
the continuous netting system could result in a 50 percent 
reduction.\59\ The Arthur Little Study, along with the NASD, concluded 
that the best nationwide clearance and settlement system would be one 
consisting of interconnected regional clearing centers, each using the 
net by net (or continuous net settlement) system.\60\
---------------------------------------------------------------------------

    \57\ A settlement fail occurs if a seller does not deliver 
securities or a buyer does not deliver funds owed by the settlement 
date.
    \58\ See Arthur D. Little, Inc., The Multiple Causes of Fails in 
Stock Clearing in the United States 2414, 21-22 (``Arthur Little 
Study''). In the balance order system, after comparing the trades 
completed for the day by each clearing corporation participant, the 
clearing corporation would net each participant's trades in each 
security and issue orders for the net sellers to deliver, and the 
net buyers to receive, specific amounts of securities at the 
established settlement price directly from other participants. The 
duty to deliver and the duty to receive would be allocated in such a 
way that, for each issue traded, the net seller would have to make 
only one delivery and the net buyer would receive only one delivery, 
which could result in participants receiving from or delivering to 
other participants with whom they did not transact that day. In the 
net by net (or continuous net settlement system), each of the 
participant's trades in every security were netted for that day, so 
that each participant would be either a net seller or a net buyer 
for a particular security, and the duty to deliver the net sales or 
receive the net purchase would be added to any outstanding deliver 
or receive obligations of that participant in that security. In 
addition, all deliveries and receipts would be made to or from the 
clearing corporation, rather than between other participants, as in 
the balance order system. Unsafe Practices Study, supra note 17, at 
167 n.6.
    \59\ Unsafe Practices Study, supra note 17, at 167 n.6, 172.
    \60\ Id. at 174-5.
---------------------------------------------------------------------------

Formation of the National Clearing Corporation (1969)
    In December 1969, the NASD formed the National Clearing Corporation 
(``NCC'') as the vehicle for developing and implementing a nationwide 
system of interconnected regional clearinghouses that would form a 
national OTC clearing system utilizing continuous net settlement. NCC 
took over the operations of the National Over-the-Counter Clearing 
Corporation and eventually grew to include OTC transactions in all 
issues listed on exchanges or included on the NASDAQ system.\61\ In 
1977, NCC merged with the clearing facilities of both the NYSE and the 
American Stock Exchange to form the National Securities Clearing 
Corporation (``NSCC''). The new entity provided clearing, settlement, 
risk management, and other services, including continuous net 
settlement of trades and payments, to its participants.
---------------------------------------------------------------------------

    \61\ NASDAQ stands for National Association of Securities 
Dealers Automated Quotations and was founded in 1971 by the NASD as 
an electronic quotation system. It later developed into an 
electronic stock market, primarily focused on the OTC market and 
today is registered with the Commission as a national securities 
exchange under Section 6 of the Exchange Act. See Exchange Act 
Section 6, 15 U.S.C. 78f; Teweles, supra note 8, at 4-5, 371-2.
---------------------------------------------------------------------------

BASIC Study (1970)
    In early 1970, around the same time that CCS extended its services 
to the American Stock Exchange, the Banking and Securities Industry 
Committee (``BASIC'') was formed by banking and

[[Page 81954]]

securities industry participants to find solutions to problems 
affecting both those industries.\62\ After more than a year of review 
and analysis, BASIC advocated the immobilization of securities 
certificates through a ``Central Securities Depository System for the 
entire securities industry comprised of regional depositories with an 
inter-connection between the depositories.'' \63\ There was also 
agreement that ``the certificate must be eliminated, but that this will 
take time.'' \64\
---------------------------------------------------------------------------

    \62\ BASIC was formed in March 1970 as an outgrowth of a joint 
committee established between representatives of the securities and 
banking industries in 1968. BASIC was sponsored by the NYSE and 
American Stock Exchange, the NASD, and the 11 New York Clearing 
House banks. Securities Industry Study, H.R. Rep. No. 92-1519, 64 
(1972) (``Securities Industry Study'').
    \63\ Unsafe Practices Study, supra note 17, at 171. See also id. 
at 184-188.
    \64\ Id. at 173.
---------------------------------------------------------------------------

2. Regulatory and Industry Responses (1971-1975)
Unsafe Practices Study (1971)
    In 1970, Congress enacted the Securities Investor Protection Act of 
1970 which established the Securities Investor Protection Corporation 
for the broad purpose of affording financial protection for the 
customers of registered brokers and dealers.\65\ The act also directed 
the Commission to conduct a study into the causes and potential 
responses to the Paperwork Crisis.\66\ In response, the Commission held 
meetings, a conference, and hearings that included participation by 
market participants and federal bank regulators to identify and correct 
operational and financial problems in the securities industry, and then 
produced the Unsafe Practices Study.\67\ The Unsafe Practices Study in 
part concluded that the inherent inefficiencies and risks associated 
with the processing of physical securities certificates contributed to 
the Paperwork Crisis, and it was therefore necessary to reduce the 
amount of paperwork connected with securities transfers.\68\ There was 
disagreement, however, regarding the best way to accomplish this goal.
---------------------------------------------------------------------------

    \65\ The Securities Investor Protection Act of 1970, Pub. L. 91-
598, 84 Stat. 1636 (Dec. 30, 1970), 15 U.S.C. 78aaa; S. Rep. No. 91-
1218 (1970) (Report to Accompany S. 2348).
    \66\ 15 U.S.C. 78kkk(g). See also Unsafe Practices Study, supra 
note 17, at 11.
    \67\ See Unsafe Practices Study, supra note 17, at 31 
(discussing a meeting of major SROs to discuss operational capacity 
in the securities industry, a conference on the stock certificate, a 
series of meetings with federal bank regulators regarding the 
regulation and performance of transfer agents, and hearings 
concerning restructuring of the securities markets).
    \68\ Id. at 28.
---------------------------------------------------------------------------

    Although it was generally recognized at the time that the complete 
elimination of certificated securities, known as ``dematerialization,'' 
was the best approach to eliminating the risks associated with the 
processing of physical securities, due to technological and legal 
impediments, dematerialization was viewed as a ``utopian solution'' 
that ``would require very extensive legal work and lead time to 
implement.'' \69\ Indeed, as noted above, two of the leading proposed 
securities settlement models designed to reduce the amount of paperwork 
being discussed at that time--the central depository system represented 
by CCS and the TAD system--would have resulted in the immobilization of 
securities rather than dematerialization, and therefore were viewed as 
``interim measures for efficient operations'' that could be taken 
immediately but would also ``serve as building blocks for that ultimate 
objective'' of dematerialization.\70\
---------------------------------------------------------------------------

    \69\ Id. at 173, 194-95. For example, Delaware did not permit 
the issuance of ``certificateless stock'' until Section 158 of the 
Delaware General Corporation Law was amended in 1983. See Welch, 
Turezyn, and Saunders, Folk on the Delaware General Corporation Law 
Sec.  158.4 (5th ed. 2013).
    \70\ Unsafe Practices Study, supra note 17, at 173.
---------------------------------------------------------------------------

    While there was widespread industry support for the TAD model, 
there were legal and technological impediments to its immediate 
implementation.\71\ In contrast, the central depository system model 
had already been established on a limited basis as the CCS established 
by NYSE, although it had not been implemented on a national basis. The 
proposal being discussed at the time would use CCS as a starting point 
and gradually expand it into a New York central securities depository 
that would link to similar regional depositories of other major 
financial centers, thus resulting in each depository having an account 
at the others.\72\ This would allow members of one depository to 
transact with members of, and effect the delivery of securities via, 
the other depositories.\73\ Under this approach, no one depository 
would be restricted solely to the specific members or securities listed 
on a particular exchange. Like the TAD, this approach resulted in 
immobilization rather than dematerialization, but instead of a 
decentralized network of transfer agents acting as individual 
depositories for issuers, all paper securities certificates for all 
issuers would be deposited into one or more central pools and kept in 
custody by such central depositories. Under this model, the more 
certificates deposited into a central depository, the more efficient 
the system would be.
---------------------------------------------------------------------------

    \71\ Unsafe Practices Study, supra note 17, at 173, 183-4, 194-
5.
    \72\ Unsafe Practices Study, supra note 17, at 184-5.
    \73\ Id. at 185.
---------------------------------------------------------------------------

Securities Industry Study (1973)
    Following publication of the Commission's Unsafe Practices Study, 
the Senate Subcommittee on Securities conducted its own 18-month study, 
which resulted in the Securities Industry Study of 1973 Report 
(``Securities Industry Study'').\74\ The Securities Industry Study 
found ``two primary functional causes'' for the Paperwork Crisis: (i) 
The securities industry had failed to develop a nationwide system for 
clearance and settlement of securities transactions; and (ii) there 
existed a lack of uniformity and coordination among the various methods 
of clearing and settlement in use. The Securities Industry Study's 
recommendations included the following: (i) That the Securities 
Exchange Act of 1934 (``Exchange Act'') be amended to ``make it clear'' 
that the Commission has the ``power and the responsibility to direct 
the evolution of clearance and settlement methods employed by the 
national securities associations and by broker-dealers engaged in 
interstate commerce;'' (ii) that legislation should ``requir[e] 
clearing agencies and depositories to register with and report to the 
SEC and empower the Commission to review and amend the rules of such 
entities;'' (iii) that ``the Commission be directed to proceed with 
dispatch toward elimination of the stock certificate as a means of 
settlement between broker-dealers. . .''; and (iv) that ``the 
Commission be directed to consider the practice of registering 
securities in `street name. . . .' ''\75\
---------------------------------------------------------------------------

    \74\ Securities Industry Study, supra note 62.
    \75\ Id. at 40.
---------------------------------------------------------------------------

1975 Amendments
    The Securities Industry Study ultimately led to Congress enacting 
the Securities Act Amendments of 1975 (``1975 Amendments''),\76\ which 
made sweeping changes to the federal securities laws, implemented many 
of the principal recommendations from the Securities Industry Study, 
and established both the national market system \77\ and the National 
C&S System

[[Page 81955]]

as they exist today.\78\ In particular, in the new statute, Congress 
directed the Commission to, among other things: (i) ``facilitate the 
establishment of a national system for the prompt and accurate 
clearance and settlement of transactions in securities;''\79\ (ii) 
``end the physical movement of securities certificates in connection 
with the settlement among brokers and dealers of transactions in 
securities;''\80\ and (iii) establish a system for reporting missing, 
lost, counterfeit, and stolen securities.\81\
---------------------------------------------------------------------------

    \76\ Securities Acts Amendments of 1975, Pub. L. 94-29, 89 Stat. 
97 (1975). See also S. Rep. No. 75, at 7 (1975).
    \77\ Section 11A of the Exchange Act directed the Commission to 
facilitate the establishment of a national market system to link 
together the multiple individual markets that trade securities and 
achieve the objectives of efficient, competitive, fair, and orderly 
markets, that are in the public interest, and protect investors. See 
Exchange Act Section 11A(a)(2), 15 U.S.C. 78k-1(a)(2).
    \78\ See Exchange Act Section 17A(a)(2), 15 U.S.C. 78q-1(a)(2). 
For legislative history concerning Section 17A, see, e.g., S. Rep. 
No. 75, at 4 (1975); H.R. Rep. No. 229, at 102 (1975).
    \79\ Exchange Act Section 17A(a)(2)(A)(1), 15 U.S.C. 78q-
1(a)(2)(A)(1). For legislative history concerning Section 17A, see 
supra note 80.
    \80\ Exchange Act Section 17A(e), 15 U.S.C. 78q-1(e).
    \81\ Exchange Act Section 17(f)(1), 15 U.S.C. 78q(f)(1).
---------------------------------------------------------------------------

3. Advent of the Modern Clearance and Settlement System (1975-Present)
Early Proliferation of Clearing Agencies
    Between 1968 and 1975, in addition to CCS (now known as DTC), 
several other securities depositories were established, including by 
the Midwest Stock Exchange, Inc., the Pacific Stock Exchange, and TAD 
Depository Corporation. The number of shares evidenced by certificates 
immobilized in depositories increased between 1968 and 1976 from 
approximately 400 million to over 4 billion.\82\ On November 3, 1975, 
pursuant to its new authority and directives under the 1975 Amendments, 
the Commission adopted Rule 17Ab2-1(c)(1) and Form CA-1 for the 
registration of clearing agencies, including central securities 
depositories.\83\ Later in 1975, the Commission granted temporary 
registrations as clearing agencies to nine entities, that were either 
clearing corporations or securities depositories.\84\ Shortly after 
NSCC was formed in 1977 through the merger of NCC and the clearing 
facilities of the NYSE and American Stock Exchange, NSCC also sought, 
and was granted, temporary registration as a clearing corporation. The 
Commission also granted temporary registrations as a clearing 
corporation to the New England Securities Depository Trust Company and 
the Philadelphia Depository Trust Company in 1976 and 1979, 
respectively.\85\
---------------------------------------------------------------------------

    \82\ Final Report of the Securities and Exchange Commission on 
the Practice of Recording the Ownership of Securities in the Records 
of the Issuer in Other than the Name of the Beneficial Owner of Such 
Securities 55 (Dec. 3, 1976) (``Final Street Name Study'').
    \83\ See Exchange Act Rule 17Ab2-1(c)(1), 17 CFR 240.17Ab2-
1(c)(1); Exchange Act Form CA-1, 17 CFR 249b.200.
    \84\ The nine entities granted temporary registrations as 
clearing agencies were: (i) DTC; (ii) Bradford Securities Processing 
Services; (iii) Stock Clearing Corporation of Philadelphia; (iv) 
Midwest Securities Trust Company; (v) Options Clearing Corporation; 
(vi) Midwest Clearing Corporation; (vii) Pacific Securities 
Depository Trust Company; (viii) Boston Stock Exchange Clearing 
Corporation; and (ix) TAD Depository.
    \85\ For more information regarding clearing agency registration 
standards and the history of those standards, see Regulation of 
Clearing Agencies, Exchange Act Release No. 16900 (June 17, 1980), 
45 FR 41920 (June 23, 1980).
---------------------------------------------------------------------------

Advances in Technology (1976-Present)
    Over the next several decades, factors such as technology 
enhancements and regulatory changes led to the increased prevalence of 
securities depositories, and many of them substantially expanded their 
services and participant base, especially DTC. Of particular note, in 
1975, DTC introduced the Fast Automated Securities Transfer (``FAST'') 
Program, which was approved by the Commission in 1976.\86\ Among other 
things, it reduced the costs and risks associated with moving street 
name securities between DTC and participants.
---------------------------------------------------------------------------

    \86\ Securities Exchange Act Release No. 12353 (Apr. 20, 1976), 
41 FR 17823 (Apr. 28, 1976) (File No. SR-DTC-76-3). The FAST Program 
was introduced in 1976 with ten transfer agents and 400 securities 
issues. See Securities Exchange Act Release No. 55816, 3 n.5 (May 
25, 2007), 71 FR 30648 (June 1, 2007) (File No. SR-DTC-2006-16). By 
the end of 1984, 64 transfer agents held balance certificates valued 
at $580 billion in 11,442 securities issues. See The Depository 
Trust Company Annual Report 1984, at 16 (``DTC Annual Report'').
---------------------------------------------------------------------------

    Prior to FAST, transferring securities to or from DTC on behalf of 
its participants required moving certificated securities back and forth 
between DTC and transfer agents. For securities being deposited with 
DTC, participants would send certificates to DTC, which would then send 
the certificates to the transfer agent for re-registration into the 
name of DTC's partnership nominee, Cede & Co.,\87\ before returning the 
reregistered certificates to DTC. For securities being withdrawn from 
DTC, DTC would send the certificates registered in the name of Cede & 
Co. to the transfer agent for re-registration into the name designated 
by the withdrawing participant, and the transfer agent then returned to 
DTC both the reregistered certificate (which DTC would then deliver to 
the withdrawing participant or other entity designated by the 
participant) and a separate certificate registered in the name of Cede 
& Co. representing the remainder of DTC's position.\88\
---------------------------------------------------------------------------

    \87\ The name Cede & Co. was drawn from the term ``certificate 
depository'' and it was formed as a partnership partly because it 
was considered simpler to effect a transfer of securities registered 
in the name of a partnership nominee than in the name of a 
corporation. For more information about Cede & Co., including 
regarding the terms of its partnership agreement, see S. Rep. No. 
93-62 (1974) (``Disclosure of Corporate Ownership'').
    \88\ Securities Exchange Act Release No. 60196 (June 30, 2009), 
74 FR 33496 (July 13, 2009) (File No. SR-DTC-2006-16).
---------------------------------------------------------------------------

    The FAST Program substantially reduced the movement of paper 
certificates by permitting transfer agents to become custodians for 
balance certificates registered in the name of Cede & Co. The balance 
certificate represents on the transfer agent's books the sum total of 
shares for that issue held by all of DTC's participants.\89\ 
Participants maintain corresponding books representing their 
securityholder accounts held in street name. Then, when securities are 
deposited into or withdrawn from DTC, FAST transfer agents adjust the 
denomination of the balance certificates and electronically confirm the 
changes with DTC on a daily basis, with the corresponding participant 
accounts adjusted accordingly by DTC.\90\
---------------------------------------------------------------------------

    \89\ Id. at 2-3.
    \90\ Id. For a description of early DTC rules relating to FAST, 
see Securities Exchange Act Release No. 13342 (Mar. 8, 1977) (File 
No. SR-DTC-76-3); Securities Exchange Act Release No. 14997 (July 
26, 1978) (File No. SR-DTC-84-4); Securities Exchange Act Release 
No. 21401 (Oct. 16, 1984) (File No. SR-DTC-84-8; Securities Exchange 
Act Release No. 31941 (Mar. 3, 1993) (File No. SR-DTC-92-15); 
Securities Exchange Act Release No. 46956 (Dec. 6, 2002) (File No. 
SR-DTC-2002-15).
---------------------------------------------------------------------------

    In 1983, DTC adopted technological enhancements to its Participant 
Terminal System which allowed participants to automatically match book-
entry receive notifications and facilitate redelivery to other 
participants.\91\ DTC also partnered with NSCC to provide an 
Institutional Delivery System which, through an interface with NSCC's 
continuous net settlement system (``CNS''), allowed brokers to net the 
often very large trades made for institutional customers instead of 
settling trade-for-trade at DTC. In 1996, the Direct Registration 
System (``DRS'') was implemented, which allowed investors to hold 
uncertificated securities in registered form directly on the books of 
the issuer's transfer agent.\92\

[[Page 81956]]

DRS also allowed investors to transfer the shares to and from a 
brokerage account through FAST when they choose to sell or transfer the 
stock.\93\
---------------------------------------------------------------------------

    \91\ For discussion of ``Dual Host PTS,'' see DTC Annual Report, 
supra note 86, at 24-5.
    \92\ See, e.g., Securities Exchange Act Release No. 37931 (Nov. 
7, 1996), 61 FR 58600 (Nov. 15, 1996) (File No. SR-DTC-96-15) 
(approving establishment of DRS). Prior to the advent of DRS, unless 
they were held on a transfer agent's books through a direct stock 
purchase plan or dividend reinvestment plan, book-entry shares 
generally could only be held by beneficial owners in street name 
through FAST. For more detail on DRS, see infra Section IV.C.2. See 
also infra note 144 (dividend reinvestment plan).
    \93\ If the securityholder wants to sell the shares, they are 
transferred into a broker's account by means of an ``Electronic 
Participant Instruction'' through DTC's proprietary communication 
network, the Profile Modification System (``Profile''), through 
which the shares are re-registered in the name of Cede & Co. See 
Securities Exchange Act Release No. 60304 (June 30, 2009), 74 FR 
33496 (July 13, 2009) (File No. SR-DTC-2009-11). For additional 
information, see infra note 309.
---------------------------------------------------------------------------

    A number of legal and regulatory changes also led to increased 
participation at securities depositories among banks and broker-
dealers. For example, in 1978, the UCC was revised to substitute the 
concept of delivery of securities specific to the physical delivery of 
certificated securities with the concept of ``transfer'' by book-entry 
on the books of a central depository.\94\ As a result, the only book-
entry transfers that qualified the transferee for protected purchaser 
rights under the UCC, as discussed above in Section II.A, were those 
made on the books of a clearing corporation.
---------------------------------------------------------------------------

    \94\ See U.C.C. 8-320.
---------------------------------------------------------------------------

    In 1982 and 1983, the NASD and five stock exchanges, including the 
NYSE and American Stock Exchange, amended their rules to require their 
members to use a Commission-registered securities depository for the 
confirmation, affirmation and settlement of transactions in depository 
eligible securities if the member provides its customer with delivery-
versus-payment privileges.\95\ Delivery versus payment privileges allow 
payments to be made prior to or simultaneously with delivery of the 
securities. Because customers typically wanted those privileges, the 
rules had the effect of requiring the use of a registered securities 
depository to clear and settle institutional trades. As a result, DTC 
participation soared. In 1995 and 1996, several exchanges adopted 
uniform depository eligibility requirements, paving the way for an 
industry standard for depository eligibility determinations.\96\ 
Finally, 1997 revisions to UCC Article 8 modernized securities holding 
rules by allowing depositories to make eligible additional foreign 
securities that are held through foreign custodians as well as other 
financial instruments.\97\ New York's adoption of these revisions 
enabled DTC to use foreign banks as custodians. This increased DTC's 
ability to maintain custody of securities abroad,\98\ which resulted in 
additional foreign securities and other financial products and 
instruments becoming depository eligible.\99\
---------------------------------------------------------------------------

    \95\ Securities Exchange Act Release No. 25120 (Nov. 13, 1987), 
52 FR 44506 (Nov. 19, 1987) (File No. SR-NYSE-87-04).
    \96\ See, e.g., Securities Exchange Act Release No. 35798 (June 
1, 1995), 60 FR 30909 (June 12, 1995) (File Nos. SR-Amex-95-17, SR-
BSE-95-09, SR-CHX-95-12, SR-NASD-95-24, SR-NYSE-95-19, SR-PSE-95-14, 
SR-PHLX-95-34); Securities Exchange Act Release No. 36788 (Jan. 26, 
1996), 61 FR 3741 (Feb. 1, 1996) (File No. SR-CBOE-95-62).
    \97\ See, e.g., U.C.C. 8-102(a)(7), (9), (17), 501, 506.
    \98\ See The Depository Trust Company 1998 Annual Report, 
available at http://www.sechistorical.org/collection/papers/1990/1998_0101_DTCAR_1.pdf.
    \99\ For example, DTC was able to expand eligible issues to 
include State of Israel bonds and Bankers' Acceptances, short-term 
debt instruments that are guaranteed by commercial banks. See The 
Depository Trust Company 1997 Annual Report, available at http://www.sechistorical.org/collection/papers/1990/1997_0101_DTCAR.pdf.
---------------------------------------------------------------------------

Clearing Agency Consolidation (1980s-present)
    Throughout the late 1980s and mid-1990s, DTC merged with or 
absorbed business from several other depositories, leading to its 
further growth. First, in April 1987, the Pacific Stock Exchange Board 
of Governors closed the Pacific Securities Depository Trust Company. 
Virtually all eligible securities in its custody were moved to DTC. 
Then, in 1995, DTC and NSCC worked together to absorb the business of 
Midwest Securities Trust Company and Midwest Clearing Corporation in 
light of the Chicago Stock Exchange's decision to exit the clearing and 
settlement business.
    By the late 1990s, DTC had become the largest depository in the 
United States, and NSCC was the largest clearing agency.\100\ On June 
15, 1999, the Commission issued an order approving DTC's integration 
with NSCC.\101\ The Commission's order authorized DTC and NSCC to 
restructure their boards of directors so that one board served both 
corporations.\102\ The Depository Trust & Clearing Corporation 
(``DTCC''), a holding company, was subsequently formed with DTC and 
NSCC as its subsidiaries.
---------------------------------------------------------------------------

    \100\ SEC Annual Report, 1997, tbl.3 (Clearing Agencies), at 179 
and tbl.9 (Depositories), at 180.
    \101\ Securities Exchange Act Release No. 41800 (Aug. 27, 1999), 
64 FR 48694 (Sept. 7, 1999) (File No. SR-NSCC-99-10).
    \102\ Id.
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    Today, DTC provides depository and book-entry settlement services 
for substantially all corporate and municipal debt, equity securities, 
asset-backed securities, and money market instruments available for 
trading in the United States.\103\ It provides custody and asset 
services for securities valued at over $37 trillion.\104\ Approximately 
1.4 million settlement-related transactions, with a value of 
approximately $600 billion, are completed at DTC each day.\105\ DTC 
provides three primary services: (i) Custody services; (ii) asset 
services, such as dividend and interest payment, reorganizations, and 
proxy services; and (iii) settlement services (through its interface 
with NSCC), all of which help facilitate the National C&S System 
mandated by the 1975 Amendments.
---------------------------------------------------------------------------

    \103\ See DTCC: Settlement & Asset Services, available at http://www.dtcc.com/asset-services.aspx (last visited December 11, 2015). 
See also DTCC, Our Capabilities 17 (2014), available at http://
www.dtcc.com/~/media/Files/Downloads/About/DTCC_Capabilities.pdf.
    \104\ Id.
    \105\ Id.
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III. Transfer Agent Role in Clearance and Settlement Processes

    Because transfer agents operate within the National C&S System, it 
is important to understand that system, especially concerning the 
services transfer agents provide by maintaining accurate ownership 
records on behalf of issuers, facilitating the issuance or cancellation 
of securities, and distributing dividends within that system. 
Accordingly, this section provides a general overview of transfer 
agents' operations and processes within the National C&S System.

A. Types of Security Ownership

    Under the current centralized depository model in the United 
States, there are two types of securities owners: (a) Registered and 
(b) beneficial.
1. Registered Securityholders
    Under state corporation law, certain securityholder rights commonly 
accrue only to those registered on the securityholder list and not to 
persons who may have an ultimate economic interest in the shares but 
who are not registered securityholders.\106\ Registered securityholders 
(who may also be referred to as ``holders of record'') \107\ own and 
hold securities in ``registered form.'' \108\ The UCC provides that an

[[Page 81957]]

``issuer . . . may treat the registered owner as the person exclusively 
entitled to vote, receive notifications, and otherwise exercise all the 
rights and powers of an owner.'' \109\ Registered securityholders are 
listed directly on the records of the issuer or the issuer's transfer 
agent under their own names.\110\ The issuer or its transfer agent may 
have direct contact with the registered securityholder, keep the 
records that reflect the ownership interest of the registered 
securityholder, and provide services directly to the registered 
securityholder. These services may include issuing, cancelling and 
transferring shares, making distributions, providing communications and 
mailings from the issuer, and answering securityholder inquiries. 
Registered owners can hold their securities either in certificated form 
or in uncertificated (i.e., book-entry) form, such as uncertificated 
securities held through DRS.\111\
---------------------------------------------------------------------------

    \106\ See, e.g., Del. Code Ann. tit. 8, Sec.  219(c) (right to 
examine the stockholder list or to vote in person or by proxy at any 
meeting of stockholders limited to registered securityholders).
    \107\ See Exchange Act Rule 17Ad-9(a)(3), 17 CFR 240.17Ad-
9(a)(3) (referring to ``securityholder's registration''); Exchange 
Act Rule17Ad-9(a)(4), 17 CFR 240.17Ad-9(a)(4) (referring to 
``registered securityholder''); Exchange Act Rule 12g5-1, 17 CFR 
240.12g5-1 (``securities shall be deemed to be `held of record' by 
each person who is identified as the owner of such securities on 
records of security holders maintained by or on behalf of the 
issuer'').
    \108\ See U.C.C. 8-102(a)(13). (```Registered form,' as applied 
to a certificated security, means a form in which: (i) The security 
certificate specifies a person entitled to the security; and (ii) a 
transfer of the security may be registered upon books maintained for 
that purpose by or on behalf of the issuer, or the security 
certificate so states.'')
    \109\ U.C.C. 8-207.
    \110\ Because a registered securityholder may be either a 
natural person or a legal entity, such as a partnership, trust, or 
corporation, transfer agents generally are familiar with issues that 
may arise with respect to a registered securityholder's legal status 
in connection with securities processing transactions. See Guttman, 
supra note 6, at Sec.  5:19-5:28 (discussing different ``aggregate'' 
and corporate types of registered securityholders).
    \111\ A registered securityholder's options for holding 
uncertificated securities, through DRS or otherwise, will be subject 
to the issuer's governing documents and the law of its jurisdiction 
of organization, as well as to other legal requirements that may 
apply to the issuer, such as rules of SROs such as DTC and national 
securities exchanges. For additional discussion of DRS, see supra 
note 92 and infra Section IV.
---------------------------------------------------------------------------

2. Beneficial Owners
    The vast majority of securityholders in the U.S. are beneficial 
owners rather than registered owners.\112\ Beneficial owners do not own 
the securities directly but generally have purchased them through an 
intermediary, such as a broker or a bank, and determined to hold them 
in street name through a book-entry account with that intermediary. The 
intermediary, rather than the transfer agent, maintains and updates the 
securityholder records, facilitates or executes transfers, and provides 
other services for the securityholder.\113\
---------------------------------------------------------------------------

    \112\ For more information regarding beneficial ownership, see, 
e.g., Final Street Name Study, supra note 82; Concept Release On The 
U.S. Proxy System, Exchange Act Release No. 62495 (July 14, 2010), 
75 FR 42982 (July 22, 2010) (``Proxy Concept Release''); Holding 
Your Securities--Get the Facts, SEC, available at http://www.sec.gov/investor/pubs/holdsec.htm.
    \113\ These transfer and recordkeeping services provided to 
beneficial owners by intermediaries may be referred to as ``sub-
transfer agent'' services. For more information, see infra Section 
VII.B.
---------------------------------------------------------------------------

    When securities are held in street name, there is a legal 
distinction between the nominee, who has legal status as the registered 
securityholder, and the person with economic or beneficial ownership of 
the security.\114\ Securities held in street name are legally owned by 
and registered in the name of the depository's nominee (most often 
DTC's nominee, Cede & Co.). The individual investor's broker (or other 
intermediary) who is a member or participant of the depository will be 
identified on the books of the depository as having a ``securities 
entitlement'' \115\ to a pro rata share of the fungible bulk of that 
security held by the depository.\116\ Correspondingly, the individual 
investor will be identified on the books of the depository participant 
(his or her broker or other intermediary) as having a securities 
entitlement to a pro rata share of the securities in which the 
participant has an interest. At each level, the intermediary will be 
obligated to provide the entitlement holder with payments and 
distributions with respect to the financial asset and to exercise 
rights as directed by the entitlement holder.\117\ A securities 
intermediary satisfies such duties where the intermediary acts as 
required by any agreement between the intermediary and entitlement 
holder.\118\ The entitlement holder will be permitted to look only to 
the intermediary for performance of the obligations.\119\ Other rights 
and interests that a beneficial owner has against a securities 
intermediary's property are created by agreements between the 
beneficial owner and the securities intermediary.
---------------------------------------------------------------------------

    \114\ For additional detail concerning aspects of beneficial 
ownership, see Preliminary Street Name Study, supra note 45, at 9-
11. For an example of reference in a rule of the Commission to 
``beneficial owner[s],'' see, e.g., Exchange Act Rule 13d-3, 17 CFR 
240.13d-3 (determination of beneficial owner).
    \115\ See U.C.C. 8-102(a)(7) (defining ``entitlement holder'' as 
a person identified in the records of a securities intermediary as 
the person having a security entitlement against the securities 
intermediary); U.C.C 8-102(a)(17) (defining ``security 
entitlement''); U.C.C. 8-102(a)(14) (defining ``securities 
intermediary'' as (i) a clearing corporation or (ii) a person, 
including a bank or broker, that in the ordinary course of its 
business maintains securities accounts for others and is acting in 
that capacity); U.C.C. 8-503(b) (providing that an entitlement 
holder's property interest with respect to a particular financial 
asset under [U.C.C. 8-503(a)] is a pro rata property interest in all 
interests in that financial asset held by the securities 
intermediary).
    \116\ For securities held in ``fungible bulk,'' there are no 
specifically identifiable shares directly owned by DTC participants. 
Rather, each participant owns a pro rata interest in the aggregate 
number of shares of a particular issuer held at DTC. In turn, each 
customer, such as an individual investor of a DTC participant, owns 
a pro rata interest in the shares in which the DTC participant has 
an interest. See Processing of Tender Offers Within the National 
Clearance and Settlement System, Exchange Act Release No. 19678, n.5 
(Apr. 15, 1983), 48 FR 17603, 17605, n.5 (Apr. 25, 1983) (describing 
fungible bulk) (``Rule 17Ad-14 Proposing Release''); Office of 
Investor Education and Advocacy, Investor Bulletin: DTC Chills and 
Freezes, SEC (May 2012), available at https://www.sec.gov/investor/alerts/dtcfreezes.pdf (discussing fungible bulk).
    \117\ U.C.C. 8-505, 506.
    \118\ U.C.C. 8-505(a)(1), 506(1). In the absence of an agreement 
covering payments and distributions, the securities intermediary 
must exercise due care in accordance with reasonable commercial 
standards. In the absence of an agreement with respect to the 
exercise of rights as directed by the entitlement holder, the 
securities intermediary either must place the entitlement holder in 
a position to exercise the rights directly or exercise due care in 
accordance with reasonable commercial standards to follow the 
direction of the entitlement holder. U.C.C. 8-505(a)(2), 506(2).
    \119\ U.C.C. 8-503(c) (referring only to ``securities 
intermediar[ies]'' with respect to enforcement rights that may be 
exercised by an entitlement holder).
---------------------------------------------------------------------------

B. Clearance and Settlement Process

    The clearance and settlement process differs depending on the type 
of security being traded, how the security is held by the investor 
(i.e., registered or beneficial form), the market or exchange on which 
it is traded, and the specific entities and institutions involved. Yet, 
regardless of the specific variables involved, the basic clearance and 
settlement processes are substantially similar. For illustration 
purposes, this section describes generally the clearance and settlement 
process for exchange-based equity trades held in street name.
    All securities trades involve a legally binding agreement that sets 
forth the terms of the trade. In general, the ``clearing'' of those 
trades is the process of comparing and confirming the material terms of 
the agreement: (i) The identity of the buyer and seller; (ii) the 
identity and quantity of the securities being traded; and (iii) the 
price, date, and other material details of the trade.\120\ Clearing can 
be ``bilateral,'' where the parties to the transaction work directly 
with each other to take the steps necessary to clear the transaction, 
or ``central,'' where a third party, such as a clearing agency, 
undertakes the steps necessary to clear the transaction.\121\
---------------------------------------------------------------------------

    \120\ October 1987 Market Break Report, supra note 54, at 10-2 
through 10-5; Teweles, supra note 8, at 302-3.
    \121\ Prior to the 1980s, central clearing predominantly 
involved a two-sided matching process conducted mainly by the 
exchanges, where an exchange collected trade data and passed that 
information to the clearing agency. After the October 1987 Market 
Break led to significant numbers of unmatched trades, the Commission 
recommended that automated systems should be used to facilitate 
comparison at or near the time of trade execution. See Securities 
and Exchange Commission Recommendations regarding the October 1987 
Market Break, contained in Testimony delivered by David S. Ruder, 
Chairman, Securities and Exchange Commission, before the Senate 
Committee on Banking, Housing and Urban Affairs, p. 23 (Feb. 3, 
1988). The recommendation was subsequently adopted in stages. See, 
e.g., New York Stock Exchange, Inc. ``Overnight Trade Comparison,'' 
adopted Aug. 14, 1989, Exchange Act Release No. 27096 (Aug. 3, 
1989), 54 FR 33299 (Aug. 14, 1989).

---------------------------------------------------------------------------

[[Page 81958]]

    Settlement is the fulfillment by the parties to the transaction of 
their respective obligations for the trade, usually by exchanging funds 
for the delivery of securities. For equities, settlement generally 
occurs three business days after the trade date (i.e., ``T+3''),\122\ 
although other arrangements may be available by private agreement.\123\ 
Delivery currently is far more likely to be by book-entry than by 
exchange of physical certificates. As previously discussed, the 
brokers' certificates in DTC's depository are held in fungible bulk and 
registered in the name of Cede & Co. to facilitate book-entry 
transactions involving electronic debits (on the seller's side) and 
credits (on the buyer's side) to the brokers' securities accounts at 
the depository rather than the movement of physical securities 
certificates. Because these shares are held in street name, DTC knows 
the names of the brokers who are DTC participants (often referred to as 
clearing brokers) but not the names of brokers who are not DTC 
participants (often referred to as introducing brokers) or either type 
of brokers' customers.\124\ The brokers track the holdings of their 
customers who are the ultimate beneficial owners of the securities. For 
securities held in fungible bulk, rights are passed from record owner 
Cede & Co. through securities intermediaries to the ultimate beneficial 
owner.
---------------------------------------------------------------------------

    \122\ See Exchange Act Rule 15c6-1, 17 CFR 240.15c6-1. T (or 
T+0) is the day the trade is executed. The first business day 
following the trade date is T+1, and so on. Thus, assuming there are 
no non-business days in the week, a trade that is executed on a 
Monday (T or T+0) would settle on Thursday (T+3). A trade executed 
on Friday would settle on the following Wednesday (Saturday and 
Sunday are not business days, so T+1 is Monday, T+2 is Tuesday, 
etc.).
    \123\ See, e.g., NYSE Rule 64 (2009).
    \124\ For further information on introducing and clearing 
brokers, see fig.1 and accompanying text, infra.
---------------------------------------------------------------------------

    Equity trades that are cleared and settled through DTC's facilities 
are generally processed in NSCC's CNS system, with final settlement on 
the third business day after the trade is executed. NSCC has 
approximately 1,000 members, made up of brokers, dealers, banks, and 
other intermediaries. Using CNS, NSCC nets multilaterally all of the 
clearing participants' purchases and sales in each security to one 
security position per participant per day in order to arrive at a daily 
net settlement obligation for each participant. NSCC then makes 
deliveries only on the remaining net positions through settlement 
accounts that the participants hold with DTC (for securities) and the 
Federal Reserve System (for cash).\125\ Because NSCC interposes itself 
between trading brokers on each trade and guarantees the settlement as 
each broker's counterparty,\126\ each broker's settlement is with NSCC 
and DTC, not with the other clearing participant, which reduces the 
brokers' exposure to risk of default by other brokers (i.e., 
counterparty risk). A broker can either settle each day or carry open 
commitments forward to net against the next business day's settlement 
(hence the continuous nature of CNS).\127\ On the cash side of the 
trade, all money owed to or from a particular DTC participant will be 
netted down each day by NSCC to a single dollar amount, which reduces 
the amount of money firms need to have on hand to settle their 
obligations.
---------------------------------------------------------------------------

    \125\ NSCC Rule 11, 68-74 (May 4, 2015), available at 
www.NSCC.com (``Continuous Net Settlement''). The Federal Reserve 
System refers to the central bank of the United States, and is 
commonly referred to as the ``Federal Reserve.'' The Federal Reserve 
Board is the governing body for the Federal Reserve System. See 
generally, Federal Reserve, http://www.federalreserve.gov/aboutthefed/default.htm.
    \126\ NSCC Rule 11,68-74 (May 4, 2015), available at 
www.dtcc.com; see also Becker and Etter, International Clearance and 
Settlement, 14 Brook. J. Int'l L. 275, note 15 (1988); David M. 
Weiss, After the Trade is Made--Processing Securities Transactions 
245-49 (2006) (``After the Trade is Made'').
    \127\ See October 1987 Market Break Report, supra note 54, at 
ch. 10, 1-12; Teweles, supra note 8, at 312-26.
---------------------------------------------------------------------------

    The goal of netting is to minimize the number and value of 
transactions required for buyers and sellers (or the firms acting on 
their behalf) to settle their transactions. For example, if a broker 
purchases 100 shares of XYZ stock for a customer and sold 50 shares of 
XYZ stock for another customer, at the end of the day the broker's 
securities account at DTC would be credited with 50 shares of XYZ (the 
net difference between buying 100 shares and selling 50 shares). If the 
broker paid $25 per share to buy the 100 shares of XYZ and sold the 50 
shares for the same price on the same day, at the end of the day the 
broker's cash account would be debited $1,250. The vast majority of 
equity trades handled by DTC clear and settle through NSCC's CNS, 
which, on average, results in an reduction of the volume of settlement 
transactions by approximately 98%.\128\ As a result, on average, 99% of 
all trade obligations that occur in U.S. equity markets do not require 
the exchange of money.\129\
---------------------------------------------------------------------------

    \128\ See DTCC's overview of NSCC, stating that NSCC's netting 
system results in ``reducing the value of securities and payments 
that need to be exchanged by an average of 98% each day,'' available 
at http://www.dtcc.com/about/businesses-and-subsidiaries/nscc.
    \129\ Virginia B. Morris and Stuart Z. Goldstein, Guide to 
Clearance and Settlement: An Introduction to DTCC, 8 (2009).
---------------------------------------------------------------------------

    For illustration purposes only, Figure 1 below depicts one possible 
example of how an equity trade effected on a national securities 
exchange is cleared and settled, beginning with the buyer conveying an 
order to an executing broker. If the executing broker is a member of 
NSCC it may be referred to as a ``clearing broker.'' If it is not a 
member of NSCC, it may be referred to as an ``introducing broker'' or 
``correspondent broker,'' depending on whether the broker carries and 
is responsible for the customer's account. Where the executing broker 
is a member of NSCC (i.e., a clearing broker) it routes the order for 
execution to a national securities exchange. Where the executing broker 
is not a member of NSCC (i.e., an introducing or correspondent broker) 
it routes the order to a clearing broker who will then route the order 
for execution to a national securities exchange. The national 
securities exchange matches the order with a corresponding sell order 
and then sends matched trade data to NSCC. NSCC nets these orders using 
its CNS system. If the securities are held in street name, there will 
be no change to the master securityholder file \130\ maintained by the 
transfer agent and settlement will be effected by crediting and 
debiting the securities entitlement accounts of the buyer and seller, 
respectively. Thus, final settlement of the securities leg of the 
transaction will involve the following sequential steps: (i) The DTC 
securities account of the seller's clearing broker will be debited with 
the securities being purchased; (ii) NSCC's securities account at DTC 
will be credited with the securities purchased; (iii) the DTC 
securities account of the buyer's clearing broker will also be 
credited; and (iv) each broker will credit or debit their respective 
customers' securities accounts held with the broker. On the cash side, 
final settlement will involve the following sequential steps: (i) The 
Federal Reserve bank account of the buyer's clearing broker will be 
debited for the sale price of the securities; (ii) DTC's Federal 
Reserve bank account will credited for the sale price of the

[[Page 81959]]

securities; (iii) DTC will transfer this cash to the Federal Reserve 
bank account of the seller's Clearing Broker; and (iv) each broker will 
credit or debit its respective customers' cash accounts held with the 
broker.
---------------------------------------------------------------------------

    \130\ See infra Sections IV.A.3 and V.A. for additional 
description and discussion of transfer agents' role and 
responsibilities with respect to the master securityholder file.
[GRAPHIC] [TIFF OMITTED] TP31DE15.009

IV. Transfer Agent Regulation: Origins and Current Status

    This section provides a general overview of the federal and state 
law and other requirements, such as those of self-regulatory 
organizations (``SRO''), that apply to transfer agents and their 
activities. We begin with a review and discussion of each of the 
Commission's current transfer agent rules, then briefly discuss banking 
regulations and taxation-related requirements that may apply to 
transfer agents.\131\ We then review the requirements of SROs that 
apply to transfer agents, particularly DTC and NYSE rules. Finally, we 
discuss the regulation of transfer agents under state law. Later, in 
Sections V, VI, and VII of the release, we discuss issues and concerns 
related to modern transfer agent activities and seek comment on the 
best approach to addressing them.
---------------------------------------------------------------------------

    \131\ See Section IV.B, supra, for discussion of bank transfer 
agents. Transfer agents that are not banks may be referred to as 
non-bank transfer agents.
---------------------------------------------------------------------------

A. Federal Transfer Agent Rules

    Prior to 1975, most transfer agents were banks or trusts.\132\ 
There was no federal regulation of transfer agents and transfer agents 
were subject to state law, generally pursuant to UCC

[[Page 81960]]

provisions.\133\ Transfer agents were also subject to stock exchange 
requirements regarding securities processing. For example, in 1869, the 
NYSE adopted a requirement that all shares of NYSE-listed companies 
must be registered at a bank or other agency.\134\ As another example, 
the ``Chambers Street Rule'' of the NYSE required transfer agents to 
maintain offices for transfer south of Chambers Street in New York 
City.\135\ The American Stock Exchange had similar requirements in its 
Rule 891.\136\
---------------------------------------------------------------------------

