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 Transfer agents are back-office businesses hired by companies to
keep track of shareholder records and changes in ownership. To date,
the industry has been lightly regulated, despite its critical role
in keeping track of stocks as they change hands, and the issuance of
shares.
The U.S. Securities and Exchange Commission is in the early stages
of drafting new rules for transfer agents.
Some officials want to get the agents to scrutinize more closely
attempts by corporate insiders or large shareholders to remove
private stock ownership restrictions so that shares may be sold in
public markets, and deny requests that may seem suspicious.
Those planning on committing a stock fraud can lie to or mislead
transfer agents so they can get restrictions on shares removed. They
may, for example, allow unregistered shares to be traded.
Unregistered shares are not supposed to be sold to the public under
federal law, unless they meet certain exemptions.
Once the stock is freely tradable, the fraudsters pump up the price
with promotional material, including phony claims about the
company's prospects, to dupe unsuspecting investors. The stock that
was cleared by the transfer agent for trading is then sold, or
"dumped," by the scam artists, often leaving them with big
percentage gains before the price collapses.
It is unclear exactly when the SEC may consider new rules or how
they will look, though SEC Chair Mary Jo White said in a statement
to Reuters that the agency plans to kick it off by publishing a
high-level policy document that will be used to solicit public
feedback and help formulate the rules.
"We must review our rules carefully and enhance our protections for
investors and the markets," she said.
SEC Democratic Commissioner Luis Aguilar said in an interview there
is no doubt that transfer agents are gatekeepers who hold a "unique
position" to identify and prevent unregistered, restricted shares
from being sold illegally.
"The commission should adopt rules providing additional safeguards
to protect against the unlawful distribution of unregistered
securities," Aguilar said.
He expressed frustration by the snail's pace in getting the reform
through especially as a 2012 law, the Jumpstart Our Business
Startups (JOBS) Act, makes it easier for companies to raise larger
sums of money without registering their securities.
There is some bipartisan support for rolling out new regulations for
transfer agents. SEC Republican Commissioner Daniel Gallagher said
in an interview that the current rules speak to a time when stock
certificates were in paper, adding that new ones are woefully
overdue.
There are currently about 450 transfer agents registered with the
SEC, and the overall industry maintains roughly 276 million
shareholder accounts for about 1.5 million issuers.
While they are required to register with the SEC, experts say it can
take less than 90 minutes to fill out the form, which is not
followed up by a rigorous review due to limited resources at the
agency. Shops can be open for business 30 days after filing.
On average, the SEC conducts compliance exams at only between about
40 to 45 a year, prioritizing transfer agents considered higher
risk.
Even some of the most basic industry best practices, such as
requiring an attorney's legal opinion prior to removing restrictions
on shares, is not required by the SEC's own rules.
"My joke is that it is harder to become a licensed hair dresser in
New York than it is a transfer agent," said R. Cromwell Coulson, the
head of OTC Markets Group Inc, the marketplace for unlisted
over-the-counter stocks. This opens the door to "some very small
capitalized businesses without the proper controls," he said.
The transfer agent industry is torn over just how much due diligence
should be required, though there are many in the business, including
its trade association, who say the lack of up-to-date regulations is
absurd.
MOM-AND-POP SHOPS
Some smaller firms say they want the SEC to give them more guidance
so they don't unwittingly enable a fraud and find themselves caught
up in an SEC probe.
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"The problem is, the SEC has not defined what red flags are," said
Kara Kennedy, the executive director for ClearTrust, a small
transfer agent in Florida. "Let's get in front of the SEC and lets
ask for guidance. And if they won’t give it to us, let's come up
with a standard ourselves," she said.
The transfer agent industry is split between operations housed in
some of the nation's largest financial firms and hundreds of
mom-and-pop shops.
The blue-chip companies generally rely on some big transfer agent
services operated by firms such as Computershare, American Stock
Transfer & Trust Company, and Wells Fargo.
Many of the mom-and-pop firms operate out of tiny offices, or in
some cases, out of people's homes and cater to smaller companies,
including the microcap companies. Microcap companies typically
disclose less financial information than major companies and trade
on a "Wild West" over-the-counter stock market where investors face
the most risk.
Transfer agents make their money by charging companies who hire them
a variety of fees, either through fixed pricing or on a transaction
by transaction basis.
CHARGES BROUGHT
In 2014, the agency brought a handful of enforcement cases against
transfer agents. Although some of these cases focused on disclosure
violations, others uncovered more serious violations such as issuing
fake stock certificates and stealing client money to pay business
expenses.
But for cases where transfer agents themselves cannot be directly
blamed for a fraudulent scheme, the SEC has sought to get more
creative to hold them accountable as gatekeepers.
In September, the SEC charged New Jersey-based Registrar and
Transfer and its former chief executive with ignoring red flags that
helped pave the way for unregistered company shares to be sold and
used for an alleged pump-and-dump scheme.
In the complaint, the SEC said the transfer agent, Registrar and
Transfer Company, "rubber stamped" requests from a company executive
to remove restrictions on unregistered shares so they could be
issued to other people, including himself. The SEC said the transfer
agent "disregarded" these red flags and issued the shares.
Registrar and Transfer, which has since been acquired by
Computershare, and its former CEO Thomas Montrone, both settled the
charges, with the firm agreeing to pay more than $127,000 in fines,
disgorgement and interest. Computershare declined to comment.
Mark Harmon, an attorney with Hodgson Russ LLP who represented
Montrone, declined to comment on the case. In general, though, he
said he has noticed the SEC stepping up its scrutiny in this area.
"I have been representing transfer agents for the better part of 20
years, and I would say the frequency of SEC inquiries on these
issues, and the depth at which they are doing it has increased in
the last few years," Harmon said.
(Reporting by Sarah N. Lynch; Editing by Karey Van Hall and Martin
Howell)
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