[Federal Register Volume 59, Number 235 (Thursday, December 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30128]


[[Page Unknown]]

[Federal Register: December 8, 1994]


SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-35040; File No. S7-35-94]
RIN 3235-AG24

 

Proposed Amendments to the Transfer Agent Rules

AGENCY: Securities and Exchange Commission.

ACTION: Notice of Proposed Rulemaking and Request for Comments.

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

SUMMARY: The Securities and Exchange Commission is proposing amendments 
to certain transfer agent rules regarding turnaround time, 
recordkeeping, and safekeeping of funds. The Commission is proposing 
these rules in light of the changes in the clearance and settlement of 
corporate securities from five days after the trade (``T+5'') to three 
days after the trade (``T+3'') and the proposal to establish a transfer 
agent operated book-entry registration system (hereinafter referred to 
as the ``direct registration system'' or ``DRS''). The proposed 
amendments to the transfer agent rules are designed to minimize 
disruptions, delays, and financial losses in the securities markets, 
particularly in the national clearance and settlement system for 
securities, that may be caused by poor turnaround performance, 
substandard or inaccurate recordkeeping practices, and inadequate 
safekeeping procedures. The Commission also is soliciting comment on 
whether additional rules are needed in light of T+3 and DRS, including 
net worth and insurance requirements.

DATES: Comments should be submitted on or before February 6, 1995.

ADDRESSES: Interested persons should submit three copies of their 
written data, views, and opinions to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549. Comment letters should refer to File No. S7-35-94 and will be 
available for public inspection and copying at the Commission's public 
reference room, 450 Fifth St., NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: Ester Saverson, Jr., Special Counsel, 
or Michele J. Bianco, Attorney, at 202/942-4187, Office of Market 
Supervision, Mail Stop 5-1, Division of Market Regulation, Securities 
and Exchange Commission, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: 

I. Background and Summary

    Transfer agents are an integral component of the clearance and 
settlement process. There are approximately 1,576 registered transfer 
agents that maintain the official registers of stockholders or 
bondholders on behalf of the issuers of securities. Transfer agents 
issue negotiable certificates evidencing security ownership, 
communicate on behalf of issuers with securityholders, and record 
changes in securities ownership as a result of securities transactions.
    A certificate issued in the name of the securityholder is one 
method of evidencing ownership of a security. The certificate is a 
negotiable instrument, and the proper indorsement of the securities has 
been the traditional method of transferring ownership. Because of the 
desire to immobilize certificates to facilitate the clearance and 
settlement of the increasingly large number of transactions that occur 
every day, transfer agents began to maintain custody of securities for 
which they act as transfer agent. Some transfer agents maintain custody 
of certificates on behalf of securities depositories,\1\ exchange 
information with the relevant depositories about position balances each 
day, and issue and transmit certificates pursuant to the depositories' 
instructions.\2\ Transfer agents also may function as custodian for 
individual securityholders through dividend reinvestment and stock 
purchase programs (``DRSPPs''), employee stock purchase programs, and 
similar transfer agent book-entry custody programs.
---------------------------------------------------------------------------

    \1\Securities depositories are registered as clearing agencies 
under Section 17A of the Securities Exchange Act of 1934. 
Depositories serve as clearinghouses for the settlement of trades in 
corporate and municipal securities and perform securities 
safekeeping services for their participating banks and broker-
dealers.
    \2\Securities Exchange Act Release No. 13342 (March 8, 1977), 42 
FR 14792.
---------------------------------------------------------------------------

    The functions performed by transfer agents are critical to the safe 
and efficient processing of securities transactions. Substandard 
performance by transfer agents can affect the accuracy of an issuer's 
securityholder records, interrupt the channels of communication between 
issuers and securityholders, frustrate investor expectations, and cause 
financial loss to investors and intermediaries such as broker-dealers, 
banks, and clearing agencies.\3\
---------------------------------------------------------------------------