    \132\ Unsafe Practices Study, supra note 17, at 38.
    \133\ For a discussion of state law requirements impacting 
transfer agent processes, see supra Sections II and III.
    \134\ See Facts and Figures, Historical, Chronology of New York 
Stock Exchange (1792-1929), available at http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=2169&category=4.
    \135\ See Jerry W. Markham, A Financial History of the United 
States: From Christopher Columbus to the Robber Barons (1492-1900) 
288 (2002).
    \136\ See, e.g., Securities Exchange Act Release No. 37562 (Apr. 
25, 1996), 61 FR 43283 (Aug. 13, 1996) (File No. SR-DTC-96-09) 
(mentioning American Stock Exchange Rule 891 requirements). These 
requirements were criticized by non-New York banks providing 
transfer agent services as many banks viewed providing transfer 
agent services as an important part of providing the full-service 
relationship it was believed was desired by corporate borrower 
clients. See Charles Welles, The Great Paper Fight: Who Will Control 
the Machinery?, Institutional Investor (May 1973), Hearings on 
S.2058 before S. Comm. on Banking, Hous. and Urban Affairs, Subcomm. 
on Securities, 93rd Cong. 334 (1973). The NYSE amended the Chambers 
Street Rule in 1971, permitting out-of-town transfer agents to act 
as listed company transfer agents, subject to certain conditions 
including that they maintain a ``drop'' office in lower Manhattan. 
In 2005, the Commission issued an order that approved an NYSE rule 
change that eliminated the Chambers Street Rule. Securities Exchange 
Act Release No. 51973 (July 5, 2005), 70 FR 40094 (July 12, 2015) 
(File No. SR-NYSE-2004-62).
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    The 1975 Amendments gave the Commission regulatory authority for 
the first time over transfer agents.\137\ Section 3(a)(25) of the 
Exchange Act defines a ``transfer agent'' as any person who engages on 
behalf of an issuer of securities or on behalf of itself as an issuer 
of securities in:
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    \137\ See S. Rep. No. 75, 57-58 (1975) (to accompany report S. 
249). S. 249 is the principal legislative history of the Securities 
Acts Amendments of 1975 of which the transfer agent legislation was 
a part.
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    (A) Countersigning such securities upon issuance;
    (B) monitoring the issuance of such securities with a view to 
preventing unauthorized issuance (i.e., a registrar); \138\
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    \138\ For additional information regarding ``registrars,'' see 
supra note 51 and Sections II.B and II.C.1 and infra notes 298, 299, 
320, 341 and Section IV.C.1.
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    (C) registering the transfer of such securities;
    (D) exchanging or converting such securities; or
    (E) transferring record ownership of securities by bookkeeping 
entry without the physical issuance of securities certificates.\139\
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    \139\ Exchange Act Section 3(a)(25), 15 U.S.C. 78c(a)(25). Note 
that any insurance company or separate account which performs such 
functions solely with respect to variable annuity contracts or 
variable life policies which it issues or any registered clearing 
agency which performs such functions solely with respect to options 
contracts which it issues is excluded from the definition of 
``transfer agent'' under the Exchange Act. Id.
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    Section 17A(c)(1) of the Exchange Act requires any person 
performing any of these functions with respect to any security 
registered pursuant to Section 12 of the Exchange Act or with respect 
to any security which would be required to be registered except for the 
exemption contained in subsection (g)(2)(B) or (g)(2)(G) of Section 12 
(``Qualifying Security'') to register with the Commission or other 
Appropriate Regulatory Agency (``ARA'').\140\ With respect to any 
transfer agent so registered, Section 17A(d)(1) of the Exchange Act 
authorizes the Commission to prescribe such rules and regulations as 
may be necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Exchange Act.\141\ Once a transfer agent is registered, either 
compulsorily or voluntarily,\142\ the Commission ``is empowered with 
broad rulemaking authority over all aspects of a transfer agent's 
activities as a transfer agent.'' \143\
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    \140\ Exchange Act Section 17A(c)(1), 15 U.S.C. 78q-1(c)(1). 
Additionally, see infra Section IV.B for discussion of bank ARAs.
    \141\ As noted in the Committee Report which accompanied Section 
17A(d)(1) of S. 249, the precursor to Section 17A(d)(1) of the 1975 
Amendments, Congress intended to ``. . . empower[ ] [the Commission] 
with broad rulemaking authority over all aspects of a transfer 
agents' activities as transfer agent.'' Senate Report on Securities 
Act Amendments of 1975, supra note 44, at 57.
    \142\ There is no statutory or other prohibition on voluntary 
registration as a transfer agent, although it is relatively 
uncommon. See generally, Exchange Act Section 17A(c), 15 U.S.C. 78q-
1(c). See also infra Section VII.B.1, discussing the practice of 
voluntary registration as transfer agents by certain third party 
administrators (``TPA'').
    \143\ See Senate Report on Securities Act Amendments of 1975, 
supra note 44. The Committee Report elaborated that it expected the 
Commission's regulations ``to include, among other matters, minimum 
standards of performance, the prompt and accurate processing of 
securities transactions, and operational compatibility of and 
cooperation by transfer agents with other facilities and 
participants in the securities handling process.'' Id.
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    Beginning in the late 1970s and early 1980s, the Commission adopted 
a series of transfer agent rules designed to regulate the basic 
recordkeeping and processing functions performed by transfer agents. 
The rules primarily related to routine transfers of certificated equity 
and debt securities and generally covered three areas: (i) Registration 
and annual reporting requirements; (ii) timing and certain notice and 
reporting requirements related to securities transaction processing 
(referred to as ``turnaround rules''); and (iii) recordkeeping and 
record retention rules and safeguarding requirements for securities and 
funds.
    As discussed more fully below, processing obligations related to 
mutual funds, dividend reinvestment plans (``DRIPs''),\144\ and limited 
partnerships were expressly exempted from most of the processing and 
recordkeeping rules because at the time, the Commission believed that 
the activities required for the redemption of investment company shares 
and shares purchased or sold through a DRIP were significantly 
different from those required for the transfer of stocks and 
bonds.\145\ Although the Commission has made modest revisions to the 
initial transfer agent rules and has added several new rules since the 
adoption of those earlier rules, the core registration, processing, 
recordkeeping, and safeguarding rules remain substantially unchanged, 
and the exemptions for mutual funds, DRIPs, and limited partnerships 
have not been revisited.
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    \144\ DRIPs allow investors who already own an issuer's stock to 
reinvest their cash dividends by purchasing additional shares or 
fractional shares directly from the issuer or the issuer's transfer 
agent, without going through a broker. Most DRIPs require the 
investor to become a registered securityholder, as opposed to a 
street name holder.
    \145\ See Regulation of Transfer Agents, Exchange Act Release 
No. 13636 (June 16, 1977), 42 FR 32404, 32408 (June 24, 1977) 
(``Rule 17Ad-1 through 17Ad-7 Adopting Release'').
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1. Registration and Annual Reporting Requirements
    The rules setting forth the registration, annual reporting, and 
withdrawal requirements for transfer agents are found in Exchange Act 
Rules 17Ac2-1 (application for registration), 17Ac2-2 (annual 
reporting), and 17Ac3-1 (withdrawal from registration).
Rule 17Ac2-1 and Form TA-1
    Before a transfer agent may perform any of the statutory transfer 
agent functions defined in Section 3(a)(25) of the Exchange Act for a 
Qualifying Security, it must apply for registration by submitting Form 
TA-1 (Uniform Form of Registration as a Transfer Agent and for 
Amendment to Registration) to its ARA and its registration as a 
transfer agent with its ARA must have become effective.\146\ Form TA-1 
requires a

[[Page 81961]]

transfer agent seeking to register to disclose information including 
the following: (a) General identification information \147\ about the 
transfer agent and whether it is part of any service company 
arrangements; \148\ (b) the identity of its direct and indirect owners 
and other control persons; \149\ and (c) whether it or any of its 
control affiliates has been subject to investment-related criminal 
prosecutions, regulatory actions, or civil actions.\150\ The 
registration automatically becomes effective 30 days after the Form TA-
1 is filed, unless the ARA takes affirmative action to accelerate, 
deny, or postpone registration in accordance with the provisions of 
Section 17A(c) of the Exchange Act.\151\ A registrant must amend its 
Form TA-1 within 60 days following the date on which information 
reported therein becomes inaccurate, incomplete, or misleading.\152\ 
For transfer agents for whom the Commission is their ARA, they must 
file Form TA-1 and amendments thereto electronically on the 
Commission's EDGAR system and each answer provided by the transfer 
agent is required to be formatted as an XML data tag.\153\
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    \146\ Exchange Act Section 17A(c)(1), 15 U.S.C. 78q-1(c)(1); 17 
CFR 240.17Ac2-1; SEC Form TA-1, 17 CFR 249b.100. Once registration 
has become effective, a transfer agent may be subject to censure, 
suspension, limitation, or revocation of its registration if the 
transfer agent or any person associated with the transfer agent 
fails to obey Commission rules or violates certain of the securities 
laws. Exchange Act Section 17A(c)(3), 15 U.S.C. 78q-1(c)(3); 
Exchange Act Section 17A(c)(4)(C), 15 U.S.C. 78q-1(c)(4)(C).
    \147\ SEC Form TA-1, Items 1-7 (concerning basic identification 
information (such as name, contact person, phone number, address and 
email address), identification numbers including the transfer 
agent's file number and FINS number, and information concerning 
service company arrangements in which the registrant may be 
involved). The file number for a transfer agent registered with the 
Commission would be the file number assigned by the Commission. A 
FINS number, short for Financial Industry Number Standard, is a 
unique five digit number issued by DTC and used by the securities 
industry as a means of identifying financial institutions in 
automated data processing systems. See Notice of Assumption or 
Termination of Transfer Agent Services, Exchange Act Release No. 
35039 n.12 (Dec. 1, 1994), 59 FR 63656 (Dec. 8, 1994) (``Adopting 
Release for Rule 17Ad-16''); See Becoming a DTC-Eligible Agent, 
DTCC, http://www.dtcc.com/asset-services/agent-services/dtc-eligible-agent (information provided by DTCC, the parent company of 
DTC, including a form for authorizing DTC to issue a FINS number).
    \148\ For definition of ``service company,'' see infra note 241 
and accompanying text.
    \149\ SEC Form TA-1, Items 8 and 9, 17 CFR 249b.100.
    \150\ SEC Form TA-1, Item 10, 17 CFR 249b.100.
    \151\ Exchange Act Rule 17Ac2-1(a), 17 CFR 240.17Ac2-1(a); SEC 
Form TA-1, General Instruction G, 17 CFR 249b.100. Note that the 30-
day time period in Exchange Act Rule 17Ac2-1(a), 17 CFR 240.17Ac2-
1(a), is shorter than the Exchange Act's 45-day time period for 
applications to be effective. Exchange Act Section 17A(c)(2), 15 
U.S.C. 78q-1(c)(2).
    \152\ Exchange Act Rule 17Ac2-1(c), 17 CFR 240.17Ac2-1(c); SEC 
Form TA-1, General Instruction H, 17 CFR 249b.100.
    \153\ Exchange Act Rule 17Ac2-1(d), 17 CFR 240.17Ac2-1(d); 
Electronic Filing of Transfer Agent Forms, Exchange Act Release No. 
54864, 5 (Dec. 4, 2006), 71 FR 74698 (Dec. 12, 2006) (``Electronic 
Filing of Transfer Agent Forms Release'').
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Rule 17Ac2-2 and Form TA-2
    All registered transfer agents, regardless of their ARA, must file 
an annual report with the Commission using Form TA-2 (Form for 
Reporting Activities of Transfer Agents Registered Pursuant to Section 
17A of the Securities Exchange Act of 1934).\154\ Form TA-2 covers a 
calendar year reporting period that ends on December 31 \155\ and must 
be filed by March 31 of the year following the end of the reporting 
period. Form TA-2 must be filed electronically on the Commission's 
EDGAR system and each answer provided by the transfer agent is required 
to be formatted as an XML data tag.\156\
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    \154\ Exchange Act Rule 17Ac2-2(a), 17 CFR 240.17Ac2-2(a); SEC 
Form TA-2, 17 CFR 249b.102 (Form for Reporting Activities of 
Transfer Agents Registered Pursuant to Section 17A of the Securities 
Exchange Act of 1934).
    \155\ Exchange Act Rule 17Ac-2-2(b), 17 CFR 240.17Ac2-2(b).
    \156\ Exchange Act Rule 17Ac2-2(c), 17 CFR 240.17Ac2-2(c); 
Electronic Filing of Transfer Agent Forms Release, supra note 153, 
at 5.
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    Form TA-2 requires transfer agents to identify and report on the 
use of service companies, or other transfer agents, in connection with 
their transfer agent activities. It also requires transfer agents to 
provide annual data regarding the transfer agent's compliance with the 
turnaround rules. Additionally, the form requires transfer agents to 
provide the Commission with updated information about their business 
activities, including accounts administered, items received,\157\ 
turnaround performance, total amounts of funds distributed, and lost 
securityholder accounts.\158\
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    \157\ See generally, Section IV.A.2 for discussion of ``item.''
    \158\ See generally, SEC Form TA-2, 17 CFR 249b.102.
---------------------------------------------------------------------------

    Rule 17Ac2-2 provides exemptions from completing certain sections 
of Form TA-2 for small transfer agents and for transfer agents that 
outsource their work completely to service companies. If a registered 
transfer agent received fewer than 1,000 items for transfer in the 
reporting period and did not maintain master securityholder files for 
more than 1,000 individual securityholder accounts as of December 31 of 
the reporting period, it is only required to complete Questions 1 
through 5, 11, and the signature section of Form TA-2.\159\ A named 
transfer agent that engaged a service company to perform all of its 
transfer agent functions during the reporting period is only required 
to complete Questions 1 through 3 and the signature section of Form TA-
2.\160\
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    \159\ Exchange Act Rule 17Ac2-2(a)(1), 17 CFR 240.17Ac2-2(a)(1).
    \160\ Exchange Act Rule 17 Ac2-2(a)(2), 17 CFR 240.17Ac2-
2(a)(2).
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    The Commission, other ARAs and members of the public (including 
issuers and investors) use information on Forms TA-1 and TA-2. The 
Commission's EDGAR database provides a means through which information 
on these forms can be searched and retrieved. The Commission uses the 
information on Form TA-1 to review an entity's application for 
registration as a transfer agent and to maintain current information 
about transfer agents. The Commission uses information on Form TA-2, as 
well as information on Form TA-1 and amendments thereto, for several 
purposes, including: (i) To determine the nature of the business 
conducted by a transfer agent, (ii) to monitor transfer agent 
activities and to evaluate compliance with Commission rules, and (iii) 
to inform Commission transfer agent policymaking.\161\ In connection 
with monitoring of and checking regulatory compliance by transfer 
agents, the Commission's examination and inspections program may use 
the information on Forms TA-1 and TA-2 to plan their site visits in 
connection with an exam. The examination staff of the Commission may 
also use the information on Forms TA-1 and TA-2 to identify particular 
issues to focus on during an exam or to analyze industry trends and to 
provide basic census information concerning registered transfer agents. 
In addition, Form TA-1 and TA-2 data provide the Commission with 
information about securities processing issues that may need to be 
addressed by Commission rulemaking. Form TA-1 and TA-2 data is also 
used by the Commission to assist it in evaluating the costs and 
benefits of potential rulemaking.
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    \161\ See Adoption of Revised Transfer Agent Forms and Related 
Rules, Exchange Act Release No. 23084 (Mar. 27, 1986), 51 FR 12124 
(Apr. 9, 1986) (``Revised Transfer Agent Forms and Related Rules''); 
Electronic Filing of Transfer Agent Forms Release, supra note 153, 
at 5.
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Rule 17Ac3-1 and Form TA-W
    Pursuant to Rule 17Ac3-1, a registered transfer agent may 
voluntarily withdraw its registration by filing Form TA-W (Notice of 
Withdrawal from Registration as a Transfer Agent) with

[[Page 81962]]

the relevant ARA, disclosing, among other things, any actual or 
potential claims or legal proceedings against the transfer agent, its 
reasons for withdrawing or ceasing to function as a transfer agent, and 
whether one or more successor transfer agents will take over the 
maintenance of its transfer books.\162\ Withdrawal from registration 
automatically becomes effective 60 days after filing Form TA-W, unless 
the Commission or applicable ARA finds it in the public interest to 
take affirmative action to accelerate, deny, or postpone the 
request.\163\
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    \162\ Exchange Act Rule 17 Ac3-1, 17 CFR 240.17Ac3-1; Exchange 
Act Section 17A(c)(3)(a), 15 U.S.C. 78q-1(c)(3)(A); SEC Form TA-W, 
17 CFR 249b.101 (Notice of Withdrawal from Registration as a 
Transfer Agent).
    \163\ Exchange Act Rule 17Ac3-1(b), 17 CFR 240.17Ac3-1(b).
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2. Processing, Reporting, Recordkeeping, and Exemptions: Rules 17Ad-1 
Through 17Ad-7 and Rules 17f-1 and 17f-2
    On June 16, 1977, the Commission adopted Rules 17Ad-1 through 17Ad-
7 as a set of performance standards for transfer agents.\164\ These 
turnaround and processing rules were ``designed to protect investors . 
. . and to contribute to the establishment of the national system for 
the prompt and accurate clearance and settlement of transactions in 
securities by,'' among other things, ``assuring that the transfer agent 
community performs its functions in a prompt, accurate and more 
predictable manner.'' The rules primarily focused on establishing 
minimum performance and recordkeeping standards for routine transfers 
of certificated equity and debt securities and the prompt and accurate 
cancellation and issuance of certificated securities.\165\ The rules 
were also designed to provide an early warning system to alert issuers 
and regulatory agencies when the performance standards are not being 
met, prohibit under-performing transfer agents from expanding their 
operations, require transfer agents to respond promptly to certain 
written inquiries regarding items presented for transfer, and require 
the maintenance and preservation of certain records necessary for 
regulatory authorities to monitor and enforce transfer agent compliance 
with the turnaround rules.\166\ The specific processing, reporting, and 
retention requirements were metrics-based and, at the time, considered 
to be those necessary to ensure that transfer agents adequately 
performed their functions and that the Commission and other ARAs would 
be able to monitor transfer agents' compliance with the turnaround 
rules.\167\ Further, the new transfer agent rules established by the 
Commission were designed not only to ensure that transfer agents meet 
prescribed performance standards for their core recordkeeping and 
transfer activities, but to ensure they would be regulated 
appropriately in the context of the National C&S System and that any 
problems meeting these performance standards would not negatively 
impact individual investors or the clearance and settlement system as a 
whole.\168\ Each rule is discussed in detail below.
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    \164\ Exchange Act Rules 17Ad1-7, 17 CFR 240.17Ad-1-7.
    \165\ See Rule 17Ad-1 through 17Ad-7 Adopting Release, supra 
note 145, at 32404.
    \166\ Id. See also Exchange Act Rules 17Ad-1-7, 17 CFR 240.17Ad-
1-7.
    \167\ Rule 17Ad-1 through 17Ad-7 Adopting Release, supra note 
145, at 32410.
    \168\ Rule 17Ad-1 through 17Ad-7 Adopting Release, supra note 
145, at 32407 (noting the importance of avoiding impediments to 
``the Commission's efforts to provide necessary or appropriate 
regulations for transfer agents in the broader context of the 
establishment of a national system for the prompt and accurate 
clearance and settlement of securities transactions.'').
---------------------------------------------------------------------------

    Rule 17Ad-1 defines the relevant terms used throughout the rules. 
One of the most important is ``item,'' which is defined as the 
certificates of a single issue of securities presented under one 
ticket,\169\ and is the basic unit for which the turnaround and other 
processing requirements apply.\170\ The other key definitions in Rule 
17Ad-1 are ``transfer'' and ``turnaround.'' ``Transfer'' of a 
certificated security (where an outside registrar is not involved) is 
the completion of all acts necessary to cancel the certificate, issue a 
new one, and make it available to the presentor, and ``turnaround'' for 
an item (where an outside registrar is not involved) is completed when 
transfer is accomplished.\171\
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    \169\ Exchange Act Rule 17Ad-1(a)(1), 17 CFR 240.17Ad-1(a)(1) 
(definition of ``item''). See supra note 17 (describing tickets).
    \170\ Rule 17Ad-1 through 17Ad- Adopting Release, supra note 
145, at 32404.
    \171\ Exchange Act Rule 17Ad-1(d), (e), 17 CFR 240.17Ad-1(d), 
(e).
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    Rule 17Ad-2 sets the basic performance standards for transfer 
agents.\172\ Transfer agents who are not acting as a registrar must 
turnaround within three business days of receipt at least 90% of all 
``routine items'' \173\ received by the transfer agent during any 
month.\174\ Non-routine items must receive ``diligent and continuous 
attention'' and must be ``turned around as soon as possible.'' \175\ 
Routine items that are not turned around within three business days 
nevertheless must be ``turned around promptly.'' \176\ Registered 
transfer agents acting as a registrar must ``process'' at least 90% of 
all items received during any given month no later than noon of the 
next business day for any item received after noon and no later than 
the opening of business on the next business day for those items 
received at or before noon.\177\ If a transfer agent fails to meet the 
performance standards for turnaround set forth in Rule 17Ad-2 with 
respect to any month, it must notify the Commission and the transfer 
agent's ARA if it is not the Commission within 10 business days of the 
end of the month, provide certain turnaround data regarding specific 
numbers and percentages of items, explain the reasons for the failure, 
identify what steps have been taken to prevent future failures, and 
provide certain data regarding routine items that have not been turned 
around and have been in the transfer agent's possession for ``more than 
four business days.'' \178\ Similar notification requirements apply 
where a transfer agent acting as a registrar fails to meet the 
processing performance standards.\179\
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    \172\ As discussed in more detail infra in Section IV.C.1, the 
NYSE imposes a 48 hour turnaround requirement.
    \173\ Routine items are defined by Rule 17Ad-1(i), 17 CFR 
240.17Ad-1(i). They are generally defined in the negative such that 
most items are considered routine so long as they do not require the 
requisition of a new certificate that the transfer agent does not 
have on hand, are not subject to a stop order, adverse claim, or 
other restriction on transfer, do not require certain additional 
documentation or review to complete the transfer, do not involve a 
transfer in connection with certain types of corporate actions, do 
not include a security of an issue which within the previous 15 
business days was offered to the public pursuant to a Securities Act 
registration statement in an offering of a non-continuing nature, 
and do not include a warrant, right or convertible security either 
presented for transfer within five business days before rights 
expire or change or presented for exercise or conversion.
    \174\ Exchange Act Rule 17Ad-2(a), 17 CFR 240.17Ad-2(a). We note 
that with automation, these standards are substantially easier to 
meet than when the rule was adopted in 1977.
    \175\ Exchange Act Rule 17Ad-2(e), 17 CFR 240.17Ad-2(e).
    \176\ Id.
    \177\ Exchange Act Rule 17Ad-2(e), 17 CFR 240.17Ad-2(b).
    \178\ Exchange Act Rule 17Ad-2(c), 17 CFR 240.17Ad-2(c).
    \179\ Exchange Act Rule 17Ad-2(d), 17 CFR 240.17Ad-2(d).
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    Rule 17Ad-3 provides limitations on the expansion of transfer agent 
activities if a transfer agent is unable to meet the minimum 
performance standards established by Rule 17Ad-2. Any transfer agent 
that is required pursuant to Rule 17Ad-2 to provide notice for failure 
to meet the performance standards for three consecutive months is 
prohibited from taking on new issues or providing new services for 
existing

[[Page 81963]]

issues.\180\ Further, if a transfer agent fails to turnaround or 
process at least 75% of all routine items, it must notify the chief 
executive officer of each issuer for which the transfer agent 
acts.\181\ Thus, Rules 17Ad-2 and 17Ad-3, taken together, provide an 
early warning system to alert issuers, the Commission and other ARAs of 
untimely performance and potential problems.
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    \180\ Exchange Act Rule 17Ad-3(a), 17 CFR 240.17Ad-3(a). Such 
limitations on the business of the transfer agent continue until 
there has been a period of three successive months in which no 
notices have been required.
    \181\ Exchange Act Rule 17Ad-3(b), 17 CFR 240.17Ad-3(b).
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    Rule 17Ad-4 provides certain exemptions from the turnaround, 
processing, and recordkeeping rules.\182\ Rule 17Ad-4(a) creates an 
exemption from Rules 17Ad-2, 17Ad-3, and 17Ad-6(a)(1)-(7) for the 
processing of interests in limited partnerships, DRIPs, and redeemable 
securities issued by investment companies registered under Section 8 of 
the Investment Company Act of 1940 (``Investment Company Act''), which 
are also known as open-end funds.\183\ In 1977, the rationale for 
providing the exemption for interests in limited partnerships was ``the 
low volume of transfers of such interests,'' \184\ while the rationale 
for providing the exemption for DRIPs was the Commission's view at the 
time that transfer agents' processing for DRIPs ``require[s] procedures 
significantly different from the procedures required to transfer 
ownership of stocks and bonds.'' \185\
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    \182\ Exchange Act Rule 17Ad-4, 17 CFR 240.17Ad-4.
    \183\ Investment Company Act Section 8, 15 U.S.C. 80a-8. See 
generally, Section VII.C for discussion of transfer agents for 
investment companies and the handling of redeemable securities 
issued by investment companies.
    \184\ Regulation of Transfer Agents, Exchange Act Release No. 
13293 (Feb. 24, 1977) (``Rule 17Ad-1 through 17Ad-7 Re-Proposing 
Release'') (``From the information provided in SEC Form TA-1, 17 CFR 
249b.100, the low volume of transfers of such [limited partnership] 
interests suggests that they may appropriately be exempted from 
revised [Rules 17Ad-2, 17Ad-3, and 17Ad-6(a)(1) through (a)(7)].'').
    \185\ Rule 17Ad-1 through 17Ad-7 Adopting Release, supra note 45 
(``Lastly, the exemptions of paragraph 17Ad-4(a) have been expanded 
to include the transfers and withdrawals of shares from dividend 
reinvestment plans which . . . require procedures significantly 
different from the procedures required to transfer ownership of 
stocks and bonds.'')
---------------------------------------------------------------------------

    The Commission expressed the same rationale with respect to 
redeemable securities of registered investment companies, stating that 
transactions in these securities were ``significantly different from 
the transfer of ownership of stocks and bonds on issuer's records.'' 
\186\ In addition, the Commission noted that such activity ``is subject 
to Section 22(e) of the Investment Company Act of 1940, 15 U.S.C. 80a-
22(e),'' \187\ and that ``[t]he amount of certificated fund shares is 
relatively small, and the amount of transfer agent activity in 
connection with transferring ownership of certificated shares 
represents a very small part of a transfer agent's activity with regard 
to an open-end investment company.'' \188\ For these reasons, the 
Commission believed at the time that ``it would be desirable to study 
further the need for, and the nature of, minimum performance standards 
for the transfer of securities effected by open-end investment 
companies registered under Section 8 of the Investment Company Act, 15 
U.S.C. 80a-8.'' \189\
---------------------------------------------------------------------------

    \186\ Rule 17Ad-1 through 17Ad-7 Adopting Release, supra note 
145, at n.13. As originally proposed, the exemption would have been 
for ``securities of open-end investment companies,'' rather than 
``redeemable securities of investment companies.'' See Rule 17Ad-1 
through 17Ad-7 Re-Proposing Release, supra note 184. By adding the 
word ``redeemable,'' redeemable securities of registered unit 
investment trusts (``UIT'') were included within the exemption. 
However, because closed-end investment companies do not issue 
redeemable securities, transfer agents servicing closed-end fund 
securities are not within the exemption. Rule 17Ad-1 through 17Ad-7 
Adopting Release, supra note 145, at n.14 (``The turnaround rules do 
apply to registered transfer agents performing transfer agent 
functions for securities issued by closed-end investment 
companies.'') (emphasis added).
    \187\ Rule 17Ad-1 through 17Ad-7 Adopting Release, supra note 
145, at 32408.
    \188\ Rule 17Ad-1 through 17Ad-7 Adopting Release, supra note 
145, at n.13.
    \189\ Rule 17Ad-1 through 17Ad-7 Re-Proposing Release, supra 
note 184.
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    Rule 17Ad-4(b) provides a similar exemption for certain small 
transfer agents by exempting a registered transfer agent from the 
turnaround, processing, recordkeeping, and other provisions of Rules 
17Ad-2(a), (b), (c), (d) and (h), 17Ad-3, and 17Ad-6(a)(2)-(7) and 
(11), provided the transfer agent has received fewer than 500 items for 
transfer and fewer than 500 items for processing within a consecutive 
six month period, and provided that the transfer agent has filed proper 
notice of its exempt status with its ARA or has prepared a document 
certifying that the transfer agent qualifies as exempt (with respect to 
those ARAs where filing is not required).\190\ The rationale behind 
this exemption was that, because the number of transfers performed by 
these smaller transfer agents was relatively small and involved issues 
which are not traded actively, it was not necessary or appropriate at 
that time to require those smaller transfer agents to comply with the 
minimum performance standards, recordkeeping provisions, and other 
requirements in those rules.\191\
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    \190\ The filing of notices of exempt status for these small 
transfer agents is required where the ARA is the Federal Deposit 
Insurance Corporation (``FDIC'') or the Federal Reserve. Where the 
ARA is the Commission or the Office of the Comptroller of the 
Currency, the exempt transfer agent is not required to file a notice 
but must prepare a document certifying that the transfer agent 
qualifies as exempt and retain it in its records. See Exchange Act 
Rule 17Ad-4(b)(3), 17 CFR 240.17Ad-4(b)(3).
    \191\ Rule 17Ad-1 through 17Ad-7 Adopting Release, supra note 
145, at 32408.
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    Rule 17Ad-5 generally requires a registered transfer agent to 
respond within prescribed timeframes to certain types of written 
inquiries.\192\ Rule 17Ad-5(a) requires a registered transfer agent to 
respond within five business days following the receipt of an inquiry 
from any ``person'' concerning the status of an item presented for 
transfer by such person or their agent during the preceding six months, 
provided the inquirer provides specific information concerning the 
item.\193\ Rule 17Ad-5(b) requires a registered transfer agent to 
respond to any ``broker-dealer'' inquiry within five business days 
confirming or denying whether it has possession of a security presented 
for transfer and, if it has possession, acknowledging the transfer 
instructions or revalidating the window ticket,\194\ provided the 
broker-dealer provides certain identifying information.\195\ Rule 17Ad-
5(c) requires a registered transfer agent to respond within 10 business 
days confirming or denying possession of a security where any person or 
their agent has requested that the transfer agent confirm possession as 
of a given date of a certificate presented by such person during the 
preceding 30 days \196\ and provides information similar to that which 
is required under Rules 17Ad-5(a) and (b).\197\ If required by the 
transfer agent, the inquirer must also provide assurance of 
payment.\198\ Rule 17Ad-5(d) requires a registered transfer agent to 
respond within 20 business

[[Page 81964]]

days where any person requests a transcript of such person's account 
with respect to a particular securities issue as of a certain date not 
more than six months prior to the request.\199\ If required by the 
transfer agent, the inquirer must provide the transfer agent assurance 
of payment of a reasonable fee for this service.\200\
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    \192\ Exchange Act Rule 17Ad-5, 17 CFR 240.17Ad-5. The response 
must generally be in writing, however, Rule 17Ad-5(f)(1) permits a 
telephone response if (i) the telephone response resolves the 
inquiry and (ii) the inquirer does not request a written response. 
Exchange Act Rule 17Ad-5(f)(1), 17 CFR 240.17Ad-5(f)(1).
    \193\ Exchange Act Rule 17Ad-5(a), 17 CFR 240.17Ad-5(a) 
(requiring inquirer to provide: (i) The issue, (ii) the number of 
shares or units (or principal amount of debt securities), (iii) the 
approximate date of presentation, and (iv) the name in which the 
item is registered).
    \194\ Exchange Act Rule 17Ad-5(b), 17 CFR 240.17Ad-5(b).
    \195\ Id. See also supra note 193 (concerning information to be 
provided by inquirers).
    \196\ Exchange Act Rule 17Ad-5(c), 17 CFR 240.17Ad-5(c).
    \197\ Id. See also supra note 193 (concerning information to be 
provided by inquirers).
    \198\ Id.
    \199\ Exchange Act Rule 17Ad-5(d), 17 CFR 240.17Ad-5(d).
    \200\ Id.
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    Rules 17Ad-6 and 17Ad-7, taken together, address some of the basic 
aspects of the records that transfer agents must maintain and for how 
long.\201\ Rule 17Ad-6 generally details what records every registered 
transfer agent shall make and keep. Rule 17Ad-6(a)(1) requires every 
registered transfer to make and keep receipts, tickets, logs, 
schedules, journals, and other records showing the number of routine 
and non-routine items received and made available each business 
day.\202\ Rules 17Ad-6(a)(2) through (4) require maintenance of records 
that generally relate to the monitoring of performance standards for 
turnaround and for processing under Rule 17Ad-2 for each month and 
notices required to be filed under Rule 17Ad-2 \203\ and any written 
inquiries or requests, including those inquiries to transfer agents 
where the inquiries were not subject to Rule 17Ad-5 or inquiries which 
were answered orally or where no response was made. Rule 17Ad-6(a)(8) 
requires maintenance of any contracts and certain related documentation 
showing the appointment or termination of the registered transfer agent 
to serve in any capacity on behalf of an issuer.\204\ Rule 17Ad-6(a)(9) 
requires records of: (i) Currently active stop orders; \205\ (ii) 
adverse claims; \206\ and (iii) restrictions on transfer.\207\
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    \201\ Exchange Act Rule 17Ad-6, 17 CFR 240.17Ad-6.
    \202\ Exchange Act Rule 17Ad-6(a)(1), 17 CFR 240.17Ad-6(a)(1).
    \203\ Exchange Act Rule 17Ad-6(a)(2)-(4), 17 CFR 240.17Ad-
6(a)(2)-(4).
    \204\ Exchange Act Rule 17Ad-6(a)(8), 17 CFR 240.17Ad-6(a)(8).
    \205\ For discussion of stop orders as a general matter, see 
supra notes 25 and 26.
    \206\ For discussion of an adverse claim in connection with 
protected purchaser status under the UCC, see supra note 14 and 
accompanying text. Regarding the existence of an adverse claim as a 
factor resulting in classification of an item as non-routine under 
the Commission's transfer agent rules, see supra note 173, Exchange 
Act Rule 17Ad-1(i), 17 CFR 240.17Ad-1(i).
    \207\ For discussion of securities subject to restrictions on 
transfer and of restrictive legends, see infra Section VI.D.
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    Rule 17Ad-7 specifies the particular lengths of time for which the 
various records described in Rule 17Ad-6 shall be maintained.\208\ 
While the records listed in Paragraph (a)(1) of this rule were 
generally, at the time of its adoption in 1977, paper records such as 
receipts, tickets, schedules, they now are likely to be electronic 
records. Rule 17Ad-7(f), was updated in 2001 and 2003 to authorize the 
use of electronic recordkeeping, electronic storage media, and 
micrographic storage media, such as microfilm records.\209\ Paragraph 
(g) of Rule 17Ad-7 regulates transfer agent records maintained by an 
outside service bureau, other recordkeeping service or the issuer.'' 
\210\ Paragraph (h) states that when a registered transfer agent ceases 
to perform transfer agent functions, its responsibilities under this 
provision ``shall end upon the delivery of such records to the 
successor transfer agent,'' a provision that was originally included to 
clarify when a transfer agent is relieved of such recordkeeping 
responsibilities.\211\
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    \208\ Exchange Act Rule 17Ad-7, 17 CFR 240.17Ad-7.
    \209\ See Recordkeeping Requirements for Transfer Agents, 
Exchange Act Release No. 44227 (Apr. 27, 2001), 66 FR 21659 (May 1, 
2001); Recordkeeping Requirements for Registered Transfer Agents, 
Exchange Act Release No. 48949 (Dec. 18, 2003), 68 FR 75050 (Dec. 
29, 2003) (``Recordkeeping Requirements for Transfer Agents'').
    \210\ Exchange Act Rule 17Ad-7(g), 17 CFR 240.17Ad-7(g).
    \211\ Rule 17Ad-1 through 17Ad-7 Adopting Release, supra note 
145, at 32411.
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    Rule 17f-1 \212\ was adopted in 1976 pursuant to Section 17(f)(1) 
of the Exchange Act in order to curtail trafficking in lost, stolen, 
missing, and counterfeit securities certificates.\213\ It requires 
reporting institutions, which are defined as national securities 
exchanges, brokers, dealers, registered transfer agents, and others, to 
report missing, lost, counterfeit, or stolen securities to the 
Commission or its designee. This led to the Commission's implementation 
in 1977 of the Lost and Stolen Securities Program and also led to 
subsequent Commission releases addressing in detail the structure of 
the program.\214\ The program became fully operational on January 2, 
1978 and consists mainly of an electronic database for securities 
certificates that have been reported lost, stolen, missing, or 
counterfeit.\215\ The Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank Act'') expanded Section 17(f)(1)'s 
statutory coverage to add securities certificates that are cancelled to 
the categories that must be reported to the Commission or its 
designee.\216\
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    \212\ Exchange Act Section 17(f)(1), 15 U.S.C. 78q(f)(1); 
Exchange Act Rule 17f-1, 17 CFR 240.17f-1. See also Adoption of 
Reporting and Inquiry Requirements with Respect to Missing, Lost, 
Stolen and Counterfeit Securities, Exchange Act Release No. 13053 
(Dec. 15, 1976), 41 FR 54923 (Dec. 16, 1976) (order adopting Rule 
17f-1).
    \213\ See Senate Report on Securities Act Amendments of 1975, 
supra note 44 at 103-4; see also Hearings before the Permanent 
Subcomm. on Investigations of the S. Comm. on Gov't Operations, 93rd 
Cong., 1st Sess. (1973), 2nd Sess. (1974).
    \214\ See, e.g., Implementation of program for reporting and 
inquiry with respect to missing, lost counterfeit or stolen 
securities, Exchange Act Release No. 13832 (Aug. 5, 1977), 42 FR 
41022 (Aug. 12, 1977) (order adopting Release implementing the Lost 
and Stolen Securities Program); U.C.C. 8-405 (``Replacement of Lost, 
Destroyed, or Wrongfully Taken Security Certificate'').
    \215\ See supra note 25. Lost and Stolen Securities Program 
Amendments, Exchange Act Release No. 15867 (May 23, 1979), 44 FR 
31500 (May 31, 1979).
    \216\ Pub. L. 111-203, 124 Stat. 1376, Sec.  929D (2010).
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    Rule 17f-2 was adopted in 1976 and requires the fingerprinting of 
certain securities industry personnel.\217\ In accordance with its 
governing statute, Section 17(f)(2) of the Exchange Act,\218\ Rule 17f-
2 requires, with certain exemptions, the fingerprinting of all 
partners, directors, officers, and employees of brokers, dealers, 
registered transfer agents, and registered clearing agencies. The Dodd-
Frank Act expanded Section 17(f)(2)'s statutory coverage to include the 
personnel of national securities exchanges, national securities 
associations, and registered securities information processors.\219\
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    \217\ Exchange Act Rule 17f-2, 17 CFR 240.17f-2; Lost and Stolen 
Securities Program Amendments, Exchange Act Release No. 12214 (Mar. 
16, 1976), 41 FR 13594 (Mar. 31, 1976) (order adopting Rule 17f-2).
    \218\ Exchange Act Rule 17(f)(2), 15 U.S.C. 78q(f)(2).
    \219\ Pub. L. 111-203, 124 Stat. 1376, Sec.  929S.
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3. Recordkeeping and Safeguarding Rules: Rules 17Ad-8 Through 17Ad-13
    The new regulatory regime established by the turnaround rules 
provided the Commission with visibility into the transfer agent 
industry and a way to review and analyze it. The first six years of 
monitoring transfer agent performance under the new regulatory regime 
highlighted some of the significant adverse operational and financial 
consequences for the securities industry, securities markets, issuer 
community, and investing public that could occur when a transfer 
agent's operations collapse, when records maintained by a transfer 
agent contain significant inaccuracies, or when a transfer agent's 
internal accounting controls are inadequate.\220\ The Commission 
therefore determined that

[[Page 81965]]

additional rulemaking was necessary and appropriate to supplement the 
turnaround rules.
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    \220\ See 17Ad-9 through 13 Proposing Release, supra note 2. In 
its release proposing Rules 17Ad-9 to 17Ad-13, the Commission cited 
examples of substandard transfer agent performance in the areas of 
recordkeeping and safeguarding and noted the significant adverse 
operational and financial problems caused by poor transfer agent 
performance or operations.
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    The impetus for Rule 17Ad-8 was the recommendation in the Final 
Street Name Study that ``each depository be required to transmit 
periodically to each issuer whose securities the depository holds of 
record a list of the persons on whose behalf the depository holds the 
securities.'' \221\ The rule, which was adopted in 1980, requires every 
registered clearing agency to provide promptly to each issuer or 
transfer agent acting on its behalf, upon request, a securities 
position listing which identifies the participants on whose behalf the 
clearing agency holds the issuer's securities in the name of the 
clearing agency or its nominee and the respective positions in such 
securities as of a specified date.\222\ The clearing agency may charge 
issuers who request this service with fees designed to recover its 
reasonable costs.\223\
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    \221\ Securities Position Listing Rule, Exchange Act Release No. 
16443 (Dec. 20, 1979), 44 FR 76774, 76775 (Dec. 28, 1979) 
(``Adopting Release for Rule 17Ad-8''); Final Street Name Study, 
supra note 82, at 55.
    \222\ See Exchange Act Rule 17Ad-8, 17 CFR 240.17Ad-8; Adopting 
Release for Rule 17Ad-8, supra note 221.
    \223\ Exchange Act Rule 17Ad-8(b), 17 CFR 240.17Ad-8(b).
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    On June 10, 1983, the Commission adopted Rules 17Ad-9 through 17Ad-
13.\224\ These new rules established various requirements and 
exemptions designed to ensure that transfer agents maintain appropriate 
internal controls, meet adequate levels of service and performance, and 
avoid adverse operational and financial problems that could harm 
investors, issuers, or other securities industry participants. Most 
notably, the new rules established additional minimum standards for 
recordkeeping and codified minimum requirements for the safeguarding of 
funds and securities.\225\ The Commission believed that these 
additional minimum standards were critical to addressing seriously 
deficient transfer agent performance.\226\
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    \224\ Exchange Act Rules 17Ad-9-13, 17 CFR 240.17Ad-9-13.
    \225\ See 17Ad-9 through 13 Proposing Release, supra note 2.
    \226\ Id. The Commission was particularly concerned with 
reducing the potential for transfer agent failure, which inevitably 
imposes substantial potential liabilities and costs on issuers, 
securities firms, and securityholders, as well as improving 
generally transfer agent performance, thereby reducing the broker-
dealers' costs associated with fails to settle and extended transfer 
delays.
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    Rule 17Ad-9 \227\ defines 12 principal terms with respect to 
transfer agents as used especially in Rules 17Ad-10 through 17Ad-13, 
consisting of the terms ``certificate detail,'' ``master securityholder 
file,'' ``subsidiary file,'' ``control book,'' ``credit,'' ``debit,'' 
``record difference,'' ``record keeping transfer agent,'' ``co-transfer 
agent,'' ``named transfer agent,'' ``service company transfer agent,'' 
and ``file.'' \228\
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    \227\ Exchange Act Rule 17Ad-9, 17 CFR 240.17Ad-9.
    \228\ See 17Ad-9 through 13 Proposing Release, supra note 2.
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    Rule 17Ad-9's certificate detail,\229\ with respect to certificated 
securities, includes, at a minimum, all of the following (and with 
respect to uncertificated securities, includes only items (ii) through 
(viii)): (i) The certificate number, meaning the unique serial number 
of each certificate of an issue of securities, as distinct from the 
CUSIP number \230\ which is the same number for all certificates of the 
same issue; (ii) the number of shares (for equity securities) or 
principal dollar amount (for debt securities) designated by the 
certificate; (iii) the securityholder's registration, which is the name 
of the individual, partnership, or corporation in which a securities 
certificate is held and which registration appears on the face of the 
certificate; (iv) the address of the registered owner, which also 
appears on the face of the certificate; (v) the date the certificate 
was issued, which likewise appears on the face of the certificate; (vi) 
the ``cancellation date of the securities certificate,'' which, if and 
when the certificate is cancelled will appear on the face of a 
certificate along with the word ``cancelled'' to evidence that the 
certificate no longer has any market value and that it no longer 
represents a claim against the issuer; (vii) in the case of redeemable 
securities of investment companies (e.g., securities issued by open-end 
management companies and other investment companies registered under 
Section 8 of the Investment Company Act), an appropriate description of 
each debit and credit (i.e., designation indicating purchase, 
redemption, or transfer); and (viii) ``[a]ny other identifiable 
information about securities and securityholders'' that the transfer 
agent reasonably deems essential to its recordkeeping system for the 
efficient and effective research of record differences.\231\
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    \229\ For ``certificate detail,'' see also Exchange Act Rule 
17f-1(c)(6), 17 CFR 240.17f-1(c)(6).
    \230\ CUSIP stands for Committee on Uniform Security 
Identification Procedures. A CUSIP number is assigned to most 
financial instruments. See CUSIP Number, SEC, http://www.sec.gov/answers/cusip.htm.
    \231\ Exchange Act Rule 17Ad-9(a), 17 CFR 240.17Ad-9(a).
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    ``Master securityholder file'' is defined as the official list of 
individual securityholder accounts. With respect to uncertificated 
securities of investment companies registered under the Investment 
Company Act, the master securityholder file may consist of multiple, 
but linked, automated files.\232\
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    \232\ Exchange Act Rule 17Ad-9(b), 17 CFR 240.17Ad-9(b). In 
other contexts, the master securityholder file may be referred to as 
a ``stockholder register,'' ``stockholder list,'' ``shareholder 
ledger,'' or some other designation. As used throughout this 
release, we refer to it as the master securityholder file. See, 
e.g., Del. Code Ann. tit. 8 Sec.  220 (referring to a corporation's 
``stock ledger'' as well as its ``list of its stockholders'').
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    A ``subsidiary file'' is any list of record of accounts, 
securityholders, or certificates that evidences debits or credits that 
have not been posted to the master securityholder file.\233\
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    \233\ Exchange Act Rule 17Ad-9(c), 17 CFR 240.17Ad-9(c).
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    A ``control book'' is the record or other document that shows the 
total number of shares (in the case of equity securities) or the 
principal dollar amount (in the case of debt securities) authorized and 
issued by the issuer.\234\ The control book may be referred to in the 
industry as a registrar journal, and is one of the mechanisms transfer 
agents use to monitor against overissuance.\235\
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    \234\ Exchange Act Rule 17Ad-9(d), 17 CFR 240.17Ad-9(d).
    \235\ The Commission's transfer agent rules do not provide a 
definition of ``overissuance'' or explicitly import a definition 
from other authorities that have defined this term. The UCC provides 
a definition of this term which has been amended over the years and 
currently provides: ``In this section `overissue' means the issue of 
securities in excess of the amount the issuer has corporate power to 
issue, but an overissue does not occur if appropriate action has 
cured the overissue.'' U.C.C. 8-210(a). One way in which an 
overissue can occur is when a corporation issues more shares than 
are authorized under its charter, such as its articles of 
incorporation. Under state law, shares over issued in such a manner 
may be deemed void. See, e.g., Del. Gen. Corp. L. Sec. Sec.  161, 
242(a)(3). For more information concerning the general concept of 
``overissuances'' and types of transactions in which overissuances 
can occur, see Guttman, supra note 6, at Sec.  11:7; Rhodes, supra 
note 18, at Sec.  22:3.
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    A ``credit'' is an addition of appropriate certificate detail to 
the master securityholder file, and a ``debit'' is a cancellation of 
appropriate certificate detail to the master securityholder file.\236\
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    \236\ Exchange Act Rule 17Ad-9(e), (f), 17 CFR 240.17Ad-9(e), 
(f).
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    A ``record difference'' occurs when either: (i) The total number of 
shares or total principal dollar amount of securities in the master 
securityholder file does not equal the number of shares or principal 
dollar amount in the control book; or (ii) the security transferred or 
redeemed contains certificate detail different from the certificate 
detail currently on the master

[[Page 81966]]

securityholder file, which difference cannot be immediately 
resolved.\237\
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    \237\ Exchange Act Rule 17Ad-9(g), 17 CFR 240.17Ad-9(g).
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    A ``recordkeeping transfer agent'' is the registered transfer agent 
that maintains and updates a security's master securityholder 
file.\238\ All other transfer agents associated with a given issue of 
securities are defined as ``co-transfer agents,'' which are registered 
transfer agents that transfer securities but do not maintain and update 
the master securityholder file.\239\ A co-transfer agent may include an 
outside registrar that keeps only the control book as defined in Rule 
17Ad-1(b). A ``named transfer agent'' is the registered transfer agent 
that is engaged by an issuer to perform transfer agent functions for an 
issue of securities but has engaged a service company to perform some 
or all of those functions.\240\ And a ``service company'' is the 
registered transfer agent engaged by a named transfer agent to perform 
transfer agent functions for that named transfer agent.\241\
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    \238\ Exchange Act Rule 17Ad-9(h), 17 CFR 240.17Ad-9(h).
    \239\ Exchange Act Rule 17Ad-9(i), 17 CFR 240.17Ad-9(i).
    \240\ Exchange Act Rule 17Ad-9(j), 17 CFR 240.17Ad-9(j).
    \241\ Exchange Act Rule 17Ad-9(k), 17 CFR 240.17Ad-9(k).
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    Finally, Rule 17Ad-9(l) clarifies that the term ``file'' includes 
both automated and manual records.\242\
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    \242\ Exchange Act Rule 17Ad-9(l), 17 CFR 240.17Ad-9(l).
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    Rule 17Ad-10 \243\ requires each recordkeeping transfer agent to 
post promptly certificate detail to its master securityholder file 
after a security is transferred, purchased, or redeemed. The meaning of 
the term ``promptly'' varies with the relevant transaction but 
generally is five business days, although for exempt transfer agents 
under Rule 17Ad-4(b) promptly means 30 calendar days and for transfer 
agents functioning solely for their own or their affiliated companies' 
securities and using batch processing promptly means ten business 
days.\244\ Timely updating of the master securityholder file is 
required because delayed posting or the failure to post would promote 
the proliferation of record inaccuracies that could impede the accurate 
payment of dividends and the processing of proxy solicitations.\245\ 
Rule 17Ad-10(g) requires, with certain exceptions, that any transfer 
agent that erroneously issues securities that result in an overissuance 
\246\ must ``buy-in'' (i.e., purchase securities in the open market) 
securities equal to the number of shares (in the case of equity 
securities) or principal dollar amount (in the case of debt securities) 
of the overissuance.\247\ The buy-in requirement is designed to deter 
transfer agents from permitting record differences to accrue and 
encourages them to maintain complete and accurate records that assure 
that securityholders will receive all appropriate corporate 
distributions and communications.\248\
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    \243\ Exchange Act Rule 17Ad-10, 17 CFR 240.17Ad-10.
    \244\ See 17Ad-9 through 13 Proposing Release, supra note 2.
    \245\ See infra Section V.B. for further discussion of proxy 
services.
    \246\ See supra note 235.
    \247\ Exchange Act Rule 17Ad-10(g)(1), 17 CFR 240.17Ad-10(g)(1).
    \248\ See Maintenance of Accurate Securityholder Files and 
Safeguarding of Funds and Securities by Registered Transfer Agents, 
Exchange Act Release No. 19860 (June 10, 1983), 48 FR 28231 (June 
21, 1983) (``Adopting Release for Rule 17Ad-10'').
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    Rule 17Ad-11 \249\ requires that within ten business days following 
the end of each month, registered recordkeeping transfer agents report 
to issuers and the ARA certain information regarding aged record 
differences \250\ when the dollar amount or the number of shares 
regarding those shares reach certain preset levels.\251\ The reports 
required by 17Ad-11 must set forth the amount of aged record 
differences, the reasons for any difference, and the steps being taken 
to resolve any difference.
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    \249\ Exchange Act Rule 17Ad-11, 17 CFR 240.17Ad-11.
    \250\ Exchange Act Rule 17Ad-11(a)(2), 17 CFR 240.17Ad-11(a)(2). 
A record difference becomes an aged record difference if it exists 
for ``more than thirty calendar days.''
    \251\ Exchange Act Rule 17Ad-11(b)(1), 17 CFR 240.17Ad-11(b)(1). 
The dollar amounts and share thresholds reflected in the table set 
forth in Rule 17Ad-11(b)(1) have not been modified since Rule 17Ad-
11 was first adopted in 1983.
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    Rule 17Ad-12 \252\ requires registered transfer agents to safeguard 
funds and securities of which they have custody or possession in a 
manner reasonably free from theft, loss, destruction, or misuse, in 
light of all the facts and circumstances including the cost of 
particular safeguards and procedures that might be employed. A 
reasonable level of safeguarding is necessary due to various duties of 
transfer agents which may include, for example: (i) Holding balance 
certificates as transfer agent custodians; (ii) administering DRIPs 
which involves the holding of funds and securities; (iii) making 
distributions, including of principal, interest and dividends, as 
paying agents of issuers; \253\ and (iv) maintaining working 
inventories of unissued securities certificates.\254\
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    \252\ Exchange Act Rule 17Ad-12, 17 CFR 240.17Ad-12.
    \253\ See generally, Section VI.C for discussion of paying agent 
services.
    \254\ Id.
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    Rule 17Ad-13 \255\ requires registered transfer agents, with 
certain exceptions, to file annually with the Commission a report 
prepared by an independent accountant concerning the transfer agent's 
system of internal controls and related procedures for the transfer of 
record ownership and the safeguarding of related securities and funds 
based on an annual study and evaluation made in accordance with 
generally accepted auditing standards. The purpose of the rule is to 
ensure that transfer agents have a system of internal controls adequate 
to provide reasonable assurances that securities and funds held by 
transfer agents--for example, when a transfer agent facilitates a 
dividend or interest payment for an issuer--are safeguarded against 
loss from unauthorized use or disposition and that transfer agent 
activities are performed promptly and accurately. The rule requires 
that the independent accountant's report state whether the annual study 
and evaluation was made in accordance with generally accepted auditing 
standards using the criteria set forth in the rule and describe and 
comment upon any material inadequacies found to exist in the system of 
internal accounting control as of the date of the evaluation and any 
corrective action taken, or state that no material inadequacy 
exists.\256\ An accountant preparing reports under this rule is 
expected to use the general standards established by the American 
Institute of Certified Public Accountants (``AICPA'').\257\
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    \255\ Exchange Act Rule 17Ad-13, 17 CFR 240.17Ad-13.
    \256\ See Adopting Release for Rule 17Ad-10, supra note 248.
    \257\ Id.
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4. Issue-Specific Rules: Rules 17Ad-14 Through 17Ad-21T
    After the adoption of Rules 17Ad-8 through 17Ad-13, between 1983 
and 2013 the Commission continued to adopt new rules to address 
specific issues. Specifically, Rules 17Ad-14 through 17Ad-20, as well 
as 17Ad-21T, address issues such as tender agent services, signature 
guarantee programs, notifications when transfer agents begin or cease 
acting for specific issues, lost shareholder searches, processes for 
cancelling certificates, transfer of restricted securities, and 
anticipated risks associated with Year 2000 compliance.

