SEC Proposes to Modernize Registered Transfer Agent Rules
Commentary by Steven Lofchie
The SEC proposed amendments to modernize its rules and forms governing registered transfer agents, reflecting technological advances such as electronic recordkeeping and blockchain. Under the updated rules, a transfer agent would be expressly permitted to use a blockchain or other distributed ledger technology as its master securityholder file.
The proposal would amend existing rules and forms, rescind one rule, and add two new rules. Key changes include: (i) extending the effective date of registration under SEA Rule 17Ac2-1 from 30 to 45 days; (ii) amending SEA Rule 17Ac2-2 to require an amended Form TA-2 within 60 days of discovering a material inaccuracy; (iii) reframing SEA Rule 17Ad-12 as a comprehensive risk management rule requiring written policies to protect funds, mitigate material risks, and maintain a business continuity plan; and (iv) adding Rule 17ad-30, requiring written policies and procedures for compliance with the federal securities laws.
To combat microcap fraud, new Rule 17ad-31 would set requirements for placing and removing restrictive legends. It would also bar transfer agents from facilitating unregistered transactions unless they have a reasonable basis to believe the transaction would not violate Section 5(a) of the Securities Act.
The proposal would also align turnaround and posting timeframes with the current settlement cycle, establish a single retention period for most records, and rescind SEA Rule 17Ad-4, whose exemptions the SEC deemed no longer necessary.
Commissioners Hester Peirce and Mark Uyeda supported the proposal. Ms. Peirce cited the need for rules reflecting tokenized shares and a balanced approach to microcap fraud, while Mr. Uyeda stressed the urgency of updating the framework given faster settlement and electronic transactions.
Comments are due 60 days after the proposal is published in the Federal Register.
Commentary
Leaving aside the amendments relating to the blockchain, the most significant of the rule changes is the addition of Rule 17Ad-31, which would require transfer agents to be alert to transactions that are violative of the Securities Act. The release describes a number of circumstances that should be "red flags" for transfer agents and indicates that while an opinion of counsel is helpful in establishing a "reasonable basis" for a transfer agent to facilitate a transfer, it is not inherently dispositive.
Commissioner Peirce has long made it a priority of her tenure at the SEC to improve the rules governing transfer agents. See, e.g., this August 2019 speech ("The rules governing transfer agents, which are very old, also need to be refreshed in response to the many problems our examination and enforcement staff have identified. I have advocated for new rules to accommodate the unique aspects of digital assets.")
As an admiring observer of her tenure at the SEC, I am satisfied to see that she has been able, with the new Chair, to make substantial progress on her long held goals before she returns to private life.