    \3\See SEC, Study of Unsafe and Unsound Practices of Brokers and 
Dealers, H.R. Doc. No. 231, 92nd Cong., 1st Sess., 37-39 (1971); 
Clearance and Settlement of Securities Transactions, Hearings on S. 
3412, S. 3297 and S. 2551 Before the Subcomm. on Securities of the 
Senate Comm. on Banking, Housing and Urban Affairs, 92nd Cong., 2d 
Sess., 94-96, 105-106 (1972); Securities Processing Act Hearings on 
H.R. 14567, H.R. 14826 and S. 3876 Before the Subcomm. on Commerce 
and Finance of the House Comm. on Interstate and Foreign Commerce, 
92nd Cong. 2d Sess., 100 (1972).
---------------------------------------------------------------------------

    Congress authorized federal regulation of transfer agent activities 
in 1975 as one component of a regulatory scheme designed to foster a 
National Clearance and Settlement System (``National System'') among 
broker-dealers, issuers, exchanges, and clearing agencies.\4\ The 
Securities and Exchange Commission (``Commission'') has adopted certain 
rules governing the performance of transfer agent functions by 
registered transfer agents to protect investors and to facilitate the 
prompt, accurate, and safe transfer, clearance, and settlement of 
securities transactions.\5\ For example, Rules 17AD-1 through 17AD-7 
(``turnaround rules'') under the Securities Exchange Act of 1934 
(``Act'') establish minimum performance standards for registered 
transfer agents in connection with the timely cancellation and issuance 
of securities certificates.\6\ In addition, Rules 17Ad-9 through 17Ad-
13 establish standards for registered transfer agents governing 
recordkeeping practices and the safeguarding of securities and 
funds.\7\ These rules were intended to promote, among other things, 
accurate securityholder records.\8\
---------------------------------------------------------------------------

    \4\S. Rep. No. 75, 94th Cong., 1st Sess. 103, reprinted in 1975 
U.S. Code Cong. & Admin. News 179, 281.
    \5\A transfer agent is required to register with its appropriate 
regulatory agency. Bank transfer agents register with one of the 
banking agencies (i.e., the Comptroller of the Currency, the Board 
of Governors of the Federal Reserve System and the Federal 
Depository Insurance Corporation) and non-bank transfer agents 
register with the Commission.
    \6\17 CFR 240.17Ad-1 through 240.17Ad-7 (1994). See Securities 
Exchange Act Release No. 13636 (June 16, 1977), 42 FR 32404.
    \7\Securities Exchange Act Release No. 19860 (June 10, 1983), 48 
FR 28231.
    \8\17 CFR 240.17Ad-9 through 240.17Ad-13 (1994). The Commission 
last amended these rules in 1986. Securities Exchange Act Release 
No. 22882 (February 10, 1986), 51 FR 5703.
---------------------------------------------------------------------------

    The Commission believes it is appropriate to solicit comment on the 
proposed amendments to the transfer agent rules. The Commission also 
solicits comment on whether other changes are needed to the transfer 
agent regulations in light of impending changes in the National System. 
Effective in June 1995, Rule 15c6-1 will shorten the standard time 
frame for settling securities transactions from T+5 to T+3. As 
discussed more fully in a companion release issued today,\9\ industry 
efforts are underway to develop expanded direct registration systems 
that rely on account statements instead of negotiable certificates, 
automated recordkeeping systems, and automated links between securities 
depositories, broker-dealers and banks. In light of these developments, 
the performance and operational efficiency of transfer agents 
increasingly will be important to the smooth functioning of the 
National System. Substandard or inefficient performance by transfer 
agents could have a significant adverse impact on the functioning of 
the National System.\10\
---------------------------------------------------------------------------

    \9\Securities Exchange Act Release No. 35038 (December 1, 1994) 
(hereinafter referred to as ``companion release'').
    \10\This discussion is limited to transfer agent regulation and 
does not address the application of the broker-dealer registration 
provisions of the Exchange Act to DRS or DRSPPs. Some of the 
activities in connection with DRS or DRSPPs may raise broker dealer 
registration issues under section 15 of the Exchange Act. Refer to 
companion release at n. 21.
---------------------------------------------------------------------------

II. Discussion

A. Turnaround of Requests for Transfer

    The current turnaround rule\11\ requires a transfer agent to 
process (``turnaround'') within three business days of receipt at least 
90% of all routine items\12\ received for transfer during that 
month.\13\ In addition, most transfer agents that transfer New York 
Stock Exchange (``NYSE'') listed securities meet the more stringent 
NYSE requirement that requires transfer agents to transfer NYSE-listed 
securities within 48 hours of receipt.\14\
---------------------------------------------------------------------------