[[Page 81967]]

    Rule 17Ad-14 \258\ requires a registered transfer agent that acts 
as a tender agent or a depositary for a party making a tender or 
exchange offer to establish and maintain special accounts with all 
qualified registered securities depositories that hold the subject 
company's securities, thereby enabling depository participants to move 
securities to and from the tender agent by book-entry.\259\ Unless a 
bidder's depositary establishes an account with a securities 
depository, all the subject securities must be tendered in physical 
certificate form, rather than by book-entry, which causes 
inefficiencies and other problems for securityholders, broker-dealers, 
bidders, tender agents, and others.\260\ The purpose of this rule is to 
reduce the processing costs and trading inefficiencies that occur when 
tender offers are processed in a physical certificate environment and 
to make the benefits of processing tender offers by book-entry 
available to the investing public and the securities industry.\261\
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    \258\ Exchange Act Rule 17Ad-14, 17 CFR 240.17Ad-14.
    \259\ See discussion infra at p. 104 for definition of ``tender 
agent.''
    \260\ Processing of Tender Offers Within the National Clearance 
and Settlement System, Exchange Act Release No. 20581 (Jan. 19, 
1984), 48 FR 17603 (Apr. 25, 1983).
    \261\ Id.
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    For example, securityholders sometimes have difficulty obtaining 
properly denominated physical certificates for tender to the bidder's 
depository prior to the offer's expiration date. Also, instances where 
there is unavailability of book-entry settlement have resulted in a 
substantially higher number of fails-to-deliver between broker-dealers. 
As a result, broker-dealers who are unable to satisfy tender 
obligations may have to buy securities in the cash market for same-day 
delivery (i.e., delivery on the day of the contract), which may create 
significant price disparities between the cash market and the regular-
way market (i.e., delivery on the third business day following the day 
of the contract).\262\ Prior to the adoption of Rule 17Ad-14, bidders 
could insist upon the tender of physical securities certificates 
outside of securities depositories (such as to the bidder's broker or 
local bank), even if the delivering entities were depository 
participants and even if the securities themselves were depository 
eligible. Doing so not only increased the number of fails, but 
increased brokerage firms' financing expenses and made it more 
difficult to settle transactions in a timely way.\263\
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    \262\ Regular way settlement generally refers to settlement that 
occurs on a T+3 basis as required pursuant to Exchange Act Rule 
15c6-1. Exchange Act Rule 15c6-1, 17 CFR 240.15c6-1. For additional 
information on cash, regular way, and other delivery schedules, see 
NYSE Rule 64 (2009).
    \263\ For a discussion of tender offers and trade processing 
problems that arise when depository book-entry services are not used 
during tender offers, see Rule 17Ad-14 Proposing Release, supra note 
116.
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    Rule 17Ad-15 \264\ prohibits inequitable treatment of eligible 
guarantor institutions (e.g., banks, brokers, and other financial 
institutions) that provide signature guarantee programs. The rule 
implements Section 17A(d)(5) of the Exchange Act which expressly bars 
transfer agents from exercising inequitable treatment of financial 
institutions with respect to security guarantees.\265\ The signature 
guarantee program requires that a securities certificate bear a 
signature by a guarantor institution with a medallion stamp backed by a 
surety bond before the transfer agent will accept the certificate for 
transfer. The guarantee program allows the high-speed processing of a 
large volume of securities certificates that would be impossible if 
transfer agents had to examine the creditworthiness of the person 
behind each certificate being presented. Specifically, the program 
establishes requirements for its members with respect to guaranteeing 
and accepting securities certificates. The indorsing signature on a 
securities certificate is guaranteed, typically by a financial 
institution, by the placement of a signature of the guarantor or its 
representative and a medallion stamp backed by a surety bond which, in 
effect, states that in event of mishap, the surety will pay for any 
damages incurred as a result of a forged signature if the guarantor 
does not pay.\266\ With these assurances of financial safety, a 
transfer agent is able to accept a securities certificate without 
further examination or delay, as is required by the terms of the 
program.\267\ Rule 17Ad-15 requires transfer agents to establish 
written standards for the acceptance of signature guarantees, and it 
authorizes signature guarantee programs. It also enables transfer 
agents to reject a request for transfer where a securities certificate 
is not guaranteed and bears no medallion stamp or where the guarantor 
is neither a member nor a participant in a signature guarantee 
program.\268\
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    \264\ Exchange Act Rule 17Ad-15, 17 CFR 240.17Ad-15.
    \265\ Exchange Act Section 17A(d)(5), 15 U.S.C. 17q-1(d)(5).
    \266\ The UCC provides: ``A person who guarantees a signature of 
an indorser of a securities certificate warrants that at the time of 
signing: (1) The signature was genuine; (2) the signer was an 
appropriate person to indorse, or if the signature is by an agent, 
the agent had actual authority to act on behalf of the appropriate 
person; and (3) the signer had legal capacity to sign.'' U.C.C. 8-
306.
    \267\ There are currently three organizations that provide 
signature guarantee programs to their members: Securities Transfer 
Agent Medallion Program, Stock Exchange Medallion Program, and New 
York Stock Exchange Medallion Program. See, e.g., Signature 
Guarantees: Preventing the Unauthorized Transfer of Securities, SEC, 
http://www.sec.gov/answers/sigguar.htm.
    \268\ See Acceptance of Signature Guarantees from Eligible 
Guarantor Institutions, Exchange Act Release No. 30146 (Jan. 6, 
1992), 57 FR 1082 (Jan. 10, 1992) (adopting release for Rule 17Ad-
15).
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    Rule 17Ad-16 requires a registered transfer agent to provide 
written notice to an ``appropriate qualified registered security 
depository'' (i.e., DTC) \269\ when terminating or assuming transfer 
agent services on behalf of an issuer or when changing its name or 
address.\270\ The rule is intended to address the problem of 
unannounced transfer agent changes that adversely affect the prompt 
transfer of securities certificates by causing needless delays, costs, 
and risks.\271\ Depositories and other entities in the marketplace must 
have the correct information in order to send transfer instructions to 
the appropriate transfer agent at the correct address. In addition to 
causing delay in execution of the instructions, certificates sent to 
the wrong address may result in a loss of certificates.
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    \269\ Rule 17Ad-16 defines an ``appropriate qualified registered 
securities depository'' as the ``qualified registered securities 
depository'' that the Commission so designates by order or, in the 
absence of such designation, the qualified registered securities 
depository that is the largest holder of record of all qualified 
registered securities depositories as of the most recent record 
date. In 1995, the Commission issued an order approving a DTC rule 
filing in which DTC was designated as the ``appropriate qualified 
registered securities depository'' to receive notices of transfer 
agent changes pursuant to Rule 17Ad-16 in order to eliminate 
uncertainty about where registered transfer agents should direct 
Rule 17Ad-16 notices, and to reduce unnecessary costs and 
administrative burdens for transfer agents and registered securities 
depositories. See Securities Exchange Act Release No. 35378 (Feb. 
15, 1995), 60 FR 9875 (Feb. 22, 1995) (File No. SR-DTC-95-02).
    \270\ Exchange Act Rule 17Ad-16, 17 CFR 240.17Ad-16.
    \271\ Adopting Release for Rule 17Ad-16, supra note 147.
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    Rule 17Ad-17 is designed to ensure that the transfer agents, 
brokers, dealers, and other financial intermediaries make adequate 
efforts to find lost securityholders.\272\ It was first adopted in 1997 
\273\ and later amended at the beginning of 2013.\274\ The rule defines

[[Page 81968]]

``lost securityholder'' as a securityholder for whom an item of 
correspondence sent to his or her last known address was ``returned as 
undeliverable'' and requires transfer agents, brokers, and dealers to 
conduct two database searches in their efforts to locate a lost 
securityholder. It defines ``unresponsive payee'' to mean a 
securityholder to whom a paying agent has sent a regularly scheduled 
check which was not cashed or otherwise negotiated before the earlier 
of either the paying agent's sending the next regularly scheduled check 
or of 6 months after the sending of the not yet negotiated check.\275\ 
Any ``paying agent,'' defined for purposes of Rule 17Ad-17 as ``any 
broker, dealer, investment advisor, indenture trustee, custodian, or 
any other person that accepts payments from the issuer of a security 
and distributes the payments to the holders of the security,'' shall 
provide to each unresponsive payee not less than one written notice 
stating that such payee has been sent a check that has not yet been 
negotiated.
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    \272\ Exchange Act Rule 17Ad-17, 17 CFR 204.17Ad-17.
    \273\ Lost Securityholders, Exchange Act Release No. 39176 (Oct. 
1, 1997), 62 FR 52229 (Oct. 7, 1997).
    \274\ Lost Securityholders and Unresponsive Payees, Exchange Act 
Release No. 68668 (Jan. 16, 2013), 78 FR 4768 (Jan. 23, 2013) 
(``Adopting Release for 17Ad-17 Amendments'').
    \275\ Id.
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    Rule 17Ad-19 was adopted in 2003 and requires every transfer agent 
to establish and implement written procedures for the cancellation, 
storage, transportation, destruction, or other disposition of 
securities certificates.\276\ Specifically, it requires transfer agents 
to mark each cancelled securities certificate with the word 
``cancelled,'' to maintain a secure storage area for cancelled 
certificates, to maintain a retrievable data base for of all its 
cancelled, destroyed, or otherwise disposed of certificates, and to 
have specific procedures for the destruction of cancelled certificates. 
The rule was adopted in response to a series of major thefts of 
cancelled certificates from transfer agent facilities, after which the 
stolen certificates were recirculated into the marketplace on a massive 
scale and fraudulently sold or used as loan collateral.\277\
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    \276\ Exchange Act Rule 17Ad-19, 17 CFR 240.17Ad-19.
    \277\ See 17Ad-19 Adopting Release, supra note 2. We note that 
in more than a decade since the adoption of Rule 17Ad-19, we are not 
aware of any major thefts of cancelled securities certificates or 
their unlawful recirculation back into the marketplace.
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    Rule 17Ad-20 prohibits registered transfer agents from effecting 
the transfer of any equity security registered pursuant to Section 12 
or that subjects an issuer to reporting under Section 15(d) of the 
Exchange Act if such security is subject to any restriction or 
prohibition on transfer to or from a securities intermediary in its 
capacity as such.\278\ In the 2004 adopting release for the rule, the 
Commission observed that issuers imposing such restrictions on transfer 
to intermediaries believe that ``precluding ownership by certain 
securities intermediaries forces broker-dealers to deliver certificates 
on each transaction and eliminates the ability of naked short sellers 
to maintain a naked short sale position.'' \279\ The Commission 
believed Rule 17Ad-20 was necessary to prevent transfer agent 
facilitation of the transfer of securities subject to such 
restrictions, because these types of restrictions disrupted prompt and 
efficient clearing and settlement in the U.S. securities markets.
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    \278\ Exchange Act Rule 17Ad-20, 17 CFR 240.17Ad-20.
    \279\ See Issuer Restrictions or Prohibitions on Ownership by 
Securities Intermediaries, Exchange Act Release No. 50758, text 
following n.41 (Nov. 30, 2004), 70 FR 70852 (Dec. 9, 2004) (adopting 
release for Rule 17Ad-20). See also U.C.C. 8-501 et seq.
---------------------------------------------------------------------------

    Two rules relate to Year 2000 compliance. Rule 17Ad-18 (Year 2000 
Reports to be Made by Certain Transfer Agents) was adopted by the 
Commission on July 13, 1998 and required non-bank transfer agents to, 
among other things, file a report attesting to the Y2K compliance of 
their mission critical computer systems by August 31, 1998.\280\ The 
rule also required non-bank transfer agents to notify the SEC of any 
material Y2K problems that would affect the millennium transition. 
Similarly, Rule 17Ad-21T required non-bank transfer agents to ensure 
that their mission critical computer systems were Year 2000 compliant 
by August 31, 1999 or to fix any non-compliant systems by November 5, 
1999.\281\ The purpose was to reduce risk to investors and the 
securities markets that were posed by non-bank transfer agents that had 
not adequately prepared their computer systems for millennium 
transition.
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    \280\ Exchange Act Rule 17Ad-18, 17 CFR 240.17Ad-18.
    \281\ Exchange Act Rule 17Ad-21T, 17 CFR 240.17Ad-21T.
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B. Bank and Internal Revenue Service Regulations

    There are approximately 95 registered transfer agents that are 
banks or subsidiaries of banks. For national banks and banks operating 
under the Code of Law for the District of Columbia, the ARA is the 
Office of the Comptroller of the Currency (``OCC''); for State member 
banks, subsidiaries thereof, bank holding companies, and bank 
subsidiaries thereof the ARA is the Federal Reserve Board; and for 
banks insured by the FDIC (non-members of the Federal Reserve), the ARA 
is the FDIC. Collectively, we refer to transfer agents registered with 
the OCC, FDIC, or Federal Reserve Board as ``bank transfer agents.'' 
For non-bank transfer agents (i.e., all other transfer agents), the ARA 
is the Commission.\282\
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    \282\ Exchange Act Section 3(a)(34), 15 U.S.C. 78c(a)(34).
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    Prior to the 1975 Amendments and the adoption of the Commission's 
transfer agent rules discussed in Section IV.A above, many of the 
organizations performing transfer agent services were banks or trust 
companies regulated by bank regulators. As noted in the Unsafe 
Practices Study, at that time, ``[t]he power of the bank regulatory 
officials over the transfer function [was] not specific. Rather their 
concern [was] whether the performance of the transfer function may 
endanger the financial stability of the bank.'' \283\ Today, pursuant 
to the 1975 Amendments and the Commission's transfer agent rules 
enacted thereunder, bank transfer agents must comply with both the 
Commission's transfer agent rules and any applicable rules promulgated 
by their ARA. Accordingly, bank transfer agents who are required to 
register as a transfer agent under the Exchange Act initially register 
with their appropriate ARA, but must file an annual Form TA-2 with the 
Commission.\284\ The bank ARAs have not promulgated separate rules 
designed to address specifically the transfer functions of bank 
transfer agents, but instead generally require bank transfer agents to 
comply with the Commission's transfer agent rules. OCC, for example, 
explicitly applies the Commission's transfer agent rules to the 
``domestic activities of registered national bank transfer agents.'' 
\285\ Similarly, the Federal Reserve Board's rules provide that the 
Commission's transfer agent rules ``apply to member bank transfer 
agents.'' \286\ The FDIC has stand-alone registration requirements for 
transfer agents and may examine transfer agents for both safety and 
soundness considerations under applicable banking regulations and for

[[Page 81969]]

compliance with the Commission's transfer agent rules.\287\
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    \283\ See Unsafe Practices Study, supra note 17, at 38. In 
contrast, the Exchange Act and the rules and regulations promulgated 
thereunder, including the Commission's transfer agent rules, are 
focused on protecting investors and the securities markets. See Rule 
17Ad-1 through 17Ad-7 Adopting Release, supra note 145 (noting the 
importance of avoiding impediments to ``the Commission's efforts to 
provide necessary or appropriate regulations for transfer agents in 
the broader context of the establishment of a national system for 
the prompt and accurate clearance and settlement of securities 
transactions.'').
    \284\ See supra Section IV.A.1.
    \285\ 12 CFR 9.20.
    \286\ 12 CFR 208.31.
    \287\ See FDIC Trust Examination Manual, sec. 11.B.1.b 
(Statutory Framework), available at https://www.fdic.gov/regulations/examinations/trustmanual/section_11/section11toc.html 
(``Registered Transfer Agent Examination Manual'').
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    With respect to examination and enforcement, both the ARA and the 
Commission have examinations powers over bank transfer agents, however, 
the Commission must provide notice to the appropriate ARA prior to 
conducting an examination and to arrange for a joint examination where 
desired.\288\ In addition, both the Commission and the ARA have 
enforcement authority over bank transfer agents.\289\
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    \288\ See Exchange Act Section 17(b), 15 U.S.C. 78q(b).
    \289\ See generally, Exchange Act Section 17A(d), 15 U.S.C. 78q-
1(d).
---------------------------------------------------------------------------

    In addition to complying with the Commission's transfer agent 
rules, bank transfer agents must also comply with their ARA's rules and 
standards. Those may supplement or exceed the Commission's rules. In 
part, this may be due to the fact that a bank transfer agent's 
activities could impact the proper functioning of the bank itself. As 
the FDIC explains in Section 11 of its Trust Examination Manual, one 
rationale for its transfer agent examination program is to ``to detect 
and prevent situations which might threaten the viability of banks 
through diminution of their capital accounts.'' \290\ It further notes 
that ``to the extent that a registered transfer agent fails to conduct 
transfer agent operations in a safe and efficient manner . . . the 
transfer agent function could incur contingent liabilities or estimated 
losses which could adversely impact the bank's capital accounts.'' 
\291\
---------------------------------------------------------------------------

    \290\ See Registered Transfer Agent Examination Manual, supra 
note 287, at sec. 11.B (Introduction discussing the rationale for 
transfer agent examinations).
    \291\ Id. at sec. 11.B.1.b (The Statutory Framework).
---------------------------------------------------------------------------

    As a result, for example, the FDIC examines its transfer agents for 
internal control and risk management policies and procedures that are 
similar to what is required for banks.\292\ With respect to internal 
controls, the FDIC specifies not only what it expects from the agent in 
order to demonstrate compliance with the Commission's rules, but 
additional standards as well. These standards apply whether the 
transfer agent is housed within the bank's trust department, is its own 
operating unit, or if the transfer agent activities are outsourced. The 
FDIC specifies suggested means for ensuring control over physical 
security, such as controlled access, secure safes and cabinets, and 
maintenance of access logs, and generally expects to see management 
oversight of operations consistent with bank management oversight. 
Supervision of the transfer agent operations may be delegated, but 
ultimately rests with the bank's Board and senior management.\293\
---------------------------------------------------------------------------

    \292\ Id. at sec. 11.G (Management), sec. 11.H (Internal 
Controls).
    \293\ Id.
---------------------------------------------------------------------------

    Separately, depending on its duties, an OCC-registered transfer 
agent also may have to comply with statutory requirements for the 
treatment of ``assets held in any fiduciary capacity.'' \294\ For 
example, entities servicing in a fiduciary capacity may be required to 
segregate the fiduciary funds from the ``general assets'' of the bank 
and have a separate accounting for transactions involving the 
segregated funds.\295\
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    \294\ 12 U.S.C. 92a(c). See also 12 CFR 9.2 (``Fiduciary 
capacity'' includes transfer agents and registrars of stocks and 
bonds).
    \295\ 12 U.S.C. 92a(c).
---------------------------------------------------------------------------

    In addition, depending on the nature and scope of the services that 
transfer agents provide, they must comply with certain regulations and 
other guidance issued by the U.S. Department of the Treasury 
(``Treasury'') and the Internal Revenue Service. For example, transfer 
agents track and report to the Internal Revenue Service the dividend 
income and share sale activity they facilitate on behalf of issuers via 
Form 1099 reporting,\296\ and follow federal law requirements 
concerning tax withholding, where appropriate.\297\
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    \296\ See 2016 Instructions for Form 1099-DIV, available at 
http://www.irs.gov/pub/irs-pdf/i1099div.pdf (last visited November 
20, 2015) (generally for information regarding disclosure of 
dividend payments).
    \297\ For example, the Foreign Account Tax Compliance Act 
(``FATCA''), enacted in 2010, is intended to reduce tax evasion by 
U.S. individuals with respect to income from financial assets held 
outside the United States by requiring foreign financial 
institutions to, among other things, report directly to the Internal 
Revenue Service certain information about financial accounts held by 
U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold 
a substantial ownership interest. See Hiring Incentives to Restore 
Employment Act, Pub. L. 111-147, Sec. Sec.  501-541 (1986). Under 
FATCA, foreign financial institutions such as investment funds 
domiciled outside the United States are permitted to contract with 
their transfer agents or other agents to perform certain due 
diligence and other FATCA obligations on their behalf. A transfer 
agent's service agreement may take into account these new 
responsibilities, under which the transfer agent may be required to 
perform due diligence on all investors listed in the investor 
record, report on U.S. individuals and institutions investing in the 
fund, and apply FATCA withholding to certain payments. For more 
information on regulations, rulings, notices, announcements, and 
other FATCA-related guidance or requirements for financial 
institutions, see, e.g., FATCA- Regulations and Other Guidance, IRS, 
http://www.irs.gov/Businesses/Corporations/FATCA-Regulations-and-Other-Guidance.
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C. SRO Rules and Requirements Applicable to Transfer Agents

    This section discusses some of the SRO rules and requirements 
applicable to transfer agents. While we focus here on NYSE and DTC 
requirements, we do so by way of example only. Other SROs may have 
additional rules which could apply to transfer agents in different 
contexts.
1. NYSE Requirements
    Transfer agents for NYSE listed securities are also subject to NYSE 
requirements. The requirements focus on (i) dual registrars and 
transfer agents; (ii) turnaround times; (iii) capitalization; and (iv) 
insurance coverage. The requirements also address transfer agent 
personnel, safeguarding, and co-transfer agents.
    First, the NYSE Listed Company Manual (``NYSE LCM''), Section 
601.01(B), provides that one person may serve as both registrar and 
transfer agent subject to compliance with the following conditions: (i) 
Meeting insurance and net capital requirements (discussed in more 
detail below); (ii) maintaining the functions separately and distinctly 
with appropriate internal controls; (iii) annual review of such 
internal controls by the transfer agent's independent auditors; (iv) 
submitting financial statements to the exchange; and (v) obtaining a 
certification from the transfer agent's insurer that NSYE insurance 
requirements have been met. This provision is less restrictive than 
stock exchange prohibitions on serving as a dual registrar and transfer 
agent that existed in earlier eras.\298\ It is the understanding of the 
Commission staff that outside or independent registrars are rarely used 
today.\299\
---------------------------------------------------------------------------

    \298\ See Rockwell Study, supra note 19, at 101 (1969 study 
discussing NYSE prohibition on serving as dual registrar and 
transfer agent); Securities Exchange Act Release No. 21499, File No. 
SR-NYSE-84-33 (Nov. 19, 1984) (discussing prior 1971 NYSE rule 
change permitting banks and trusts to serve as dual registrar and 
transfer agent and approving NYSE rule change to eliminate 
prohibition on acting as dual transfer agent and registrar that had 
applied to transfer agents other than banks and trusts, subject to 
certain conditions).
    \299\ Separate registrars and transfer agents still were common 
between 1977 and 1983, when the Commission adopted the majority of 
its transfer agent rules. Although even by that point, stock 
exchanges had relaxed certain prohibitions on serving as dual 
transfer agent and registrar, the practice often was followed 
because many securities industry participants believed that the 
independent registrar served an audit function that protected 
investors. See Study of the Securities Industry: Hearings Before the 
Subcomm. on Commerce and Fin. of the H. Comm. on Interstate and 
Foreign Commerce, 92nd Cong. app. DD 2391 (1971) (``1971 Study of 
the Securities Industry Hearings'') (Statement of Herman W. Bevis, 
Executive Director of BASIC).

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[[Page 81970]]

    Second, as noted above, NYSE also imposes turnaround time 
requirements. NYSE LCM Section 601.01(A)(2) requires that routine 
transfers (as defined in Exchange Act Rule 17Ad-1) ``must be processed 
under normal conditions within 48 hours of receipt of the securities by 
the transfer agent at its address designated for registration of 
transfers.'' The 48 hour turnaround requirement was adopted by the NYSE 
in 1971 (originally as Rule 496) in the immediate wake of the transfer 
agent problems during the Paperwork Crisis.\300\ The Commission adopted 
its Rule 17Ad-2 turnaround requirement (providing for three day 
turnaround) approximately six years later in 1977. In the adopting 
release for Rule 17Ad-2, the Commission stated ``The adopted rules are 
not intended to and do not supersede any rules of self-regulatory 
organizations which impose more stringent performance standards.'' 
\301\
---------------------------------------------------------------------------

    \300\ See Securities Exchange Act Release No. 21499, File No. 
SR-NYSE-84-33 n.16 (Nov. 19, 1984) (noting the NYSE adopted the 48 
hour turnaround policy in 1971); 2011 NYSE Rule Archives, Rule 496.
    \301\ Rule 17Ad-1 through 17Ad-7 Adopting Release, supra note 
145, at 32404 n.4.
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    Third, NYSE LCM Section 601.01(A)(1)(i) requires that a transfer 
agent must have at least $10 million in ``capital, surplus (both 
capital and earned), undivided profits, and capital reserves.'' Where a 
transfer agent is unable to meet this capital requirement, NYSE LCM 
Section 601.01(A)(12) provides for a lower alternative capital standard 
of $2 million that the transfer agent may meet if it maintains certain 
additional insurance coverage.\302\ The requirements may also be 
satisfied by a parent company.\303\ Fourth, NYSE LCM Section 
601.01(A)(1)(ii) requires that a transfer agent maintain insurance 
coverage of at least $25 million ``to protect securities while in 
process.'' \304\
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    \302\ See NYSE Listed Co. Manual Sec.  601.01(A)(12) (2013) 
(making the lower capital standard conditional on the maintenance by 
the transfer agent of ``errors and omissions insurance coverage in 
an amount which, taken together with its capital, surplus (both 
capital and earned), undivided profits, and capital reserves, equals 
at least $10,000,000 and, provided further, that such transfer agent 
maintains the insurance required by Para.601.01(A)(1)(ii).'').
    \303\ NYSE Listed Co. Manual Sec.  601.01(A)(10) (2013).
    \304\ NYSE Listed Co. Manual Sec.  601.01(A)(1) (2013).
---------------------------------------------------------------------------

    The NYSE also requires transfer agents to be staffed with 
``experienced personnel qualified to handle so-called `legal terms' and 
to advise on and handle other transfer problems.'' \305\ A transfer 
agent is also required to assume responsibility and liability for 
securities in its possession and must ``provide adequate facilities for 
the safekeeping of securities in its possession or under its control.'' 
\306\ Additional provisions address other items specific to the NYSE, 
co-transfer agents, and independent registrars.\307\
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    \305\ NYSE Listed Co. Manual Sec.  601.01(A)(6) (2013).
    \306\ NYSE Listed Co. Manual Sec.  601.01(A)(4),(7) (2013).
    \307\ See generally, NYSE Listed Co. Manual Sec.  601.01(A)-(D) 
(2013).
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2. DTC Requirements
    Transfer agents who participate in DRS must comply with DTC rules 
and regulations. Many transfer agents participate in DRS, especially 
because national U.S. securities exchanges, including NYSE and NASDAQ, 
require newly listed securities to be DRS eligible.\308\
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    \308\ See NYSE Listed Co. Manual Sec.  501.00 (2013) (requiring 
``all securities listed on the Exchange [to] be eligible for a 
direct registration system operated by a securities depository''); 
NASDAQ Rule 5210(c) (requiring ``all securities initially listing on 
Nasdaq, except securities which are book-entry only, [to] be 
eligible for a Direct Registration Program operated by a clearing 
agency registered under Section 17A of the [Exchange] Act.'').
---------------------------------------------------------------------------

    DTC requires transfer agents to satisfy four primary requirements 
before being eligible to process DRS transactions, including the 
following:

     Because DRS is integrated for communication purposes 
into DTC's Profile system, transfer agents must become ``Limited 
Participants'' in DTC by submitting an application to the DRS 
Program Administration for DTC approval.\309\
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    \309\ Profile was implemented by DTC in 2000 to ``electronically 
convey an investor's request to move from one form of securities 
ownership to another. Profile takes the place of the paper 
transaction advice for electronic movement of securities positions 
between street-name positions and direct registration book-entry 
positions. Profile includes all the data fields listed on the paper 
transaction advice, including the investor's broker-dealer account 
number, investor's DRS account number, Tax I.D./Social Security 
number, full registration, and CUSIP.'' DTC, An Overview, available 
at http://www.dtc.org/dtcpublic/html/lob2/prod6/drsdetail.htm. In 
addition, since 2001, the Profile Surety Program has provided for a 
surety bond to help mitigate the risks for parties using DRS and 
Profile, similar to a medallion stamp on a certificated security.
---------------------------------------------------------------------------

     Participate in DTC's FAST program by becoming a FAST 
agent and agreeing to DTC's Operational Criteria for FAST Transfer 
Agent Processing (``FAST criteria''). The FAST criteria outline 
rules for securities transfers through FAST, DTC's Operational 
Arrangements, and DTC's Balance Certificate Agreement. The 
Operational Arrangements include, among other things, DTC's 
requirements for issues to be DTC-eligible, additional transfer 
requirements for FAST agents, record date requirements, and dividend 
and income notification procedures. By signing the Balance 
Certificate Agreement with DTC, transfer agents agree to maintain 
DTC-eligible inventory in the form of jumbo certificates registered 
in the name of DTC's nominee, Cede & Co., and that they will 
electronically reconcile DTC participants' daily deposit and 
withdrawal activities.
     Establish and maintain electronic communication links 
with DTC through Profile so that DTC participants (e.g., broker-
dealers) and limited participants (e.g., transfer agents) can 
communicate investors' instructions electronically. DTC requires 
transfer agents to complete DRS and Profile training before using 
Profile. Profile includes data fields that would be included in a 
traditional paper transaction, including the investor's broker-
dealer account number, investor's DRS account number, Tax I.D./
Social Security number, and CUSIP numbers of the securities. Once 
those instructions are transmitted, the actual movement of 
securities ownership takes place in DRS.
     Participate in DTC's Profile Surety Program, which 
functions similarly to the medallion guarantee programs for paper 
based transactions by providing for a surety bond to back the 
representations made by the transacting parties.\310\
---------------------------------------------------------------------------

    \310\ See Securities Exchange Act Release No. 41862 (Sept. 10, 
1999), 64 FR 51162, 51163 (Sept. 21, 1999) (File No. SR-DTC-99-16). 
See also supra note 86 (regarding FAST requirements).

    Additionally, DTC criteria that must be met by a securities issuer 
to ensure its securities are eligible for DRS and Profile may 
indirectly apply to transfer agents acting on behalf of the issuer. For 
example, DTC requires issuers to mail DRS book-entry statements to 
registered owners evidencing their holdings at least once a year.\311\ 
Transfer agents acting on behalf of issuers wishing to participate in 
DRS may therefore be asked by their issuer clients to handle this 
statement mailing function.
---------------------------------------------------------------------------

    \311\ DTC requirements for DRS and Profile eligible transfer 
agents and issuers are discussed in greater detail at Direct 
Registration System, DTCC, http://www.dtc.org/dtcpublic/html/lob2/prod6/drsdetail.htm (last visited November 20, 2015).
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D. Regulation of Transfer Agents Under State Law

    Transfer agents are subject indirectly to state corporation law 
when acting as agents of corporate issuers, and they are directly 
subject to state commercial law, principal-agent law, and other laws, 
many of which are focused on corporate governance and the rights and 
obligations of issuers and securityholders.\312\ While a full 
discussion of all state laws applicable to transfer agents is beyond 
the scope of this release, the transfer of investment securities is 
primarily governed by UCC Article 8, which has been adopted by the 
legislatures of all 50 states,\313\ the District of Columbia, Puerto 
Rico, and the Virgin Islands. Article 8 was most

[[Page 81971]]

recently revised in 1994 to introduce the concept of a securities 
entitlement as a way to simplify and clarify the rules for the modern 
street name system.\314\ Although UCC Article 8 is intended to provide 
a uniform and practical definition of the responsibilities of issuers 
and their agents in issuing and transferring securities, it does not 
encompass or preempt the complete body of state laws that may relate to 
transfer agent activity.\315\ Transfer agents may also be subject to 
the laws of the states of incorporation for both issuers and their 
securityholders that apply to specific services provided by the 
transfer agent, such as data privacy.\316\
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    \312\ See, e.g., Del. Code Ann. tit. 8 (Delaware General 
Corporation Law), Del. Code Ann. tit. 6, art. 8 (Investment 
Securities), Restatement (Third) of Agency (2006).
    \313\ Louisiana has enacted the provisions of Article 8 into the 
body of its law, among others, but has not adopted the UCC as a 
whole.
    \314\ U.C.C. 8-501 et seq. (1994).
    \315\ For example, in addition to UCC Article 8, various state 
laws relating to contracts, principal agent relationships, estoppel, 
fraud, bankruptcy, escheatment (or abandoned property) and other 
areas may apply to a specific transaction or situation.
    \316\ For example, California's privacy statute which became 
effective in 2003, was the first significant effort by a state to 
assert substantive regulation of privacy of customer data. See Cal. 
Civ. Code Sec. Sec.  1798.80-1798.84. While state regulations vary 
across jurisdictions, other states have followed suit with similar 
regulatory initiatives. See, e.g., Minn. Stat. Sec.  325E.61, Neb. 
Rev. Stat. Sec. Sec.  87-801-807.
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V. Evolution of Recordkeeping, Transfer, and Related Transfer Agent 
Activities

    This section discusses some of the core recordkeeping, transfer, 
and other activities that transfer agents engage in, the manner in 
which the current transfer agent rules apply to those activities, and 
how those activities have evolved over time. The world looks very 
different today than it did in 1977, when the first transfer agent 
rules were adopted. Since then, the increased use and decreased cost of 
technology, the expansion of corporate actions to bring securities into 
the public market, the continued dematerialization of securities, and 
other changes have resulted in significant evolution and changes to the 
types of services transfer agents provide and the manner in which they 
provide them. At the same time, with limited exceptions, the 
Commission's transfer agent rules have not been updated. As a result, 
there may be divergence between modern transfer agents' activities and 
the activities that the Commission's rules are designed to regulate.

A. Recordkeeping, Transfer, Issuance, and Corporate Actions

    All transfer agents perform a number of core recordkeeping, 
transfer, and other services related to their primary function of 
facilitating the transfer of securities. This section discusses some of 
the activities transfer agents engage in with respect to these services 
and the relevant transfer agent rules applicable to them.
1. Recordkeeping: Rules 17Ad-9, 10, and 11
    Transfer agents have direct responsibility for maintaining on 
behalf of the issuer the currency and integrity of the official list of 
the registered owners of an issuer's stocks and bonds, how those stocks 
and bonds are held, and how many shares or bonds each investor owns. 
This list is defined by Rule 17Ad-9(b) as the master securityholder 
file.\317\ Without the master securityholder file, registered owners of 
an issuer's securities cannot be assured that they are recognized as 
such by the issuer and that they will receive corporate distributions, 
communications, and the other rights of security ownership to which 
they are entitled.\318\
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    \317\ See Exchange Act Rule 17Ad-9(b), 17 CFR 240.17Ad-9(b).
    \318\ See generally, e.g., Del. Code Ann. tit. 8 Sec. Sec.  170, 
173 (authorizing a corporation to pay cash and stock dividends under 
certain circumstances); Exchange Act Rule 14c-3, 17 CFR 240.14c-3 
(requirement to furnish an annual report to securityholders); Del. 
Code Ann. tit. 8 Sec.  212 (providing for voting rights of 
stockholders and permitting them to vote by proxy); Del. Code Ann. 
tit. 8 Sec.  222 (requirement to send stockholder notice in advance 
of stockholder meeting).
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    Transfer agents also maintain and keep current the control book 
which is defined by Rule 17Ad-9(d) as the record of the total number of 
shares of equity securities or the principal dollar amount of debt 
securities authorized and issued by the issuer for each issue the 
transfer agent services.\319\ As discussed above in Section IV.A.3, one 
of the main purposes of the control book is to allow the transfer agent 
to monitor the number of securities outstanding to prevent overissuance 
because the total number of shares reflected in the aggregate on the 
master securityholder file should match the number of shares authorized 
in the control book.\320\
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    \319\ Exchange Act Rule 17Ad-9(d), 17 CFR 240.17Ad-9(d).
    \320\ When acting in this capacity, a transfer agent may be 
referred to as a ``registrar.'' See Exchange Act Section 3(a)(25), 
15 U.S.C. 78c(a)(25).
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    Finally, pursuant to Rule 17Ad-6, transfer agents maintain the 
transfer journal.\321\ The transfer journal can be a useful tool for 
transfer agents and issuers. For example, when reviewed in conjunction 
with the master securityholder file, the transfer journal may provide 
historical information regarding the issuance and transfer of a 
specific security or the holdings of a specific securityholder. The 
transfer agent rules do not define transfer journal nor codify 
requirements with respect to the transfer journal.
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    \321\ Exchange Act Rule 17Ad-6, 17 CFR 240.17Ad-6.
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    The primary recordkeeping rules that apply to the core records 
discussed above include Rules 17Ad-9, 17Ad-10, and 17Ad-11. These 
recordkeeping requirements are supplemented and reinforced by the 
recordkeeping and record retention and preservation requirements found 
in Rules 17Ad-6 and 17Ad-7. Rules 17Ad-9 and 17Ad-10 define the term 
master securityholder file, provide the specific information regarding 
a securityholder that must be maintained on the master securityholder 
file, defined in the rules as certificate detail,\322\ and set specific 
timing deadlines for recording this information.\323\ In addition, Rule 
17Ad-10 imposes obligations on transfer agents to carry over any 
existing certificate detail where they succeed to the maintenance of a 
master securityholder file that was maintained in an earlier format or 
by a predecessor transfer agent.\324\
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    \322\ See supra Section IV.A.3. We note that the ``certificate 
detail'' requirements in Rule 17Ad-9 apply to both certificated 
securities and book-entry positions. Further, while we focus here on 
Rule 17Ad-9's certificate detail requirements, Rule 17Ad-9(a)(4) is 
relevant to other rules that depend on obtaining securityholders' 
address information such as Rules 17Ad-12 and 17Ad-17. We also note 
that Rule 17Ad-9(b) permits registered investment companies to 
maintain multiple, but linked, automated files with respect to book-
entry securities.
    \323\ With certain exceptions, certificate details must be 
posted within five business days, unless a transfer agent is an 
``exempt transfer agent'' under Rule 17Ad-4(b) or an issuer acting 
as its own transfer agent for its own securities. Exchange Act Rule 
17Ad-10(a)(2)(i)-(ii), 17 CFR 240.17Ad-10(a)(2)(i)-(ii).
    \324\ See Exchange Act Rule 17Ad-10(h), 17 CFR 240.17Ad-10(h). 
As discussed below in Section VI.B, the rule does not require 
predecessor transfer agents to turn over such information to the 
issuer or to a successor transfer agent.
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    The Commission's transfer agent rules seek to promote accurate 
recordkeeping by transfer agents by establishing specific requirements 
when a transfer agent identifies a specific type of discrepancy in its 
records referred to in Rule 17Ad-9(g) as a record difference.\325\ Rule 
17Ad-10(b) requires transfer agents to ``exercise diligent and 
continuous attention to resolve all record differences.'' Further, Rule 
17Ad-10(b) requires that every recordkeeping transfer agent maintain 
and keep current an accurate master securityholder file and subsidiary 
files, and if a record difference is identified,

[[Page 81972]]

then both the master securityholder file and subsidiary files must 
accurately represent all relevant debits and credits until the record 
difference is resolved.\326\
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    \325\ Exchange Act Rule 17Ad-9(g), 17 CFR 240.17Ad-9(g). For 
additional discussion of the goals and objectives of the 
Commission's transfer agent rules, see supra Section IV.
    \326\ Exchange Act Rule 17Ad-10(b), 17 CFR 240.17Ad-10(b). We 
also note that, as part of a transfer agent's obligation to monitor 
against overissuances, Rule 17Ad-10(g) imposes buy-in obligations 
when an actual physical overissuance has occurred that was caused by 
the transfer agent. Exchange Act Rule 17Ad-10(g), 17 CFR 240.17Ad-
10(g). There are limited exceptions to this requirement. See 
Exchange Act Rules 17Ad-10(g)(2)-(3), 17 CFR 240.17Ad-10(g)(2)-(3).
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    As discussed above, if a record difference exists for ``more than 
thirty calendar days,'' it becomes an aged record difference under Rule 
17Ad-11(a)(2).\327\ Depending upon the aggregate market value of the 
aged record differences for a particular issuer and the capitalization 
of the issuer, Rule 17Ad-11(b) may require the transfer agent to send a 
monthly report to the affected issuer.\328\ Depending on the total 
number of issuers serviced and the aggregate market value of all record 
differences across all issuers serviced, the transfer agent may also 
need to make reports to its ARA pursuant to Rule 17Ad-11(c).\329\
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    \327\ Exchange Act Rule 17Ad-11(a)(2), 17 CFR 240.17Ad-11(a)(2).
    \328\ Exchange Act Rule 17Ad-11(b), 17 CFR 240.17Ad-11(b). Rule 
17Ad-11(b) also requires, without imposing any minimum threshold as 
with the amount of aged record differences, that the transfer agent 
report to issuers concerning any securities bought-in pursuant to 
Rule 17Ad-10(g) or reported as bought-in pursuant to Rule 17Ad-10(c) 
during the preceding month.
    \329\ Exchange Act Rule 17Ad-11(c), 17 CFR 240.17Ad-11(c). The 
report to the ARA must also include information concerning buy-ins 
required by Rule 17Ad-10(g) when the aggregate market value of all 
buy-ins during a calendar quarter exceeds $100,000. Id.
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2. Securities Transfers, Exchanges, and Conversions: Rules 17Ad-9, 10, 
12, and 19
    Transfer agents are integrally involved in effecting transfers of 
ownership of securities, as well as exchanging and converting 
securities.\330\ For example, an equity sale would usually involve a 
transfer. In contrast, a stock-for-stock merger, where the equity 
security of Company A is exchanged for an equity security of Company B 
(and Company B is the disappearing company) would involve an exchange. 
Finally, a securityholder's election to convert a convertible debt 
security into an equity security would usually involve a conversion. 
While these transfer agent services vary in terms of definition, the 
transfer agent rules apply to all of them in substantially similar 
ways. Therefore, for the purposes of describing all of these services 
in the discussion that follows, we will focus on the activities and 
rules applicable to transfers.
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    \330\ The terms ``exchange'' and ``conversion'' are used in 
Exchange Act Section 3(a)(25) and in the Commission's transfer agent 
rules but are not defined in the Commission's transfer agent rules. 
The term ``exchange'' is commonly used to refer to the trading of 
specific securities for another asset, usually without an 
accompanying change in ownership. The term ``conversion'' is 
commonly used to refer to the changing into or substitution of one 
security for another security or asset under specific conditions, 
also without an accompanying change in ownership.
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    In connection with transfers of certificated securities, the first 
steps in the transfer process are to match the certificate detail with 
the master securityholder file, verify the signature guarantee, and 
then cancel the negotiable certificate that has been presented for 
transfer. With respect to verifying the signature, presentation by the 
transferor typically involves providing the transfer agent an indorsed 
security certificate bearing a medallion stamp. In some cases, the 
indorsement and assignment may be made not on the certificate itself 
but by an executed power of attorney authorizing the transfer of 
ownership on the books of the issuer.\331\
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    \331\ See supra note 18 (regarding powers of attorney).
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    Rule 17Ad-19 governs certificate cancellation and requires that 
``every transfer agent involved in the handling, processing, or storage 
of securities certificates shall establish and implement written 
procedures for the cancellation, storage, transportation, destruction, 
or other disposition of securities certificates.'' \332\ The rule 
grants transfer agents flexibility to develop their own procedures, but 
depending on which procedures they adopt (i.e., cancellation, 
destruction, or other disposition), they must comply with minimum 
requirements regarding three general areas: (i) The manner of 
cancellation and destruction of certificates; (ii) the storage and 
transport of cancelled certificates; and (iii) recordkeeping with 
respect to cancelled certificates.\333\
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    \332\ Exchange Act Rule 17Ad-19(b), 17 CFR 240.17Ad-19(b).
    \333\ Id.
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    Rule 17Ad-12 governs the safeguarding of cancelled certificates. 
First, certificates that are cancelled generally must be stamped or 
perforated with the word ``CANCELLED'' and, for any cancelled 
certificate that is subsequently destroyed, the destruction of 
certificates must be witnessed by authorized personnel of the transfer 
agent or its designee.\334\ Second, transfer agents must control access 
to the location where cancelled certificates are kept and transport of 
cancelled certificates must be made in a ``secure manner.'' \335\ If 
cancelled certificates are not destroyed, they must be retained for six 
years pursuant to Rule 17Ad-7(d).\336\ Furthermore, Rule 17Ad-12 
requires that cancelled certificates be ``held in safekeeping and . . . 
handled, in light of all facts and circumstances, in a manner 
reasonably free from risk of theft, loss or destruction (other than by 
a transfer agent's certificate destruction procedures pursuant to Sec.  
240.17Ad-19).'' Third, transfer agents must keep a record regarding 
each cancelled certificate that is in transit and records for each 
cancelled certificate and destroyed certificate that in both cases are 
``indexed and retrievable by CUSIP and certificate number.'' \337\ 
These records must be kept for three years.
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    \334\ Exchange Act Rules 17Ad-19(c)(2), (6), 17 CFR 17.24017Ad-
19(c)(2), (6). The requirement to stamp or perforate the certificate 
as cancelled does not apply where ``the transfer agent has 
procedures adopted pursuant to this rule for the destruction of 
cancelled certificates within three business days of their 
cancellation.'' In addition, a certificate may be marked 
``cancelled'' and stored for a period of time before being 
destroyed.
    \335\ Exchange Act Rules 17Ad-19(c)(1), (5), 17 CFR 240.17Ad-
19(c)(1), (5).
    \336\ We note that when the Commission adopted Rule 17Ad-19 in 
2003 addressing among other things the destruction of certificates, 
it did not amend Rule 17Ad-7(d) to delete the requirement to retain 
cancelled security certificates for six years. But concurrently in 
2003, the Commission amended Rule 17Ad-7(f) such that ``the records 
required to be maintained pursuant to Sec.  240.17Ad-6 may be 
retained using electronic or micrographic media. . . .'' See 
Exchange Act Rule 17Ad-7(f), 17 CFR 240.17Ad-7(f); Recordkeeping 
Requirements for Transfer Agents, supra note 215. We understand that 
many transfer agents today follow a practice of destroying 
certificates after a period of time in accordance with their 
individual policies and in compliance with Rule 17Ad-19 but keep 
electronic copies of the cancelled certificate by imaging it to 
comply with Rule 17Ad-7 as well as keeping the records required by 
Rule 17Ad-19(c)(4) for destroyed certificates.
    \337\ Exchange Act Rule 17Ad-9(c)(5), 17 CFR 240.17Ad-9(c)(5). 
The record regarding cancelled certificates in transit must show the 
certificate numbers and CUSIP numbers. The records regarding both 
cancelled certificates and destroyed certificates must include ``the 
CUSIP number, certificate number with any prefix or suffix, 
denomination, registration, issue date, and cancellation date.'' 
Exchange Act Rules 17Ad-9(c)(3)-(4), 17 CFR 240.17Ad-9(c)(3)-(4).
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    Once the old certificate has been cancelled, the next step in the 
transfer of a certificated security will generally involve recording 
the change of record ownership of the relevant securities on the master 
securityholder file. In the context of certificated securities, this is 
done by debiting the securities account of the transferor. Rule 17Ad-
9(f) defines the term ``debit'' as ``a cancellation of appropriate 
certificate detail from the master securityholder file.'' Because the 
cancellation date is one of the defined elements of certificate detail 
under Rule 17Ad-9, together Rules 17Ad-9(a)(6)