    \11\17 CFR 240.17Ad-2 (1994).
    \12\17 CFR 250.17Ad-1(i) (1994) defines a routine item as 
follows: ``An item is routine if it does not: (1) Require 
requisitioning certificates of an issue for which the transfer 
agent, under the terms of its agency, does not maintain a supply of 
certificates; (2) include a certificate as to which the transfer 
agent has received notice of a stop order, adverse claim, or any 
other restriction on transfer; (3) require any additional 
certificates, documentation, instructions, assignments, guarantees, 
endorsements, explanations or opinions of counsel before transfer 
may be effected; (4) require review of supporting documentation 
other than assignments, endorsements or stock powers, certified 
corporate resolutions, signature or other common and ordinary 
guarantees or appropriate tax or tax waivers; (5) involve a transfer 
in connection with a reorganization, tender offer, exchange, 
redemption or liquidation; (6) include a warrant, right or 
convertible security presented for transfer of record ownership 
within five business days before any day upon which exercise or 
conversion privileges lapse or change; (7) include a warrant, right, 
or convertible security presented for exercise or conversion; or (8) 
include a security of an issue which within the previous 15 business 
days was offered to the public, pursuant to a registration statement 
effective under the Securities Act of 1933, in an offering of a 
continuing nature.''
    \13\An exempt transfer agent i.e., a transfer agent that during 
any six consecutive months has received fewer than 500 items for 
transfer and fewer than 500 items for processing does not have to 
meet the three day turnaround requirement. 17 CFR 240.17Ad-4 (1994). 
An exempt transfer agent that handles any depository-eligible 
securities must turnaround 90% of all routine items received during 
a month within five business days of receipt. 17 CFR 240.17Ad-
2(e)(2) (1994). All other exempt transfer agents must turnaround all 
items promptly. 17 CFR 240.17Ad-2(e)(1) (1994).
    \14\NYSE Rule 496, NYSE Guide (CCH) 2496 at 4225.
---------------------------------------------------------------------------

    In light of the shortening of the settlement cycle to T+3, the 
Commission is proposing to amend Rule 17Ad-2 to reduce the turnaround 
requirement from three business days to two business days for transfer 
agents that do not qualify for the exemption under Rule 17Ad-4(b). 
Although there are several ways to transfer ownership of securities in 
settlement of secondary market trades,\15\ changing ownership on the 
books maintained by the transfer agent can still be a critical step in 
that process. The Commission also is proposing to amend Rule 17AD-2(e) 
to require ``exempt'' transfer agents that transfer depository-eligible 
securities to turnaround ninety percent of all routine items received 
during a month within three business days of receipt.\16\ Currently, 
those transfers must be completed within five business days.
---------------------------------------------------------------------------

    \15\See, e.g., N.Y. U.C.C. LAW Sec. 8-313(1) (McKinney 1994). 
The most common method today is by book-entry notation on the 
records of a securities depository, bank, or broker-dealer. See 1993 
SEC Annual Report at 125.
    \16\The Commission invites commenters to address whether other 
time frames, such as one or two business days, would be more 
appropriate.
---------------------------------------------------------------------------

    The Commission invites commenters to address whether a shorter 
turnaround standard should be established for all transfer agents.\17\ 
Currently, Rule 17Ad-2 establishes different turnaround standards for 
``low-volume'' transfer agents because these transfer agents are 
generally small businesses and the cost associated with requiring 
faster turnaround might be significant to these entities. The 
Commission invites commenters to address whether the distinction among 
transfer agents based on volume should be maintained. Commenters 
addressing this issue are requested to provide data in support of their 
views.
---------------------------------------------------------------------------

    \17\The Securities Transfer Association (``STA'') questioned the 
validity of other distinctions of exempt transfer agents. STA's 
Petition for Commission Rulemaking to Rule IVa of the Securities and 
Exchange Commission's Rules of Practice to Eliminate Differential 
Regulatory Standards for Transfer Agents Under Section 17A of the 
Securities Exchange Act of 1934 (November 23, 1988). Those 
distinctions include different exemptions for independent audit 
requirements, and recordkeeping requirements. A copy of the petition 
will be placed in the public file and will be available for 
inspection. The Commission invites commenters to address the 
continued validity of these exceptions.
---------------------------------------------------------------------------

B. Accurate Securityholder Records

    Rule 17Ad-10 requires all recordkeeping transfer agents 
``promptly''\18\ and accurately to update the securityholders file. 
Issuer transfer agents\19\ and transfer agents that employ batch 
posting systems must post certificate detail\20\ to the master 
securityholder file within 10 business days. Transfer agents that 
qualify for the exemption under Rule 17Ad-4(b) must post certificate 
detail to the master securityholder files within 30 calendar days. All 
other recordkeeping transfer agents must post certificate detail to the 
master securityholder files within five business days.
---------------------------------------------------------------------------

    \18\Promptly is defined as five business days, ten business 
days, or 30 calendar days depending on the category of the transfer 
agent. 17 CFR 240.17Ad-10(a)(2)(ii) (1994).
    \19\Issuer transfer agents are those transfer agents which 
perform transfer agent functions exclusively with respect to their 
own securities or those issued by an affiliate. See 17 CFR 240.17Ad-
10(2) (1994).
    \20\``Certificate detail'' is defined in 17 CFR 240.17Ad-9(a) 
(1994) and generally means those data elements that identify the 
owner and the certificate or positions held by that owner.
---------------------------------------------------------------------------

    The Commission is proposing to amend Rule 17Ad-10(a)(2) to require 
``exempt'' registered transfer agents to update the master 
securityholder file within ten business days of an issuance, purchase, 
transfer, or redemption of a security instead of the 30 calendar days 
current required. Although recordkeeping transfer agents would continue 
to have as much as two weeks from the transfer of ownership to update 
the master security holder file, their subsidiary file system must 
contain records that reflect all transfers and that are readily 
accessible. The Commission understands that many transfer agents 
maintain systems that provide for same-day or immediate updates to the 
master securityholder files, while other transfer agents update the 
file periodically and direct their staff to review transfer ledgers 
between updates. The Commission invites commenters to address whether 
more stringent time frames should be mandated, such as same-day, next-
day, or five business days, and whether the rule should continue to 
reflect differences in the automation and size of registered transfer 
agents.
    One of the major functions of a transfer agent is to transfer the 
security from the seller to the buyer after a transaction. Typically 
this is evidenced by cancelling the old certificate and issuing a new 
certificate. With the growth of uncertificated recordkeeping functions 
by transfer agents, an increasing number of transfers are effected by 
book-entry only. Without the certificate, the integrity of the records 
of the transfer agent is crucial. As discussed in the Companion 
Release, under the DRS Concept and other uncertificated recordkeeping 
functions, the request for transfer in many instances may no longer be 
submitted in writing but will be submitted electronically. In addition, 
the DRS Concept could allow an investor to direct the sale of 
securities or to request a certificate by telephone. Accordingly, the 
Commission invites commenters to address whether additional 
recordkeeping requirements are necessary in light of the trend toward 
statement-based securities ownership accounting (i.e., recording 
ownership without issuing a negotiable certificate evidencing those 
securities). For example, are there additional records transfer agents 
should maintain concerning transfer instructions transmitted 
electronically or by telephone?
    The Commission also invites commenters to address the following 
questions. Should the Commission require transfer agents to issue 
confirmation statements every time there is a transaction that changes 
an investor's DRSPP or DRS account similar to those required to be sent 
by broker-dealers in Rule 10b-10.\21\ If there is no activity in an 
account, how often should a transfer agent send an account statement? 
What, if anything, should the Commission require to be disclosed on 
such account statements?
---------------------------------------------------------------------------

    \21\17 CFR 240.10b-10 (1994).
---------------------------------------------------------------------------

C. Investors' Funds and Securities

    Currently Rule 17Ad-12 requires transfer agents that have custody 
or possession of funds or securities related to their transfer agent 
activities to 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 destruction, theft or other loss; and (2) all such 
funds are protected, in light of all facts and circumstances, 
against misuse. In evaluating which particular safeguards and 
procedures must be employed, the cost of the various safeguards and 
procedures as well as the nature and degree of potential financial 
exposure are two relevant factors.\22\