[[Page 81973]]

and 17Ad-10 have the effect of requiring that the cancellation date be 
posted to the master securityholder file, generally within five 
business days.\338\
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    \338\ Exchange Act Rules 17Ad-9-10, 17 CFR 240.17Ad-9-10. 
Moreover, Congress in the Dodd-Frank Act has taken another step to 
tighten recordkeeping of cancelled securities by adding 
``cancelled'' securities as a category of securities that must be 
reported to the Commission or its designee. See Exchange Act Section 
17(f)(1), 78 U.S.C. 187(f)(1).
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    The final step in the process of completing a transfer for a 
certificated security is for the transfer agent to issue (on behalf of 
the issuer) a new security to the transferee. The transfer agent's role 
in connection with the issuance stage of transfer is discussed in more 
detail in the next section below.
    For uncertificated securities, transfer agents do not issue or 
cancel physical securities certificates when transferring securities. 
Instead, they effect book-entry transfers by registering the change in 
ownership on the master securityholder file, which does not involve the 
physical issuance and cancelling of securities certificates. The term 
``registering'' means an official form of recording by a person charged 
with that function, which is accomplished under Exchange Act Rules 
17Ad-9(h) and 17Ad-10(e) by updating the master securityholder file, as 
discussed above. Book-entry transfer may be accomplished through DTC's 
DRS using DTC's Profile system.\339\ Once the transfer has been 
effected, the investor would receive from the transfer agent a 
statement of ownership that acknowledges his or her new DRS position.
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    \339\ See supra note 93.
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3. Securities Issuance: Rules 17Ad-1 and 2
    Transfer agents are also involved in the issuance of securities, 
which may be one of the final stages before completing a transfer, as 
discussed above, or could involve a primary offering of securities such 
as an initial public offering. Generally, from the perspective of the 
transfer agent facilitating a transfer, issuance will involve a credit 
to the transferee's securities account, as compared to the cancellation 
and transfer processes discussed above, which involve debiting the 
securities account of the transferor.
    The clock for turnaround under Rules 17Ad-1 and 17Ad-2 begins when 
a transfer agent receives an item and ends when a transfer agent issues 
the new security. Thus, from the transfer agent's perspective, issuance 
is what stops the clock. Rule 17Ad-2(a) generally has the effect of 
imposing a three day deadline on turnaround of transfer of a routine 
item.\340\ Rule 17Ad-1 provides in general terms that turnaround is 
achieved ``when transfer is accomplished.'' \341\ In turn, ``transfer 
is accomplished'' when ``all acts necessary to cancel the certificate 
or certificates presented for transfer and to issue a new certificate 
or certificates . . . are completed and the item is made available to 
the presentor by the transfer agent . . .'' \342\ Thus, with certain 
exceptions, the ``made available'' standard \343\ functions similar to 
a ``mailbox'' rule because the item is considered to have been made 
available when the transfer agent mails the new certificate to the 
transferee (or otherwise makes it available).
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    \340\ If a transfer agent fails to turnaround 90% of routine 
items received during a month within three business days of receipt, 
certain sanctions apply. See discussion supra Section IV.B for 
additional details on the turnaround requirements and requirements 
in the event of failure to meet the turnaround requirements.
    \341\ Rule 17Ad-1(c)(2) applies a different measurement of when 
turnaround is achieved when an outside registrar is involved: 
instead of the clock stopping when the new certificate is presented 
to the transferee, it stops when the item is ``made available'' to 
the outside registrar. Thus, turnaround will be accomplished when 
the transfer agent ``completes all acts necessary to cancel the 
certificate or certificates presented for transfer and to issue a 
new certificate or certificates, and the item is made available to 
an outside registrar.'' Exchange Act Rule 17Ad-1(c)(2), 17 CFR 
240.17Ad-1(c)(2).
    \342\ If the presentor has given special instructions, the 
timing is measured differently. See Exchange Act Rule 17Ad-1(d), 17 
CFR 240.17Ad-1(d).
    \343\ See Exchange Act Rule 17Ad-1(c)(1), 17 CFR 240.17Ad-
1(c)(1).
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    Upon issuing the new security to the transferee, the transfer agent 
must credit the securities account of the transferee receiving the new 
security. This is accomplished by posting to the master securityholder 
file all of the certificate detail information set forth in Rule 17Ad-
9(a), generally within five business days.\344\
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    \344\ See Exchange Act Rules 17Ad-9(a), 17Ad-10, 17 CFR 
240.17Ad-9(a), 17Ad-10. We note that, in the case of a cancellation, 
which involves a ``debit'' to the master securityholder file under 
Rule 17Ad-9, the cancellation date would be the only portion of the 
``certificate detail'' required to be posted to the master 
securityholder file. See Exchange Act Rule 17Ad-9, 17 CFR 240.17Ad-
9.
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    In the case of an uncertificated security, there is no certificate 
to cancel and no new certificate to be issued. Under Rule 17Ad-1(d), 
posting the new ownership information to the master securityholder file 
changes the ownership information of the securities account and 
``completes registration of change in ownership of all or a portion of 
those securities.''
    Transfer agents are also responsible for countersigning securities 
upon issuance, which provides critical authentication of a security by 
an independent, outside actor. In general, ``countersigning'' means a 
signature added to a document previously signed by another person for 
authentication or confirmation. The second signature confirms the first 
signature, and the two signatures together are intended to show the 
certificate's legitimacy. In the case of certificated securities, the 
first signer is typically an officer of the issuing corporation, and 
the countersigner is typically an independent officer of the issuer's 
transfer agent. The procedures involved in countersignature of physical 
certificates are not mandated by the Exchange Act,\345\ but are 
generally the product of other sources of law that either require them 
or otherwise address them in certain respects, such as by permitting 
them to be made by facsimile.\346\
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    \345\ As discussed in Section IV.A, the Exchange Act, however, 
includes countersigning certificates as one element of the 
definition of transfer agent in Section 3(a)(25).
    \346\ See, e.g., Del. Code Ann. tit. 8 Sec.  158 (``Any or all 
the signatures on the certificate may be a facsimile.'').
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    In the case of DRS shares, where no certificate exists, an investor 
has the option of having his or her ownership of securities registered 
in book-entry form on the issuer's records or on the books of the 
issuer's transfer agent, and in either case the investor receives a 
``statement of ownership.'' \347\ In either event, it is an important 
verification step in the issuance of a security and highlights the 
important role that transfer agents play as intermediaries for the 
public interest.
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    \347\ See Concept Release, Transfer Agents Operating Direct 
Registration System, Exchange Act Release No. 35038 (Dec. 1, 1994), 
59 FR 63652 (Dec. 8, 1994) (``Investors who choose to participate in 
a direct registration system could have their securities registered 
in book-entry form directly on the books of the issuer and could 
receive a statement of ownership in lieu of a securities 
certificate.'').
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4. Corporate Actions and Related Services: Rules 17Ad-1, 6, 10, 12, and 
13
    A corporate action is an event in the life of a security, typically 
instigated by the issuer, which affects a position in that 
security.\348\ Examples of common corporate actions include changes 
that affect capital structure, such as a merger or acquisition, and 
distributions to securityholders, such as a dividend distribution or 
principal or interest payment on a debt security. Corporate actions may 
also include bankruptcy or liquidation proceedings, conversions, 
warrants, exchange offers, subscription

[[Page 81974]]

rights, tender offers, and other events.\349\ Generally, corporate 
actions can be divided into two broad categories: Mandatory and 
voluntary (sometimes referred to as ``elective.'') Mandatory corporate 
actions usually affect all securityholders equally and the 
securityholder does not have different options from which to choose; 
voluntary corporate actions usually allow securityholders to choose 
among one or more different elections they can make.
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    \348\ Simmons and Dalgleish, Corporate Actions: A Guide to 
Securities Event Management 3-5 (2006).
    \349\ See id. (categorizing major types of corporate actions).
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    Transfer agents may perform a variety of roles and provide a 
variety of services, depending on the type and nature of the corporate 
action. For example, a transfer agent may take on the role of exchange 
agent in a mandatory corporate action, such as a stock-for-stock merger 
or a cash-for-stock merger. In a stock-for-stock merger the exchange 
agent might facilitate the surrender of outstanding securities for new 
securities, and in a cash-for-stock merger the exchange agent might 
facilitate the exchange of outstanding securities for cash.
    In both of these examples, under Rule 17Ad-10, the transfer agent 
performing exchange agent services generally must update the master 
securityholder file with certificate details within five business days. 
But because the transfer associated with some of the most common 
corporate actions qualify as non-routine items under Rule 17Ad-1, 
including transfers ``in connection with a reorganization, tender 
offer, exchange, redemption, or liquidation,'' \350\ the general three 
business day deadline for turnaround of routine items under Rule 17Ad-2 
may not apply. However, if a transfer agent makes a determination that 
a transfer does fall within Rule 17Ad-1(i)(5) and therefore is non-
routine, Rule 17Ad-6(a)(11) requires the transfer agent to maintain 
records documenting the basis for this determination.\351\ Other 
aspects of the processing of the corporate action may cause the 
corporate action to be classified as non-routine as well. For example, 
if a transfer associated with a corporate action involves a need to 
review ``explanations, or opinions of counsel before transfer may be 
effected,'' requires ``review of supporting documentation'' other than 
routine documentation, or includes a warrant, right, or convertible 
security ``presented for exercise or conversion'' or ``presented for 
transfer . . . within five business days'' before expiry it will be 
considered non-routine under Rule 17Ad-1.\352\
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    \350\ Exchange Act Rule 17Ad-1(i)(5), 17 CFR 240.17Ad-1(i)(5).
    \351\ A large portion of specific records that transfer agents 
are required to maintain under Rule 17Ad-6 and to retain for 
different periods of time under Rule 17Ad-7 relate to: (i) The 
classification of an item as routine or non-routine; (ii) tracking 
the compliance of the transfer agent with the performance standards 
for turnaround of routine items under Rule 17Ad-2(a); and (iii) the 
performance standards for processing of all items pursuant to Rule 
17Ad-2(b).
    \352\ Exchange Act Rule 17Ad-1(i), 17 CFR 17Ad-1(i).
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    Voluntary corporate actions, which permit securityholders to choose 
among different options, may result in the need for additional tasks 
and systems for transfer agents to process them. For example, in 
addition to the ordinary recordkeeping tasks, the transfer agent may be 
responsible for monitoring whether elections have been made by 
deadlines and for tracking such elections.
    In addition to the examples discussed above, transfer agent roles 
in connection with corporate actions may also include serving as: (i) 
Tender agent, when the transfer agent collects shares surrendered from 
securityholders and makes payments for the shares at a predetermined 
price; (ii) exchange agent, when the transfer agent collects shares 
surrendered from securityholders and issues, registers, and/or 
distributes shares of the bidding company's securities as compensation 
for tendered securities of the subject company; (iii) subscription 
agent, when the transfer agent invites existing equity securityholders 
of an issuer to subscribe to a new issuance of additional debt or 
equity of the issuer; (iv) conversion agent, for example when the 
transfer agent converts debt securities into equity securities; and (v) 
escrow agent, when the transfer agent holds an asset on behalf of one 
party for delivery to another party upon specified conditions or 
events.
    Finally, transfer agents providing corporate action services may be 
subject to Rule 17Ad-12 and 17Ad-13, regarding safeguarding 
requirements for funds and securities and an annual audit of internal 
control of safeguarding procedures. As discussed above, corporate 
actions may involve transfer agents making distributions on behalf of 
issuers to securityholders of cash and stock dividends as well as 
principal and interest payments on debt securities. Rule 17Ad-12(a) 
requires that:

    Any registered transfer agent that has custody or possession of 
any funds or securities related to its transfer agent activities 
shall assure that: (1) All such securities are held in safekeeping 
and are handled, in light of all facts and circumstances, in a 
manner reasonably free from risk of theft, loss or destruction . . 
.; and (2) All such funds are protected, in light of all facts and 
circumstances, against misuse.

    Rule 17Ad-13 requires every registered transfer agent to file an 
annual report with the Commission and the transfer agent's ARA prepared 
by an independent accountant concerning the transfer agent's system of 
internal accounting controls and procedures for, among other things, 
safeguarding of securities and funds. Specifically, Rule 17Ad-
13(a)(2)(iii) requires the report to cover ``[t]ransferring record 
ownership as a result of corporate actions'' and Rule 17Ad-13(a)(2)(iv) 
requires the report to cover ``[d]ividend disbursement or interest 
paying-agent activities.''

B. Annual Meeting, Proxy-Related Services, and Securityholder Services 
and Communications

    One of the key rights of securityholders is the right to vote their 
shares on important matters that affect the companies they own. 
Pursuant to state corporate law, registered securityholders may either 
attend a meeting to vote shares in person or authorize an agent to act 
as their ``proxy'' at the meeting to vote their shares pursuant to 
their voting instructions.\353\ Because most securityholders do not 
physically attend public company securityholder meetings, the corporate 
proxy is the principal means by which they exercise their voting 
rights.
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    \353\ See Del. Code Ann. tit. 8, Sec.  212(b), (c). A full 
discussion of the proxy system is beyond the scope. For more 
information on the proxy system, see Proxy Concept Release, supra 
note 112.
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    The process in the United States for distributing proxy materials 
and soliciting, tabulating, and verifying votes by securityholders is 
complex, especially with respect to beneficial securityholders.\354\ 
Most corporate issuers and securities intermediaries such as banks and 
brokers rely on a proxy service firm to perform these functions, which 
may include distributing and forwarding the proxy materials and 
collecting and tabulating voting instructions. Alternatively, some

[[Page 81975]]

issuers choose to engage their transfer agents for certain parts of the 
proxy distribution process, such as printing and distributing proxy 
materials either directly to registered securityholders or to 
intermediaries, which will then distribute them to beneficial owners 
either through the mail or electronically.\355\ Providing these 
services may be a natural extension of a transfer agent's core 
functions because most transfer agents will already possess and 
maintain the master securityholder file listing the issuer's registered 
securityholders, will have the infrastructure in place to communicate 
with registered securityholders, and will be in a position to reconcile 
the identity of registered voters and the number of votes against the 
official records of the issuer.\356\ Typical transfer agent proxy 
services might include mailing or electronically transmitting notices 
of meetings,\357\ proxy statements, and proxy cards \358\ to 
securityholders.
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    \354\ Beneficial owners holding securities in street name are 
not technically entitled to vote shares or grant proxy authority. 
Rather, the voting rights reside with Cede & Co. as the record owner 
of all street name shares. However, because Cede & Co.'s role is 
only that of nominee for DTC as custodian and it has no beneficial 
interest in the shares, mechanisms have been developed in order to 
pass the legal rights it holds as the record owner to the beneficial 
owners, enabling them to vote. For a more comprehensive discussion 
of these and other issues relating to the U.S. proxy and indirect 
holding systems, see Proxy Concept Release, supra note 112.
    \355\ See, e.g., Broadridge Annual Report 2015 (2015), available 
at http://www.broadridge-ir.com/~/media/Files/B/Broadridge-IR/
annual-reports/ar-2015.pdf.
    \356\ See Proxy Concept Release, supra note 112. See Proxy 
Tabulation and Solicitation, AST, http://www.amstock.com/corporate/corporate_proxy.asp (last visited November 20, 2015).
    \357\ See, e.g., Del. Code Ann. tit. 8, Sec.  222 (2001). See 
also Del. Code Ann. tit. 8, Sec.  232 (2001).
    \358\ In cases where the issuer is relying upon the notice and 
access model of proxy statement distribution, the proxy card must be 
mailed even if the proxy statement is not mailed by the issuer. See 
Final Rule: Internet Availability of Proxy Materials, Exchange Act 
Release No. 55146, 10 (Jan. 22, 2007), 72 FR 4148 (Jan. 29, 2007).
---------------------------------------------------------------------------

    In addition, under many state statutes, an issuer must appoint a 
vote tabulator (sometimes referred to as the ``inspector of elections'' 
or ``proxy tabulator'') to collect and tabulate the proxy votes as well 
as ballot votes cast in person by registered owners at a securityholder 
meeting.\359\ As with proxy distribution services, some issuers hire 
their transfer agent to create sophisticated voting platforms for 
securityholders or to act as the vote tabulator.\360\ The vote 
tabulator is ultimately responsible for determining whether shares are 
represented at the meeting, the validity of proxies received, and 
tallying the votes.\361\ The tabulator must determine that the correct 
number of votes has been submitted by each registered owner and 
determine that proxies submitted by securities intermediaries that are 
not registered owners are reconciled with DTC's securities position 
listing for that intermediary (i.e., determining that the number of 
nominee shares voted equals the number of shares that DTC indicates are 
held in nominee name).\362\ Although the Commission does regulate 
transfer agents, which often serve as vote tabulators, it does not 
regulate the function of tabulating proxies by transfer agents.
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    \359\ See, e.g., Del. Code Ann. tit. 8, Sec.  231(a)-(c)(2001) 
(inspectors must be appointed in advance of all stockholder meetings 
of publicly held corporations and have responsibility for 
ascertaining the number of shares outstanding and the voting power 
of each, determining the shares represented at the meeting and the 
validity of proxies and ballots, counting all votes and ballots, 
creating and retaining a record of the disposition of any challenges 
made to any determination of the inspectors, and certifying their 
determination of the number of shares represented at the meeting and 
the count of all votes and ballots).
    \360\ Sometimes the issuer will hire an independent third party 
other than the transfer agent to perform the proxy tabulation 
function, such as to certify important votes. In such cases, the 
issuer or its transfer agent typically will provide the third party 
vote tabulator with the list of record owners so the vote tabulator 
can make this determination. Additionally, in contested votes, the 
issuer will commonly retain an independent inspector to count the 
proxies. See, e.g., www.ivsassociates.com/html/index2.htm.
    \361\ See, e.g., Del. Code Ann. tit. 8, Sec.  231(2001); see 
also Marcel Kahan & Edward B. Rock, The Hanging Chads of Corporate 
Voting, 96 Geo. L.J. 1227, 1235 (2008) (``Where more than one valid 
proxy is given for a share, the later proxy revokes the earlier 
proxy. Determining the validity of proxies and the tally of votes is 
the responsibility of the inspector, appointed by the 
corporation.''), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1007065.
    \362\ See Proxy Concept Release, supra note 112. See, e.g., 
http://www.amstock.com/corporate/corporate_proxy.asp.
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    All transfer agents also provide some level of securityholder 
communications services. The level of services may depend on the type 
or size of the issuer, but at a minimum, most transfer agents 
facilitate the mailing of quarterly and annual statements with details 
of holdings, transaction confirmations, and letters or communications 
confirming other transactions, such as address-change confirmations. 
Many transfer agents also provide tax reporting services, including 
sending tax forms such as W-9, W-8BEN, 1099-DIV, and 1099-B.
    Most transfer agents also receive and respond to inquiries and 
requests by securityholders and non-securityholders,\363\ often through 
interactive Web sites, call centers, and the like. Requests may involve 
a transfer (for example, a gift of fund shares from one family member 
to another) or a change in the securityholder's account, such as an 
address change or different election regarding dividend reinvestment. 
For transfer agents to open-end mutual funds, transfers may involve a 
purchase (i.e., a ``subscription'') or sale (i.e., a ``redemption'') of 
the fund's shares.\364\ Transfer agents may receive inquiries as well, 
which may not require processing a transaction or account change, but 
may involve merely answering questions about the securityholder's 
account or regarding the issuer generally.\365\ Requests and inquiries 
are transmitted to transfer agents through various methods, including 
by telephone, mail, facsimile, email, internet, mobile communication 
device, and in-person. The predominance of telephone and other forms of 
electronic communication as favored methods for securityholders to 
communicate with issuers and their transfer agents, including the use 
of standardized protocols over the internet, means that managing 
sizable call centers and other customer service departments, with many 
representatives fielding calls and other message-traffic, has become a 
critical aspect of the transfer agent-issuer relationship.
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    \363\ As discussed supra Section IV.A, several Commission rules 
address securityholder inquiries. See Exchange Act Rule 17Ad-5, 17 
CFR 240.17Ad-5 (written inquiries and requests); Exchange Act Rules 
17Ad-6, 7, 17 U.S.C. 240.17Ad-6, 7 (recordkeeping and retention 
requirements regarding inquiries and requests).
    \364\ For additional discussion of ``transfers,'' see supra 
Section IV.A.2.
    \365\ Inquiries about the securityholder's account may relate, 
for example, to matters such as dividend reinvestment or other 
account options.
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    One aspect of these securityholder services is lost certificate 
replacement. If a securityholder loses a certificate, the old 
certificate must be cancelled and new shares issued, either in 
certificated or book-entry form. Transfer agents facilitate this 
process by processing the request and replacing the lost or missing 
certificate. Generally, the securityholder will be required to fill out 
a declaration, affidavit, or other form with identifying information 
and a description of the circumstances giving rise to the loss and pay 
a fee to the transfer agent for processing the request. Most transfer 
agents will also require a surety bond to indemnify the issuer and 
transfer agent against any potential losses in connection with the 
missing or replacement certificate in the event it is later presented 
for transfer or conversion. The transfer agent will then report the 
lost or missing certificate to SIC pursuant to Rule 17f-1, as described 
above in Section II.B.

C. Regulatory Compliance and Reporting

    Although not addressed directly in the transfer agent rules, most 
transfer agents today provide assistance with issuers' obligations to 
comply with various state and federal laws, including the federal 
securities laws, because many issuer compliance obligations fall 
directly into areas in which the transfer

[[Page 81976]]

agent is already providing services to the issuer. For example, 
transfer agents may use their mailing and fulfillment services to help 
issuers meet their obligations to deliver certain documents to 
securityholders.\366\ Transfer agents may also use their existing 
recordkeeping capabilities to help issuers meet obligations regarding 
disclosure of securityholders owning more than a certain threshold of 
ownership.\367\ Further, investment company issuers subject to anti-
money laundering responsibilities under federal law may rely on 
transfer agents to assist their compliance since this function is 
closely related to the new account processing services and 
securityholder recordkeeping services transfer agents provide to these 
issuers.
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    \366\ See, e.g., Exchange Act Rule 14c-3, 17 CFR 240.14c-3 
(annual report to be furnished securityholders); Investment Company 
Act Rule 30e-1, 17 CFR 270.30e-1 (reports to stockholders of 
management companies); Investment Company Act Rule 30e-2, 17 CFR 
270.30e-2 (reports to shareholders of unit investment trusts).
    \367\ See, e.g., SEC Form N-1A, Item 18 (Control Persons and 
Principal Holders of Securities), SEC Form 10-K, Item 12 (Security 
Ownership of Certain Beneficial Owners and Management and Related 
Stockholder Matters).
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    Finally, transfer agents spend a much greater amount of time and 
resources on assisting issuers with their escheatment obligations under 
state law than they have done historically. Escheatment is the process 
of transferring abandoned property to the state or territory. All 50 
states, Washington, DC, Puerto Rico, and all U.S. territories have 
abandoned property laws which apply to any type of holding, including 
stock and associated payments made to securityholders, such as dividend 
payments. When a property owner fails to demonstrate ownership of 
property--for example, by not cashing dividend checks or responding to 
mailings--for a period of time, that property is deemed abandoned and 
is turned over to the state. The state then converts the property to 
cash within 30 days to two years. A securityholder who is holding 
securities that have been escheated will only be able to reclaim the 
sale price the state received, without interest, not the securities 
themselves.\368\
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    \368\ See, e.g., Cal. Civ. Proc. Code Sec. Sec.  1500 et. seq. 
(California's requirements); Tex. Prop. Code Ann. Sec. Sec.  72-76 
(Texas' requirements). We note also that Rule 17Ad-17 requires 
transfer agents to make certain efforts to locate lost 
securityholders.
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    Pursuant to these abandoned property laws, issuers, through their 
transfer agents, are required to report when property is deemed to be 
abandoned based on the applicable abandoned property statute. Thus, 
issuers are required to file abandoned property reports annually with 
the individual states and U.S. territories, and to turn over abandoned 
property according to individual state laws. Failure to file on time 
can result in significant penalties and interest fees per year.
    Transfer agents typically assist issuers with initial escheatment 
filings with the states in which securityholders have abandoned 
property, and then an annual filing every year after that with those 
states. In addition to fulfilling reporting requirements, typical 
activities may include attempted communications with the 
securityholder, maintaining up-to-date knowledge of federal and state 
escheatment requirements, proper accounting and handling of property 
prior to escheatment, and appropriate transfer of property.

VI. Advance Notice of Proposed Rulemaking

    An advance notice of proposed rulemaking provides notice to the 
public that the agency is considering rulemaking in an area so that the 
public can participate in the formulation of potential future rules and 
can help shape a future notice of proposed rulemaking. Through this 
advance notice of proposed rulemaking, the Commission is requesting 
comment on specific areas and topics with respect to transfer agent 
regulation. As noted earlier, the Commission then intends to review 
comments and to then propose new rules, as soon as is practicable, 
either individually or in groups or phases to expedite the rulemaking 
process.
    In particular, based on our current understanding of transfer 
agents and their functions, the Commission intends to propose new or 
amended rules to: (1) Expand the scope of information collected by 
Forms TA-1 and TA-2 and capture all such information in a structured, 
electronic format as needed to enhance aggregation, comparison, and 
analysis; (2) require that any arrangement for transfer agent services 
between a registered transfer agent and an issuer be set forth in a 
written agreement that addresses topics such as the transfer agent 
services to be provided, the fee schedule, and requirements for the 
handing over of transfer agent records to the successor transfer agent; 
(3) enhance transfer agents' requirements for the safeguarding of 
issuer and securityholder funds and securities; (4) apply an anti-fraud 
provision to specific activities of transfer agents; (5) require 
transfer agents to establish business continuity and disaster recovery 
plans; (6) require transfer agents to establish basic procedures 
regarding the use of information technology, including methods of 
safeguarding personally identifiable information; (7) revise the 
recordkeeping requirements to more fully capture the scope of a 
transfer agent's business activities; and (8) conform and update 
various terms and definitions to reflect modern systems and usage, as 
well as the elimination of obsolete rules, such as those addressing Y2K 
issues.
    In addition to the specific requests for comments in each section 
below, we also seek comment on the following:

    1. For all regulatory issues discussed below, please comment on 
the need for revisions to the current regulatory framework, 
including the proposals described above, and the benefits they could 
provide for transfer agents, investors, issuers, and the capital 
markets. In particular, please comment on whether the proposals will 
increase the prompt and accurate clearance and settlement of 
securities transactions or have other benefits, such as reducing the 
potential for fraudulent activity. Please also comment on the 
potential effects on efficiency, competition, and capital formation 
of potential revisions to the current regulatory framework, if any. 
If you wish to comment on such potential benefits and effects, 
please explain the implications of any impact on competition, 
economic efficiency, capital formation, and the behavior of affected 
market participants, including transfer agents, issuers, and 
investors. For each benefit, effect and implication, provide 
supporting evidence and/or explain how such evidence may be 
obtained. Also please describe the current competitive landscape for 
each such affected transfer agent service. For example, to the 
extent possible, provide evidence on the identities of current 
providers, their market shares, their ease or cost of entry and 
exit, the cost to issuers of switching transfer agents, and the 
frequency of any such switching. Are there any other issues that are 
not discussed below but that should be addressed? If so, what are 
they and how should they be addressed?
    2. For all regulatory issues discussed below, please comment on 
any potential interplay between applicable SRO rules and the 
potential revisions to the current regulatory framework for transfer 
agents discussed herein, including any potential conflicts that 
should be considered or resolved. Please provide a full explanation.
    3. Are there specific areas where transfer agents need 
additional guidance or regulatory clarity regarding the 
applicability of current rules? How could such guidance best be 
provided? Would rule modification, staff guidance, or an industry 
roundtable be helpful?
    4. Should the Commission prioritize certain of the proposed rule 
changes discussed in this Advance Notice of Proposed Rulemaking over 
others? If so, which ones and why? Are there other rule changes 
besides those discussed in this Advance Notice of Proposed 
Rulemaking that the Commission should prioritize? Please explain.

[[Page 81977]]

A. Registration and Annual Reporting Requirements

    As discussed generally above in Section IV.A, Forms TA-1 and TA-2 
are used to: (i) Help regulators, issuers, investors, and other 
interested parties determine whether a transfer agent is and will 
continue to be able to perform its functions properly; (ii) help 
regulators, issuers, investors, and other interested parties determine 
the nature of the business conducted by a particular transfer agent; 
(iii) permit the Commission to effectively target its transfer agent 
inspection program, including assisting examiners in preparing for and 
conducting transfer agent examinations; (iv) monitor transfer agent 
activity generally; (v) enable Commission staff to evaluate particular 
burdens and benefits that would be placed on the industry in potential 
rulemaking endeavors; and (vi) assist the Commission and Commission 
staff in assuring that rules are properly focused and refined.\369\ 
Form TA-1 was developed and first adopted in 1975 \370\ and Form TA-2 
was first adopted in 1986.\371\ The information provided by these forms 
serves, among others, the vital regulatory goals of informing the 
Commission's oversight and examination programs and informing the 
public about the nature and scope of transfer agents' activities. The 
Commissions believes the usefulness and utility of both forms in 
serving these important goals might be enhanced if they captured 
certain additional information, such as financial information, 
potential conflicts of interest, and detailed information about the 
types of services being provided and to whom.
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    \369\ See, e.g., Adoption of Revised Transfer Agent Forms and 
Related Rules, supra note 161.
    \370\ See Notice of Adoption of Rule 17Ac2-1 and Related Form 
TA-1 under the Securities Exchange Act of 1934 Providing for the 
Registration of Transfer Agents for which the Commission is the 
Appropriate Regulatory Agency, Exchange Act Release No. 11759 (Oct. 
22, 1975), 40 FR 51181 (Nov. 4, 1975).
    \371\ See Adoption of Revised Transfer Agent Forms and Related 
Rules, supra note 161.
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    To assure that Forms TA-1 and TA-2 continue to serve the regulatory 
goals described above, especially in light of the expanded scope of 
transfer agents' activities as discussed throughout this release, the 
Commission intends to propose amendments to the forms to include 
disclosure requirements with respect to certain financial information, 
such as the financial reports discussed below in Section VI.C (e.g., 
statements of financial condition, income, and cash flows), all direct 
or indirect conflicts of interest, the issuers and securities for which 
a transfer agent is providing transfer agent and other services, and 
the specific services being provided or expected to be provided for 
each issuer or security, regardless of the nature of those services. 
These anticipated amendments are intended to facilitate disclosure that 
is more closely targeted at risks associated with contemporary transfer 
agent activities.
    A requirement that transfer agents and their officers and directors 
disclose any past or present affiliation with issuers serviced by, or 
broker-dealers affiliated with, the transfer agent could reveal 
instances where a transfer agent or its officers and directors have an 
ownership interest in such issuers and broker-dealers, including 
details about how the interest was obtained. Such disclosures could 
provide transparency about the existence of possible financial 
interests or other potential conflicts of interest that could 
incentivize a transfer agent to facilitate an improper transfer or 
engage in other improper conduct.
    Financial disclosures may include annual financial statements using 
a data-tagged format, such as XBRL, broken out by the asset classes 
serviced by the transfer agent, such as equities, debt, and investment 
companies.
    The Commission seeks comment on the following:

    5. Should the Commission require any of the registration and 
disclosure items discussed above? Why or why not? Should the 
Commission consider other requirements? Please explain. What would 
be the benefits and costs associated with any such requirements? 
Please provide empirical data. If the Commission were to require 
transfer agents to disclose financial information, what information 
should be required, and why? Would requiring such information to be 
disclosed on Forms TA-1 and/or TA-2 be an effective and appropriate 
measure? What would be the benefits and costs associated with any 
such requirement?
    6. Should the Commission consider amending the registration 
process to allow for the issuance of an order approving a transfer 
agent's TA-1 application before that application becomes effective, 
rather than having such applications become effective automatically 
after 30 days? Should the Commission consider making certain 
findings before approving a transfer agent's application? If so, 
what should those findings be? Should the Commission impose 
threshold requirements that transfer agents must satisfy before 
their applications can become effective? If so, what would they be?
    7. The Commission intends to propose to require transfer agents 
to submit annual financial statements. Should these statements be 
required to be audited? Why or why not?
    8. Should the Commission require that annual financial 
statements be submitted using a data-tagged format such as XML or 
XBRL? Would such a requirement require changes to the U.S. GAAP 
Taxonomy in order to capture the information included in transfer 
agents' financial statements? Why or why not? Should some other 
electronic format be required or permitted?
    9. Does the receipt of securities as payment for services create 
conflicts of interest for transfer agents, and if so, should the 
Commission require that such payments be disclosed? The Commission 
intends to propose to amend Forms TA-1 and/or TA-2 to require 
transfer agents to disclose all actual and potential conflicts of 
interest. Should it do so? Why or why not? Should the Commission 
provide any guidance as to what constitutes a conflict of interest? 
Why or why not? Has the proliferation of the types of services 
offered by transfer agents in recent years created new conflicts of 
interest? How might transfer agents' conflicts of interest differ 
depending upon whether the transfer agent is paid by the issuer, the 
shareholder, or some combination thereof? Is disclosure of conflicts 
of interest a sufficient safeguard for investors? Should the 
Commission ban certain conflicts of interest entirely? For example, 
should the Commission prohibit transfer agents from having certain 
affiliations with issuers or broker-dealers, or from providing 
certain services if they have such affiliations? Please provide a 
full explanation.
    10. Should the Commission amend Forms TA-1 and/or TA-2 to 
require transfer agents to disclose information regarding the fees 
imposed or charged by the transfer agent for various services or 
activities? If so, what type of information or level of detail 
should be required? Should the Commission require that fee 
disclosures be standardized to facilitate comparison? Should fees 
charged to both issuers and directly to shareholders be required to 
be disclosed? Please provide a full explanation.
    11. To increase the ability of the Commission to monitor trends, 
gather data and address emerging regulatory issues, should the 
Commission require registered transfer agents to file material 
contracts with the Commission as exhibits to Form TA-2? What costs, 
benefits and burdens, if any, would this create for issuers or 
transfer agents? Should the Commission establish a materiality 
threshold or provide guidance on materiality were it to propose such 
a rule? Please provide a full explanation.
    12. Should the Commission amend Forms TA-1 and/or TA-2 beyond 
any changes discussed above? If so, what amendments should the 
Commission consider in making that determination and why? Please 
provide a full explanation.
    13. What costs, benefits, and burdens, if any, would the 
potential requirements discussed above create for issuers or 
transfer agents?

B. Written Agreements Between Transfer Agents and Issuers

    Transfer agency agreements between transfer agents and issuers are 
mainly governed by state contract law.\372\ It is

[[Page 81978]]

the Commission staff's understanding, based on information collected 
during examination of registered transfer agents and review of a number 
of written agreements between transfer agents and issuers, that many 
transfer agents enter into written contracts with their issuers that 
cover some or all of the following subjects: (1) The services to be 
provided by the transfer agent and performance metrics and standards; 
(2) the responsibilities of the parties; (3) the duration of the 
agreement, including termination fees; (4) the fees and terms of 
payment; (5) the terms that govern termination of the agreement; (6) 
the disposition of securityholder records after the agreement's 
termination; (7) the use and protection of data, such as privacy and 
business continuity requirements; and (8) indemnification.
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    \372\ At present, no UCC or Commission rule requires that 
transfer agent service agreements with issuers be set down in 
writing or governs the terms of such agreements. Rule 17Ad-16 
requires a registered transfer agent to notify an appropriate 
qualified registered securities depository under certain 
circumstances, including when the transfer agent assumes or ceases 
transfer agent services for an issuer, but does not address the 
terms of transfer agent service agreements with issuers nor require 
that they be set forth in writing. Exchange Act Rule 17Ad-16, 17 CFR 
240.17Ad-16. See also Adopting Release for Rule 17Ad-16, supra note 
147.
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    However, some transfer agents, often smaller transfer agents that 
may primarily service smaller issuers, may not document their 
arrangements with issuers in a written agreement or, even if they do 
enter into a written agreement, it may not cover all of the subjects 
identified above. Based on the Commission staff's experience 
administering the Commission's transfer agent rules and examination 
program, it appears that such undocumented or under-documented 
arrangements may be more likely than written agreements to lead to 
protracted disputes, especially with respect to: (1) The duration of 
the arrangement; (2) the conditions of the arrangement's termination; 
(3) the disposition of the securityholder records after termination or 
notice of termination; and (4) the fees charged by the transfer agent. 
Such disputes may interfere with the operations of the markets and the 
protection of investors by disrupting or otherwise hindering transfer 
agent processing, recordkeeping, and safeguarding. For example, it is 
the Commission staff's understanding that some transfer agents, after 
having been terminated by the issuer, have substantially delayed the 
handing over of securityholder records to successor transfer agents by 
demanding that the issuer pay a substantial ``termination'' fee before 
the transfer agent would agree to hand over the securityholder records 
it had been maintaining, even though the issuer claimed there was no 
written agreement in place or it had otherwise not agreed to such a 
fee.\373\ In such cases, the issuer may be unable to retain a new 
transfer agent if the old transfer agent will not make the records 
available to the new transfer agent. The inability to retain a new 
transfer agent could lead to inaccuracies in the master securityholder 
file and other records or impede trading in the issuer's securities. 
Commission staff is also aware of instances in which a termination 
dispute between an issuer and a transfer agent has resulted in two 
transfer agents each maintaining separate records, which could be 
inconsistent with each other.
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    \373\ It is the Commission staff's understanding that typical 
termination fees may range from about $1,000 to $5,000, though 
disputes like those described herein may involve a transfer agent's 
demand for fees as high as $30,000.
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    The Commission believes that the existence of a written agreement 
that describes the ongoing relationship under which a transfer agent 
and an issuer will operate, including the terms under which the 
agreement between them may be terminated, could help to avoid such 
disputes, including disputes over agreed-upon fees, and could help 
ensure the timely and appropriate turnover of an issuer's shareholder 
records upon the termination of the written agreements. If the 
relationship between an issuer and a transfer agent is terminated and 
the issuer engages a new transfer agent, it is essential to the issuer, 
its securityholders, and the market participants who may seek to trade 
the issuer's securities, that the issuer's records are promptly 
delivered to the new transfer agent to provide an orderly continuity of 
services.
    Among the issuer's records and related documents typically in the 
possession of its transfer agent are: (1) The master securityholder 
file with the names and addresses of current securityholders and the 
amount of securities owned by each holder; \374\ (2) the control book 
showing the total units outstanding of each securities issue; \375\ (3) 
the logs showing items transferred and processed for each issue; (4) 
the records of each issue's distributions (e.g., interest and 
dividends) to securityholders; (5) an inventory of blank (unissued) 
securities certificates for each issue; and (6) the records of 
cancelled securities certificates for each issue.\376\ Such records are 
critical to issuers' routine operations as a stock corporation and to 
ensuring that investors' rights are protected. Without these records it 
would be challenging to: (1) Establish the identities of its own 
securityholders or the number of units of securities each investor 
holds; (2) determine whether the number of its shares outstanding is 
within the bounds of its corporate charter or whether there has been an 
overissuance; (3) distribute interest and dividend payments to its 
investors; or (4) provide to investors periodic reports and proxy 
statements.
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    \374\ See Exchange Act Rule 17Ad-9(b), 17 CFR 240.17Ad-9(b).
    \375\ See Exchange Act Rule 17Ad-9(d), 17 CFR 240.17Ad-9(d) 
(defining ``control book'').
    \376\ See Exchange Act Rule 17Ad-19, 17 CFR 240.17Ad-19 
(cancellation of certificates); Exchange Act Rules 17Ad-6(c), 7(d), 
17 CFR 240.17Ad-6(c), 7(d) (requiring that such cancelled 
certificates ``be maintained for a period of not less than six 
years.'').
---------------------------------------------------------------------------

    The Commission therefore intends to propose amendments to the 
transfer agent rules to require that any arrangement for transfer agent 
services between a registered transfer agent and an issuer be set forth 
in a written agreement that covers certain basic topics, such as the 
transfer agent services to be provided, the terms of payment and fees 
to be imposed, particularly any termination fees, and requirements for 
the turnover of transfer agent records to the successor transfer agent. 
The Commission further intends to propose new or amended rules 
requiring transfer agents to pass through certain records to newly 
appointed or successor transfer agents in a prompt, complete, and 
uniform manner.
    The Commission seeks comment on the following:

    14. Should the Commission require that any arrangement for 
transfer agent services between a registered transfer agent and an 
issuer be set forth in a written agreement? Why or why not? What are 
the alternative means of achieving similar objectives, and are they 
as effective or efficient? If the Commission were to require a 
written agreement, should it cover certain topics? If so, what 
topics? For any such provisions or topics, are there asymmetries in 
information or other areas between transfer agents and issuers that 
the Commission should consider in connection with such contractual 
provisions? For what types of transfer agents, or in what types of 
such relationships, do these asymmetries most frequently arise, and 
where are they most acute? Please provide a full explanation and 
supporting evidence.
    15. How are fees set out in transfer agent agreements today? Do 
issuers find it difficult to fully understand the fee structures 
offered by transfer agents, and how do those fee structures work in 
practice? Should the Commission require that all fee arrangements 
between an issuer and a transfer agent be set forth and specified in 
a written agreement? Why or why not? Should the Commission require 
that transfer agents disclose their fee arrangements in their 
filings with the Commission? If so, should transfer agents be 
required to utilize a standardized framework

[[Page 81979]]

or terminology when disclosing their fee structures? Should the 
Commission exempt fees which may be negotiated on a case-by-case 
basis, such as corporate action fees? Why or why not? Would 
requiring disclosure of fees affect competition, or the form of 
competition, among transfer agents or between transfer agents and 
other entities? Please provide a full explanation and supporting 
evidence.
    16. Currently, transfer agents are not required by rule to pass 
through specified records to successor transfer agents. Are issuers 
or transfer agents aware of instances where records have not been 
passed from one agent to the next, or agents have not done so in a 
prompt manner? Are commenters aware of disputes between transfer 
agents and their issuer clients or successor transfer agents with 
respect to the transfer of records to a successor transfer agent? 
How was the situation resolved? Have transfer agents demanded 
previously undisclosed termination fees, or fees inconsistent with 
what those parties previously agreed to, in exchange for turning 
over records to a successor? Would the anticipated proposed rules 
described above help avoid or resolve any disputes between transfer 
agents and issuers or successor-transfer agents with respect to the 
transfer of records? Please provide a full explanation and 
supporting evidence.
    17. What costs, benefits, and burdens, if any, would a written 
agreement create for issuers or transfer agents?

C. Safeguarding Funds and Securities

    Because transfer agents already facilitate securities transfers and 
maintain securityholder records, approximately one-third of them are 
engaged by issuers to provide administrative, recordkeeping, and 
processing services related to the distribution of cash and stock 
dividends, bond principal and interest, mutual fund redemptions, and 
other payments to securityholders.\377\ These services, which are 
generally referred to in this release as ``paying agent'' 
services,\378\ often require the transfer agent to receive and accept 
funds or securities from issuers or securityholders and hold them for 
periods generally ranging from less than one day to 30 days before 
distributing the funds or securities to the intended recipients.\379\ 
Transfer agents' activities with respect to paying agent services are 
significant. In 2014, transfer agents distributed over $2.4 trillion in 
securityholder dividends, bond principal and interest, and mutual fund 
redemption payments.\380\
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    \377\ This data is based on transfer agent annual reports filed 
with the Commission on Form TA-2 on or before March 31, 2015, which 
are publicly available once filed. See generally, Exchange Act Rule 
17Ac2-2(a), 17 CFR 240.17Ac2-2(a); SEC Form TA-2, 17 CFR 249b.102.
    \378\ Entities other than transfer agents may also provide 
paying agent services. For example, recently amended Rule 17Ad-
17(c)(2) defines ``paying agent'' to include ``any issuer, transfer 
agent, broker, dealer, investment adviser, indenture trustee, 
custodian, or any other person that accepts payments from the issuer 
of a security and distributes the payments to the holders of the 
security.'' 17 CFR 240.17Ad-17(c)(2). See supra Section IV.A.4 for 
additional discussion of Rule 17Ad-17.
    \379\ Certain corporate actions may require the transfer agent 
to hold funds for extended periods of time beyond 30 days. For 
example, where a tender offer is extended beyond 30 days, the 
transfer agent may maintain possession or control over investor 
funds until the offer expires. The Commission notes that when 
transfer agents have custody of funds or securities, they have a 
duty to safeguard that property. See Exchange Act Rule 17Ad-12, 17 
CFR 240.17Ad-12.
    \380\ This figure is based on transfer agent annual reports 
filed with the Commission on Form TA-2 under the Exchange Act on or 
before Mar. 31, 2015, which are publicly available once filed. See 
generally, Exchange Act Rule 17Ac2-2(a), 17 CFR 240.17Ac2-2(a); SEC 
Form TA-2, 17 CFR 249b.102.
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    Additionally, the Commission's staff understands that transfer 
agents may hold residual funds from thousands to millions of dollars 
and securities for long periods of time ranging from over a month to 
several years, before distributing the funds or securities either to 
the intended recipients or escheating the funds or securities to a 
state or territory.\381\ Residual funds or securities include those 
which cannot be successfully delivered to the intended recipient 
because the transfer agent has lost contact with the intended recipient 
(e.g., lost securityholder funds),\382\ as well as those which are 
transmitted or delivered, but the intended recipient nonetheless does 
not demonstrate ownership of the property (e.g., unresponsive payee 
funds, which may ultimately be escheated).\383\
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    \381\ As noted above in Section V.C, when a property owner fails 
to demonstrate ownership of property for a specified period of time 
by, for example, cashing a dividend check, that property will likely 
be deemed by the relevant state to be abandoned and will be 
escheated to the state's unclaimed property administrator pursuant 
to the state's applicable escheatment laws. See, e.g., Adopting 
Release for 17Ad-17 Amendments, supra note 274.
    \382\ See Exchange Act Rule 17Ad-17(b)(2), 17 CFR 240.17Ad-
17(b)(2) (defining ``lost securityholder''). As noted above in 
Section IV.A.4, the requirement to conduct database searches for 
lost securityholders has been extended to brokers and dealers. See 
Adopting Release for 17Ad-17 Amendments, supra note 274.
    \383\ See Exchange Act Rule 17Ad-17(c)(3), 17 CFR 240.17ad-
17(c)(3) (defining ``unresponsive payee''). Rule 17Ad-17(c)(1) 
generally requires paying agents to provide within certain time 
periods written notification to each unresponsive payee that the 
securityholder has been sent a check (or checks) that has not yet 
been negotiated. Exchange Act Rule 17Ad-17(c)(1), 17 CFR 240.17Ad-
17(c)(1).
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    As demonstrated by the Paperwork Crisis, the financial crisis of 
2008, the 2012 flooding of the DTCC securities vault in New York during 
Superstorm Sandy,\384\ and many other incidents, the safe, accurate, 
and efficient delivery of funds and securities, whether in certificated 
or uncertificated form, is vital to the integrity and smooth 
functioning of the National C&S System. Given their significant role in 
providing paying agent and custody services for funds and 
securities,\385\ and the risk of loss from fraud, theft, or other 
misappropriation,\386\ the funds and securities held in a transfer 
agent's custody in either physical or electronic form could present 
significant custody or delivery risks to issuers, securityholders, and 
the financial system as a whole. In addition, funds and securities in 
custody of transfer agents could also be subject to risk of loss from 
recordkeeping errors (e.g., where the transfer agent is unable to 
reconcile the origin and ownership of funds or securities held), 
attachment (e.g., in the event of a judgment against the transfer 
agent), and insolvency (e.g., securityholder or issuer funds could be 
commingled with transfer agent funds and therefore, in the event of 
bankruptcy, treated as general assets of the transfer agent and not as 
separately identifiable investor or issuer funds).\387\
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    \384\ See DTCC 2013 Annual Report (2013), available at http://www.dtcc.com/annuals/2013/index.php (discussing DTC vault flood and 
security certificate recovery process after Superstorm Sandy).
    \385\ See supra note 380 (data on distributions made in 2014 by 
registered transfer agents on behalf of issuers).
    \386\ See, e.g., SEC v. Robert G. Pearson and Illinois Stock 
Transfer Company, Civ. Action No. 1:14-cv-03875 (N.D. Ill. May 22, 
2014); SEC Litigation Release No. 23007 (May 28, 2014) (announcing 
fraud charges against Illinois Stock Transfer Company and its owner, 
alleging misappropriation of money belonging to their corporate 
clients and the clients' securityholders in order to fund their own 
payroll and business); In the Matter of Securities Transfer 
Corporation and Kevin Halter, Jr., Exchange Act Release No. 64030 
(Mar. 3, 2011) (settled action) (finding that transfer agent and its 
president failed to ensure that transfer agent had adequate 
supervisory procedures and a system for applying such procedures to 
safeguard client funds held in its custody or possession from 
internal employee abuse perpetrated by the transfer agent's former 
bookkeeper).
    \387\ As noted in Section I, a transfer agent's failure to 
perform its recordkeeping duties can create significant risks. These 
risks may be heightened where a transfer agent maintains the only 
electronic record of ownership of an issuer's securities, such as 
when facilitating an issuer's DRS program whereby the transfer 
agent, not DTC, maintains electronic book-entry custody and records 
of shares.
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    Further, even routine paying agent activity, such as dividend 
distribution processing, may be complex. For example, after determining 
record date eligibility, the paying agent (who may be a transfer agent) 
will calculate and balance the cash dividend amount or, in the case of 
a stock dividend, the equivalent number of shares, which the transfer 
agent will issue, register, and deliver, either in certificated or 
book-entry form. The paying agent may then

[[Page 81980]]

handle the printing, posting, and distribution \388\ of dividend 
payments to the issuer's registered securityholders,\389\ either 
directly or through a third-party service provider. The paying agent 
may also reconcile all checks and disbursements from the dividend 
account, and thereafter may also offer ancillary payment services to 
securityholders, such as: (i) Corresponding with securityholders 
regarding uncashed or stale-dated distribution payments or distribution 
payments declared lost or stolen; (ii) placing stops on checks or 
certificates that are certified to be lost or stolen; (iii) reissuing 
replacement checks and securities where necessary; (iv) providing 
photocopies of paid checks; and (v) preparing and mailing dividend tax 
reporting forms required by the Internal Revenue Service.
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    \388\ Disbursements may be by check, electronic deposit into a 
securityholder bank account, or reinvestment in additional shares of 
the company through a DRIP or a Direct Stock Purchase Plan 
(``DSPP''). Additionally, some larger transfer agents may provide 
currency exchange services to international investors, allowing them 
to select the currency in which they want their dividend payments or 
sale proceeds to be calculated and paid.
    \389\ Where securities are held in street name registered to 
DTC's nominee, Cede & Co., rather than issuing thousands of 
individual checks or securities directly to registered 
securityholders, the paying agent will deliver funds (or newly 
issued securities generated by certain corporate actions) to DTC. 
DTC then electronically credits the accounts of the appropriate 
banks and brokers, which in turn credit the payments and/or 
securities to the accounts of the beneficial owners. For additional 
information about DTC's Corporate Actions Processing Service for 
distributions, see Corporate Actions Processing, DTCC, http://www.dtcc.com/asset-services/corporate-actions-processing.aspx.
---------------------------------------------------------------------------

    Other distributions, like those arising from lawsuits or 
settlements, may require special attention. For example, to ensure that 
only investors who held shares between specific dates or meet other 
detailed tests are compensated for a specific settlement, transfer 
agents who are engaged to perform distribution activities must 
carefully review ownership records to determine who is entitled to 
receive a payment and in what amount. Any processing errors at any 
point in this complex process could present substantial risks for both 
issuers and securityholders. For example, if there is a substantial 
positive adjustment to the share price following the payment date, a 
transfer agent's failure to calculate or distribute the correct amounts 
to securityholders could create risk of loss of funds or securities for 
investors, as well as risk of liability for the issuer, transfer agent, 
and others involved in the processing. A transfer agent's inadvertent 
failure to reinvest a dividend payment or an erroneous distribution of 
a cash payment could create similar risks.
    Despite the amounts involved and risks posed, only one of the 
existing transfer agent rules--recently amended Rule 17Ad-17--
specifically refers to and directly addresses certain limited conduct 
of paying agents.\390\ Other Commission rules indirectly address 
activity implicated by the paying agent role, but do not specifically 
address the complex administrative, recordkeeping, and processing 
activities associated with transfer agents' activities as paying 
agents, nor do they provide definitive standards to determine the 
adequacy of the transfer agent's safeguards or prescribe specific 
requirements for how transfer agents in such instances should protect 
funds and securities from misappropriation, theft, or other risk of 
loss. In particular, Rule 17Ad-12 requires transfer agents to assure 
that funds and securities in their possession or control are 
``protected, in light of all facts and circumstances, against misuse,'' 
and that all such securities ``are held in safekeeping and are handled, 
in light of all facts and circumstances, in a manner reasonably free 
from risk of theft, loss or destruction.'' \391\ Rule 17Ad-13 requires 
transfer agents to file an annual report prepared by an independent 
accountant concerning the transfer agents' systems of internal 
accounting control and related procedures for the safeguarding of 
related funds.
---------------------------------------------------------------------------

    \390\ See supra Section IV.A.4 for additional discussion of Rule 
17Ad-17.
    \391\ Exchange Act Rule 17Ad-12, 17 CFR 240.17Ad-12.
---------------------------------------------------------------------------

    More specificity and a more robust set of standards against which 
paying agent activities can be measured may be necessary to better 
protect investors, facilitate the prompt and accurate clearance and 
settlement of securities transactions, and keep pace with the evolving 
roles transfer agents occupy in this space. We intend to propose new 
rules or rule amendments to address transfer agents' expanded role in 
handling investor funds and securities, as well as the increase in the 
number and types of transactions currently facilitated by transfer 
agents. In particular, the Commission intends to propose new rules or 
amend Rule 17Ad-12 to require transfer agents to comply with specific 
minimum best practices requirements related to safeguarding funds and 
securities, such as: (i) Maintaining secure vaults; (ii) installing 
theft and fire alarms; (iii) developing specific written procedures for 
access and control over securityholder accounts and information; (iv) 
enhanced recordkeeping requirements; and (v) specific unclaimed 
property procedures. The Commission also intends to propose a rule 
requiring transfer agents to segregate client funds to ensure that bank 
accounts are appropriately designated to protect client funds from 
being counted as transfer agent funds in the event of insolvency, and 
to obtain written notification from banks holding the funds that the 
funds are for the exclusive benefit of the customers, not the transfer 
agent.
    In addition, the Commission intends to propose new rules for 
transfer agents similar to those recently adopted for registered 
broker-dealers regarding amended annual reporting, independent audit, 
and notification requirements, which are designed to, among other 
things, increase broker-dealers' focus on compliance and internal 
controls.\392\ In light of the activities and risks associated with 
their paying agent activities discussed above, the Commission 
preliminarily believes it would be appropriate to implement similar 
rules for transfer agents, including rules requiring transfer agents to 
prepare and file annual financial reports consisting of a statement of 
financial condition, a statement of income, a statement of cash flows, 
and certain other financial statements, similar to those discussed 
above in Section VI.A in connection with new registration and annual 
reporting requirements. The Commission intends to propose new rules to 
require transfer agents acting as paying agents or custodians to 
prepare and maintain current and detailed policies and procedures 
reasonably designed to comply with any new or amended possession and 
control requirements for the safeguarding of customer funds and 
securities. In connection with these proposals, the Commission also 
intends to propose certain amendments to Form TA-2 requiring transfer 
agents to disclose the number and/or dollar value of residual and 
unclaimed funds. Finally, the Commission intends to propose amendments 
to Rule 17Ad-12 to provide specific requirements for the safeguarding 
of uncertificated securities, including appropriate controls and 
limitations on access to a transfer agent's electronic records.
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    \392\ For a discussion of the recent amendments to the 
requirements for broker-dealers, see Broker-Dealer Reports, Exchange 
Act Release No. 70073 (July 30, 2013), 78 FR 51910 (Aug. 21, 2013).
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    The Commission seeks comment on the following:

    18. Would the anticipated proposals described immediately above 
appropriately

[[Page 81981]]

strengthen practices and procedures involving the safeguarding of 
funds and securities by transfer agents? Are there other areas that 
the Commission should consider? If so, what regulatory or other 
action to address any areas of weakness or risk should the 
Commission consider? Please provide a full explanation.
    19. Should the Commission require transfer agents to file on a 
periodic basis information disclosing whether and how a transfer 
agent maintains custody of issuer and securityholder funds and 
securities, similar to the information broker-dealers are required 
to report quarterly? Why or why not? What benefits, costs, and 
burdens would result? Please provide a full explanation.
    20. In addition or as an alternative to the anticipated 
proposals described above, should the Commission provide specific 
guidelines or requirements for transfer agents' paying agent and 
custody services? Why or why not? What should those guidelines or 
requirements be? Do commenters believe the lack of such guidelines 
or requirements results in varying practices and standards among 
transfer agents, or specific areas of weakness or risk? Why or why 
not? Please provide a full explanation.
    21. What are the current best practices with respect to the 
safeguarding of funds and securities (e.g., segregation of accounts, 
written procedures, specific internal controls, limits on employee 
access to physical items and records, and to computer systems, as 
well as other access controls)? Do commenters believe that Rules 
17Ad-12, 17Ad-13, and 17Ad-17 are effective in encouraging those 
best practices? Are there differences in how funds are safeguarded 
between smaller and larger transfer agent firms? Please provide a 
full explanation.
    22. What are the current best practices with respect to the 
creation, maintenance, and reconciliation (or other use) of 
financial or other records that might bear upon the safety of 
customer funds and securities? Should the Commission require any 
such best practices, such as: (i) Monitoring the financial position 
of the transfer agent by preparing, maintaining, and reconciling 
financial books and records, including a statement of financial 
condition, a statement of income, a statement of cash flows, and 
certain other financial statements; and (ii) adopting internal 
written procedures or specific internal controls requiring the 
monthly reconciliation of all bank accounts used in a transfer 
agent's business, and requiring audits of the effectiveness of these 
internal controls by independent public accountants? Why or why not? 
Please provide a full explanation.
    23. Should the Commission require transfer agents to file 
certain additional reports prepared by an independent public 
accountant on the transfer agent's compliance and internal controls? 
Why or why not? In connection with any such requirement, should the 
Commission require transfer agents to allow representatives of the 
Commission or other ARA to review the documentation associated with 
certain reports of the transfer agent's independent public 
accountant and to allow the accountant to discuss with 
representatives of the Commission or ARA the accountant's findings 
associated with those reports when requested in connection with an 
examination of the transfer agent? Why or why not? Please provide a 
full explanation.
    24. Do commenters believe that there are different risks 
associated with transfer agents maintaining issuer or securityholder 
funds at banks that are part of the same holding company structure 
as the transfer agent, as opposed to a wholly unaffiliated bank? Why 
or why not? If there are distinct risks, should the Commission act 
to mitigate those risks, and if so, how? Should the Commission 
prohibit a transfer agent from maintaining issuer and securityholder 
funds at a bank that is affiliated with the transfer agent? If so, 
how should ``affiliated bank'' be defined? Should transfer agents 
that are also custodian banks be required to maintain a segregated 
special account or accounts at an unaffiliated bank or other 
approved location? Why or why not? Please provide a full 
explanation.
    25. If transfer agents were to be required to deposit or 
transmit issuer and securityholder funds into a special bank 
account, should the Commission also limit the amount of funds that 
could be deposited in special accounts at a bank to reasonably safe 
amounts, whether the bank is affiliated or non-affiliated? Why or 
why not? If so, what amounts should the Commission consider 
reasonably safe? Should such amounts be measured against the 
capitalization of the transfer agent and/or the bank? Why or why 
not? Please provide a full explanation.
    26. What are the current insurance requirements and/or practices 
among transfer agents, and what is the source of those requirements 
and/or practices? Would different or additional insurance 
requirements address current paying agent risks, such as loss or 
misuse of funds? Why or why not? If so, what types and amounts of 
insurance would be sufficient to address current paying agent risks? 
Why? If the Commission proposes specific insurance requirements for 
transfer agents, should it also require transfer agents to establish 
and maintain written policies and procedures describing their 
process for evaluating and procuring insurance (such as fidelity, 
professional indemnity, cybersecurity, errors and omissions and 
surety coverage) and for determining the coverage amounts? Should 
the transfer agent's annual accountant's report on internal controls 
required by Rule 17Ad-13 include verification that the transfer 
agent has fulfilled these requirements? Please provide a full 
explanation.
    27. What are the industry best practices with respect to 
safeguarding procedures specific to residual or unclaimed funds and 
securities remaining in the transfer agent's possession or control 
post-payment but prior to the successful distribution to 
securityholders or escheatment to a state or territory?
    28. If the Commission were to require transfer agents to 
disclose information pertaining to residual or unclaimed funds, what 
type of information and level of detail should be required, and how 
frequently should it be required to be reported? What would be the 
cost, burdens or benefits, if any, of such disclosure for issuers or 
transfer agents?
    29. Currently, Rule 17Ad-5 only requires a transfer agent who 
has not handled disbursements or dividends for at least three years 
to respond to inquiries by simply indicating the agent is no longer 
the paying agent. What volume of such requests do paying agents 
typically receive annually? Do paying agents typically know who the 
current agent is? What would be the costs, burdens or benefits if 
paying agents were required to provide such information? Please 
provide a full explanation.
    30. What would be the costs, benefits, and burdens, if any, of 
the proposals described above?

D. Restricted Securities and Compliance With Federal Securities Laws

    Transfer agents play a particularly important role in the 
securities industry with respect to the issuance and transfer of 
restricted securities. Restricted securities cannot be resold legally 
unless there is an effective registration statement for their resale, 
or there is an available exemption from registration for the resale. 
Typically, these securities bear restrictive legends indicating that 
their sale or transfer may be subject to a restriction or limitation 
and intermediaries will not effectuate their transfer until restrictive 
legends are removed. Because transfer agents are often the party 
responsible for affixing, tracking, and removing restrictive legends, 
they play an important role in helping to prevent unregistered 
securities distributions that violate Section 5 of the Securities Act 
of 1933 (``Securities Act'').\393\ The need to prevent unregistered 
securities distributions is particularly acute in the microcap market, 
where OTC issuers may not be subject to certain of the Commission's 
disclosure requirements and there is an increased potential for fraud 
and abuse because potential investors have few, if any, resources for 
obtaining meaningful disclosure or conducting independent research on 
microcap issuers.
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    \393\ See Securities Act Section 5, 15 U.S.C. 77e.
---------------------------------------------------------------------------

    The Commission's experience in investigating abuses in the microcap 
market and bringing enforcement actions charging violations of the 
federal securities laws demonstrates how the removal of restrictive 
legends can often be a central element contributing to illegal, 
unregistered distributions of securities. While these actions typically 
involve misconduct by persons other than the transfer agent, the 
Commission has charged transfer agents as culpable participants in a 
variety of circumstances. Transfer agents may face potential liability 
for aiding and abetting

[[Page 81982]]

or causing a violation of Section 5 of the Securities Act for an act or 
omission that contributes to or helps effectuate an illegal 
unregistered distribution.\394\ In some cases, we have brought an 
action against the transfer agent for violating Section 5 on the theory 
that the transfer agent was a ``necessary participant'' and 
``substantial factor'' in the unregistered distribution or sale.\395\ 
Depending on the facts and circumstances, a transfer agent also could 
incur liability pursuant to the anti-fraud provisions of the federal 
securities laws,\396\ such as Section 10(b) of the Exchange Act,\397\ 
Rule 10b-5 thereunder,\398\ and Section 17(a) of the Securities 
Act.\399\
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    \394\ See, e.g., National Stock Transfer, Inc., A.P. File No. 3-
9949, Sec. Act Rel. No. 7924 (Dec. 4, 2000) (settled proceeding 
against transfer agent and an officer of the transfer agent for 
willfully aiding and abetting and causing Section 5 violations by 
issuing shares in reliance on an issuer's representation of an S-8 
transaction that had been purportedly registered with the Commission 
when no such registration existed); Holladay Stock Transfer, Inc., 
A.P. No. 3-9567, Sec. Act Rel. No. 7519 (Mar. 25, 1998) (settled 
cease and desist proceeding against transfer agent and president 
for, among other charges, willfully aiding and abetting and causing 
Section 5 violations by an issuer client).
    \395\ See, e.g., Registrar and Transfer Company, A.P., Exchange 
Act Rel. No. 73189, para. 21 (Sep. 23, 2014) (settled action against 
transfer agent and its chief executive officer for, respectively, 
willfully violating Sections 5(a) and 5(c) and causing the transfer 
agents' violations); SEC v. CMKM Diamonds, Inc., 2011 WL 3047476 
(granting summary judgment for violations of Section 5 against 
transfer agent and its principal as necessary participants and 
substantial factors in unlawful distribution), rev'd, 729 F.3d 1248, 
1259 (9th Cir. 2013) (holding that ``undisputed facts do not 
establish that [transfer agent and its principal] were substantial 
participants . . . as a matter of law''); SEC v. CIBC Mellon Trust 
Co., Civ. Action No. 1:05-cv-0333 (PLF) (D.D.C. Feb. 16, 2005) 
(settled action charging a transfer agent with primary violations of 
Section 5 in addition to primary and aiding and abetting liability 
in a 10b-5 fraud to promote, distribute, and sell the stock of 
issuer Pay Pop, Inc. where Pay Pop officers paid a senior manager at 
the transfer agent bribes in the form of Pay Pop shares to obtain 
transfer agent services).
    \396\ See, e.g., id.
    \397\ Exchange Act Section 10, 15 U.S.C. 78j.
    \398\ Exchange Act Rule 10b-5, 17 CFR 240.10b-5.
    \399\ Securities Act Section 17(a), 15 U.S.C. 77q(a).
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    Some transfer agents have expressed concern, however, that they 
perceive a conflict in some instances between their obligation to take 
appropriate steps to forestall an illegal distribution, and their 
obligation under state law to comply with a valid request to issue a 
security or facilitate a transfer, which may require removal of a 
restrictive legend.\400\ Nonetheless, if a transfer would be unlawful 
under the federal securities laws, the transfer agent is not required 
by state law to comply with a request for transfer.\401\ We note that 
the person or entity requesting a transfer of restricted securities 
based on an exemption from the registration requirements of the 
Securities Act bears the burden of proving entitlement to that 
exemption.\402\ Further, it appears that issuers (and their transfer 
agents) may reasonably withhold consent to register a transfer until 
they can determine that the request ``is in fact rightful'' under 
Section 8-401(a)(7) of the UCC.\403\ Because the relevant 
determinations can involve the assessment of legal issues that are 
fact-dependent,\404\ transfer agents typically may seek to rely on 
representations or opinions provided by the issuer or securityholder 
and their counsels, usually in the form of an ``attorney opinion 
letter,'' to determine whether an exemption from registration under 
Section 5 of the Securities Act is applicable. As our enforcement 
experience demonstrates, however, this process is also susceptible to 
abuse, as many illegal distributions are facilitated by the improper 
issuance of such opinion letters.\405\
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    \400\ See, e.g., Robert Feyder, Transfer Agents Beware: A 
Request to Remove a Restrictive Legend May be the Equivalent of a 
Request to Register Transfer, The Securities Transfer Association, 
Inc. Newsletter, Issue 2 (2002).
    \401\ See Campbell v. Liberty Transfer Co., 2006 U.S. Dist. 
LEXIS 91568 (E.D.N.Y. Dec. 19, 2006) (holding that transfer agent 
could not be found liable for requiring that certificate be legended 
and refusing to honor transfer absent attorney opinion letter; 
federal law precluded the transfer agent from treating the shares as 
if they were freely tradable; to conclude that plaintiff's request 
for transfer required action by the transfer agent would be 
inconsistent with the Supremacy Clause); Catizone v. Memry Corp., 
897 F. Supp. 732 (S.D.N.Y. 1995) (holding that since the transfer 
violated the Securities Act, it cannot be considered rightful under 
Section 8-401 of the U.C.C. and transfer agent was under no duty to 
register the transfer); Charter Oak Bank & Trust Co. v. Registrar & 
Transfer Co., 358 A.2d 505 (N.J. Sup. Ct. 1976) (holding that a 
transfer agent cannot be required by state law to transfer stock in 
violation of the Securities Act, therefore, when a transfer agent 
has reasonable cause to believe that a transfer will be in violation 
of the Securities Act, it has the right to refuse to make the 
transfer until it has received an explanation or showing that the 
proposed transfer would not violate the Securities Act).
    \402\ See, e.g., SEC v. Ralston Purina Co., 346 U.S. 119 (1953); 
Gilligan, Will & Co. v. SEC, 257 F.2d 461 (2d Cir. 1959); SEC v. 
Culpepper, 270 F.2d 241 (2d Cir. 1959); Edwards v. United States, 
312 U.S. 473 (1941).
    \403\ If any of the preconditions enumerated in UCC Section 8-
401 do not exist, such as where a transfer is wrongful, the issuer 
is under no duty to register the transfer. See U.C.C. 8-401, cmt. 1.
    \404\ These issues can include determining a securityholder's 
affiliate status with the issuer or identifying the holding period 
during which an individual held restricted securities. See 
Securities Act Rule 144(b)(2), 17 CFR 230.144(b)(2) (providing for 
different conditions for use of the rule on affiliates than on non-
affiliates); Securities Act Rule 144(d)(1), 17 CFR 230.144(d)(1) 
(providing for a holding period for restricted securities).
    \405\ See, e.g., SEC v. Gendarme Capital Corp., 2012 WL 346457 
(E.D. Cal. Jan. 31, 2012) (denying defendant's motion to dismiss 
Section 5 claims, where Commission's complaint alleged that attorney 
issued more than 50 opinion letters to transfer agents containing 
false statements); SEC v. Czarnik, 2010 WL 4860678 (S.D.N.Y. Nov. 
29, 2010) (denying defendant's motion to dismiss Section 5 charges 
where complaint alleged, among other things, that attorney drafted 
false opinion letters provided to transfer agents).
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    More specificity around transfer agents' responsibilities with 
respect to illegal distributions may help to better protect investors, 
facilitate the prompt and accurate clearance and settlement of 
securities transactions, and combat fraud and manipulation in the 
microcap market. We therefore intend to propose new rules or rule 
amendments to address transfer agents' role in facilitating transfers 
of securities that result in illegal distributions of securities. In 
particular, the Commission intends to propose a new rule prohibiting 
any registered transfer agent or any of its officers, directors, or 
employees from directly or indirectly taking any action to facilitate a 
transfer of securities if such person knows or has reason to know that 
an illegal distribution of securities would occur in connection with 
such transfer.
    We also intend to propose a new rule prohibiting any registered 
transfer agent or any of its officers, directors, or employees from 
making any materially false statements or omissions or engaging in any 
other fraudulent activity in connection with the transfer agent's 
performance of its duties and obligations under the Exchange Act and 
the rules promulgated thereunder, including any new or amended rules 
the Commission may promulgate in the future, such as those dealing with 
transfer agents' safeguarding, paying agent, and other activities 
discussed above in Section VI.C and throughout this release. We also 
intend to propose a new rule requiring each registered transfer agent 
to adopt policies and procedures reasonably designed to achieve 
compliance with applicable securities laws and applicable rules and 
regulations thereunder, and to designate and specifically identify to 
the Commission on Form TA-1 one or more principals to serve as chief 
compliance officer.
    The Commission seeks comment on the following:

    31. Is there a need for Commission rules clarifying transfer 
agent liability for participating in or facilitating an unlawful 
distribution of securities in violation of Section 5 of the 
Securities Act? Why or why not? If so, what rules should be 
considered?
    32. Currently, there are no specific Commission rules regarding 
the placement or removal of restrictive legends by transfer agents. 
Is there a need for Commission rules governing the role of transfer 
agents in

[[Page 81983]]

placing or removing restrictive legends? Why or why not? If so, what 
are the specific issues that should be addressed by Commission 
rulemaking?
    33. Should the Commission provide specific guidelines and 
requirements for registered transfer agents in connection with 
removing a restrictive legend and in connection with issuing any 
security without a restrictive legend, such as: (1) Obtaining an 
attorney opinion letter; (2) obtaining approval of the issuer; (3) 
requiring evidence of an applicable registration statement or 
evidence of an exemption; and/or (4) conducting some level of 
minimum due diligence (with respect to the issuer of the securities, 
the shareholder and/or the attorney providing a legal opinion)? Why 
or why not? Should the Commission also consider specific 
recordkeeping and retention requirements related to the issuance of 
share certificates without restrictive legends? Why or why not? How 
should book-entry securities be addressed? Are there other 
guidelines or requirements the Commission should consider with 
respect to the issuance of share certificates or book-entry 
securities without restrictive legends?
    34. If the Commission were to issue any standards for 
restrictive legend removal, what would be an appropriate level of 
due diligence? Should any due diligence requirements be compatible 
with current state law governing the issuance and transfer of 
securities? Should the Commission consider specific guidelines and 
requirements for the review of representations that a shareholder is 
not an affiliate of the issuer or is not acting in coordination with 
other shareholders? Why or why not? If so, what guidelines or 
requirements should be considered? Should the Commission consider 
specific guidelines and requirements regarding transfer agents' 
obligations to review or determine the ultimate beneficial ownership 
of shares, identification of control persons of the shareholders, 
and relationship of shareholders to the issuer, officers or each 
other?
    35. Do transfer agents currently possess detailed and accurate 
information regarding the ownership history of the securities they 
process? For example, do transfer agents know whether the securities 
they process were ever owned by a control person or other affiliate 
of the issuer, and for how long? If so, how do they know this? If 
transfer agents possess such information, do they provide it to 
other market intermediaries, such as broker-dealers and securities 
depositories? If not, should transfer agents be required to do so? 
Has the inability of broker-dealers and other market intermediaries 
to obtain detailed and accurate securities ownership information 
facilitated the unlawful distribution of securities? Has it impaired 
secondary market liquidity, such as by making other market 
intermediaries unwilling or less willing to handle certain 
securities? If so, how can the Commission address these issues?
    36. Should transfer agents be permitted to rely on the written 
legal opinion of an attorney under certain circumstances? If so, 
what should those circumstances be? For example, should there be 
requirements regarding the attorney's qualifications or the 
attorney's relation to the issuer or investor? Is it appropriate for 
transfer agents to rely on attorney opinion letters to the extent 
the letters are based on representations of the issuer or third 
parties without the attorney's review of relevant documentation or 
independent verification of the representations?
    37. Should the Commission obligate transfer agents to: (i) 
Confirm the existence and legitimacy of an issuer's business (for 
example by reviewing leases for corporate offices, etc.); (ii) 
obtain names and signature specimens for persons the issuer 
authorizes to give issuance or cancellation instructions, together 
with any documents establishing such authorization; (iii) conduct 
credit and criminal background checks for issuers' officers and 
directors and shareholders requesting legend removal; (iv) obtain 
and confirm identifying information for shareholders requesting 
legend removal (e.g., legal name, address, citizenship); and/or (v) 
obtain and review publicly-available news articles or information on 
issuers or principals? Why or why not?
    38. Should the Commission enumerate a non-exhaustive list of 
``red flags'' or other specific factors which would trigger a duty 
of inquiry by the transfer agent? Why or why not? If so, which ``red 
flags'' should be included?
    39. Are there types of securities or categories of transactions 
commenters believe should require a heightened level of scrutiny or 
review by transfer agents before removing a restrictive legend or 
processing a transfer? If so, which ones and why? What should any 
such heightened scrutiny or review entail? For example, should the 
Commission require additional diligence requirements for securities 
offered by issuers that are not required to file financials with the 
Commission? Why or why not?
    40. The Commission is aware that industry participants have 
suggested that the Commission provide a safe harbor for transfer 
agents from direct liability or secondary liability (e.g. aiding and 
abetting) in connection with an unregistered distribution of 
securities if the transfer agent follows the procedures set out in 
the safe harbor concerning legend removal.\406\ Should the 
Commission impose such a safe harbor? Why or why not? If so, what 
should be the specific conditions of the safe harbor?
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    \406\ See Rhodes, supra note 18, at Sec.  6:12 (``Attempts are 
now being made to persuade the SEC to adopt a procedure and a form 
which, when presented to a transfer agent, would free the transfer 
agent from liability in making the transfer in reliance on the 
form.'').
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    41. Other than ensuring that the removal of restrictive legends 
is appropriate and not a means to sidestepping registration 
requirements, what requirements or prohibitions, if any, should the 
Commission consider as additional protections against the unlawful 
distribution of unregistered securities? For example, should 
transfer agents be required to deliver securities certificates 
directly to registered securityholders or be prohibited from 
delivering securities certificates to third parties that are not 
registered as owners of the certificates on the transfer agents' 
books? Why or why not?
    42. In what form (e.g. certificate form or book-entry form) are 
restricted securities held and issued today? Please provide specific 
data and examples and, where available, breakdowns by asset class. 
To what extent, if any, do holders of restricted securities own 
those securities in street name today? To the extent restricted 
securities are held in book-entry form, what practices are used in 
the marketplace today with respect to sending securityholders 
account statements generally and, specifically, sending account 
statements bearing restrictive legends? Are any special issues 
created by intermediation, such as by broker-dealers, of any 
restricted securities held in street name? Should the Commission 
consider rules governing the display of legends on account 
statements of shareholders who hold restricted securities in book-
entry form? Are there are any technological or regulatory barriers 
to the application of restrictive legends to securities held in DRS 
form? Should the Commission regulate transfer agent processing of 
securities that are held in DRS form?
    43. The Commission's staff understands that transfer agents may 
receive compensation in-kind in the form of securities of the issuer 
that hired the agent to remove restrictive legends. Does this create 
additional or different risks than if the transfer agent were paid 
in cash? If so, should the Commission limit transfer agents' 
acceptance of securities as payment for services related to penny-
stock securities or small issuers, or acquiring shares of the 
issuers they are servicing through other means, such as gift or 
purchase? Why or why not?
    44. What costs, benefits, and burdens, if any, would the 
potential requirements discussed above create for issuers or 
transfer agents?
    45. Should the Commission require transfer agents to maintain, 
implement, and enforce written compliance and/or supervisory 
policies and procedures, similar to those required of broker-
dealers? Why or why not? If so, what policies and procedures should 
be required? Should the Commission require transfer agents to 
disseminate written policies and procedures to all employees of the 
transfer agent on an annual or semi-annual basis? Why or why not? 
Please explain.
    46. Should the Commission adopt rules requiring registered 
transfer agents to designate and identify a chief compliance 
officer? Why or why not? If so, should the Commission adopt rules 
governing the reporting lines and relationships of the chief 
compliance officer? Should the chief compliance officer be required 
to file an annual compliance report with the Commission? Why or why 
not? If so, what information should be included in the annual 
compliance report?
    47. Should the Commission require transfer agents to undertake 
security checks or confirm regulatory and employment history for 
employees, certain third-party service providers, and associated 
persons,

[[Page 81984]]

and to require certain employees of registered transfer agents to 
register with the Commission? Why or why not? What would be the 
costs, benefits, and burdens associated with such a requirement? 
What challenges does the trend toward the outsourcing and offshoring 
of certain aspects of transfer agents' functions pose for ensuring 
compliance with such a requirement? Please provide a full 
explanation.
    48. Should the Commission require transfer agents to obtain 
certain information concerning their issuer clients, clients' 
securityholders and their accounts, and securities transactions? Why 
or why not? Please explain and provide supporting evidence where 
applicable. Should transfer agents be required to perform a form of 
due diligence on their clients and the transactions they are asked 
to facilitate, similar to the know-your-customer requirements 
applicable to broker-dealers? Should transfer agents be required to 
obtain a list of all affiliates of their issuer clients--including 
current and former control persons, promoters, and employees--and to 
take special precautionary steps whenever they are asked to process 
transactions for these affiliates?
    49. Should the Commission require transfer agents to maintain 
originals of all communications received and copies of all 
communications sent (including both paper and electronic 
communications) to or from the transfer agent related to its 
business? Why or why not? Please explain.

E. Cybersecurity, Information Technology, and Related Issues

    Cybersecurity risk is a specific type of operational risk and 
includes risks related to the security of data stored on computers, 
networks, and similar systems, and technology-related disruptions of 
operational capacity. Given the increased use of and reliance on 
computers, networks, and similar systems throughout society, 
cybersecurity threats are omnipresent today. They come from many 
sources and present a significant risk to a wide range of American 
interests, including critical governmental and commercial 
infrastructures, the national securities markets, and financial 
institutions and other entities that are involved in the National C&S 
System. In 2012, a single group targeted and attacked more than a dozen 
financial institutions with a sustained Distributed Denial of Service 
attack on those institutions' public Web sites.\407\ That same year, 
89% of global securities exchanges identified cyber-crime as a 
potential systemic risk and 53% reported experiencing a cyber-attack in 
the previous year.\408\
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    \407\ FSOC Annual Report 2013, sec. 7.2, p. 136. The attacks 
began in September and ``were targeted, persistent, and recurring.''
    \408\ See Rohini Tendulkar, Cyber-crime, securities markets and 
systemic risk, Joint Staff Working Paper of the IOSCO Research 
Department and World Federation of Exchanges (July 16, 2013), 
available at http://www.iosco.org/research/pdf/swp/Cyber-Crime-Securities-Markets-and-Systemic-Risk.pdf. Forty-six securities 
exchanges responded to the survey.
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    Cybersecurity risks faced by the capital markets and Commission-
regulated entities are of particular concern to the Commission. Given 
the highly-dependent, interconnected nature of the U.S. capital markets 
and financial infrastructure, including the National C&S System, as 
well as the prevalence of electronic book-entry securities holdings in 
that system, the Commission has a significant interest in addressing 
the substantial risks of market disruptions and investor harm posed by 
cybersecurity issues.
    Transfer agents are subject to many of the same risks of data 
system breach or failure that other market participants face. With 
advances in technology and the enormous expansion of book-entry 
ownership of securities, transfer agents today rely more heavily than 
ever on technology and automation for their core recordkeeping, 
processing, and transfer services, especially the use of computers and 
networks to store, access, and manipulate data, records, and other 
information. As a result, modern transfer agents are vulnerable to a 
variety of software, hardware, and information security risks which 
could threaten the ownership interest of securityholders or disrupt 
trading not only among registered securityholders but, because of 
transfer agents' electronic linkages to DTC, also among street name 
owners. For example, a software or hardware glitch, technological 
failure, or processing error by a transfer agent could result in the 
corruption or loss of securityholder information, erroneous securities 
transfers, or the release of confidential securityholder information to 
unauthorized individuals. A concerted cyber-attack or other breach 
could have the same consequences, or result in the theft of securities 
and other crimes.\409\
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    \409\ See generally, SEC Cybersecurity Roundtable transcript 
(Mar. 26, 2014), available at https://www.sec.gov/spotlight/cybersecurity-roundtable/cybersecurity-roundtable-transcript.txt.
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    Cybersecurity issues have been analyzed and discussed in detail 
over the last several years in a variety of fora.\410\ For example, the 
Commission has adopted a number of rules in recent years to address 
cybersecurity and related issues, although most of them either do not 
apply to registered transfer agents or do not address transfer agents' 
specific activities. In 2015, the Commission adopted Regulation SDR 
(``Reg SDR''), which addresses registration requirements, duties, and 
core principles for security-based swap data repositories (``SDRs'') 
and includes a requirement that every SDR adopt written policies and 
procedures reasonably designed to ensure that its core systems provide 
``adequate levels of capacity, integrity, resiliency, availability, and 
security.''\411\ However, unless it qualifies as an SDR, a registered 
transfer agent would not otherwise be subject to these requirements.
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    \410\ See, e.g., id.; see also OCIE Risk Alert, ``OCIE's 2015 
Cybersecurity Exam Initiative,'' Vol IV, Issue 8 (Sept. 15, 2015); 
OCIE Risk Alert, ``Cybersecurity Examination Sweep Summary,'' Vol 
IV, Issue 4 (Feb. 3, 2015); Luis A. Aguilar, Comm'r, SEC, Speech at 
``Cyber Risks and the Boardroom'' Conference of the New York Stock 
Exchange (June 10, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370542057946 (Boards of Directors, Corporate 
Governance and Cyber-Risks: Sharpening the Focus); Luis A. Aguilar, 
Comm'r, SEC, Speech at SINET Innovation Summit (June 25, 2015), 
available at http://www.sec.gov/news/speech/threefold-cord-challenge-of-cyber-crime.html.) (A Threefold Cord--Working Together 
to Meet the Pervasive Challenge of Cyber-Crime); Michael S. Piwowar, 
Comm'r, Interview at The World Today (Sept. 17, 2014), available at 
http://www.abc.net.au/worldtoday/content/2014/s4150439.htm (last 
visited Dec. 11, 2015).
    \411\ Exchange Act Rule 13n-6, 17 CFR 240.13n-6. Security-Based 
Swap Data Repository Registration, Duties, and Core Principles, 
Exchange Act Release No. 74246 (Feb. 11, 2011), 80 FR 14437 (Mar. 
19, 2015).
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    In 2014, the Commission adopted Regulation Systems, Compliance and 
Integrity (``Reg SCI''), which requires entities covered by the rule to 
test their automated systems for vulnerabilities, test their business 
continuity and disaster recovery plans, notify the Commission of cyber 
intrusions, and recover their clearing and trading operations within 
specified time frames.\412\ While Reg SCI covers registered clearing 
agencies and other entities, it does not apply to transfer agents.\413\
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    \412\ See Regulation Systems Compliance and Integrity, Exchange 
Act Release No. 73639 (Nov. 19, 2014), 79 FR 72252 (Dec. 5, 2014).
    \413\ Id. at 439-40 (discussing commenters views on whether or 
not transfer agents and other types of entities should be subject to 
Reg SCI and noting ``should the Commission decide to propose to 
apply the requirements of Regulation SCI to these entities, the 
Commission would issue a separate release discussing such a proposal 
and would take these comments into account.''). See also comment 
letters in response to Regulation Systems Compliance and Integrity 
(Proposing Release), Exchange Act Release No. 69077 (Mar. 8, 2013): 
The Securities Transfer Association, Inc. at 2 (Apr. 3, 2013) 
(commenting that transfer agents should not be subject to Reg SCI 
because they were not part of the Automation Review Policy (ARP 
Program) of the Commission existing prior to the proposal of Reg SCI 
and only large transfer agents have direct connectivity to entities 
proposed to be covered by Reg SCI); The Investment Company Institute 
at 3 (July 12, 2013) (transfer agents should not be subject to SCI); 
Fidelity Investments at 4 (July 8, 2013) (transfer agents should not 
be subject to SCI because they do not engage in real-time trading 
and they were not included in ARP Program).

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[[Page 81985]]

    To address cybersecurity risk issues faced by financial 
institutions (as defined in the Fair Credit Reporting Act) that are 
registered with the Commission, in 2013 the Commission adopted 
Regulation S-ID, which requires these entities to adopt and implement 
identity theft programs.\414\ Unless it meets the definition of a 
financial institution as defined in the Fair Credit Reporting Act, a 
registered transfer agent would not otherwise be required to comply 
with Regulation S-ID.\415\
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    \414\ See 17 CFR 248.201.
    \415\ See 17 CFR 248.201(a)(1); 15 U.S.C. 1681 (defining 
``financial institution'' to include certain banks, credit unions, 
and ``any other person that, directly or indirectly, holds a 
transaction account (as defined in Section 19(b) of the Federal 
Reserve Act) belonging to a consumer.''); see also Identity Theft 
Red Flags Rules, Exchange Act Release No. 69359, 69 n.182 (Apr. 10, 
2013), 78 FR 23637 (Apr. 19, 2013) (``SEC staff expects that other 
SEC-regulated entities described in the scope section of Regulation 
S-ID, such as . . . transfer agents . . . may be less likely to be 
financial institutions or creditors as defined in the rules, and 
therefore we do not include these entities in our [cost/benefit] 
estimates.'').
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    Finally, Regulation S-P was adopted in 2000 and requires certain 
Commission-registered entities to adopt measures to protect sensitive 
consumer financial information.\416\ Although Regulation S-P primarily 
covers registered brokers, dealers, investment companies, and 
investment advisers, it also covers transfer agents in a limited 
way.\417\ In addition, Commission staff has published guidance and 
other documents addressing cybersecurity risks faced by specific types 
of Commission registrants, such as corporate issuers, broker-dealers, 
investment advisers, and investment companies.\418\
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    \416\ See Final Rule: Privacy of Consumer Financial Information 
(Regulation S-P), Exchange Act Release No. 42974 (June 22, 2000), 65 
FR 40334 (June 29, 2000); Disposal of Consumer Report Information, 
Exchange Act Release No. 50781 (Dec. 2, 2004), 69 FR 71322 (Dec. 8, 
2004) (amending rule to require policies and procedures be written).
    \417\ See 17 CFR 248.30(b)(1)(v) (``Every . . . transfer agent 
registered with the Commission, that maintains or otherwise 
possesses consumer report information for a business purpose must 
properly dispose of the information by taking reasonable measures to 
protect against unauthorized access to or use of the information in 
connection with its disposal.''); see also Final Rule: Privacy of 
Consumer Financial Information (Regulation S-P), Exchange Act 
Release No. 42974 (June 22, 2000), 65 FR 40334 (June 29, 2000).
    \418\ See, e.g., Disclosure Guidance: Topic No. 2, Cybersecurity 
of the Division of Corporation Finance of the Commission (Oct. 13, 
2011), available at https://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm; OCIE Cybersecurity Initiative, National Exam 
Program Risk Alert Volume IV, Issue 2 (Apr. 15, 2014), available at 
http://www.sec.gov/ocie/announcement/Cybersecurity-Risk-Alert-Appendix-4.15.14.pdf; Cybersecurity Examination Sweep Summary, 
National Exam Program Risk Alert Volume IV, Issue 4 (Feb. 3, 2015), 
available at https://www.sec.gov/about/offices/ocie/cybersecurity-examination-sweep-summary.pdf; Cybersecurity Guidance, Division of 
Investment Management Guidance Update No. 2015-02 (Apr. 2015), 
available at http://www.sec.gov/investment/im-guidance-2015-02.pdf.
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    Further, as discussed above, the Commission's efforts to address 
transfer agents' safeguarding obligations, including the adoption and 
application of Rule 17Ad-12,\419\ have focused primarily on funds and 
securities rather than information systems or cybersecurity. Rule 17Ad-
12 requires transfer agents to exercise reasonable discretion in 
adopting safeguards appropriate for their own operations and risks, and 
a transfer agent can adopt the safeguards and procedures that are most 
suitable and cost-effective in light of its potential exposure to risk 
since the reasonableness of safeguards and procedures are tested ``in 
light of all facts and circumstances.'' \420\ The existing rule, 
however, prescribes no specific requirements for safeguarding 
additional items of potential value in a transfer agent's possession 
which potentially could be used to gain access to funds or securities, 
such as securityholder and account information and data in either 
physical or electronic form. Based on its experience administering the 
Commission's transfer agent examination program, the Commission staff 
is aware that some transfer agents have identified risks related to 
information and data directly or tangentially related to funds and 
securities used in their operations, such as securityholder and account 
information stored on systems and in records, and as a result, have 
developed policies, procedures, controls, or best practices to mitigate 
risk. However, the Commission is concerned that widely varying 
safeguarding procedures and controls among transfer agents could create 
uncertainty and risk in the market. The Commission is further concerned 
that insufficient safeguarding of information and data, such as 
securityholder personal and account information stored in computer 
systems and in records, could lead to the loss of information, theft of 
securities or funds, fraudulent securities transfers, or the 
misappropriation or release of private securityholder information to 
unauthorized individuals.
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    \419\ Exchange Act Rule 17Ad-12, 17 CFR 240.17Ad-12.
    \420\ See id.
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    In light of the foregoing, the Commission intends to propose 
certain amendments to the transfer agent rules to address how 
technology in general and cybersecurity risks in particular affect 
transfer agents and their activities, and how transfer agents' 
technology and information systems, including securityholders' data and 
personal information, may be related to their safeguarding activities. 
In particular, the Commission intends to propose new or amended rules 
requiring registered transfer agents to, among other things: (i) Create 
and maintain a written business continuity plan, tailored to the size 
and activities of the transfer agent, identifying procedures relating 
to an emergency or significant business disruption, including 
provisions such as data back-up and recovery protocols; (ii) create and 
maintain basic procedures and guidelines governing the transfer agent's 
use of information technology, including methods of safeguarding 
securityholders' data and personally identifiable information; and 
(iii) create and maintain appropriate procedures and guidelines related 
to a transfer agent's operational capacity, such as IT governance and 
management, capacity planning, computer operations, development and 
acquisition of software and hardware, and information security.
    The Commission seeks comment on the following:

Safeguarding of Securityholder Information and Data

    50. How do commentators understand transfer agents' safeguarding 
obligations as applied to uncertificated securities? Please be 
specific.
    51. How have transfer agents' data gathering and retention 
practices evolved in recent years? Do transfer agents collect more 
or different types of information than in the past? What new risks, 
if any, have arisen as a result of these changes? Are there some 
types of information collected by transfer agents that are more 
valuable to cyber-attackers than others, or that could cause more 
harm to investors or the markets if disclosed? If so, please 
specify. Do transfer agents currently have special protocols to 
protect their most sensitive information? If not, should the 
Commission require them to do so?
    52. Have transfer agents experienced internal or external access 
breaches, internal or external fraud or abuse, or other issues 
associated with creating, accessing, controlling, altering, or 
securely storing issuer or investor information or data, including 
securityholders' private account information and other private 
personal information, whether electronic or otherwise? If so, please 
describe the nature, extent, and resolution of such problems.
    53. What are the most significant risks or threats with respect 
to such information and data and what challenges do transfer agents 
face when attempting to assure that it is created, accessed, 
altered, controlled, and securely stored and retained in a manner 
reasonably free from identified risks? What policies, procedures, or 
controls may be employed to mitigate these risks or threats

[[Page 81986]]

and address these challenges? What is the evidence on the beneficial 
impact of these practices and does it vary across transfer agents? 
How and why?
    54. Have transfer agents identified risks related to information 
and data directly or tangentially related to funds and securities 
used in their operations, such as securityholder and account 
information stored on systems and in records, electronic or 
otherwise? Please describe the nature and scope of any such 
identified risks, as well as any challenges transfer agents face 
when attempting to mitigate them.
    55. Do commenters believe that insufficient safeguarding of 
information and data, such as securityholder personal and account 
information stored in computer systems and in records, could lead to 
the loss of information, theft of securities or funds, fraudulent 
securities transfers, or the misappropriation or release of private 
securityholder information to unauthorized individuals? Why or why 
not? Are commenters aware of any such occurrences or incidents 
resulting from insufficient safeguarding of information? If so, 
please describe the nature, extent, and resolution thereof, 
including any steps perceived as necessary to be taken to prevent a 
reoccurrence.
    56. What are the current industry best practices for protecting 
issuer or investor information or data in physical or printable 
records? What minimum standards, if any, should the Commission 
require for the safeguarding of such information or data?
    57. To ensure that data, records, and other types of information 
stored on computers, networks, and similar systems used by various 
participants in the National C&S System are safeguarded in a manner 
that protects investors and promotes the prompt and accurate 
clearance and settlement of transactions in securities, should 
Commission requirements apply to certain types of data, records, or 
other information, rather than to a particular type of entity? For 
example, should the Commission impose specific safeguarding, 
recordkeeping, or other requirements on registered transfer agents 
and other entities registered or required to be registered with the 
Commission that possess or control securityholder and account 
information (electronic or otherwise)? Why or why not? What would be 
the costs, benefits, and burdens associated with such an approach? 
Please provide empirical data if available.