    \22\ 17 CFR 240.17Ad-12 (1994).
---------------------------------------------------------------------------

    The Commission believes a transfer agent should not commingle 
investor funds with other funds of the transfer agent. With the growth 
of DRSPPs, it is not unusual for transfer agents to hold considerable 
sums of investor funds. Although the Commission is not aware of any 
losses to investors from existing practices, the Commission believes it 
is appropriate to take steps to reduce the potential for such losses. 
Accordingly, the Commission is proposing to amend Rule 17Ad-12 to 
require every registered transfer agent to maintain with a bank or 
banks at all times a ``Bank Account for the Exclusive Benefit of 
Securityholders'' (hereinafter referred to as the ``Securityholders' 
Bank Account'') which shall remain separate from any other bank account 
of the transfer agent. The proposed amendment to Rule 17Ad-12 also 
would require every registered transfer agent to maintain at all times 
in such Securityholders' Bank Account all securityholders' funds in the 
transfer agent's custody and possession that are related to its 
transfer agent activities.
    The proposed rule is intended to restrict transfer agents from 
using or investing securityholders' funds for any purpose and to 
protect those funds from the transfer agent's general creditors. As 
proposed, transfer agents must deposit cash in a bank, as that term is 
defined is Section 3(a)(6) of the Act. The Commission invites comments 
on whether other financial institutions or account structures might be 
used or mandated to preserve the liquidity and safety of funds.

D. Minimum Net Worth and Insurance Requirements

    During its 1983 rulemaking process, the Commission sought comment 
on whether it should impose minimum net worth and insurance 
requirements on transfer agents registered under Section 17A of the 
Exchange Act, other than federally regulated banks or transfer agents 
that perform transfer agent functions exclusively for their own 
securities.\23\ The Commission also requested comment on whether a 
minimum net worth requirement would be necessary if an appropriate 
insurance requirement were imposed. Most commenters favored a minimum 
insurance requirement and many favored both minimum insurance and net 
worth requirements. Commenters, however, suggested widely varying 
ranges of minimum insurance and net worth levels. In June 1983, when 
the Commission adopted recordkeeping rules and safeguarding procedures 
for registered transfer agents, the Commission considered, but decided 
to defer, promulgating rules regarding transfer agent net worth and 
insurance requirements.\24\
---------------------------------------------------------------------------

    \23\See Securities Exchange Act Release No. 19860 (June 10, 
1983), 48 FR 28231.
    \24\Id.
---------------------------------------------------------------------------

    Thereafter, the Securities Transfer Association, Inc. (``STA'') 
petitioned the Commission for changes to rules concerning transfer 
agents which included, among other things, minimum insurance and net 
worth requirements.\25\ As discussed below, the Commission believes it 
is appropriate to reconsider the merits and costs of minimum net worth 
and insurance requirements for transfer agents.
---------------------------------------------------------------------------

    \25\The STA's Petition for Commission Rulemaking Filed Pursuant 
to Rule IVa of the Securities and Exchange Commission's Rules of 
Practice to Establish Minimum Capital and Adequate Insurance 
Requirements for Transfer Agents Under Section 17A of the Securities 
Exchange Act of 1934 (November 23, 1988).
---------------------------------------------------------------------------

1. Net Worth Requirements
    The STA advocated net worth requirements for several reasons. 
First, transfer agents may require a minimum amount of net worth to 
permit efficient and safe transfer operations.\26\ Second, transfer 
agents may require a minimum amount of net worth to meet potential 
liabilities in connection with those functions. Although the Uniform 
Commercial Code (``UCC'') imposes liability on issuers for damages to 
securityholders and bona fide purchasers as a result, among other 
things, of a refusal to register transfers,\27\ that liability is often 
borne by the transfer agent (if the issuer does not perform its own 
transfer agent functions) under the terms of the contract governing the 
transfer agent's appointment.\28\ If, for example, inadequate 
procedures, internal controls, employee errors, or defalcations result 
in inaccurate records, transfer agents must have sufficient net worth 
to enable them to reestablish accurate records.\29\ In addition, if 
errors, omissions, or employee defalcations result in an overissuance 
of securities, transfer agents may be required to purchase securities 
for delivery to securityholders or bona fide purchasers who have 
suffered consequential damages. Because the market value of securities 
can fluctuate significantly and considerable time can elapse between 
the event giving rise to liability and the discovery of that liability, 
an insignificant error today can result in significant expense when it 
is finally discovered.\30\ Although many transfer agents can purchase 
insurance against some of these risks, many of those policies contain 
deductibles, exclusions or conditions that result in the transfer agent 
bearing a significant percentage of the ultimate cost.
---------------------------------------------------------------------------