Operational Risk, Cybersecurity, and Other Technology-Related Issues

    58. Should the Commission impose specific cybersecurity 
standards for transfer agents? If so, what should they be, and what 
standard would be appropriate? Should these standards vary depending 
on the size of the transfer agent or the nature and scope of the 
services it provides? Do commenters believe Reg SCI or Reg SDR 
provide an appropriate model for potential transfer agent rules 
addressing cybersecurity issues? Why or why not? If so, which 
aspects of Reg SCI or Reg SDR might be most appropriate given the 
activities of transfer agents? Are there other models that might be 
appropriate for the Commission to consider when developing 
cybersecurity rules for transfer agents? Regardless of the framework 
utilized, should the Commission consider requiring certain minimum 
cybersecurity protocols, such as practicing good cyber hygiene, 
patching critical software vulnerabilities, and using multi-factor 
authentication? Should the Commission require transfer agents to 
implement heightened security protocols for their most sensitive 
data? If so, which data would merit special protection, and what 
form should that protection take? Please provide a full explanation.
    59. Should the Commission require transfer agents to demonstrate 
a certain level of operational capacity, such as IT governance and 
management, capacity planning, computer operations, development and 
acquisition of software and hardware, and information security? Why 
or why not? If so, what requirements should the Commission consider? 
For example, would it be appropriate to require transfer agents to 
adopt written procedures concerning all business services performed 
by, and IT and other systems used by, the transfer agent? Should the 
requirements be different depending on whether the transfer agent 
uses proprietary systems or contracts with outside parties for some 
or all of their services or IT and other systems? Should the 
requirements be different depending on the size of the transfer 
agent or the scope of its activities? Please provide a full 
explanation.
    60. If the Commission proposes a rule requiring transfer agents 
to maintain a written business continuity or disaster recovery plan, 
what, if any, items should be required to be included in the plans 
in order to accomplish business continuity and disaster recovery 
objectives? Please provide a full explanation.
    61. What risks do transfer agents face from internal or external 
cyber attacks? What costs, challenges, or issues do transfer agents 
face in dealing with those risks (e.g., costs and resources, 
government and industry cooperation, and information sharing)? Are 
there different cybersecurity risks, or different best practices and 
procedures for addressing such risks, for transfer agents, depending 
on the size, activities, business lines, or technology 
infrastructure of the transfer agent? How often do transfer agents 
review operations and compliance policies and procedures related to 
cybersecurity?
    62. What tradeoffs should the Commission consider in addressing 
cybersecurity issues with respect to transfer agents? What evidence 
should it consider in evaluating those tradeoffs, including any 
benefits, burdens, or costs of specific rule proposals? Please 
provide a full explanation.
    63. Are transfer agents who have offices or do business in 
multiple jurisdictions subject to different standards or 
requirements with respect to cybersecurity, data privacy or business 
continuity? Do those standards or requirements conflict with one 
another? If so, how and to what extent do those standards conflict?
    64. What are the industry best practices with respect to 
identifying and addressing cybersecurity risk? What are the costs 
associated with any such best practices? Do commenters believe these 
costs are reasonable in light of relevant risks?
    65. What are industry best practices with respect to protecting 
electronic communications between and among transfer agents and 
other market participants using standardized communication protocols 
and standards? Should the Commission require standards for message 
encryption? Why or why not? Please provide a full explanation.
    66. What consequences for shareholders and issuers could result 
if the privacy of transfer agent records is compromised? Are there 
standards to which transfer agents should be required to adhere to 
reduce the possibility or likelihood of such an occurrence? 
Similarly, what consequences for shareholders and issuers could 
result from actions taken by impersonators due to inadequate 
authentication and/or attempts to cancel or repudiate previously 
executed instructions? Do the current processes and requirements for 
signature guarantees apply adequately in an electronic environment?
    67. How often do transfer agents review operations and 
compliance policies and procedures related to cybersecurity? Are 
third-party vendors utilized and, if so, to what extent? Where 
third-party vendors are utilized, how do transfer agents conduct 
oversight of such vendors?
    68. Should the Commission require transfer agents to have a 
minimum level of cybersecurity protection, and if so, what should 
those levels be? Should the Commission prohibit indemnification of 
transfer agents by issuers for liability for losses due to the 
agents' cybersecurity weaknesses? Why or why not?
    69. Should the Commission require transfer agents to maintain 
minimum insurance coverage for operational risks associated with 
transfer agent operations and services, including cybersecurity 
losses? Why or why not? Should the level and type of coverage be 
based on the transfer agent's particular circumstances? If so, what 
requirements and level of coverage would be appropriate for what 
circumstances?
    70. A new technology, the blockchain or distributed ledger 
system, is being tested in a variety of settings, to determine 
whether it has utility in the securities industry.\421\ What 
utility, if any, would a distributed public ledger system have for 
transfer agents, and how would it be used? What regulatory actions, 
if any, would facilitate that utility? How would transfer agents 
ensure their use of or interaction with such a system would comply 
and be consistent with federal securities laws and regulations, 
including the transfer agent rules? Please explain.
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    \421\ See generally, Nasdaq Announces Inaugural Clients for 
Initial Blockchain-Enabled Platform ``Nasdaq Linq'', Nasdaq (Oct. 
27, 2015), http://www.nasdaq.com/press-release/nasdaq-announces-inaugural-clients-for-initial-blockchainenabled-platform-nasdaq-linq-20151027-00986 (announcement regarding Nasdaq's use of 
blockchain technology to create a platform for trading shares of 
privately-held trading); Matthew Leising, Blockchain Potential for 
Markets Grabs Exchange CEOs' Attention, Bloomberg Business (Nov. 4, 
2015), http://www.bloomberg.com/news/articles/2015-11-04/futures-market-ceos-says-blockchain-shows-serious-potential (discussing 
financial services industry's interest in blockchain technology).
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    71. What costs, benefits, and burdens, if any, would the 
potential requirements

[[Page 81987]]

discussed above create for issuers or transfer agents?

F. Definitions, Application, and Scope of Current Rules

    The Commission intends to propose certain amendments to Rules 17Ad-
1 through 17Ad-20 designed to modernize, streamline, and simplify the 
overall regulatory regime for transfer agents and bring greater 
clarity, consistency, and regulatory certainty to the area, as well as 
mitigate any unnecessary costs or other burdens resulting from now 
obsolete or outdated requirements. In particular, the Commission 
intends to propose to: (i) Rescind Rules 17Ad-18 and 17Ad-21T; (ii) 
consolidate all definitions, including those in Rule 17Ad-1 and 17Ad-9, 
as well as specific definitions embedded in Rules 17Ad-5 (written 
inquiries), 17Ad-15 (signature guarantees), 17Ad-17 (lost 
securityholders), and 17Ad-19 (cancellation of securities certificates) 
into a single rule; (iii) update various definitions and references 
throughout the rules to correspond more accurately to the prevailing 
industry practices and standards, including clarifying that Rule 17Ad-
2's turnaround provisions apply with equal force to book-entry 
securities and clarifying, where appropriate, that other references to 
``certificates'' include book-entry securities, defining the terms 
``promptly, ``as soon as possible,'' and ``non-routine'' in Rule 17Ad-
2, and other clarifications; (iv) update the current turnaround, 
recordkeeping, and retention requirements to correspond more closely to 
the operations and capabilities of modern transfer agents; (v) amend 
the recordkeeping and retention requirements in Rules 17Ad-7 (record 
retention), 17Ad-10 (prompt posting of certificate detail, etc.), 17Ad-
11 (aged record differences), and 17Ad-16 (notice of assumption and 
termination) and consolidate them into a single rule; (vi) update the 
dollar and share thresholds reflected in Rule 17Ad-11 (aged record 
differences); (vii) amend Rule 17Ad-13 to provide additional and more 
useful information regarding transfer agents' internal controls; (viii) 
amend Rule 17Ad-15 to require transfer agents to document in writing 
their procedures and requirements for accepting signature guarantees; 
and (ix) propose other new rules and amendments designed to address 
certain TA activities not currently addressed by the rules, as 
discussed throughout this release.
    Further, the Commission's core books and records rules for transfer 
agents, Exchange Act Rules 17Ad-6 and 17Ad-7, prescribe minimum 
recordkeeping requirements with respect to the records that transfer 
agents must make and record retention requirements specifying how long 
those records and other documents relating to a transfer agent's 
business must be kept.\422\ These requirements, adopted in 1977, were 
intended to serve a dual purpose: (1) To assure that transfer agents 
are maintaining the minimum records necessary to monitor and keep 
adequate control over their own activities and performance; and (2) to 
permit the appropriate regulatory authorities to examine transfer 
agents for compliance with applicable rules.\423\ The Commission is 
concerned that the scope of the recordkeeping and record retention 
rules may no longer be broad enough to serve this dual purpose relative 
to the expanded scope of the activities and services that transfer 
agents provide today as discussed throughout this release. Accordingly, 
the Commission intends to propose certain amendments to Rules 17Ad-6 
and 17Ad-7 to ensure they adequately address: (i) Any new or amended 
registration, reporting, and disclosure requirements adopted by the 
Commission; (ii) any new or amended contract rules adopted by the 
Commission; (iii) any new or amended safeguarding requirements adopted 
by the Commission, including amendments to Rule 17Ad-12; (iv) any new 
or amended business recovery, information security, operational, or 
cybersecurity requirements proposed by the Commission; and (v) any 
conforming or other changes or additions to the Commission's transfer 
agent rules. The Commission seeks comment on the following:
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    \422\ Exchange Act Rule 17Ad-6, 17 CFR 240.17Ad-6; Exchange Act 
Rule 17Ad-7, 17 CFR 240.17Ad-7. For a more detailed description of 
the recordkeeping and record retention requirements for transfer 
agents, see supra Section IV.A.2.
    \423\ See Rule 17Ad-1 through 17Ad-7 Adopting Release, supra 
note 145.

    72. Are any of the current transfer agent rules outdated or 
obsolete? If so, which ones and why? Do commenters believe that any 
such outdated or obsolete portions of the transfer agent rules 
create confusion or inefficiency among transfer agents, issuers, 
investors, and other market participants? Why or why not? Please 
provide a full explanation.
    73. Should the Commission eliminate or amend any of the 
definitions in the transfer agent rules? If so, which ones and why? 
For example, should the Commission eliminate references to ``control 
book,'' ``processing,'' ``process'' deadlines, and ``outside 
registrar''? Are there any other definitions which should be 
amended? Why and how? Please provide a full explanation.
    74. Should the Commission eliminate the current exemption in 
Rule 17Ad-4 for small transfer agents? Why or why not? Have 
circumstances in the industry changed such that the original 
rationale for this exemption should be reconsidered? Should the 
Commission take into account the size of a transfer agent, or any 
other measure, in determining whether the current exemption is 
appropriate? Why or why not? Please provide a full explanation.
    75. Currently, Rule 17Ad-5 (written inquiries and requests) 
permits transfer agents to respond to certain instructions and 
inquiries ``promptly'' rather than within a specified time period 
unless the requestor provides specific detailed information, such as 
a certificate number, number of shares, and name in which the 
certificate was received. In commenters' experience, is the detailed 
information specified in Rule 17Ad-5 an accurate description of the 
minimum information necessary to permit a transfer agent to identify 
the subject of an inquiry or instruction and respond? If not, what 
other information would allow a transfer agent to identify the 
subject of the inquiry and respond?
    76. Does Rule 17Ad-5 address the full scope of inquiries 
received by transfer agents? If not, what additional types of 
inquiries and requests do transfer agents receive, and in what 
volume? How are those inquiries received (e.g., letter, email, 
phone, fax, internet)? Should the Commission include additional 
inquiries within the scope of Rule 17Ad-5? Why or why not? If so, 
what types of inquiries should be included and what types should be 
excluded? Please provide a full explanation.
    77. Should the Commission update Rule 17Ad-6 to expand the 
categories and types of records required to be maintained by 
registered transfer agents? Why or why not? If so, what requirements 
should the Commission consider? Please provide a full explanation.
    78. Should the Commission eliminate or amend the requirement to 
escrow ``source code'' in Rule 17Ad-7 (record retention)? Why or why 
not? How do transfer agents comply with this requirement, and what 
are the benefits, costs, burdens, and tradeoffs associated with 
those efforts? If the Commission amends rather than eliminate the 
requirement, what amendments should the Commission consider? Please 
provide a full explanation.
    79. Rule 17Ad-7(g) requires certain records to be made available 
to the Commission. What records do commenters believe should be 
covered by the rule? Are there electronic communication standards in 
use by the industry to transfer such records and, if so, should the 
Commission require their use? Why or why not?
    80. Are the different record retention requirements in Rules 
17Ad-7 (record retentions), 17Ad-10 (prompt posting of certificate 
detail, etc.), 17Ad-11 (aged record differences), and 17Ad-16 
(notice of assumption and termination) still appropriate in light of 
transfer agents' operational and technological capabilities? Why or 
why not? Particularly in light of the prevalence of electronic 
records, should retention periods for all documents be similar? Why 
or why not? For the records that transfer agents are

[[Page 81988]]

required to maintain, should the Commission require a longer or 
shorter retention period? Why or why not? Please provide a full 
explanation.
    81. Does the current definition of certificate detail in Rule 
17Ad-9 (definitions) reflect current processes? Why or why not? For 
example, should the Commission amend the definition to include 
additional information relevant to identifying the specific 
security, such as CUSIP number or a unique product identifier if 
available, or additional information relevant to identifying the 
investor, such as investor email address and phone number? Why or 
why not? Do commenters believe such information would help transfer 
agents identify lost securityholders or improve securityholder 
communications? Please provide a full explanation.
    82. With respect to Rule 17Ad-11 (aged record differences), 
which requires reports for actual overissuances, should the 
Commission require transfer agents to provide issuers with 
information about all aged differences, rather than just differences 
that lead to overissuance? Why or why not? Are the current dollar 
and share thresholds reflected in Rule 17Ad-11 appropriate 
indicators of current or impending problems? Should the thresholds 
be amended? If so, what thresholds would be more appropriate? Are 
commenters aware of instances where impending problems were not 
reported because the dollar or share threshold did not apply to the 
situation? Please provide a full explanation.
    83. Should the Commission again consider expanding Rule 17Ad-14 
(tender agents) to include reorganization events such as 
conversions, maturities, redemptions, and warrants, as it proposed 
in 1998? \424\ Why or why not? Please provide a full explanation.
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    \424\ Processing of Reorganization Events, Tender Offers, and 
Exchange Offers, Exchange Act Release No. 40386 (Aug. 31, 1998), 63 
FR 47209 (Sept. 4, 1998).
---------------------------------------------------------------------------

    84. What are the current best practices with regard to accepting 
signature guarantees, if any? Should the Commission amend Rule 17Ad-
15 to require transfer agents to document in writing their 
procedures and requirements for accepting signature guarantees? Why 
or why not? Should the Commission require transfer agents to 
establish and comply with certain minimum procedures and 
requirements related to accepting signature guarantees? Why or why 
not? If so, what procedures and requirements should be required, and 
why? Please provide a full explanation.
    85. Should the Commission amend Rule 17Ad-16 (notice of 
assumption)? Why or why not? If so, what amendments should be 
considered, and why? Is the information required by Rule 17Ad-16 
already provided to the industry, including DTC? If yes, how is that 
information being provided to the industry? Is there an industry 
standard for electronic communications of these changes? Please 
provide a full explanation.
    86. Are there other amendments to the rules that commenters 
believe would be appropriate or beneficial that the Commission 
should consider? Please provide a full explanation.
    87. What costs, benefits, and burdens, if any, would the 
potential requirements discussed above create for issuers or 
transfer agents?

G. Conforming Amendments

    In connection with the potential new rules and rule amendments 
discussed above, the Commission also intends to propose rules for 
conforming and other revisions to Forms TA-1 and TA-2 and to Rules 
17Ad-1 through 17Ad-20, as appropriate. For example, the Commission may 
propose to amend Section 8(a)(iv) of Form TA-1 to require disclosure of 
employees' actual percentage ownership of the transfer agent, rather 
than whether their percentage ownership falls within a broad range. The 
Commission also intends to propose defining or clarifying certain terms 
and definitions used in the forms, such as ``independent, non-issuer'' 
and ``control,'' which are not currently defined in Form TA-1, and to 
clarify the type of disciplinary history required to be disclosed by 
Question 10. The Commission preliminarily believes that such 
clarifications would help ensure that transfer agents are interpreting, 
completing, and filing the requisite forms in a consistent manner. The 
Commission requests comment on all aspects of the conforming and other 
amendments described above.

VII. Concept Release and Additional Request for Comment

    This section discusses additional regulatory, policy, and other 
issues associated with transfer agents beyond those discussed above in 
Section VI and seeks comment to identify, where appropriate, possible 
regulatory actions to address those issues. In particular, we discuss: 
(i) The processing of book-entry securities by transfer agents; (ii) 
differences between transfer agent recordkeeping for registered 
securityholders and broker-dealer recordkeeping for beneficial owners; 
(iii) characteristics of and issues associated with transfer agents to 
mutual funds; (iv) crowdfunding; (v) services provided by transfer 
agents and other entities that act as ``third party administrators'' 
for issuer-sponsored investment plans; and (vi) issues associated with 
outside entities engaged by transfer agents to perform certain 
services. Throughout, we seek comment regarding the issues raised, and 
conclude with a series of requests for comment on potential broad 
changes to the overall regulatory regime for transfer agents that may 
be appropriate in light of the issues discussed throughout this 
release.

A. Processing of Book-Entry Securities

    Most municipal and corporate bonds, U.S. government and mortgage-
backed securities, commercial paper, and mutual fund securities, are 
offered almost exclusively in book-entry form (i.e., certificates are 
not available).\425\ While equities have lagged behind this trend, they 
too have been moving closer to full dematerialization.\426\ At the same 
time, much of the terminology and definitions found in the Commission's 
transfer agent rules were written, and therefore reflect, a time when 
most securities were certificated. For example, the definitions of 
``item'' and ``transfer'' in Rules 17Ad-1, 17Ad-2, and 17Ad-4 primarily 
reference certificated securities.\427\ Likewise, Rule 17Ad-10, which 
addresses a transfer agent's buy-in requirement in the event of 
physical overissuance of securities, refers only to ``certificates.'' 
\428\
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    \425\ See generally, Strengthening the U.S Financial Markets, A 
Proposal to Fully Dematerialize Physical Securities, Eliminating the 
Cost and Risks They Incur, A White Paper to the Industry, DTCC 1, 3-
6 (July 2012), available at http://www.dtcc.com/~/media/Files/
Downloads/WhitePapers/Dematerialize_Securities_Jul._2012.pdf.
    \426\ Id.
    \427\ See, e.g., Exchange Act Rules 17Ad-1(a)(1)(i), (d), 17 CFR 
240.17Ad-1(a)(1)(i), (d).
    \428\ See Exchange Act Rule 17Ad-10(g)(1), 17 CFR 240.17Ad-
10(g)(1).
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    Although many of the transfer agent rules refer only to 
certificated securities, it has long been the Commission's position 
that, absent an explicit exemption, all of the transfer agent rules 
apply equally to both certificated and uncertificated securities, 
particularly in cases where the rules impose time limits within which a 
transfer agent must turn around or process a transfer. For example, 
when adopting Rules 17Ad-9 through 17Ad-13 in 1983, the Commission 
clarified in its response to public comments that the definition of 
certificate detail in Rule 17Ad-9 applies with equal force to both 
certificated and uncertificated securities and related account 
details.\429\ In that same adopting release, the Commission noted that 
exemptions respecting uncertificated securities are inappropriate in 
regulations regarding registered transfer agents' accurate creation and 
maintenance of issuer securityholder records and safeguarding of funds 
and securities in their operations.\430\
---------------------------------------------------------------------------

    \429\ See 17Ad-9 through 13 Proposing Release, supra note 2 
(noting that the reference to ``certificate detail'' does not 
necessarily require the existence of a ``certificated security.'' 
Rather, it reflects the items of information regarding the 
registered owner and of the security, regardless of the form of the 
security.).
    \430\ Id.

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[[Page 81989]]

    At the same time, the Commission is aware that differences of 
interpretation among transfer agents may result in widely varying 
compliance practices, procedures, and controls among transfer agents. 
For example, because Rule 17Ad-10(g) refers specifically to 
certificates,\431\ Commission staff have received questions regarding 
the rule's applicability to overissuances that did not involve 
certificated securities, indicating that, in applying that rule, some 
transfer agents may buy-in securities if an overissuance involved 
certificated securities, but not if it involved book-entry securities.
---------------------------------------------------------------------------

    \431\ Exchange Act Rule 17Ad-10(g), 17 CFR 240.17Ad-10(g).
---------------------------------------------------------------------------

    The Commission believes it is appropriate to consider possible 
amendments to address the applicability of the transfer agent rules to 
uncertificated or book-entry securities, including those held in DRS or 
issued by investment companies such as mutual funds.\432\ Accordingly, 
the Commission seeks comment on the following:
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    \432\ Exchange Act Rule 17Ad-4(a) exempts from the application 
of Exchange Act Rule 17Ad-2, among other rules from which it 
provides exemption, securities held in a DRIP, redeemable securities 
of registered investment companies (which include open-end 
investment management companies (i.e., mutual funds)) and limited 
partnership interests. Consequently, the provisions of Rule 17Ad-2 
which are a fundamental part of Commission regulation of transfer 
agent processing of securities do not apply to mutual fund shares or 
securities held in Issuer Plans that are DRIPs.

    88. Should the Commission amend the existing rules in light of 
the significant increase in book-entry securities? If so, what 
approach should the Commission take? For example, although a 
significant percentage of transfer instructions are categorized as 
non-routine items under the current rules (such as investor requests 
for certificates, to close accounts, and to act in certain types of 
corporate actions), there are no specific processing requirements 
for non-routine items. Should the same processing obligations apply 
to all instructions, thereby dispensing with the current routine and 
non-routine distinctions in Exchange Act Rule 17Ad-1? Alternatively, 
or in conjunction with that approach, should the existing rules be 
amended to explicitly apply transfer agents' processing obligations, 
not only to ``transfers'' as defined in Rule 17Ad-1, but also to the 
entire range of instructions a transfer agent may receive, including 
those related to uncertificated securities, such as purchase and 
sale orders, balance certificates, establishment and movement of 
book-entry positions, corporate actions, and updates of 
securityholder book-entry account information? Why or why not? Are 
there other approaches that would be appropriate? If so, please 
describe.
    89. What policies, concerns, factors, and other considerations 
do commenters believe should inform any approach the Commission 
might take to ensure the transfer agent rules apply appropriately to 
book-entry securities? For example, in determining whether a 
specific rule or requirement is appropriate, should the focus of the 
Commission's consideration be on the physical nature of the security 
(whether certificated or uncertificated), or market-based factors, 
such as whether there is a potential for backlog to occur based on 
trading volume in the particular type of asset, or both and why? Are 
there other appropriate considerations? If so, please describe.
    90. Given that transfer and other requests now often involve the 
highly automated processing of book-entry securities rather than 
manual processing of certificates, should the Commission modify or 
eliminate the turnaround and processing requirements of Rules 17Ad-1 
and 17Ad-2? Why or why not? For example, is the distinction between 
items received before noon and items received after noon still 
relevant given that the vast majority of requests are now received 
and responded to electronically? Should the Commission shorten the 
timeframe for fulfilling instructions and/or increase the percentage 
of transfer instructions that must be fulfilled within those 
timeframes each month? Why or why not?
    91. Should the Commission shorten Rule 17Ad-9's permitted 
timeframes for posting credits and debits to the master 
securityholder file? Should the Commission require that certificate 
details be dispatched daily? Why or why not?
    92. Are commenters aware of instances where securityholders or 
broker-dealers cannot determine whether their securities have been 
processed by transfer agents, despite the requirements of Rule 17Ad-
5? If so, please describe any such instances and indicate what 
requirements, if any, the Commission should consider to address such 
instances. For example, should the Commission expand the definition 
of ``item'' to include presentation by both individual investors and 
broker-dealers or other intermediaries acting on behalf of 
individual investors and require transfer agents to report to the 
presentor of an item the status of any item for transfer not 
processed within the required timeframes? Why or why not?
    93. It is the Commission staff's understanding that investors 
have brought legal actions against transfer agents under state law 
to require the transfer agent to effect a transfer, including when 
the transfer agent claimed the securityholder's instructions were 
not in good order and therefore the relevant securities were not 
transferred, or were delayed for a long period of time.\433\ Are 
commenters aware of these or other problems or issues associated 
with transfer agents failing to effect a securityholder's transfer 
instructions within a reasonable period of time? If so, please 
describe the relevant facts and circumstances. For example, what 
factors might have led to such a situation and how was it resolved? 
What types of securityholders were directly involved? What were the 
adverse consequences, if any?
---------------------------------------------------------------------------

    \433\ See, e.g., Kanton v. United States Plastics, Inc., 248 F. 
Supp. 353 (D.N.J. 1965) (involving common law claims); Bender v. 
Memory Metals, Inc., 514 A.2d 1109 (Del. Ch. 1986) (involving claim 
under UCC that transfer was rightful); Mackinder v. Schawk, Inc., 
No. 00 Civ. 6098 (DAB), 2005 WL 1832385, at *16 (S.D.N.Y. Aug. 2, 
2005) (involving shareholder claim under Delaware law to require the 
removal of restrictive legend reflecting restrictions imposed by 
stock purchase agreement).
---------------------------------------------------------------------------

    94. Do commenters believe there are problems associated with 
transfer agents failing to effect or reject transfer instructions 
within a reasonable time? Should the Commission amend the rules to 
define what information or documentation is required and from whom 
it must be received to constitute good order? Should the Commission 
amend the rules to define the terms ``reject'' or ``rejection'' in 
connection with transfer instructions? Why or why not? Should 
transfer agents be required to communicate the specific reasons why 
an instruction was not a good order? Should transfer agents be 
required to buy-in securities (or take other corrective action to 
satisfy transfer instructions that were received in good order but 
not completed after a specific period of time)? If so, should the 
requirement apply broadly or be limited to specific conditions? 
Please explain.
    95. Are commenters aware of delays in processing incomplete or 
improper requests for DRS transactions? If so, what caused these 
delays, and would they be eliminated or reduced if transfer agents 
were to provide to securityholders the information the 
securityholder would need to prepare complete instructions for 
shares held in DRS? Please explain.
    96. Given that most securityholders no longer receive paper 
certificates evidencing their holdings, should the Commission 
require transfer agents to provide securityholders with an account 
statement with specific details for each transaction that occurred 
with respect to each securityholder's account? If so, how and how 
often should such statements be provided and what information should 
be included? Please describe.

B. Bank and Broker-Dealer Recordkeeping for Beneficial Owners

    Although transfer agents provide critical recordkeeping and 
transfer services to registered owners, they generally do not have 
visibility beyond the master securityholder file and therefore rarely 
provide recordkeeping and transfer services to beneficial owners who 
hold in street name. Instead, recordkeeping and transfer services 
usually are provided to beneficial owners by the intermediary through 
whom the beneficial owner purchased the securities, usually a broker-
dealer or bank.\434\ Because many

[[Page 81990]]

securityholders elect to hold exchange-traded securities in street 
name, many issuers have significantly more beneficial owners than 
registered owners. As a result, broker-dealers, banks, and other 
intermediaries may provide recordkeeping and transfer services to a 
larger portion of a given issuer's shareholder base--the 
intermediaries' customers--than the registered transfer agent for that 
issuer.
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    \434\ Commission staff understands that some industry 
participants may refer to the recordkeeping and transfer services 
provided to beneficial owners by brokers and banks discussed herein 
as ``sub-accounting'' or ``sub-transfer agent'' services. We note 
that the term sub-transfer agent in this context is not meant to 
imply a contractual relationship between the registered transfer 
agent who provides recordkeeping and transfer services for 
registered owners and the broker or bank that provides the same 
services for their own beneficial owner customers. Although brokers 
and banks who act as sub-transfer agents could contract with 
registered transfer agents to provide recordkeeping and transfer 
services for their beneficial owner customers, they rarely do so, 
choosing instead to provide these services themselves.
---------------------------------------------------------------------------

    The transfer and recordkeeping services provided to beneficial 
owners by banks and brokers are largely identical to the recordkeeping 
and transfer services provided with respect to registered owners by 
registered transfer agents. For example, banks and brokers often 
maintain accountholder information details, process transfers and other 
changes to accounts, provide securityholder services such as call 
center support, and provide account statements showing ownership 
positions for their beneficial owner customers. Yet although these 
services may be nearly identical to the services provided to registered 
owners by transfer agents, banks and brokers are typically not required 
to register as transfer agents under the Exchange Act solely for 
providing these services to beneficial owners. This is because the 
positions serviced are ``securities entitlements'' under the UCC rather 
than ``Qualifying Securities'' that trigger transfer agent 
registration.\435\
---------------------------------------------------------------------------

    \435\ See supra note 115 (UCC definition of ``securities 
entitlement''), Section IV.A (discussing provisions of the Exchange 
Act regarding Qualifying Securities).
---------------------------------------------------------------------------

    As street name registration has become more prevalent and the 
number of registered holders has decreased, more banks and brokers are 
providing to more investors critical transfer, processing, and 
recordkeeping services, but are not required to register with the 
Commission or other ARA as a transfer agent.\436\ This raises potential 
issues regarding the Commission's regulation of securities processing 
as it pertains to the processing of equity securities by banks, 
brokers, and other intermediaries.\437\ Specifically, if a bank or 
broker providing transfer and recordkeeping services to beneficial 
owners is not required to register as a transfer agent with the 
Commission or other ARA, it will not be required to comply with the 
Commission's transfer agent rules, including the specific 
recordkeeping, processing, transfer, and other investor protection 
requirements imposed by those rules. While some banks and brokers may 
be subject to certain regulatory requirements depending on their 
specific activities, those regulations may not specifically address 
securities processing or provide the same investor protections as do 
the Commission's transfer agent rules. For example, registered broker-
dealers are subject to extensive books and records requirements 
pursuant to Exchange Act Rule 17a-3, but that rule does not impose the 
same ownership and transfer recordkeeping requirements as the transfer 
agent rules such as Exchange Act Rule 17Ad-10, which imposes detailed 
information requirements with respect to every securityholder account 
position.\438\ Further, some third party administrators \439\ and other 
intermediaries who provide recordkeeping, administrative, and other 
services for retirement and issuer plans may not be regulated directly 
at all by any federal financial regulator. Any risks or other issues 
associated with these intermediaries' activities become more acute as 
street name ownership, and the resulting volume of processing of street 
name book-entry positions by brokers, banks, and other intermediaries 
providing transfer and recordkeeping services to beneficial owners, 
continues to increase.\440\
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    \436\ Id.
    \437\ There are of course other issues raised by the increasing 
prevalence of bank and broker recordkeeping for beneficial owners, 
including complexity in the proxy distribution and voting systems 
and barriers to communication between securityholders and issuers. 
These issues are beyond the scope of this release but have been 
discussed in other Commission releases. See, e.g., Final Street Name 
Study, supra note 82; Proxy Concept Release, supra note 112. We 
discuss certain issues concerning bank and broker processing of 
investment company securities below in Section VII.C.4.
    \438\ We note, however, that Rule 17a-3 does contain several 
requirements related to securityholder accounts, such as a 
``blotter'' that shows ``the account for which each such transaction 
was effected'' as well as other details, and an ``account record'' 
with detailed identifying information for each customer or owner, 
such as their name, address, and date of birth, as well as their 
annual income, net worth, and the account's investment objectives.
    \439\ Third party administrators are discussed in more detail 
below in Section VII.E.
    \440\ For example, Professor Egon Guttman identified the lack of 
regulation of broker-dealer street name ownership processing as a 
key regulatory gap and advocated closing it as one of his key 
recommendations for regulatory improvement. See Egon Guttman, 
Federal Regulation of Transfer Agents, 34 a.m. U. L. Rev. 281, 327-8 
(1985), available at http://www.americanuniversitylawreview.org/pdfs/34/34-2/Guttman.pdf.
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    The Commission seeks comment on the following:

    97. Are there regulatory discrepancies among transfer agents and 
banks and brokers who provide similar services for beneficial 
owners? If so, what are they and do they present risks or raise 
competition issues in the market for these services? If so, what are 
the competition issues or risks associated with any such 
discrepancies, and what approach, if any, should the Commission 
consider to address them? Please provide a full explanation.
    98. Are there reasons why the Commission should regulate 
transfer agent processing of registered owner securities held in 
book-entry positions differently than bank and broker processing of 
street name positions held in book-entry form? If so, please 
describe them. Please provide a full explanation.
    99. In light of increased obligations under federal law for 
certain issuers to ascertain their securityholders' identities and 
the barriers to doing so created by the street name system, as 
discussed above in Section III.B, should the Commission require 
entities that are regulated by the Commission, including brokers, 
banks, or others who provide transfer and recordkeeping services to 
beneficial owners, to provide or ``pass through'' securityholder 
information to transfer agents? If so, what type of information 
should be provided and how should it be transmitted? What would be 
the effect on the actions and choices of affected parties, including 
transfer agents, banks and brokers, issuers, registered owners, and 
beneficial owners? Please provide a full explanation.
    100. If the Commission were to require certain registrants to 
pass through securityholder information regarding beneficial owners 
to transfer agents, should the Commission prohibit transfer agents 
from using such information for other than certain prescribed 
purposes? If so, for what purposes should such information be 
allowed to be used, and why? For example, should the information be 
used solely for the transfer agent's legal/compliance purposes, or 
should it be permitted to be used for other purposes, such as 
securityholder communications? Should transfer agents' ability to 
share information be limited, particularly where information is 
shared in return for compensation or where information sharing is 
not fully disclosed to parties such as the issuer or the 
securityholder? Why or why not? Should such information be permitted 
to be shared only with the securityholder's consent? Please provide 
a full explanation.

C. Transfer Agents to Mutual Funds

    U.S. registered investment companies managed $18.7 trillion in 
assets at year-end 2014.\441\ This figure is primarily comprised of 
mutual funds (i.e., open-end management investment companies or ``open-
end funds''), but also includes closed-end management investment 
companies (``closed-end funds'') of $289

[[Page 81991]]

billion, unit investment trusts (``UITs'') \442\ of $101 billion, and 
exchange-traded funds (``ETFs'') \443\ of approximately $2 trillion, 
which have seen considerable growth in recent years.\444\ While the 
discussion on transfer agents to mutual funds is focused on open-end 
funds, the Commission also seeks comment on transfer agents to other 
registered investment companies as discussed in Section 5 below.
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    \441\ See Testimony of David W. Grim, Director, Division of 
Investment Management, before the House subcommittee on Capital 
Markets and Government Sponsored Enterprises (Oct. 23, 2015) (``Grim 
Testimony'').
    \442\ UITs are funds that offer a fixed, unmanaged portfolio, 
generally of stocks and bonds, as redeemable ``units'' to investors 
for a specific period of time, each of which represents an undivided 
interest in a unit of specified securities. See Investment Company 
Act Section 4(2), 15 U.S.C. 80a-4(2).
    \443\ ETFs may be formed as either open-end funds or UITs.
    \444\ See Grim Testimony, supra note 441.
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    Open-end funds \445\ have become one of the main investment 
vehicles for retail investors \446\ in the United States and play a 
major role in the U.S. economy and financial markets. When the first 
transfer agent rules were adopted in 1977, there were approximately 477 
mutual funds with $48 billion in assets for shareholders in just under 
8.7 million accounts.\447\ By the end of 2014, there were approximately 
7,900 mutual funds with approximately $16 trillion in assets \448\ held 
on behalf of hundreds of millions of investors.\449\
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    \445\ Open-end management investment companies are a type of 
registered investment company under Section 8 of the Investment 
Company Act that issue redeemable securities. Other types of 
investment companies include, but are not limited to, closed-end 
funds and UITs. See Investment Company Act Sections 4(2), 15 U.S.C. 
80a-4(2) (definition of unit investment trust) and 5(a) (definition 
of open and closed-end 1940 Act companies). ETFs are typically 
organized as open-end funds or UITs.
    \446\ See Grim Testimony, supra note 441; see also Investment 
Company Institute, 2015 Investment Company Fact Book, 29 (2015), 
available at http://www.ici.org/pdf/2015_factbook.pdf (``2015 ICI 
Factbook''). At year-end 2014, retail investors (i.e., households) 
held the vast majority (89 percent) of the nearly $16 trillion in 
mutual fund assets, whereas institutions held about 11 percent.
    \447\ 2015 ICI Factbook, supra note 446, at 173 (Data sec. 1, 
tbl. 1).
    \448\ Id.
    \449\ The number of shareholder accounts last reported by the 
Investment Company Institute (``ICI'') was approximately 265 million 
in 2013 and includes a mix of individual and omnibus accounts 
(excluding certain underlying beneficial owner accounts), thus 
understating the total number of shareholder accounts for funds. See 
ICI, 2014 Investment Company Fact Book, 168 (2014), available at 
http://www.ici.org/pdf/2014_factbook.pdf.
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    By mid-2014, 53.2 million households, approximately 43 percent of 
all U.S. households, owned mutual funds.\450\ Today, the typical 
investor has $103,000 invested in mutual funds, which, for 
approximately 68 percent of investors, represents more than half of 
their household financial assets.\451\ For many of these investors, 
mutual funds are their primary source of investing for retirement, 
higher education, and other financial goals.\452\ Historically, many 
mutual fund investors purchased their shares ``direct'' from the fund 
or through the fund's transfer agent.\453\ However, today many 
investors engage an investment professional (also referred to as an 
``intermediary'' for beneficial owners of fund shares), such as a 
broker-dealer or investment adviser \454\ who provides many services, 
such as helping them identify their financial goals, analyzing an 
existing financial portfolio, determining an appropriate asset 
allocation, and (depending on the type of investment professional) 
providing investment advice or recommendations.\455\ In addition, many 
intermediaries have arrangements with the mutual fund or the mutual 
fund's transfer agent to perform the underlying shareholder 
recordkeeping and servicing for their customers' mutual fund 
positions.\456\ Under such arrangements, the intermediary performs 
recordkeeping on their own books and other services with respect to the 
beneficial owner, and in many cases aggregates their customer records 
into a single or a few ``omnibus'' \457\ accounts registered in the 
intermediary's name on the Mutual Fund Transfer Agent's recordkeeping 
system.\458\
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    \450\ 2015 ICI Factbook, supra note 446, at 114 (fig. 6.2).
    \451\ Id.
    \452\ Id.
    \453\ In this section, when discussing transfer agents providing 
services to mutual funds, we refer to ``Mutual Fund Transfer 
Agents,'' and when discussing transfer agents to operating company 
issuers, or issuers whose business is not primarily investing in 
securities, we refer to ``Operating Company Transfer Agents.''
    \454\ Also, the 2015 ICI Factbook notes that among households 
owning mutual fund shares outside employer-sponsored retirement 
plans, 80 percent own fund shares through investment professionals. 
Id. at 104.
    \455\ Id. at 104 (``The investment professional also may provide 
ongoing services, such as responding to investors' inquiries or 
periodically reviewing and rebalancing their portfolios.'').
    \456\ Examples of these services include communicating with 
their customers about their fund holdings; maintaining their 
financial records; processing changes in customer accounts and trade 
orders; recordkeeping for customers; answering customer inquiries 
regarding account status and the procedures for the purchase and 
redemption of fund shares; providing account balances and providing 
account statements, tax documents, and confirmations of transactions 
in a customer's account; transmitting proxy statements, annual 
reports and other communications from a fund; and receiving, 
tabulating and transmitting proxies executed by customers.
    \457\ Omnibus accounts are held by and registered in the name of 
a single intermediary, such as a broker, and the holdings in the 
account represent the aggregated positions of multiple beneficial 
owner customers of the intermediary. Typically, the issuer will not 
have information regarding the intermediary's underlying beneficial 
owners. See ICI, Navigating Intermediary Relationships, 3, 6-7 
(2009), available at https://www.ici.org/pdf/ppr_09_nav_relationships.pdf. Regarding omnibus relationships 
generally, see also The Stock Market, supra note 8, at 542.
    \458\ The growth in retirement plan assets also has resulted in 
a significant increase in the number of third party administrators 
that perform retirement plan recordkeeping on behalf of mutual fund 
investors that are plan participants, whose mutual fund positions 
are held in omnibus accounts on the fund's transfer agent 
recordkeeping system. Third Party Administrators are discussed 
further in Section VII.E.
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    We understand that the shift to omnibus account arrangements for 
mutual fund shareholders \459\ has altered the landscape of 
recordkeeping and other services provided to fund investors. This 
fundamental shift in the roles and responsibilities of traditional 
shareholder servicing and recordkeeping, however, has resulted in a 
lack of transparency of beneficial owners, their trading activities and 
related records.\460\
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    \459\ See generally, Deloitte, Mutual Fund Directors Digest, The 
Omnibus Revolution: Managing risk across an increasingly complex 
service model (2012), available at http://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-fund-director-digest-1-090412.pdf (``Deloitte Digest on Omnibus Revolution'').
    \460\ See generally, PricewaterhouseCoopers LLP, Evolution of 
the Mutual fund Transfer Agent: Embracing the Challenges and 
Opportunities, 9 (July 2015), available at https://www.pwc.com/us/en/asset-management/investment-management/publications/assets/pwc-mutual-fund-transfer-agent-evolution.pdf (``PWC Evolution of the 
Mutual Fund Transfer Agent'').
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    The complexity of recordkeeping for mutual fund shares also has 
increased significantly over the last several decades. The total number 
of mutual fund share classes offered increased from 1,243 share classes 
in 1984 to over 24,000 share classes in 2014.\461\ Historically, as 
products and share classes evolved, shareholders and their investment 
professionals looked for diversification by focusing on a mutual fund 
complex with a broad lineup of funds taking advantage of breakpoint 
discounts offered on their suite of mutual fund products.\462\ In 
recent

[[Page 81992]]

years, however, many intermediaries are managing clients' mutual fund 
investments using advisory type models, where typically a wide range of 
mutual fund investments from many different fund companies are 
utilized.\463\
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    \461\ 2015 ICI Factbook, supra note 446, at 173 (Data sec. 1, 
tbl. 1).
    \462\ See generally, ICI Research Perspective, Vol. 20, No.2, 
Mutual Fund Load Fees (May 2014), available at https://www.ici.org/pdf/per20-02.pdf (``Thirty years ago, fund shareholders usually 
compensated financial professionals through a front-end load--a one-
time, up-front payment for current and future services. That 
distribution structure has changed significantly.''). The report 
notes that there has been a marked reduction in load fees paid by 
mutual fund investors, from nearly 4 percent in 1990 to roughly 1 
percent in 2013. It also notes that funds often waive load fees on 
purchases made through retirement plans, as well as waive or reduce 
load fees for large initial or cumulative purchases.
    \463\ Id. In these advisory arrangements, the investment 
professional who sells mutual funds is assessing an asset based-fee 
(a percentage of the net assets managed for an investor), rather 
than a percentage of the dollars initially invested (a front-end 
load), utilizing newer free or low-fee share classes designed for 
advisory type programs. The report also notes that because of the 
recent trend toward asset-based fees the market share of traditional 
front-end and back-end load shares has fallen, while the market 
share of newer share classes that are no-load has increased 
substantially.
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    The Commission understands that the growth in both mutual fund 
products and share classes offered has added complexity and requires 
Mutual Fund Transfer Agents to maintain, in addition to the master 
securityholder file, extensive CUSIP databases that define the 
characteristics and processing rules for each fund share class to 
ensure prospectus compliance and accurate processing and recordkeeping 
of mutual fund transactions.\464\ As a result, Mutual Fund Transfer 
Agents have made significant investments in technology advancements to 
manage more frequent and diverse transaction processing and shareholder 
communications through different channels. The industry also has relied 
heavily on the automation developed through NSCC for processing and 
settling mutual fund transactions \465\ and exchanging and reconciling 
customer account information, whether held in direct or omnibus 
accounts.\466\
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    \464\ We note that, generally, many of the recordkeeping and 
processing tasks discussed in this section may be performed by 
either the Mutual Fund Transfer Agent or the intermediary, depending 
on whether the investor holds his or her mutual fund shares directly 
with the mutual fund or through an intermediary. We focus herein 
primarily on transfer agents.
    \465\ See DTCC, 2014 Annual Report (2014), available at http://dtcc.com/annuals/2014/wealth-management-services/index.php. The 
value of mutual fund (Fund/SERV) transactions reported was $4.9 
trillion.
    \466\ See PWC Evolution of the Mutual fund Transfer Agent, supra 
note 460.
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    The growth of the mutual fund industry since 1977, the attendant 
growth of the portion of the transfer agent community specifically 
focused on servicing that industry, the proliferation of fund share 
classes, the growth in intermediary omnibus account arrangements and 
the Mutual Fund Transfer Agent community, and the complexity of fund 
processing and reliance on NSCC's systems (discussed below), are among 
the factors informing the Commission's examination of its transfer 
agent rules.
1. Key Characteristics of Mutual Fund Transfer Agents
    If any person performs for a mutual fund any services listed in 
Exchange Act Section 3(a)(25), such as registering transfers and 
transferring registered investment company securities, the person must 
register with the Commission as a transfer agent pursuant to Exchange 
Act Section 17A(c)(1).\467\ When mutual funds were first introduced, 
many transfer agents provided these services because the traditional 
services they offered to operating company issuers (i.e., issuers whose 
business is not primarily investing in securities), such as maintaining 
records of stock ownership, paying dividends, sending securityholder 
communications, and transferring stock ownership, were easily adapted 
to the particularities of mutual funds.\468\ But as mutual fund 
processing and operations came to involve greater numbers of investors 
and intermediaries, greater numbers of products, and a broader array of 
services, some transfer agents evolved with the industry to specialize 
in the increasingly unique needs of mutual funds, creating a segment of 
the transfer agent industry that focuses, often exclusively, on 
servicing mutual funds.\469\
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    \467\ Exchange Act Section 17A(c)(1), 15 U.S.C. 78q-1(c)(1).
    \468\ Lee Gremillion, Mutual Fund Industry Handbook: A 
Comprehensive Guide for Investment Professionals (Sept. 2005) 
(``Mutual Fund Industry Handbook'').
    \469\ Id. Today, there is no overlap among the Mutual Fund 
Transfer Agents with the largest market share and the Operating 
Company Transfer Agents with the largest market share. Compare 
SourceMedia, Mutual Fund Service Guide, 41 (2015), available at 
http://www.mmexecutive.com/mutual-fund-guide/ranking-stats/?service=transfer-agent (providing tables listing the ten largest 
Mutual Fund Transfer Agents by number of accounts and the eleven 
largest Mutual Fund Transfer Agents by number of clients) with 
Jessica Fritz, Audit Analytics, 2013 Transfer Agent Market Share: 
AST Still On the Rise (Oct. 14, 2013), available at http://www.auditanalytics.com/blog/2013-transfer-agent-market-share-ast-still-on-the-rise/ (providing charts showing the five largest 
Operating Company Transfer Agents by market share and the six 
largest Operating Company Transfer Agents by market share of initial 
public offerings).
---------------------------------------------------------------------------