    \26\Of course, the amount of net worth necessary to sustain 
efficient operations and service levels will depend, among other 
things, on the number of securities issues, the number of 
securityholder accounts to be serviced, and the volume of transfers 
in those securities issues.
    \27\UCC 8-401 and 8-404 (Official Text, 1978).
    \28\See UCC 8-406 (Official Text, 1978) and E. Guttman, Modern 
Securities Transfer (revised ed. 1987) at 3-34.
    \29\Record reconstruction can be very expensive, depending on 
the number of accounts affected, since research and reconciliation 
procedures are time-consuming and labor-intensive.
    \30\For example, a transfer agent might incorrectly account for 
a conversion of debentures into common stock because a conversion 
tender was lost in processing at the transfer agent. Upon discovery 
of the error, the transfer agent likely will be liable not only for 
delivery of the number of shares pursuant to the conversion, but 
also for any intervening dividends, distributions and stock splits 
the securityholder would have realized if the securityholder's 
instructions had not been lost.
---------------------------------------------------------------------------

    The Commission is not aware of any formal studies assessing 
transfer agent losses or liabilities. Nevertheless, based on its 
oversight of transfer agents since 1975 and episodic recordkeeping and 
transfer difficulties, the Commission believes that financial exposure 
associated with erroneous, unsafe or inaccurate transfer agent 
functions can range from several thousand dollars to several hundred 
thousand dollars.31
---------------------------------------------------------------------------

    \3\1For example, an operational crisis in the transfer agent 
industry (such as the collapse of First Independent Stock Transfer 
Agent, Inc. (``FISTA'') in 1981), that makes it necessary for 
issuers to find an alternative means to ensure the performance of 
transfer functions could significantly delay the transfer of 
certificates, causing brokers, financial institutions, securities 
depositories and investors to sustain financial losses. See In the 
Matter of First Independent Stock Transfer Agent, Inc., Securities 
Exchange Act Release No. 19608 (March 17, 1983). See also cases 
cited in Securities Exchange Act Release No. 19142 (October 15, 
1982), 47 FR 47269 and SEC. v. Dynapac, Inc., et al., Civ. No. C-86-
20694-RPA, NDCA (Final Judgment of Permanent Injunction and Other 
Equitable Relief entered November 7, 1986) where the Commission 
filed a complaint against 23 defendants alleging fraudulent 
distribution of unregistered stock and numerous other violations of 
the securities laws.
---------------------------------------------------------------------------

    The Commission requests comment as to whether minimum net worth 
requirements for transfer agents are necessary or appropriate.32 
Would the financial risks to shareholders and financial intermediaries 
be reduced significantly if a minimum net worth requirement for 
transfer agents were imposed? Would the existence of a minimum net 
worth requirement cause transfer agents to make a greater commitment to 
their transfer agent business? If the Commission were to establish 
minimum net worth requirements, should it consider whether a transfer 
agent issues negotiable certificates evidencing ownership? Should the 
Commission limit any minimum net worth requirements to transfer agents 
that provide the DRS services or engage in other unregistered 
recordkeeping functions? Would investors have sufficient confidence in 
the integrity of the proposed DRS, in the absence of either minimum net 
worth or minimum insurance requirements? Does the present lack of 
minimum net worth requirements for transfer agents performing transfer 
functions exclusively for non-NYSE and non-Amex issues create undue 
risk to investors?33
---------------------------------------------------------------------------