    Today, these specialized Mutual Fund Transfer Agents provide many 
of the same transfer and account maintenance services that other 
transfer agents perform for operating companies, including the 
recordkeeping, transfer, and related activities discussed above in 
Section V.\470\ They also commonly provide recordkeeping and other 
services related to the mutual funds' recordkeeping obligations under 
the Investment Company Act.\471\ However, instead of processing 
exchange or OTC-traded equity or debt securities, like other transfer 
agents, Mutual Fund Transfer Agents process redeemable securities of 
investment companies registered under Section 8 of the Investment 
Company Act,\472\ which under Rule 17Ad-4, are exempt from: (i) The 
turnaround and processing requirements of Rule 17Ad-2; (ii) the 
limitations on expansion under Rule 17Ad-3; and (iii) key recordkeeping 
requirements related to the transfer agent's processing and performance 
obligations under Rules 17Ad-6(a)(1)-(7) and (11).\473\ Thus, although 
they provide many services identical to those provided by Operating 
Company Transfer Agents, Mutual Fund Transfer Agents are exempt from 
the key turnaround, processing, performance, and recordkeeping 
requirements.
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    \470\ For example, Mutual Fund Transfer Agents effect transfers 
in ownership of fund securities, which usually involves making 
changes to the master securityholder file but not cancelling or 
issuing certificates because almost all mutual fund securities are 
issued and held in book-entry form. They also facilitate 
communications between issuers and securityholders, including by 
sending to securityholders mutual fund prospectuses, confirmations, 
periodic account statements, semi-annual and annual reports, and 
proxy statements. See, e.g., Robert Pozen & Theresa Hamacher, The 
Fund Industry: How Your Money is Managed, 348 (2nd ed. 2015) 
(``Pozen & Hamacher'') (discussing transfer agent distribution of 
such materials). Mutual Fund Transfer Agents also distribute to 
securityholders tax information, such as estimates of fund 
distributions, Form 1099-DIV and Form 1099B. Id. at 349. They also 
process cash distributions by the fund, ensuring that cash from 
distributions is properly credited to securityholder accounts. Id. 
at 348. In addition, where securityholders elect to reinvest cash 
distributions by the fund by purchasing additional shares of the 
fund, Mutual Fund Transfer Agents help facilitate execution of the 
purchase and calculate and record the number of additional shares 
purchased. Id.
    \471\ See Investment Company Act Rule 31a-1(b)(1), 17 CFR 
270.31a-1(b(1) (requiring current journals detailing sales and 
redemptions of the investment company's own securities and the trade 
date).
    \472\ See supra note 183.
    \473\ Exchange Act Rule 17Ad-4(a), 17 CFR 240.17Ad-4(a).
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    Although many of the core services Mutual Fund Transfer Agents 
provide are similar to the core services provided by Operating Company 
Transfer Agents, there are differences. One is the degree to which the 
securities typically serviced by Mutual Fund Transfer Agents are 
dematerialized.\474\ The mutual fund industry was an early adopter of 
the practice of issuing shares in book-entry form. By the time the 
first Commission transfer agent rules were adopted in 1977, registered 
ownership of mutual fund shares already had been

[[Page 81993]]

predominantly dematerialized.\475\ In contrast, the trend towards 
dematerialization of registered ownership positions of operating 
companies evolved over a much longer period of time through some of the 
incremental developments discussed in this release, such as DRS and 
issuer plans (e.g., DRIPs). And, for beneficial owners, equity 
securities issued by operating companies have largely been immobilized 
in central securities depositories, as discussed above in Sections II 
and III. Thus, while both Mutual Fund Transfer Agents and Operating 
Company Transfer Agents today process large numbers of dematerialized 
securities, Mutual Fund Transfer Agents process them in larger numbers 
and have been doing so for a longer period of time.
---------------------------------------------------------------------------

    \474\ For discussion of dematerialization, see supra note 69 and 
accompanying text.
    \475\ See 1971 Study of the Securities Industry Hearings, supra 
note 299 (statements of David Hughey, Senior Vice President--
Operations, Putnam Management Co., Inc. that the percentage of 
Mutual Fund holders owning in certificated form dropped from 72 
percent in 1956 to 27.5 percent by 1969). It was estimated in 1978 
that less than 10% of registered owners of Mutual Fund shares 
requested certificates. See, e.g., Martin J. Aronstein, The Decline 
and Fall of the Stock Certificate in America, 1. J. Int'l L. 273, 
278 (1978), available at http://scholarship.law.upenn.edu/jil/vol1/iss3/4.
---------------------------------------------------------------------------

    There are also important differences in how Mutual Fund Transfer 
Agents are organized and compensated compared to Operating Company 
Transfer Agents generally. For example, there are, in general, three 
types of Mutual Fund Transfer Agent arrangements: (i) Internal (which 
may also be referred to as ``captive,'' ``affiliated'' or ``full 
internalization''),\476\ (ii) external (which may also be referred to 
as ``third party'' or ``full service''), and (iii) hybrid (which may 
also be referred to as ``remote vendor'').\477\ Mutual funds generally 
tend not to have employees; therefore, internal transfer agent services 
are not actually provided by the fund. ``Internal'' transfer agents are 
typically affiliated with the mutual fund complex, or the fund's 
investment adviser.\478\ The main advantage of an internal transfer 
agent arrangement is that it allows a mutual fund or fund complex to 
closely monitor the delivery and quality of services provided to 
securityholders, which may be important to attracting and retaining 
investors who value service quality.\479\ Larger mutual funds or mutual 
fund complexes may be more inclined to use internal transfer agents 
than their smaller counterparts because these funds' sponsors may be 
better able to undertake the costs required to develop and maintain the 
extensive technology systems and internal workforce needed to provide 
service to a large number of accounts.\480\ External (or third-party) 
transfer agents are independent from (as opposed to being affiliated 
with) the mutual fund and its fund complex or investment adviser. While 
there may be variation from firm to firm, the external model may not 
require the same capital expenditures by fund sponsors as for internal 
transfer agent services, and therefore may be viewed as a cost 
effective alternative to the internal model.\481\
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    \476\ Mutual funds generally do not have employees. As a result, 
the Commission understands that transfer agent services that are 
characterized as being provided ``internally'' are not actually 
provided by the fund but are provided by personnel from the 
investment adviser to the mutual fund or by an affiliate of such 
investment adviser.
    \477\ See generally, ICI, The Role and Responsibilities of a 
Mutual Fund Transfer Agent: Workbook, 4 (2001) (``Mutual Fund 
Transfer Agent Workbook''); PWC Evolution of the Mutual fund 
Transfer Agent, supra note 460. For a discussion of one mutual fund 
complex's evaluation of using the internal (``full 
internalization''), hybrid (``remote vendor''), or external (``full 
service'') Mutual Fund Transfer Agent models, see In the Matter of 
Smith Barney Fund Management LLC and Citigroup Global Markets, Inc., 
Exchange Act Release No. 51761 at 4-15 (May 31, 2005).
    \478\ ``Independent'' and ``affiliated'' are used generally in 
connection with this discussion and are not intended to refer to any 
particular definition of those terms in any of the provisions of the 
federal securities laws or other authorities.
    \479\ See, e.g., Mutual Fund Industry Handbook, supra note 468, 
at 277 (``In many cases, fund groups that outsource their transfer 
agent back-office functions perform investor service from their own, 
internal contact centers. This reflects the widespread belief that 
the quality of this visible service has competitive implications. 
The back-office functions, by contrast, must be performed correctly, 
but they offer little opportunity for the fund to differentiate 
itself from the competition.'').
    \480\ See generally, Mutual Fund Transfer Agent Workbook, supra 
note 477. We note, however, even among larger mutual funds, it is 
possible for decisions to vary from firm to firm and for similar 
size firms to come to different conclusions concerning expected 
costs and the degree to which the mutual fund should internalize 
transfer agent services when faced with similar factors.
    \481\ It is the understanding of the Commission that these 
capital expenditures to build and maintain transfer agent technology 
and infrastructure systems may be absent or reduced in the case of 
an external transfer agent because an external transfer agent may 
have already made these investments in the past and, to the extent 
some or all of the cost of those investments may be passed on to 
transfer agent issuer clients, the full extent of the redistributed 
cost is unlikely to be borne by a single issuer and is more likely 
to be diffused across multiple issuers.
---------------------------------------------------------------------------

    External transfer agents have their own business model, processing 
and procedural routines, computer systems, and service providers.\482\ 
Because of this independence, the mutual fund or mutual fund complex 
may have less input or control over how a fund's securityholders are 
ultimately serviced. For this reason, some mutual funds use a hybrid 
transfer agent arrangement, whereby an internal transfer agent performs 
certain services in an effort to maintain control over the quality of 
the securityholder servicing relationship, and other services are sub-
contracted to an external transfer agent.\483\ For example, many mutual 
funds using a hybrid arrangement will use an external transfer agent 
for core record-keeping functions and an internal transfer agent for 
securityholder servicing, especially when such servicing involves 
direct interaction with mutual fund securityholders.\484\ As a result, 
there may be significant variation in services provided, technology 
resources and capability, and corporate structure and organization 
among Mutual Fund Transfer Agents.
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    \482\ In contrast to mutual funds, operating companies with a 
large number of shareholders rarely use the internal or hybrid 
models and nearly always use an external transfer agent, although 
there are exceptions where a public company serves as its own 
transfer agent, particularly among local utility companies and local 
banks where the administration to service stockholders as a transfer 
agent is already in place and where the stockholders are often 
customers of the company.
    \483\ See, e.g., supra note 479 (discussing internal servicing 
and quality of service).
    \484\ See, e.g., Mutual Fund Industry Handbook, supra note 468, 
at 277 (citing ICI, Mutual Funds and Transfer Agent Billing 
Practices 1997 (1998) (finding that 87 percent of 483 funds surveyed 
performed such securityholder servicing ``internally'' (i.e., using 
personnel from the management company or an affiliate of the 
management company)).
---------------------------------------------------------------------------

    Mutual Fund Transfer Agents may also have different compensation 
arrangements than typical Operating Company Transfer Agents, which 
generally will be compensated on a per securityholder account basis. 
While Mutual Fund Transfer Agents may also be compensated on a per 
securityholder account basis, many of them instead receive compensation 
based on a percentage of a fund's net assets.\485\ Mutual Fund Transfer 
Agent fees are typically the second largest expense borne by mutual 
funds, exceeded only by the investment management fee.\486\
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    \485\ Fee arrangements may vary from Mutual Fund Transfer Agent 
agreement to agreement and other fee permutations are possible, for 
example as an at-cost arrangement between an internal Mutual Fund 
Transfer Agent and the fund.
    \486\ See, e.g., Mutual Fund Industry Handbook, supra note 468, 
at 231 (``Transfer agent service is typically the largest component 
of a fund's expense after investment management.''); H. Kent Baker, 
Greg Filbeck & Halil Kiymaz, Mutual Funds and Exchange-Traded Funds: 
Building Blocks to Wealth, 406 (2015) (analyzing 2014 data of one 
Mutual Fund and finding $21 million in transfer agent fees to have 
been the fund's second largest expense after $65 million in 
investment management fees).
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2. Increased Complexity
    As a result of the collective effect of the five factors discussed 
below, transaction processing for Mutual Fund Transfer Agents may be 
more complex

[[Page 81994]]

or involve additional responsibilities as compared to Operating Company 
Transfer Agents. First, Mutual Fund Transfer Agents receive cash and 
perform calculations as a part of regular processing of transactions in 
shares of mutual funds to a greater extent than is involved in the day-
to-day work of Operating Company Transfer Agents. As a general matter, 
unlike publicly traded equity securities, mutual fund securities are 
redeemable, meaning that investors in mutual fund securities (or their 
intermediaries) purchase or redeem mutual fund shares directly with the 
mutual fund itself rather than on the secondary market.\487\ Mutual 
fund securities must be purchased and redeemed at their current net 
asset value (``NAV'') per share next computed after receipt.\488\ 
Investor orders to purchase mutual fund shares are ultimately received 
by a Mutual Fund Transfer Agent, regardless of whether the investor's 
order is submitted directly by the investor or is submitted by an 
intermediary such as a broker (including where a broker may submit the 
order via NSCC's Fund/SERV system).\489\ After receiving a purchase 
order, Mutual Fund Transfer Agents calculate the number of shares 
purchased in some cases (such as where the investor indicates the 
dollar amount the investor seeks to purchase rather than the number of 
shares). With respect to purchase orders from investors, Mutual Fund 
Transfer agents collect the payment for those shares, deposit the 
payment into the account of the custodian of the mutual fund, issue on 
behalf of the mutual fund the shares to be purchased, and record the 
transaction on the master securityholder file of the mutual fund.\490\ 
Mutual Fund Transfer Agents engage in a comparable process when an 
investor decides to redeem shares in a mutual fund.
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    \487\ See Investment Company Act Sections 5(a), 2(a)(32), 15 
U.S.C. 80a-5(a), 80a-2(a)(32) (defining open-end companies and 
redeemable securities, respectively).
    \488\ See Investment Company Act Rule 22c-1 17 CFR 270.22c-1. 
Under Rule 22c-1, commonly called the ``forward pricing'' rule, an 
investor who submits an order before the next computed NAV, 
generally calculated by most funds as of the time when the major 
U.S. stock exchanges close at 4:00 p.m. Eastern Time, receives that 
day's price, and an investor who submits an order after the pricing 
time receives the next day's price. See generally, Amendments to 
Rules Governing Pricing of Mutual Fund Shares, Investment Company 
Act Release No. 26288 (Dec. 17, 2003), 68 FR 70388 (Dec. 17, 2003) 
(proposing release).
    \489\ For additional details regarding Fund/SERV, see Exchange 
Act Release No. 22928 (Feb. 20, 1986), 51 FR 6954 (Feb. 27, 1986) 
(File No. SR-NSCC-85-09); Exchange Act Release No. 25146 (Nov. 20, 
1987), 52 FR 45418 (Nov. 27, 1987) (File No. SR-NSCC-87-08); 
Exchange Act Release No. 26376 (Dec. 20, 1988), 53 FR 52544 (Dec. 
28, 1988) (File No. SR-NSCC-88-08); Exchange Act Release No. 31487 
(Nov. 27, 1992), 57 FR 56611 (Nov. 30, 1992) (File No. SR-DTC-92-
02).
    \490\ See, e.g., Exchange Act Release No. 12440 (May 12, 1976), 
41 FR 22595 (June 4, 1976) (ICI comment letter (July 19, 1976)) 
(``The mutual fund transfer agent receives cash for investment in 
mutual fund shares and pays cash to shareholders for the redemption 
of outstanding shares.''); Pozen & Hamacher, supra note 470 (``The 
transfer agent is responsible for collecting payment for share 
purchases and arranging for its deposit into the fund's bank 
account.'').
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    Second, Mutual Fund Transfer Agents also play a role that serves to 
assist in the determination of the appropriate price for an investor's 
purchase or redemption order (which is based on the NAV per share and 
any applicable commissions or fees). They do so by coordinating with 
mutual fund administrators, who commonly perform the main calculations 
that assist a mutual fund in determining its NAV.\491\ The coordination 
with the mutual fund's administrator is necessary, not only because 
Mutual Fund Transfer Agents must process purchases and redemptions at 
current NAV as described above, but because current NAV as calculated 
by the administrator on behalf of the mutual fund must reflect changes 
in the number of shares of the mutual fund outstanding pursuant to 
Investment Company Act Rule 2a-4(a)(3).\492\ Because the Mutual Fund 
Transfer Agent is the entity primarily responsible for keeping track of 
this information on behalf of the mutual fund, the administrator 
typically receives this record of changes in the capital stock of the 
mutual fund from the Mutual Fund Transfer Agent. Because Mutual Fund 
Transfer Agent transaction processing is price-dependent as described 
above, if an error is made and later discovered in connection with some 
aspect of this process, the Mutual Fund Transfer Agent may need to 
reprocess all of the purchases and redemptions that were affected by 
the error (``as of'' transaction processing). Both the daily NAV and 
any corrections are communicated by Mutual Fund Transfer Agents to 
intermediaries for transaction processing conducted on behalf of 
beneficial owners of mutual funds.
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    \491\ The Commission understands that most mutual funds and 
other investment companies that are required to register with the 
Commission contract with one service provider for transfer agent 
services and a different provider for fund ``administration,'' which 
generally involves services such as calculation of NAV and 
management fee accruals. In contrast, it is the understanding of the 
Commission that many private funds (i.e., investment funds not 
registered with the Commission) use a single service provider for 
both transfer agent and administration functions.
    \492\ See Investment Company Act Rule 2a-4(a)(3), 17 CFR 270.2a-
4(a)(3) (``Changes in the number of outstanding shares of the 
registered company resulting from distributions, redemptions, and 
repurchases shall be reflected no later than in the first 
calculation on the first business day following such change.'').
---------------------------------------------------------------------------

    Third, some mutual funds may provide their investors with options 
which may add additional complexity to the Mutual Fund Transfer Agent's 
or intermediary's processing tasks. For example, many mutual funds 
allow investors to exchange a mutual fund within the same fund complex 
without having to pay a sales load or other fee for purchasing shares 
of the new mutual fund. This arrangement may require Mutual Fund 
Transfer Agents (or intermediaries) to determine if the exchange 
qualifies for a waiver of the sales charge and to track the total time 
the investor has been invested in the mutual fund complex. In addition, 
some mutual funds may offer other services and options, such as 
systematic withdrawal plans, that may require Mutual Fund Transfer 
Agents and their intermediaries to keep track of a potentially wide 
range of securityholder elections, transaction types, and prospectus 
and business processing rules in CUSIP databases that are utilized for 
transaction processing.
    Fourth, the use of different sales load structures and distribution 
methods, particularly with respect to redemption of mutual fund 
securities, as well as other fee payments to intermediaries, also adds 
complexity in the mutual fund context. For example, for load funds, or 
funds that charge a sales load to the investor, Mutual Fund Transfer 
Agents commonly process and distribute related commission payments to 
intermediaries in connection with sales of mutual fund shares.\493\ As 
part of a distribution strategy, some mutual funds compensate 
distributors such as broker-dealers with trail commissions that are 
processed and distributed by the Mutual Fund Transfer Agent, even after 
completion of a sale.\494\ A Mutual Fund Transfer Agent may process 
redemption fee charges or track relevant information and give effect to 
sales load discounts (often referred to as breakpoints) for direct 
investors, often based on the amount invested or intended to be 
invested. Mutual Fund Transfer Agents also may process and distribute 
ongoing

[[Page 81995]]

sub-transfer agency fees to intermediaries.\495\
---------------------------------------------------------------------------

    \493\ In addition, if the mutual fund has a contingent deferred 
sales load (often referred to as a ``back-end load''), transfer 
agents commonly process and distribute these commissions to 
distributors in connection with a redemption.
    \494\ See Investment Company Act Rule 12b-1, 17 CFR 270.12b-1.
    \495\ See supra Section VII.B for a discussion of sub-transfer 
agents.
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    Fifth, Mutual Fund Transfer Agents traditionally have functioned in 
a more central role in connection with clearing and settlement of 
securities transactions than have Operating Company Transfer Agents. 
With a mutual fund purchase or redemption, there is no clearing 
corporation involved that serves to novate trades as a central 
counterparty as in the case of a broker-facilitated trade in an equity 
security on a national securities exchange (as shown in Figure 1 in 
Section III.B above) because mutual funds generally are not exchange-
traded.\496\ As a result of this clearance and settlement environment, 
Mutual Fund Transfer Agents interact with sub-transfer agents such as 
broker-dealers, who hold shares on behalf of their beneficial owner 
customer, similar to the way in which DTC interacts with Operating 
Company Transfer Agents.\497\ Mutual Fund Transfer Agents also maintain 
on the master securityholder file omnibus positions for intermediaries 
(on behalf of the intermediaries' beneficial owner-customers), which is 
similar to the way in which DTC maintains securities accounts of 
participants, but there is no jumbo Cede & Co. position at DTC in the 
case of a mutual fund.
---------------------------------------------------------------------------

    \496\ While as discussed above, there is no clearing corporation 
that serves as central counterparty in mutual fund transactions, 
there are services provided by NSCC, such as Fund/SERV and 
Networking. This centralized clearance and settlement platform 
employs standardized data fields and protocols for mutual fund 
transaction processing and daily net settlements, through which 
intermediaries such as brokers may transmit and settle orders with 
Mutual Fund Transfer Agents. For additional details regarding Fund/
SERV, see supra note 489.
    \497\ See supra note 113 for definition of sub-transfer agent.
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3. Compliance and Other Services
    Many Mutual Fund Transfer Agents may assist mutual funds with their 
compliance obligations, not only with respect to general recordkeeping 
obligations, but also to enable mutual funds to comply with regulations 
to which operating companies may not be subject in the same way or at 
all.\498\ One such obligation is that mutual funds have various 
``client on-boarding'' requirements under federal law \499\ and 
commonly rely upon their Mutual Fund Transfer Agent to do the work that 
will enable the mutual fund to meet such obligations. For example, 
mutual funds are required to implement anti-money laundering (AML) 
programs pursuant to an interim final rule of the Treasury.\500\ In 
addition, mutual funds are required to establish customer 
identification programs pursuant to a joint rule of the Commission and 
Treasury.\501\ That rule requires, at a minimum, that the mutual fund 
verify an investor's identity to the extent reasonable and practicable, 
maintain records of the information used to verify identity, and 
determine whether the investor appears ``on any list of known or 
suspected terrorists or terrorist organizations issued by any federal 
government agency and designated as such by Treasury in consultation 
with the federal functional regulators.'' \502\ While mutual funds bear 
ultimate responsibility for compliance, as a practical matter, the 
customer identification processes commonly are carried out by Mutual 
Fund Transfer Agents for direct investors.\503\ In addition, mutual 
funds are required to report suspicious transactions (``Suspicious 
Activity Reports'') to the Treasury's Financial Crimes Enforcement 
Network.\504\ Mutual Fund Transfer Agents may assist the mutual fund in 
filing the Suspicious Activity Reports.
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    \498\ Regarding general recordkeeping obligations, see 
Investment Company Act Rule 31a-1(b)(1), 17 CFR 270.31a-1(b)(1) 
(requiring current journals detailing sales and redemptions of the 
investment company's own securities and the trade date).
    \499\ See, e.g., Bank Secrecy Act Section 5312(a)(2) (including 
``investment compan[ies]'' within the definition of ``financial 
institution''). Transfer agents may also be subject directly to 
related federal requirements that do not apply solely to ``financial 
institutions.'' See, e.g., Section 6050I of the Internal Revenue 
Code, 26 U.S.C. 6050I (requirement to report to Internal Revenue 
Service receipt of cash in excess of $10,000 in a single or related 
transaction).
    \500\ See Financial Crimes Enforcement Network, Anti-Money 
Laundering Programs for Mutual Funds, 67 FR 21117 (Apr. 29, 2002).
    \501\ 31 CFR 103.131; see Customer Identification Programs for 
Mutual Funds, Investment Company Act Release No. 26031 (Apr. 29, 
2003), 68 FR 25131 (May 9, 2003).
    \502\ Id.
    \503\ See, e.g., Pozen & Hamacher, supra note 470 (discussing 
transfer agent verification of investor identity information as part 
of the mutual fund share purchase process); Id. at 352 (``Funds must 
take steps to avoid providing a laundry service for criminals with 
dirty money. As mentioned earlier, transfer agents verify a 
customer's identity when they open an account, under what are 
referred to as the know your customer, or KYC rules.'') (emphasis in 
the original); Practising Law Institute, Mutual Funds and Exchange 
Traded Funds Regulation Sec.  1A:3.1 Money Laundering (Clifford A. 
Kirsch ed., 3rd ed. 2014) (``Most funds accomplish AML compliance 
through their transfer agents and distributors.'')
    \504\ 31 CFR 103.15(a)(1); see Financial Crimes Enforcement 
Network; Amendment to the Bank Secrecy Act Regulations--Requirement 
That Mutual Funds Report Suspicious Transactions, 68 FR 2716 (Jan. 
21, 2003); see also Guidance, Frequently Asked Questions, Suspicious 
Activity Reporting Requirements for Mutual Funds, FIN-2006-G013 
(Oct. 4, 2006) (authorizing mutual fund to use an agent to file 
reports but stating the ``mutual fund remains responsible for 
assuring compliance with the regulation and must monitor performance 
by the service provider.'')
---------------------------------------------------------------------------

    Mutual Fund Transfer Agents may also assist mutual funds in 
complying with requirements related to the price-dependent nature of 
mutual fund transaction processing. First, Mutual Fund Transfer Agents 
may be responsible for monitoring, on behalf of the mutual fund, that 
intermediaries such as dealers are properly separating orders received 
from customers before NAV is next computed from those received 
afterwards and are sending them in separate batches to the Mutual Fund 
Transfer Agent.\505\ As another example, mutual funds are entitled to 
receive taxpayer identification numbers of beneficial owner customers 
upon request under shareholder information agreements that mutual funds 
(other than money market mutual funds and mutual funds that expressly 
authorize short-term trading) must enter into pursuant to Investment 
Company Act Rule 22c-2(a)(2) with financial intermediaries who submit 
orders on behalf of beneficial owner customers.\506\ Mutual Fund 
Transfer Agents commonly assist the mutual fund's review of this 
taxpayer identification number and related transaction information in 
order to monitor against trading practices that may dilute the value of 
the outstanding securities issued by the mutual fund.\507\
---------------------------------------------------------------------------

    \505\ See Compliance Programs of Investment Companies and 
Investment Advisers, Investment Company Act Release No. 26299 (Dec. 
17, 2003) (reliance solely on ``contractual provisions with transfer 
agents and other intermediaries that obligate those parties to 
segregate orders received by time of receipt in order to prevent 
``late trading'' based on a previously determined price'' would be 
``insufficient to meet the requirements of the new rule. Funds 
should . . . also take affirmative steps to . . . obtain[ ] 
assurances that those policies and procedures are effectively 
administered.'').
    \506\ Investment Company Act Rule 22c-2(a)(2), 17 CFR 270.22c-
2(a)(2).
    \507\ See id. (authorizing a Mutual Fund Transfer Agent to enter 
into the shareholder information agreement on behalf of the mutual 
fund with the financial intermediary).
---------------------------------------------------------------------------

4. Broker-Dealer Recordkeeping for Beneficial Owners Who Invest in 
Mutual Funds
    As happens in the operating company space, many securities 
intermediaries such as broker-dealers and banks perform recordkeeping 
and processing services for their customers who are beneficial owner 
investors in mutual funds.\508\ A key difference is that

[[Page 81996]]

frequently a mutual fund will compensate the intermediary pursuant to 
an agreement with the intermediary for the provision of those services 
to fund investors, typically based on the number of shareholder 
accounts or a percentage of the net assets of the fund, or some 
combination thereof. However, most operating companies do not 
compensate intermediaries for servicing their beneficial owner 
customers. The oversight and invoicing for these payments is often 
delegated to the Mutual Fund Transfer Agent,\509\ who will commonly 
process and distribute ongoing sub-transfer agency fees to 
intermediaries.
---------------------------------------------------------------------------

    \508\ See Section VII.B for a discussion of the transfer and 
account maintenance-related services performed by broker-dealers and 
banks for their beneficial owner customers and related issues. We 
note that the relationship between fees received by intermediaries 
for these types of ``sub-transfer agent'' services and the 12b-1 fee 
plan of a mutual fund is beyond the scope of this release.
    \509\ See generally, ICI, Financial Intermediary Controls and 
Compliance Assessment Engagements (2015), available at https://www.ici.org/pdf/ppr_15_ficca.pdf. The mutual fund industry has 
developed a standardized framework, the Financial Intermediary 
Controls and Compliance Assessment Engagement (FICCA), for 
intermediary oversight, where fund sponsors are seeking assurances 
on the effectiveness of the intermediary's control environment. The 
framework calls for the omnibus account recordkeeper to engage an 
independent accounting firm to assess its internal controls related 
to specified activities the intermediary performs for fund 
shareholder accounts. FICCA is performed under attestation standards 
issued by the AICPA and the auditor report expresses an opinion on 
its evaluation of an intermediary's assertion that controls were 
suitably designed and operating effectively. The framework includes 
17 areas of focus, including document retention and recordkeeping, 
transaction processing, shareholder communications, privacy 
protection and anti-money laundering. It is the understanding of the 
Commission that FICCA engagements are voluntary and some 
intermediary reports may not provide an assessment on all 17 areas 
of focus.
---------------------------------------------------------------------------

    Because intermediaries are compensated for providing recordkeeping 
and processing services for their customers who are beneficial owner 
investors in mutual funds, many of the issues discussed above in 
Section V.D.3 are relevant to Mutual Fund Transfer Agents. 
``Networking'' of a single investor's account or position potentially 
gives Mutual Fund Transfer Agents more transparency through to 
beneficial owners than is available to Operating Company Transfer 
Agents, because the recordkeeping for such accounts is primarily kept 
on the Mutual Fund Transfer Agent's system. ``Networking'' is a service 
provided by NSSC by which Mutual Fund Transfer Agents can also exchange 
general shareholder account data with intermediaries such as brokers 
that provide sub-transfer agency services.\510\ This service provides 
for different levels of securityholder account networking between 
mutual funds and securities intermediaries.\511\ Networked accounts are 
in the name of the intermediary on the master securityholder file but 
can represent both individual customers and omnibus accounts. 
Nevertheless, Networking's advantages are less utilized today as many 
beneficial owner accounts are now held in omnibus accounts that may 
also be networked. Thus, due in part to the increasing prominence of 
the omnibus account, Mutual Fund Transfer Agents' ability to look-
through to beneficial owners has decreased.
---------------------------------------------------------------------------

    \510\ Data communicated via NSSC Networking may include: (i) 
Shareholder elections regarding the settlement of cash dividends and 
capital gains distributions (such as by check or direct deposit), 
(ii) reinvestment elections, (iii) address changes, (iv) the 
financial adviser associated with the account, and (v) tax reporting 
information. See Mutual Fund Transfer Agent Workbook, supra note 
477, at 84.
    \511\ Intermediary accounts can be networked at three levels (0, 
3 and 4), providing different information concerning underlying 
beneficial owners. In Level 3, the intermediary handles all aspects 
of the customer relationship and the customer does not interact with 
the Mutual Fund Transfer Agent. In Level 4, the Mutual Fund Transfer 
Agent handles all client communications, and customers as well as 
their intermediary may interact with the Mutual Fund Transfer Agent. 
Level 0 refers to a bank trust networked account that functions 
similar to a Level 3 account, and the term also is used when 
referencing non-networked accounts.
---------------------------------------------------------------------------

    The use of breakpoints historically highlights some of the issues 
faced by Mutual Fund Transfer Agents that are associated with 
recordkeeping and processing services provided by intermediaries.\512\ 
A 2003 joint report of the staffs of the Commission, NASD and NYSE, 
found that ``[t]he dramatic growth in the number of [mutual fund] 
families, share classes, and, to a lesser extent, customer account 
types, has increased the complexity of applying breakpoints 
appropriately.'' \513\ The Staff Report also noted that whereas ``in 
the past, broker-dealers dealt directly with mutual fund transfer 
agents and disclosed the customer's identity to them, the increasing 
prominence of omnibus account arrangements and sub-transfer agency 
services provided to these accounts by intermediaries such as brokers 
had made the tasks related to the application of breakpoints more 
challenging.'' \514\
---------------------------------------------------------------------------

    \512\ Some mutual funds that charge front-end sales loads will 
charge lower sales loads for larger investments (i.e., 
``breakpoints). For addition information on breakpoints, see Final 
Rule: Disclosure of Breakpoint Discounts by Mutual Fund, Exchange 
Act Release No. 49817 (June 7, 2004), 69 FR 33262 (June 14, 2004).
    \513\ Staff Report: Joint SEC/NASD/NYSE Report of Examinations 
of Broker-Dealers Regarding Discounts on Front-End Sales Charges on 
Mutual Funds (Mar. 2003), available at https://www.sec.gov/news/studies/breakpointrep.htm.
    \514\ Id.; see also infra Section C.4 for additional discussion 
of Mutual Fund sub-transfer agent issues.
---------------------------------------------------------------------------

    Finally, the Commission understands that there has been a movement 
to omnibus sub-accounting arrangements over the years for mutual fund 
shareholders \515\ and that this movement has resulted in a fundamental 
shift in the roles and responsibilities of traditional shareholder 
servicing and recordkeeping.\516\ The Commission is examining the 
issues or concerns that may arise in connection with the lack of 
visibility that issuers and transfer agents acting on their behalf may 
have regarding the records maintained by intermediaries for their 
customers who are beneficial owners of mutual funds that are being 
serviced through omnibus and sub-accounting arrangements.
---------------------------------------------------------------------------

    \515\ See generally, Deloitte Digest on Omnibus Revolution, 
supra note 459; Deloitte, The Omnibus Revolution; managing risk 
across an increasingly complex service model (2012), available at 
http://www.deloitte.com/view/en_US/us/Industries/Private-Equity-Hedge-Funds-Mutual-Funds-Financial-Services/e89659d4db516310VgnVCM3000001c56f00aRCRD.htm.
    \516\ See generally, PWC Evolution of the Mutual fund Transfer 
Agent, supra note 461; PricewaterhouseCoopers, LLP, Evolution of the 
mutual fund transfer agent: Embracing the challenges and 
opportunities (July 2015), available at http://www.pwc.com/us/en/asset-management/investment-management/publications/mutual-fund-transfer-agent-evolution.html.
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5. Discussion and Request for Comment
    Given these developments, as well as the proliferation and growth 
of registered investment companies, including open-end funds, closed-
end funds, UITs \517\ and ETFs,\518\ the Commission believes it is 
appropriate to examine the regulation of transfer agents who provide 
services to registered investment companies.
---------------------------------------------------------------------------

    \517\ See supra note 442.
    \518\ The first Commission transfer agent rules were adopted in 
1977. See generally, supra Section IV.A. The advent of ETFs occurred 
more than a decade later. For examples of some of the earliest ETFs 
authorized under Commission exemptive orders, see, e.g., SPDR Trust, 
Series 1, Investment Company Act Release No. 18959 (Sept. 17, 1992) 
(notice), 19055 (Oct. 26, 1992) (order); Diamonds Trust, Investment 
Company Act Release No. 22927 (Dec. 5, 1997) (notice), 22979 (Dec. 
30, 1997) (order). For a discussion of key characteristics of ETFs, 
see Request for Comment on Exchange-Traded Products, Exchange Act 
Release No. 75165 (June 12, 2015), 80 FR 34729 (June 17, 2015); 
Exchange-Traded Funds, Investment Company Act Release No. 28193 
(March 11, 2008), 73 FR 14618 (March 18, 2008).
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    In particular, the Commission seeks comment regarding the 
regulation of transfer agents to registered investment companies based 
on the unique trading, market, asset class, and other relevant 
characteristics of the registered investment companies they service. 
Some of the issues posed by these unique characteristics of these 
registered investment companies are illustrated by the potentially 
different treatment of UITs and closed-end funds with respect to the 
Rule 17Ad-4(a)

[[Page 81997]]

exemptions, despite the many similarities that have existed 
historically among the secondary market trading characteristics of UITs 
and closed-end funds. Closed-end funds typically trade in a secondary 
market and often list on a national securities exchange for trading. By 
definition under Section 5 of the Investment Company Act, the 
securities of closed-end funds are not redeemable (i.e., the investor 
does not have a right to require the fund to redeem the investor's 
shares in exchange for a proportionate share of the fund's underlying 
asset or cash equivalent thereof).\519\ As a result, transfer agents 
servicing closed-end funds do not qualify for the Rule 17Ad-4(a) 
exemption, with respect to closed-end funds.\520\ In contrast, transfer 
agents servicing UITs qualify for the exemption because UIT units are 
redeemable.\521\ Yet, although UIT units are redeemable, because UITs 
are static trusts, redemptions of the UIT would require the UIT to 
dilute the corpus of the trust in order to meet redemption requests 
(whether paid out by the UIT in cash or met by distributions by the UIT 
of in-kind assets of the UIT). Therefore, just like closed-end funds, 
in order to provide liquidity to selling shareholders, historically 
UITs commonly have been traded in a secondary market, typically made up 
of broker-dealers, but UITs typically do not list their shares on a 
national securities exchange for trading as closed-end funds often 
do.\522\ Thus, UITs and closed-end funds are treated differently for 
purposes of Rule 17Ad-4, despite historically having similar trading 
characteristics.\523\
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    \519\ While a closed-end fund investor may not have the right to 
require the fund to redeem the investor's shares, in some cases, a 
closed-end fund may elect to purchase shares from its investors if 
they wish to sell their shares. See also Investment Company Act 
Rules 23c-1 through 23c-3, 17 CFR 270.23c-1 through 23c-3.
    \520\ See 17Ad-1-7 Proposing Release, supra note 165, at n.14 
(``The turnaround rules do apply to registered transfer agents 
performing transfer agent functions for securities issued by closed-
end investment companies.'')
    \521\ Id.
    \522\ See Thomas Harman, Emerging Alternatives to Mutual Funds: 
Unit Investment Trusts and Other Fixed Portfolio Investment 
Vehicles, 1987 Duke L.J. 1045, 1046 (1987), available at http://scholarship.law.duke.edu/dlj/vol36/iss6/4/; Gould and Lins, Unit 
Investment Trusts: Structure and Regulation under the Federal 
Securities Laws, 43 Bus. Law. 1177, 1185 (Aug. 1988); Form N-7 for 
Registration of Unit Investment Trusts under the Securities Act of 
1933 and the Investment Company Act of 1940, Investment Company Act 
Release No. 15612 at text following n.1 (Mar. 9, 1987), 52 FR 8268 
(Mar. 17, 1987); and SEC, Office of Investor Education and Advocacy, 
Unit Investment Trusts (UITs), available at http://www.sec.gov/answers/uit.htm.
    \523\ With respect to UITs that are not ETFs and that do not 
serve as separate account vehicles that are used to fund variable 
annuity and variable life insurance products, broker-dealers have 
historically maintained a secondary market in UIT units. At present, 
based on Commission staff analysis of data as of December 2014, the 
Commission understands that approximately 75% of the assets held in 
UITs serve as separate account vehicles that are used to fund 
variable annuity and variable life insurance products, and the 
sponsors of these UITs do not typically maintain a secondary market 
in UIT units. See Open-End Fund Liquidity Risk Management Programs; 
Swing Pricing; Re-Opening of Comment Period for Investment Company 
Reporting Modernization Release, Investment Company Act Release No. 
31835, 51-52 (Sept. 22, 2015), 80 FR 62273, 62289 (Oct. 15, 2015).
---------------------------------------------------------------------------

    The Commission also seeks comment with respect to the Rule 17Ad-
4(a) exemptions. As discussed above, although Mutual Fund Transfer 
Agents provide many of the same recordkeeping, transfer, account 
maintenance, and related services that Operating Company Transfer 
Agents provide, under Rule 17Ad-4(a) they are exempt from some of the 
turnaround, processing, performance, and recordkeeping requirements 
that make up the foundation of the transfer agent rules.\524\ One of 
the primary justifications for the Rule 17Ad-4(a) exemption was that at 
the time of adoption most equity securities at that time were issued in 
certificated form, while most mutual fund shares were 
uncertificated.\525\ Thus, the Commission viewed the ``redemption of 
fund shares'' as being ``significantly different from the transfer of 
ownership of stocks and bonds on the issuer's records.'' \526\ However, 
today most equity securities are either immobilized at DTC or 
completely dematerialized and issued in book-entry form, potentially 
making the processing of securities issued by mutual funds and equity 
securities issued by operating companies more alike than different and 
raising the question of whether the Commission should consider amending 
or eliminating the Rule 17Ad-4 exemption.
---------------------------------------------------------------------------

    \524\ As noted above, Rule 17Ad-4(a) creates an exemption from 
Rules 17Ad-2, 17Ad-3, and 17Ad-6(a)(1)-(7) and (11) for interests in 
limited partnerships, DRIPs, and redeemable securities issued by 
investment companies registered under Section 8 of the Investment 
Company Act. See supra Section IV.A.2 for additional information 
regarding Rule 17Ad-4.
    \525\ See supra Section IV.A.2.
    \526\ Rule 17Ad-1 through 17Ad-7 Adopting Release, supra note 
145, at 32408; see also id. at n.13 (``[t]he amount of certificated 
fund shares is relatively small, and the amount of transfer agent 
activity in connection with transferring ownership of certificated 
shares represents a very small part of a transfer agent's activity 
with regard to an open-end investment company.'').
---------------------------------------------------------------------------

    Based on these and the other issues and developments discussed in 
this section and throughout this release, the Commission believes it is 
appropriate to consider whether new or amended rules governing transfer 
agents' services and activities with respect to mutual funds and other 
registered investment companies could be appropriate. Accordingly, the 
Commission seeks comment on the following:

    101. What are the similarities and differences among transfer 
agents that service equity securities, debt securities, and 
registered investment company securities? Please explain.
    102. Do transfer agents face different risks and challenges 
depending on the industry segment or asset class they service? Does 
the level of complexity associated with transaction processing by 
Mutual Fund Transfer Agents create risks or challenges the 
Commission should consider addressing? Why or why not? Please 
explain.
    103. Should the Commission address specific issues related to 
Mutual Fund Transfer Agents and transfer agents that service other 
registered investment companies? Should the Commission, in 
regulating transfer agents to registered investment companies, take 
into account the trading, market, asset class, or other 
characteristics of the securities or issuers being serviced? What 
other factors, if any, should be considered and why? Alternatively, 
should the Commission regulate all transfer agents uniformly, 
regardless of the industry segment or asset class they service? Why 
or why not? What data should the Commission consider in making that 
determination? Please explain.
    104. Should the Commission impose additional recordkeeping and 
disaster recovery requirements for Mutual Fund Transfer Agents? Why 
or why not?
    105. Should the Commission require that transfer agents provide 
more detailed information on Form TA-2 about the type of issuers 
they are servicing and the types of work they are performing for 
those issuers? Why or why not? For example, should Form TA-2 include 
information regarding whether a transfer agent is servicing 
investment companies or pension plans? Why or why not? Would this 
information be helpful to issuers who seek specific skills or 
experience from their transfer agent? Should Form TA-2 require the 
disclosure of the name of each issuer serviced during the reporting 
period? Why or why not? What would be the benefits, costs, or 
burdens associated with any such requirements? Are there already 
freely available sources for this information? Please provide 
empirical data, if any.
    106. As noted, transfer agent services for interests in limited 
partnerships, DRIPS, and redeemable securities of registered 
investment companies are exempt from certain turnaround rules under 
Rule 17Ad-4(a). In light of the expanded role of transfer agents in 
these areas, should the Commission eliminate these exemptions? If 
so, what costs, burdens, or benefits would accrue to investors, 
issuers, or the transfer agent industry? If these exemptions are not 
eliminated, should the Commission add other book-entry forms of 
ownership to the

[[Page 81998]]

list of exemptions, including direct registration system positions, 
direct purchase plan positions, and employee purchase plans? Why or 
why not?
    107. Are limited partnerships traded today in greater volumes 
than they were in 1977? Please provide empirical data. If so, do 
commenters believe the Commission should consider this as a 
potential basis for eliminating the exemption for transfer agents to 
limited partnerships in Rule 17Ad-4(a)? Why or why not?
    108. In light of increased dematerialization, do commenters 
believe transfer agent processing of DRIP transactions today is 
largely similar to the processing of equity and debt securities? Why 
or why not? If so, do commenters believe the Commission should 
consider this as a potential basis for eliminating the exemption for 
transfer agents to DRIPs in Rule 17Ad-4(a)? Why or why not?
    109. Transfer agents that service UITs are currently exempt 
under Rule 17Ad-4(a), but transfer agents that service closed-end 
funds are not. Should the Commission continue this distinction? 
Should the Commission apply transfer agent rules to transfer agents 
that service UITs in the same manner as the rules apply to transfer 
agents that service closed-end funds on the basis of historical 
similarities in the secondary market trading of both types of funds? 
Why or why not? Please explain.
    110. Should the Commission amend the current transfer agent 
rules to explicitly address transfer agents for ETFs? Why or why 
not? How do transfer agent functions in connection with ETFs differ, 
if at all, from services transfer agents provide to other types of 
investment companies? Are there any particular issues unique to 
transfer agent service of ETFs that raise risks not present with 
respect to other types of investment companies? Please explain. If 
Rule 17Ad-4(a) is retained by the Commission in some form and is not 
proposed to be eliminated, should the Commission amend Rule 17Ad-
4(a) to specify explicitly the applicability of its exemption to 
transfer agents to ETFs? If so, should transfer agents to ETFs be 
able to avail themselves of the exemption or should the exemption 
not apply to transfer agents to ETFs similar to the way in which the 
exemption today does not apply to transfer agents to closed-end 
funds, which in some cases are traded on national securities 
exchanges as are ETFs? Why or why not?
    111. How are Mutual Fund Transfer Agents compensated today? Do 
any aspects of the structure or terms of their compensation raise 
regulatory concerns? Do Mutual Fund Transfer Agent fees based upon 
the fund's net assets create any conflicts of interest? Why or why 
not? If so, are there alternative fee structures that would not 
create conflicts of interest? Do Mutual Fund Transfer Agents provide 
fee rebates to issuers and, if so, do these raise any issues of 
regulatory concern? Do the internal and hybrid transfer agent models 
discussed above raise any special regulatory concerns? Why or why 
not? Please explain.
    112. Should the Commission adjust its regulatory oversight of 
Mutual Fund Transfer Agents and, if so, how? Should any aspects of 
the Commission's regulatory regime for registered clearing agencies, 
including those that act as central securities depositories, apply 
to Mutual Fund Transfer Agents? Why or why not?
    113. Given the increasing volume of transactions and activities 
facilitated through NSCC as the central clearance and settlement 
utility for mutual funds and intermediaries, what issues or 
concerns, if any, should the Commission consider with respect to the 
various activities conducted through NSCC for mutual fund investors? 
Please describe.
    114. How often do Mutual Fund Transfer Agents serve as fund 
administrators for the same mutual fund? Does this dual role create 
conflicts of interest for either the mutual fund or the Mutual Fund 
Transfer Agent? Does this dual role raise other concerns? If so, 
please describe.
    115. What ancillary information or systems do Mutual Fund 
Transfer Agents or intermediaries rely on to ensure accurate 
processing and recordkeeping of mutual fund shares (e.g., master 
security/CUSIP databases, systems for tracking the age of fund 
shares for fee processing, cost basis systems for tax reporting)? 
Should the recordkeeping rules be modified or expanded to address 
such records? Please explain.
    116. Transfer agents currently engage in the processing of ``as 
of'' transactions, or transactions which correct errors in the 
purchase or sale of mutual fund shares. What, if anything, 
differentiates, the ``as of'' transactions from an initial purchase 
or sale? Should the Commission specifically address ``as of'' 
transactions in transfer agent rules? Why or why not? Should the 
Commission adopt rules that govern which party, the mutual fund 
issuer or the Mutual Fund Transfer Agent, loses or retains profits 
resulting from processing errors when these errors are corrected by 
later ``as of'' transactions?
    117. Mutual fund transfer agents facilitate the delivery of 
critical information (e.g., daily fund NAVs, dividend accrual 
information) to intermediaries for overnight batch processing of 
beneficial owner transactions. What issues or concerns, if any, 
should the Commission consider with respect to the timely delivery 
of such information, and the impacts of potential processing delays 
and downstream effects, including to investors? Please describe.
    118. Should the Commission require that the number of ``as of'' 
transactions be reported by Mutual Fund Transfer Agents on Form TA-
2? Why or why not? Are greater numbers of ``as of'' transactions 
indicative of potential processing problems at a Mutual Fund 
Transfer Agent, such as a turnaround backlog or problems with 
accuracy? Why or why not? Do greater numbers of ``as of'' 
transactions indicate potentially risky mutual fund trading 
practices that may dilute the interests of long-term investors in 
the mutual fund? Why or why not?
    119. Does mutual funds' use of intermediaries who act as sub-
transfer agents introduce new or additional risks to the prompt and 
accurate settlement of securities transactions? If so, what are 
those risks, should the Commission consider addressing those risks, 
and if so, how? Please explain.
    120. Should the Commission propose rules governing how Mutual 
Fund Transfer Agents oversee sub-transfer agents to mutual funds? 
Why or why not? If so, what rules should the Commission consider? 
Why, and what would be the benefits, costs, or other consequences of 
such rules? Please explain.
    121. What oversight functions, if any, do Mutual Fund Transfer 
Agents typically perform for intermediaries performing sub-transfer 
agent or sub-accounting services to beneficial owners of mutual fund 
shares? What are the types of initial versus ongoing due diligence 
performed? What types of obstacles do Mutual Fund Transfer Agents 
face in performing the oversight function?
    122. What problems, if any, are created by transfer agents' lack 
of visibility into the identity of beneficial owners and products 
serviced by intermediaries acting as sub-transfer agents? Please 
describe. If appropriate, could these issues be addressed solely by 
the Commission through revisions to the rules governing transfer 
agents? Would other regulatory changes be necessary, such as changes 
to the rules under the Investment Company Act or rules for broker-
dealers under the 1934 Act (and 1933 Act)? Would other regulators 
also need to enact rule changes (for example, banking regulators and 
the Department of Labor for retirement plan recordkeepers) to assist 
with transparency?

D. Crowdfunding

    Pursuant to the Jumpstart Our Business Startups (JOBS) Act (``JOBS 
Act''), the Commission adopted Regulation Crowdfunding on October 30, 
2015.\527\ These rules permit an issuer to raise up to $1,000,000 in a 
crowdfunding offering that is not registered under the Securities Act, 
subject to, among other things, certain caps on amounts individual 
investors may invest.\528\ Crowdfunding offerings are offerings that 
are conducted primarily over the internet through registered brokers or 
a new class of intermediaries, called ``funding portals.'' The JOBS Act 
and Regulation

[[Page 81999]]

Crowdfunding contain provisions that relate directly to transfer 
agents.
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    \527\ See Crowdfunding, Securities Act Release No. 9974 (Oct. 
30, 2015), 80 FR 71388 (Nov. 16, 2015) (``Crowdfunding Adopting 
Release''). In addition, pursuant to Section 401 of the JOBS Act, 
the Commission adopted amendments to Regulation A in March 2015. 
These amendments included a conditional exemption for securities 
issued in a Tier 2 offering under Regulation A from the mandatory 
registration requirements of Section 12(g) of the Exchange Act. One 
of the conditions of the exemption is that the issuer ``[h]as 
engaged a transfer agent registered pursuant to Section 17A(c) of 
the Act to perform the function of a transfer agent with respect to 
. . . securities'' issued in a Tier 2 offering pursuant to 
Regulation A. Amendments for Small and Additional Issues Exemptions 
under the Securities Act (Regulation A), Exchange Act Release No. 
74578 14, 249, 285 n. 972 (Mar. 25, 2015), 80 FR 21805, 21809, 
21820, 21867, 21879 n. 972 (Apr. 20, 2015), available at http://www.sec.gov/rules/final/2015/33-9741.pdf.; Exchange Act Rule 12g5-
1(a)(7)(iii),17 CFR 240.12g5-1(a)(7)(iii).
    \528\ See Regulation Crowdfunding Rule 100(a); Crowdfunding 
Adopting Release, supra note 527, at 71389.
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    First, Regulation Crowdfunding created an exemption from the record 
holder count under Section 12(g) of the Exchange Act provided that 
certain conditions are met. One of these conditions is that ``the 
issuer . . . has engaged the services of a transfer agent registered 
with the Commission pursuant to Section 17A of the Exchange Act.'' 
\529\
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    \529\ The other conditions are that the issuer is current in its 
ongoing annual reports required pursuant to Rule 202 of Regulation 
Crowdfunding and has total assets as of the end of its last fiscal 
year not in excess of $25 million. See Crowdfunding Adopting 
Release, supra note 527, at 330, 662.
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    Second, under the JOBS Act and new Rule 501 of Regulation 
Crowdfunding, securities issued in crowdfunding offerings are subject 
to restrictions on resale for a period of one year, with the exception 
that they may be resold to other investors under specific conditions 
prior to the expiration of the holding period.\530\ Regulation 
Crowdfunding does not mandate the use of a restrictive legend on 
crowdfunding securities certificates or book-entry security positions, 
but it does require the placement of a legend in the offering statement 
used in the offering.\531\ Because of their experience in handling 
restricted securities, transfer agents retained by issuers in 
connection with crowdfunding offerings may be asked to track securities 
that were issued in crowdfunding offerings and handle issues related to 
the restrictions on transfer and exemptions thereto.
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    \530\ Securities Act Section 4A(e) provides that ``Securities 
issued pursuant to a transaction described in section 4(6) may not 
be transferred by the purchaser of such securities during the 1-year 
period beginning on the date of purchase, unless such securities are 
transferred'' under certain specified conditions. Rule 501(a) of 
Regulation Crowdfunding provides ``Securities issued in a 
transaction exempt from registration pursuant to section 4(a)(6) of 
the Securities Act . . . and in accordance with section 4A of the 
Securities Act . . . and this part may not be transferred by any 
purchaser of such securities during the one-year period beginning 
when the securities were issued in a transaction exempt from 
registration pursuant to section 4(a)(6) of the Securities Act . . . 
unless such securities are transferred'' under certain specified 
conditions, including that the transfer is to the original issuer, 
to an accredited investor, is part of a registered offering, or to a 
family member.
    \531\ See Regulation Crowdfunding, Form C, Item 2, General 
Instruction III; see also Crowdfunding Adopting Release, supra note 
527, at 68-69.
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    Third, Rule 301(b) of Regulation Crowdfunding requires 
intermediaries to have a ``reasonable basis'' for believing that an 
issuer has established means to keep accurate records of the holders of 
the securities it would offer and sell through the intermediary's 
platform.\532\ Intermediaries may rely on the representations of the 
issuer concerning its means of recordkeeping unless the intermediary 
has reason to question the reliability of those representations.\533\ 
Rule 301(b), however, also provides a safe harbor for compliance for 
those issuers that use a registered transfer agent.\534\
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    \532\ Regulation Crowdfunding Rule 301(b).
    \533\ Id.
    \534\ Id. (``An intermediary will be deemed to have satisfied 
this requirement if the issuer has engaged the services of a 
transfer agent that is registered under Section 17A of the Exchange 
Act . . .'')
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    As a result of these new provisions, transfer agents are likely to 
be involved in at least some crowdfunding offerings. Accordingly, the 
Commission seeks comment on the following:

    123. What services, if any, do commenters anticipate transfer 
agents providing for crowdfunding issuers? How do commenters 
anticipate transfer agents will comply with their recordkeeping, 
safeguarding, and other requirements in the context of crowdfunding 
securities? Does the entry of transfer agents into the crowdfunding 
space pose new or additional risks for the prompt and accurate 
settlement of securities transactions? What are these risks, should 
the Commission address them, and, if so, how?
    124. Transfer agents have traditionally assessed fees on a per 
shareholder basis. Do commenters believe transfer agents are likely 
to impose a per shareholder fee in connection with crowdfunding 
issuances? If so, is a per-shareholder fee appropriate? If not, what 
other kinds of fees are likely to be charged, and would they be 
appropriate?

E. Administration of Issuer Plans

    Many transfer agents provide transfer, recordkeeping, 
administrative, and other services related to certain types of issuer-
sponsored plans that provide incentives to the issuer or 
securityholders in the form of reduced fees and commissions, as well as 
other benefits. These plans include DRIPs, DSPPs,\535\ employee stock 
purchase plans (``ESPPs''),\536\ equity-based incentive compensation 
plans,\537\ odd lot programs,\538\ and subscription rights programs 
(collectively, ``Issuer Plans'').\539\ Many transfer agents also help 
administer employer-sponsored retirement plans (``Retirement Plans).'' 
The specific services provided will vary depending on the nature of the 
plan or mutual fund and the agreement between the issuer and agent, but 
many are similar and can be thought of broadly as ``Plan 
Administration'' \540\ services. Depending on the transfer agent and 
the specific services provided, some of these activities may raise 
broker-dealer registration issues. This section discusses these and 
other issues associated with transfer agents' Plan Administration 
activities and seeks comment regarding possible regulatory actions 
regarding those issues.
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    \535\ DSPPs allow individuals to purchase stock directly from 
the issuer or its transfer agent, again without going through a 
broker. Unlike DRIPs, investors do not need to be existing 
securityholders to participate in DSPPs.
    \536\ ESPPs allow employees to invest in their employer's 
securities by purchasing shares directly from the employer (issuer) 
or its transfer agent, frequently at a discount to the market price.
    \537\ Equity-based incentive compensation plans for example 
include plans regarding stock options, restricted stock units, and 
stock appreciation rights.
    \538\ Odd-lot program are used by issuers to purchase shares of 
their own stock back from owners of less than 100 shares (a 100 
share block is considered to be a ``round lot''), which may reduce 
the issuer's transfer agent and other fees by reducing the number of 
registered stockholders and/or allow small investors to sell their 
stock without a broker. The Commission staff has provided no-action 
relief to a transfer agent in connection with its participation in 
an odd-lot program and charging of fees to investors (that were 
estimated to be lower than standard broker commissions) without 
requiring registration of the transfer agent as a broker-dealer. See 
American Transtech Inc., SEC Staff No-Action Letter (Sept. 22, 
1985).
    \539\ Subscription rights programs allow existing stockholders 
to avoid dilution of their percentage ownership by purchasing enough 
shares in the issuance to retain at least the same level of 
percentage ownership.
    \540\ ``Plan Administration'' and ``Administration,'' as used in 
this release are not terms of art with a fixed definition. We use 
them broadly as simplified shorthand to refer to some of the 
services discussed herein.
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1. Third Party Administrators
    The majority of Plan Administrators that provide services for 
Retirement Plans (and some Issuer Plans and mutual funds) do not 
perform statutory transfer agent functions,\541\ and therefore may not 
be required to register as a transfer agent with the Commission or 
other ARA. Because they are generally hired by the Retirement Plan or 
other plans rather than the issuer, in this context, Plan 
Administrators may be referred to as Third-Party Administrators 
(``TPAs'').\542\ It is the Commission staff's understanding that the 
majority of TPAs are not registered as transfer agents, although some 
do so voluntarily.
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    \541\ See supra note 139 and Section IV.A for a description of 
the specific activities which require registration as a transfer 
agent under the Exchange Act.
    \542\ The term ``TPA'' is used here to refer generally to a 
broad category of ``administrators'' who provide the types of 
services described herein.
---------------------------------------------------------------------------

    One of the TPA's main responsibilities is acting as an intermediary 
between benefit plan participants and the plan. For example, TPAs 
provide various services when enrolling new employees in a company's 
benefit plan, including recording and processing their enrollment and 
collecting information about their funding and investing preferences 
(e.g., fund allocations).

[[Page 82000]]

TPAs use this information to generate payroll deduction instructions 
and transmit these instructions to the participant's payroll or human 
resources department for processing.
    TPAs continue to act as intermediaries between the benefit plan 
participants and plans after participants enroll in the plan. For 
example, if participants wish to transfer or reallocate mutual funds 
within their plan, they submit their request to the TPA, which will 
process and record these requests and provide the transactional details 
to the plan trustee or investment manager. Similarly, when participants 
request a payment, the TPA may send the transaction details to the 
NSCC, plan trustee, and investment manager, and provide payment 
instructions to the mutual fund and Mutual Fund Transfer Agent. In 
addition to processing transactions, TPAs may provide participants with 
customer service support, activity statements, and other 
communications.
    TPAs may also provide sub-transfer agent services for plans that 
offer, as investment options of the plan, investment in the shares of 
mutual funds.\543\ In this arrangement, TPAs take orders from investors 
and perform record consolidation services as sub-transfer agents to the 
plan. Instead of submitting to mutual funds (and their Mutual Fund 
Transfer Agents) hundreds or thousands of individual purchase and 
redemption orders each day in the shares of those mutual funds that 
have been submitted to the plan (and its TPA) by individual plan 
participants, TPAs may aggregate and, in some instances, net orders on 
behalf of the plan to be submitted to a mutual fund.\544\ Orders are 
aggregated by adding all of the purchase and redemption orders for a 
particular mutual fund and submitting the total purchase order and the 
total redemption order to the mutual fund.
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    \543\ For additional discussion of sub-transfer agent services, 
see supra Section VII.B.
    \544\ See, e.g., comment letters to Investment Company Act 
Release No. 26288 (Dec. 11, 2003), 68 FR 70388, 70388-89 (Dec. 17, 
2003), available at http://www.sec.gov/rules/proposed/s72703.shtml.
---------------------------------------------------------------------------

    Once aggregated, TPAs may go a step further and create a single net 
order by offsetting the purchase and redemption orders against each 
other. These services allow TPAs to complement the administrative and 
recordkeeping services they already provide to plans and possibly earn 
additional fees from mutual fund complexes. They also reduce the amount 
of transactions that mutual fund complexes (and their Mutual Fund 
Transfer Agents) need to process. Under this arrangement, the mutual 
fund often does not know the identity of the plan participants since 
TPAs, not the mutual funds, are taking the orders directly from the 
plan participants and submitting orders to the mutual funds on behalf 
of and generally in the name of the plan.\545\ In these situations, the 
Mutual Fund Transfer Agent would know only the plan, which is the legal 
owner of the shares of the mutual fund held by the plan for the benefit 
of its participants.
---------------------------------------------------------------------------

    \545\ See supra note 506 and accompanying text for a discussion 
of Investment Company Act Rule 22c-2, the provision of taxpayer 
identification numbers to assist mutual funds in complying with 
rules related to ``forward pricing,'' and transfer agent services 
that assist mutual funds in complying with Rule 22c-2.
---------------------------------------------------------------------------

2. Issuer Plans
    Issuers commonly appoint Plan Administrators to administer their 
Issuer Plans. Depending on the type of security being serviced and the 
scope of the activities performed, Plan Administrators may be required 
to register with the Commission or other ARA as a transfer agent.\546\ 
For simplicity and because of the pre-existing relationship, issuers 
may simply hire their existing transfer agent.
---------------------------------------------------------------------------

    \546\ For additional discussion of transfer agent registration 
requirements, see supra Section IV.A.
---------------------------------------------------------------------------

    Plan Administrators perform primarily four tasks for these plans. 
First, they handle communications with investors, including their 
initial plan registration,\547\ often by operating a Web site that 
allows investors to sign up for and manage their account.
---------------------------------------------------------------------------

    \547\ Many DRIPs require investors to own at least one share 
registered in their name (as opposed to being held in street name) 
before they will be allowed to participate in the DRIP.
---------------------------------------------------------------------------

    Second, they purchase company shares for the plan,\548\ typically 
on the secondary market, although purchases can also be made through 
negotiated transactions or from the company itself, for example by 
using authorized but unissued shares of common stock or shares held in 
the company's treasury.\549\ Some issuers offer investors who 
participate in their plans discounts on the share price, but there is 
wide variation in how this is offered.
---------------------------------------------------------------------------

    \548\ When investors join a plan, they are typically required to 
sign a document authorizing the agent to make purchases on their 
behalf.
    \549\ Plan Administrators typically purchase shares on or around 
the dividend payment date, but they may spread out large purchases 
made on the secondary market over a longer period of time to avoid 
affecting the share price. When purchasing shares on the secondary 
markets, the share price is generally determined by averaging the 
price of all shares purchased for that investment period; when 
purchased directly from the company, it is based on an average of 
the high and low or the closing price for the stock as reported by a 
specified source.
---------------------------------------------------------------------------

    Third, Plan Administrators maintain custody of purchased shares on 
the participants' behalf,\550\ with the purchased shares typically 
being registered in the name of the transfer agent's nominee. This 
could lead to plan participants holding the issuer's shares in two 
places: Their bank or brokerage firm for the original registered 
shares, and the Plan Administrator for shares purchased through a plan. 
To address this, many Plan Administrators allow Plan participants to 
deposit their original registered shares into the participant's DRIP 
account for safekeeping at no charge or for a modest fee. Once 
deposited with the transfer agent, the shares are treated the same way 
as the other shares in the participant's account.
---------------------------------------------------------------------------

    \550\ Paper certificates for shares of the company's common 
stock purchased under the plans will generally not be issued unless 
requested by the participant. Paper certificates are also issued 
when a participant no longer wants to participate in the plan.
---------------------------------------------------------------------------

    Finally, Plan Administrators maintain Plan records and send regular 
account statements and other communications to plan participants. These 
typically include quarterly account statements and transactional 
statements after each cash investment, transfer, deposit, withdrawal, 
or sale. These statements generally show cash dividends and optional 
cash payments received, the number of shares purchased, the purchase 
price for the shares, the total number of shares held for the 
participant, and an accumulation of the transactions for the calendar 
year to date. In addition, Plan Administrators send plan participants 
the same communications that are sent to every other securityholder of 
the company's common stock, including the company's annual report, 
annual meeting notices, proxy statements, and income tax information 
for reporting dividends paid by the company.
3. Potential Broker-Dealer Registration Issues
    As described above, Plan Administrators, TPAs, and Mutual Fund 
Transfer Agents all provide some level of transaction execution and 
order routing services. The specific services may vary depending on the 
plan or firm, but in general, administrators that provide transaction 
execution services will handle customer funds and securities and may 
provide some level of netting, which is the process of offsetting 
expected deliveries and payments against expected receipts in order to 
reduce the amount of cash and securities to be moved. For example, some 
administrators for employer-sponsored retirement plans offset purchase 
and sale transactions in the

[[Page 82001]]

same target mutual fund by different participants in the plan and 
submit a net order to the transfer agent of the mutual fund. Netting is 
a function commonly performed by clearing agencies and may also be 
performed by broker-dealers for customers holding in street name, but 
is not among the core functions enumerated in Exchange Act Section 
3(a)(25) performed by registered transfer agents. Hence, netting and 
other execution services may not themselves implicate transfer agent 
requirements, but nonetheless may trigger broker-dealer regulatory 
requirements.
    The Exchange Act defines a ``broker'' as ``any person engaged in 
the business of effecting transactions in securities for the account of 
others'' \551\ and requires non-exempt brokers to register with the 
Commission.\552\ ``Effecting securities transactions'' includes, among 
other things, identifying potential purchasers of securities, 
soliciting securities transactions, routing or matching orders, 
handling customer funds or securities, and preparing and sending 
transaction confirmations (other than on behalf of a broker-dealer that 
executes the trades).\553\ Receiving transaction-based compensation may 
also indicate that a person is effecting securities transactions for 
the account of other.\554\
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    \551\ Exchange Act Section 3(a)(4)(A), 15 U.S.C. 78c(a)(4)(A).
    \552\ Exchange Act Section 15(a)(1), 15 U.S.C. 78o(a)(1). 
Exchange Act Section 3(a)(4)(B), 15 U.S.C. 78c(a)(4)(B), provides an 
exception to the definition of ``broker'' for certain bank 
activities.
    \553\ Definition of Terms in and Specific Exemptions for Banks, 
Savings Associations, and Savings Banks Under Sections 3(a)(4) and 
3(a)(5) of the Securities Exchange Act of 1934, Exchange Act Release 
No. 44921, 66 FR 27760, 2772-3 (May 18, 2001).
    \554\ See, e.g., SEC v. Margolin, 1992 WL 279735, at *5 
(S.D.N.Y. Sept. 30, 1992) (ruling that Commission had demonstrated a 
substantial likelihood of success on the merits of its claim that a 
person was acting as an unregistered broker where the defendant 
``provided clearing services'' for many transactions, ``receiv[ed] 
transaction-based compensation, advertis[ed] for clients, and 
possess[ed] client funds and securities.'')
---------------------------------------------------------------------------

    The Commission has brought enforcement actions against transfer 
agents operating as broker-dealers without registering as such with the 
Commission. For example, the Commission found that a transfer agent was 
acting as an unregistered broker-dealer in violation of Exchange Act 
Section 15(a) when it, among other things: opened accounts for 
individual retirement account (``IRA'') customers; established an 
interest bearing depository account to receive IRA customer monies; had 
a power of attorney to withdraw, deposit and transfer IRA customer 
funds held by custodial banks, and to purchase assets in the name of 
the custodian; charged IRA customers a transaction fee when IRA 
customers made a purchase or sale of securities through a broker-dealer 
or issuer; prepared periodic account statements for IRA customers; and 
physically held certain IRA customers' securities in its office 
vault.\555\ Furthermore, a transfer agent that effects securities 
transactions for investors in connection with administering certain 
types of Issuer Plans may be engaging in broker activity.\556\
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    \555\ In the Matter of Bankers Pension Services, Inc., Exchange 
Act Release. No. 37567 (Aug. 14, 1996) (settled action). See also In 
the Matter of Transcorp Pension Services, Inc., Exchange Act Release 
No. 37278 (Jun. 4, 1996) (finding a transfer agent acted an 
unregistered broker-dealer for engaging in similar conduct).
    \556\ In the Matter of CIBC Mellon Trust Company, Exchange Act 
Release No. 51291 (Mar. 2, 2005); In the Matter of Computershare 
Trust Company of Canada, Exchange Act Release No. 53668 (Apr. 18, 
2006).
---------------------------------------------------------------------------

    The Commission staff has stated its view that it will not recommend 
enforcement action where a TPA performs some ``clerical and 
ministerial'' activities without registering as a broker, subject to 
the conditions that, among things, the TPA refrain from netting or 
matching orders.\557\ This guidance is consistent with long-standing 
views on what constitutes broker activity.\558\ The Commission also 
notes that its staff has taken the position in connection with no-
action relief that, depending on the facts and circumstances, the 
performance of some or all of the administrative activities discussed 
in this section are also performed by entities that have registered 
with the Commission as brokers for such purposes.\559\ Transfer agents 
that solicit purchase and sale orders, accept orders directly from 
investors, advertise services directly to investors, and make 
investment recommendations, also raise broker-dealer registration 
issues.\560\
---------------------------------------------------------------------------

    \557\ See Universal Pensions, Inc., SEC Staff No-Action Letter 
25 (Jan. 30, 1998) (applicant letter noting that ``the SEC staff has 
previously agreed that broker registration is not required for 
persons who perform `clerical and ministerial' services similar to 
services provided by the TPA.''); see also Urratia, Carlos M., SEC 
Staff No-Action Letter (Aug. 27, 1980); Investment Company 
Institute, SEC Staff No-Action Letter (June 13, 1973); Applied 
Financial Systems, SEC Staff No-Action Letter (Sept. 25, 1971); 
Dreyfus Group Equity Fund, SEC Staff No-Action Letter (June 26, 
1971) (``No Action Letters'').
    \558\ See generally, Louis Loss, Joel Seligman, and Troy 
Paredes, Securities Regulation, Sec.  8(A)(3) (2007); David A. 
Lipton, Broker-Dealer Regulation, Vol. 15, Sec.  1:6 (2006).
    \559\ See, e.g., No-Action Letters, supra note 557 (regarding 
condition that the recipients of the letters refrain from executing 
orders).
    \560\ See, e.g., SEC v. Deyon, 977 F. Supp. 510 (D. Me. Aug. 27, 
1997) (two unregistered defendants violated Section 15(a) of the 
Exchange Act by, among other things, soliciting investors by phone 
and in person); SEC v. Century Inv. Transfer Corp., Fed. Sec. L. 
Rep. (CCH) 93,232 (S.D.N.Y. Oct. 5, 1971) (defendant was engaged in 
the broker-dealer business by, among other things, advertising in 
the Wall Street Journal to solicit customers); SEC v. Corporate 
Relations Group, Inc., 2003 WL 25570113 (M.D. Fla. Mar. 28, 2003) 
(defendant acted as an unregistered broker when it actively sought 
investors, recommended securities to investors through registered 
representatives, and provided its broker relations executives with 
transaction-based compensation for stock sales).
---------------------------------------------------------------------------

4. Discussion and Request for Comment
    The Commission is generally requesting comment on whether new rules 
may be appropriate to bring greater clarity, consistency, and 
regulatory certainty to Plan Administration and similar activities by 
entities registered with the Commission solely as transfer agents as 
well as by entities that may not be registered with the Commission in 
any capacity.\561\ Specifically, the Commission requests comment on the 
following:
---------------------------------------------------------------------------

    \561\ As noted, depending on the type of securities being 
administered and the scope of administration services being 
performed, an entity may or may not be required to register with the 
Commission in the capacity of a transfer agent and/or a broker-
dealer.

    125. Exchange Act Rule 17Ad-9(m) describes various transfer 
agent functions that are broader than the five statutory functions 
defined in Exchange Act Section 3(a)(25). Likewise, as discussed in 
this and other sections, modern transfer agents perform a wide array 
of services and functions that do not fall within the confines of 
Section 3(a)(25) and are not otherwise identified or contemplated in 
the existing transfer agent rules. Should the Commission update the 
transfer agent rules to address additional transfer agent services 
and functions that do not fall within the confines of Section 
3(a)(25)? Why or why not?
    126. Should the Commission impose supervisory obligations on 
entities engaged in transfer agent activities, such as transfer 
agents and plan administrators, such as requiring that employees be 
properly trained, comply with continuing education requirements, and 
adhere to regulations and company policies? Why or why not?
    127. Definitions in Rules 17Ad-1 and 17Ad-9 do not explicitly 
apply to all types of transactions and functions related to Issuer 
Plans, investment company securities, restricted securities, and 
corporate actions, or to all transactions relating to book-entry 
activity and DRS transactions. For example, the rule does not 
specify that ``credit'' and ``debit'' include Issuer Plan 
transactions and book-entry accounts as well as investment company 
securities transactions. Does the lack of specificity cause 
difficulties in providing services relating to those areas not 
specifically enumerated? Why or why not?
    128. Does Rule 17Ad-2 create uncertainty concerning the 
applicability of the rule to activities related to Issuer Plans, 
investment company securities, restricted securities, and corporate 
actions? If there is such uncertainty, how does it impact transfer 
agents' functionality? Are issuers concerned

[[Page 82002]]

about impacts on service levels? If so, please describe.
    129. The recordkeeping requirements in Rule 17Ad-6 do not 
specifically include activities associated with investment company 
securities, Issuer Plans, DRS transactions, paying agent activities, 
or corporate actions. Are transfer agents applying the rule's 
recordkeeping requirements to these activities? If not, what would 
be the additional cost, benefits and/or burdens, if any, in doing 
so? Please describe.
    130. Rule 17Ad-10 does not specifically address activities 
performed by many transfer agents, such as Plan Administration, 
paying agent activities, or corporate action recordkeeping. Does 
this create any obstacles to complying with the rule, such as by 
creating confusion or uncertainty? Why or why not? Please explain.
    131. There are no Commission regulations addressing plan 
enrollment practices, such as negative consents or automatic 
enrollments. What risks, if any, arise from these enrollment 
methods? Should the Commission address any such risks? Why or why 
not? If, so how?
    132. To ensure that transfer agents make and keep comprehensive 
records relating to all of their activities, should the Commission 
address records related to Issuer Plan and mutual fund activities? 
Why or why not? For example, should transfer agents be required to 
make and maintain records of orders for the purchase or sale of Plan 
or mutual fund securities in a manner similar to that required of 
broker-dealers? Why or why not? Should they be required to create 
and maintain records relating to reconciliations with custodial 
accounts and order-submitting entities? Should they be required to 
make and maintain specific records relating to plan participants? 
Why or why not? Please explain and provide supporting evidence 
regarding any potential effects. To the extent that any data, 
records, and/or other information that such rules might require to 
be made and preserved are prepared and maintained by an outside 
party on the transfer agent's behalf, should the Commission require 
that the outside entity file a signed, written undertaking with the 
Commission to the effect that such records are the property of the 
transfer agent and will be surrendered promptly on request of the 
transfer agent and subject to examination by the Commission or other 
ARA? Why or why not? Please explain and provide supporting evidence 
regarding any potential effects.
    133. Should the Commission amend the rules so that transfer 
agents performing specific activities are exempt from broker-dealer 
registration only if they are (i) registered with the Commission as 
a transfer agent, (ii) limit their activities to those specified in 
the general rule, and/or (iii) agree to abide by certain other 
conditions designed to protect investors and limit the risks 
associated with those activities? Why or why not? Should the 
Commission require broker-dealer registration for any activities 
beyond what is permitted or conducted by an entity that is not 
registered with the Commission as a transfer agent under such an 
exemption? Why or why not? Please explain and provide supporting 
evidence regarding any potential effects.
    134. Do commenters have any concerns about TPAs who voluntarily 
register with the Commission as transfer agents, but do not provide 
statutory transfer agent services as defined by Exchange Act Section 
3(a)(25)? Why or why not? Should the Commission prohibit TPAs who do 
not perform statutory transfer agent functions as defined by 
Exchange Act Section 3(a)(25) from voluntarily registering with the 
Commission as transfer agents? Alternatively, should the Commission 
deny transfer agent registration applications or revoke 
registrations of TPAs that do not provide statutory transfer agent 
services as defined by Exchange Act Section 3(a)(25)? Why or why 
not? Please explain and provide supporting evidence regarding any 
potential effects.
    135. Do commenters have any concerns regarding the activities or 
business practices of TPAs that are not registered with any federal 
financial regulator? If so, what actions, if any, should the 
Commission consider taking to address these concerns? Please explain 
and provide supporting evidence regarding any potential effects.
    136. What risks, if any, do commenters believe are posed by the 
enrollment and purchase and sale activities of transfer agents with 
respect to Issuer Plans and registered investment companies? What, 
if anything, should the Commission do to address such risks and why? 
For example, would rules focusing on risk management address any 
risks associated with transfer agents' current role in the purchase 
and sale of securities? Please explain and provide supporting 
evidence regarding any potential effects. Are there additional 
Issuer Plan activities or services provided by transfer agents, Plan 
Administrators, or other entities that are not described in the 
release? If so, what are they?
    137. Should the Commission conditionally exempt from broker-
dealer registration transfer agents that effect orders to purchase 
or sell securities in connection with their servicing of Issuer 
Plans? If so, what conditions, if any, should apply to that 
exemption? Should they be subject to net capital or customer 
protection requirements to guard against the risks of mishandling 
investors' funds or securities? What regulations, if any, should the 
Commission propose to safeguard investor privacy? Does the Issuer 
Plan business necessitate different books and recordkeeping 
requirements? If so, how should the Commission amend its books and 
recordkeeping requirements? Should the Commission's rules require 
the personnel of Issuer Plan transfer agents who interact with 
Issuer Plan investors, such as call center representatives, to be 
subject to registration, licensing, training, or continuing 
education requirements? Should transfer agents for Issuer Plans be 
permitted to net customer buy and sell orders? Why or why not, and 
if so, under what conditions? Should transfer agents be required to 
hold the funds of Issuer Plan securities in a bank account for the 
exclusive benefit of investors? Why or why not? Under what 
circumstances should a transfer agent or its personnel be 
disqualified from effecting transactions on behalf of Issuer Plans? 
Should transfer agents be permitted to receive payment for order 
flow in connection with Issuer Plan transactions? Why or why not? 
What rules might help to ensure the integrity of the master 
securityholder file in cases where a transfer agent servicing the 
Issuer Plan is not the recordkeeping transfer agent?
    138. What fees are being charged today by transfer agents 
directly to investors or indirectly to investors (such as through 
transaction fees in connection with Plan Administration activities 
that are comparable to broker commissions or dealer markups)? Should 
the Commission require transfer agents to clearly and concisely 
disclose fees charged to the investor? Do fees charged to investors 
by transfer agents or by sub-transfer agents encourage or deter 
investor decisions regarding their form of ownership (e.g. the 
investor decision to hold in DRS, the investor decision to request a 
certificate, or the investor decision to hold in registered versus 
street name)? If these fees influence investor decision-making, is 
the aggregate effect on this influence good or bad for: (i) The 
protection of investors and (ii) continued improvement in the 
promptness and efficiency of the National C&S System? What is the 
available evidence?
    139. Investors who transact with or through a broker-dealer 
receive confirmations pursuant to Rule 10b-10. However, investors 
holding securities positions directly with a transfer agent in DRS, 
in an Issuer Plan or other program administered by a transfer agent, 
or in a mutual fund that attracts self-directed investors, do not 
always receive comparable information from the transfer agent. 
Should the Commission require transfer agents to provide written 
communication to a securityholder with details about a transaction 
within a set time period? Why or why not? Are there other approaches 
the Commission could consider to ensure that investors are informed 
about their transactions on a timely basis? If so, please describe.
    140. While transfer agents may be authorized by an issuer to 
assist with the enrollment process for plan participants, it may not 
be clear whether investors have initiated the enrollment or whether 
the transfer agent solicited the transaction. Similarly, while 
transfer agents may assist with securityholder inquiries, it may not 
be clear whether agents in so doing may, inadvertently or not, 
solicit securityholders for purchase or sale activities. What 
controls, if any, do transfer agents put in place to prevent 
solicitation? Do commenters believe those controls are effective? 
Why or why not? Should the Commission impose additional or different 
controls? Why or why not? Please explain.

F. Outsourcing Activities and Non-Qualifying Securities Serviced by a 
Registered Transfer Agent

    As noted, the transfer agent rules established by the Commission 
are designed not only to ensure that transfer agents meet prescribed 
performance standards for their core recordkeeping and transfer 
activities, but to ensure they are regulated appropriately in the

[[Page 82003]]

context of the National C&S System \562\ and that any problems meeting 
these performance standards do not negatively impact individual 
investors or the National C&S System as a whole.\563\ Today, some 
transfer agents maintain offices and provide services outside the 
United States, and almost all transfer agents provide an array of 
services, including for non-Qualifying Securities. Other transfer 
agents may outsource some of their activities or operations to outside 
entities. For example, some registered transfer agents rely on outside 
entities to provide data hosting or specific IT services, perform data 
entry, or provide call center services. While the Commission believes 
the consistent application of the transfer agent rules to all 
activities of registered transfer agents is critical to protect 
investors and promote the safe and efficient functioning of the 
National C&S System, we also are mindful that applying the transfer 
agent rules uniformly to all securities serviced by those transfer 
agents could: (i) Increase costs above those that would be incurred if 
the transfer agent rules applied only to Qualifying Securities; (ii) 
create conflicts with the laws of the other jurisdictions in which a 
transfer agent operates; \564\ or (iii) impact transfer agents in other 
ways.
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    \562\ See Rule 17Ad-1 through 17Ad-7 Adopting Release, supra 
note 145 (noting the importance of avoiding impediments to ``the 
Commission's efforts to provide necessary or appropriate regulations 
for transfer agents in the broader context of the establishment of a 
national system for the prompt and accurate clearance and settlement 
of securities transactions.'').
    \563\ Id. (Exchange Act Rule 17Ad-3 prohibits transfer agents 
from taking on new or additional business in certain circumstances 
where they fail to meet their performance standards over certain 
time periods, in part, because ``it is not in the public interest or 
consistent with the protection of investors for a transfer agent 
which is unable to perform its current obligations in a timely 
manner to take on additional responsibilities.'')
    \564\ For example, the privacy laws of some foreign 
jurisdictions may not permit the fingerprinting required under Rule 
17f-1.
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    Accordingly, the Commission seeks comment on the following:

    141. What activities do transfer agents outsource, domestically 
or foreign, and why? Does the outsourcing of these activities 
present risks or raise other issues? What is the empirical evidence? 
What regulations, if any, should the Commission impose to address 
these risks? For example, should the Commission require outsourcing 
arrangements to be memorialized in a written agreement detailing the 
allocation of responsibilities? Why or why not? If such a written 
agreement were required, should the Commission require some or all 
records associated with the performance of the agreement to be 
considered records of the registered transfer agent and therefore 
subject to inspection by the Commission? Why or why not? Should 
outsourcing arrangements be disclosed in Form TA-2? Why or why not? 
Should the Commission apply different standards or different rules 
to transfer agents who use or engage in outsourcing activities? If 
so, what standards should apply, and why? Please identify any 
tradeoffs, including any costs and benefits that the Commission 
should consider. Please also provide supporting empirical evidence, 
if available.
    142. Are there non-U.S. regulations governing transfer agents 
operating outside the United States that commenters believe the 
Commission could use as a model for similar regulations in the 
United States? If so, why, and how do these regulations serve the 
public interest in the jurisdictions in which they apply? If the 
Commission were to consider similar regulations, in what ways should 
such regulations be tailored to operations in the U.S. securities 
markets? What tradeoffs should the Commission consider in evaluating 
the alternatives?
    143. Should the Commission's transfer agent rules apply with 
equal force to U.S. and non-U.S. transfer agents (or non-U.S. 
subsidiaries of U.S.-based transfer agents) that provide transfer-
related services for Qualifying Securities? Why or why not?
    144. Should the Commission codify existing staff interpretations 
stating that registered transfer agents that service at least one 
Qualifying Security must apply all of the transfer agent rules to 
all securities serviced by that transfer agent, including non-
Qualifying Securities? Alternatively, should the Commission provide 
exemptions regarding non-Qualifying Securities from one or more or 
from all of the Commission's transfer agent rules? Why or why not? 
If so, what exemptions would be appropriate, and why? How would any 
such exemptions protect investor funds and securities, ensure the 
safe and efficient functioning of the National C&S System, and 
ensure appropriate oversight by regulators of transfer agents and 
the entities that perform services on their behalf?
    145. Are there technological, legal, policy, or other reasons 
why a registered transfer agent would not be able to apply the 
transfer agent rules to all securities serviced by the transfer 
agent? Why or why not? If so, should the Commission provide 
exemptions to address such issues, and what should such exemptions 
provide?
    146. Do transfer agents typically have access to or control over 
records created or held by sub-contractors? \565\ If so, are those 
records part of the records that transfer agents provide to the 
Commission in response to requests? Why or why not?
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    \565\ Regarding sub-contractor relationships, see generally, 
Section VII.C.1.
---------------------------------------------------------------------------

    147. Do other transfer agent activities, such as operating call 
centers, present investor protection or other concerns? How are call 
center employees supervised? How are call center employees trained 
on applicable federal securities law and legal documents that may 
govern or affect the issuer, for example policies and procedures of 
the issuer and, for certain types of issuers, prospectus 
limitations? Are risks greater if these securityholder services are 
conducted by offshore call centers?
    148. Should the Commission impose additional recordkeeping, 
processing, and transfer rules on outside entities retained by 
transfer agents to address concerns that third-party firms may pose 
a risk to investors and the National C&S System? If so, should those 
rules apply to foreign firms that are engaged in services for U.S. 
issuers? Why or why not?
    149. As noted, both Reg SDR and Reg SBSR may permit, in certain 
circumstances, substituted compliance for foreign participants and 
registrants. Should the Commission take a similar approach to 
regulating non-U.S. transfer agents? Why or why not?

G. Additional Request for Comment

    We are also interested in more generalized concerns related to 
transfer agents and any other issues that commenters may wish to 
address relating to transfer agents. For example, we seek comment on 
how the role of transfer agents may continue to evolve, and what 
regulatory challenges these changes may pose. Please be as specific as 
possible in your discussion and analysis of any additional issues. In 
connection with comments, we also welcome comments that respond to 
requests for comment or of their own accord, and/or suggest specific 
amendments or new additions to the transfer agent rules including draft 
rule text. We also request commenters to provide any specific, detailed 
data and information related to potential or actual costs and benefits 
associated with any of the suggested reforms, changes, or amendments 
discussed throughout this release. Accordingly, the Commission seeks 
comment on the following:

    150. Do the transfer agent rules accomplish the Commission's 
regulatory objectives of protecting investors, promoting the prompt 
and accurate clearance and settlement of securities transactions, 
and evaluating transfer agents' ability to perform their functions 
properly? Why or why not? Please provide a full explanation.
    151. Do the current transfer agent rules adequately address the 
interests of issuers? If not, in what ways do they not address 
issuers' interests and should they? Why and in what way?
    152. Do the current transfer agent rules adequately address the 
interests of other market participants? If not, in what ways do they 
not address those interests and should they? Why and in what way?
    153. Some of the original transfer agent rules established 
metrics-based performance standards designed to measure the transfer 
and processing of paper certificates. Given the prevalence of 
electronic transactions, do those metrics-based performance 
standards adequately address transfer agents' operational 
capabilities, which now largely depend on systems and technology 
that did not exist when the original rules were adopted in 1977? 
Should the Commission rely on a different or additional approach to

[[Page 82004]]

regulating transfer agents, such as a risk-based approach focused on 
the risks associated with specific activities or conduct? Please 
provide a full explanation.
    154. In what ways do the activities performed and services 
provided by transfer agents differ depending on the type of issuer, 
asset class, product category, market segment, or other factors the 
transfer agent is servicing? For example, are there differences in 
activities, services, or other areas between issuers that act as 
their own transfer agent and independent transfer agents? If so, 
what are those differences? Do a transfer agent's processes differ 
if the transfer agent is servicing debt securities instead of equity 
securities? If a transfer agent primarily services debt securities, 
do the transfer agent's processes differ depending on the specific 
type of debt security being serviced (e.g., corporate, asset-backed, 
etc.)? Are there differences in services provided, compensation 
arrangements, or other areas between or among different types of 
transfer agents? If so, what factors influence or affect those 
differences? Do transfer agents tend to service one type of issuer, 
asset class, or market segment to the exclusion of others? If so, 
what factors influence that focus and why? Please explain.
    155. Do commenters believe that transfer agent servicing of debt 
securities raises different issues or concerns than those raised by 
servicing of equity securities? Do commenters believe there are 
specific risks or issues related to transfer agents' servicing of 
debt issues that are not addressed by existing Commission transfer 
agent rules? Are there differences in agreements that equity 
transfer agents enter into with issuers as compared to transfer 
agency agreements between debt transfer agents and issuers, 
including differences in services to be provided, methods of 
compensation, or any other topics?
    156. Should the Commission propose different rules for different 
types of transfer agents depending on the particular issuer type, 
asset class, or market segment serviced by the transfer agent? Why 
or why not?
    157. What fees do transfer agents assess with respect to 
processing DRS instructions? How and to whom are such fees assessed? 
Do commenters believe the Commission should consider regulating such 
fees in some manner? If so, why and how? Please explain.
    158. Do transfer agent fees vary, depending upon the asset class 
of the security serviced by the transfer agent? If so, how do they 
vary? To what extent does competition among transfer agents 
constrain such fees, and what is the evidence? Should the Commission 
require that any such fees be fair and reasonable? Why or why not? 
Please provide a full explanation.
    159. To what extent are co-transfer agents used in securities 
processing today? Should the Commission amend its rules with respect 
to co-transfer agents?
    160. What, if any, are the problems in the marketplace today 
with respect to the role of transfer agents and corporate actions? 
Should the Commission propose rules governing transfer agent 
services provided in connection with corporate actions? Why or why 
not? If so, which types of services provided in connection with 
corporate actions should the Commission consider regulating?
    161. Should the Commission propose rules requiring standardized 
corporate actions processing as a method to facilitate 
communications among market participants? Why or why not? If so, 
what are the primary market issues that such a standardization 
program is likely to address? Would there be any market issues that 
such a standardized program would not be able to address? Please 
explain.
    162. What, if any, are the risks posed by transfer agents' role 
when they serve as: (i) Tender agent; (ii) subscription agent; (iii) 
conversion agent; or (iv) escrow agent? Do commenters believe rules 
governing transfer agent services provided in connection with these 
services would be appropriate? Why or why not? If so, what 
regulatory action should the Commission consider to address those 
concerns and why?
    163. Do commenters believe there are any concerns that might 
arise from regulation of the proxy tabulation process generally and 
the transfer agents' role in the proxy process in particular? If so, 
what regulatory action, if any, should the Commission consider to 
address those concerns and why?
    164. Is the role that transfer agents play in the proxy process 
useful for efficient, accurate, and timely communications between 
issuers and their securityholders? In light of comments previously 
received by the Commission in connection with its concept release 
concerning the proxy process, are there additional concerns 
regarding consolidation in the market? If so, please describe any 
such concerns.
    165. In connection with considerations of transfer agents' role 
within the National C&S System, do commenters believe the creation 
of an SRO for transfer agents would be useful or appropriate? Why or 
why not? If so, what should the scope of the purview of such an SRO 
be, and what should the SRO be tasked with? Please explain.
    166. Do commenters believe the introduction of certain 
alternatives to the current central securities depository model, 
such as a modified transfer agent depository, could be beneficial to 
issuers, securityholders, and/or the National C&S System? Why or why 
not? Could it co-exist with the current central depository system? 
Why or why not? What would such a modified depository entail or look 
like?
    167. Some observers have commented that current DTC 
requirements, such as those related to DRS and FAST, operate as so-
called de facto regulation of transfer agents by DTC.\566\ Is this 
accurate? If so, do such DTC requirements create inconsistencies 
and/or conflicts for transfer agents to comply with all rules and 
requirements? Why or why not? If yes, please describe the 
inconsistencies and/or conflicts. Should the Commission adopt any of 
DTC's current requirements or standards that apply to transfer 
agents who conduct business with DTC as rules? Why or why not? If 
so, what requirements or standards should be considered, and why?
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    \566\ See Securities Exchange Act Release No. 60196 (June 30, 
2009), 74 FR 33496 (File No. SR-DTC-2006-16) (specifically, comment 
letter from Martin (Jay) J. McHale, President, U.S. Equity Services, 
Computershare, Mar. 20, 2008; comment letter from Charles V. Rossi, 
President, Securities Transfer Association, June 22, 2007; comment 
letter from Gary N. Nazare, Managing Director, Transfer Agency 
Services, The Bank of New York, June 29, 2007).
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    168. Should the Commission propose any other amendments to the 
transfer agent rules that are not discussed above? If so, please 
describe what amendments should be considered and why, including any 
information on the benefits, risks, and/or burdens of any suggested 
approach.
    169. How might the transfer agent industry continue to evolve in 
the future, and what challenges might that evolution pose for the 
regulatory structure? What regulatory issues and other challenges 
are posed by the industry's increasing concentration and 
specialization? What does the decline in the number of registered 
securityholders mean for the industry, and for the regulatory 
regime? Do commenters believe that, as dematerialization progresses, 
the role of transfer agents to operating companies will change? If 
so, will it converge with that of Mutual Fund Transfer Agents? If 
so, what are the possible implications of this?
    170. Are there any other issues that commenters may wish to 
address relating to transfer agents? Please provide a full 
explanation.

    By the Commission.
    December 22, 2015.
Brent Fields,
Secretary.
[FR Doc. 2015-32755 Filed 12-30-15; 8:45 am]
 BILLING CODE 8011-01-P