    \3\2The STA proposed that every registered transfer agent 
maintain a level of net worth related to the number of issues 
handled by the transfer agent. The proposed level of required net 
worth for registered transfer agents is: (i) $150,000 for five or 
fewer issues; (ii) $200,000 for six to 24 issues; (iii) $300,000 for 
25 to 99 issues; (iv) $500,000 for 100 to 499 issues; (v) $650,000 
for 500 to 999 issues; and (vi) $1,000,000 for 1,000 issues or more. 
While the STA's proposal is a starting point, the Commission 
believes that transfer agents that engage in uncertificated 
recordkeeping functions may need more net worth than transfer agents 
that do not perform such functions to adequately perform their 
duties. The NYSE and the American Stock Exchange (``Amex'') impose a 
$10,000,000 and a $3,000,000 minimum capital requirement, 
respectively, for non-issuer transfer agents that perform transfer 
functions for NYSE-listed and Amex-listed issues, respectively. See 
NYSE Rule 496 and Amex Rule 891.
    \3\3See note 32.
---------------------------------------------------------------------------

    The Commission also invites comment on whether net worth 
requirements would impose undue expense on transfer agents and whether 
alternatives to net worth requirements might achieve the goals of 
prompt, accurate, and safe transfer, clearance, and settlement of 
securities transactions. Such alternatives might include reliance on 
existing market forces, such as the incentive for issuers to avoid 
liability by policing transfer agent performance. Persons addressing 
these issues are invited to submit data in support of their views.
2. Insurance Requirement
    Unlike funds and securities held by broker-dealers, funds and 
securities held by transfer agents are not covered under the Securities 
Investors Protection Act of 1970 (``SIPA'').34 SIPA established 
the Securities Investors Protection Corporation (``SIPC'') fund, which 
insures each customer of a broker-dealer against the loss of funds and 
securities at the broker-dealer in the event of the broker-dealer's 
insolvency for cash and securities up to a maximum of $500,000, with a 
limit of $100,000 on claims for cash. Nothing analogous exists with 
respect to transfer agents, although non-issuer transfer agents that 
transfer securities listed on the Amex or the NYSE are required to 
obtain insurance.35 SIPC was established for broker-dealers 
because they regularly handle customers' funds and securities, and, 
without such protection, investors face the potential loss of funds and 
securities if they fail.
---------------------------------------------------------------------------

    \3\415 U.S.C. 78aaa-111 (1993).
    \3\5Amex Rule 891 requires a minimum of $10,000,000 of insurance 
coverage and NYSE Rule 496 requires $25,000,000 of insurance 
coverage for non-issuer transfer agents that transfer Amex-listed 
and NYSE-listed securities, respectively. See note 32.
---------------------------------------------------------------------------

    To cover liabilities that might arise in connection with the 
transfer process, many transfer agents have purchased insurance similar 
to insurance coverage obtained by broker-dealers and banks. Insurance 
currently available to transfer agents is designed to protect the 
transfer agent against financial loss resulting from liabilities for 
substandard transfer agent performance, including, but not limited to 
premises loss, in transit loss, breach of duty of fidelity, and 
fraudulent transfers.\36\ In addition, many transfer agents already are 
subject to self-regulatory organization insurance requirements.
---------------------------------------------------------------------------

    \36\On Premises Loss insurance covers loss of funds or 
securities through criminal acts of other than employees and through 
unexplained causes while on the insured's premises. In Transit Loss 
insurance covers all methods of shipping securities and to any 
destination or addressee (e.g., mail, overnight delivery service, 
messenger, or armored carrier). Fidelity insurance covers losses 
through any dishonest, fraudulent, or criminal act of any employee 
of the insured. Fraudulent Transfers insurance covers losses when a 
security is registered to a person because of a wrongful transfer. 
This usually occurs because the signature of the person authorizing 
the transfer is fraudulent or the person signing the transfer 
request does not have the authority to make such transfer. Such 
insurance is generally available to transfer agents under a blanket 
bond coverage. See E. Guttman, Modern Securities Transfer (revised 
ed. 1987).
---------------------------------------------------------------------------

    The Commission requests comment on whether an insurance requirement 
is necessary or appropriate for the protection of investors or to 
further other statutory goals.\37\ For example, requiring transfer 
agents to maintain an adequate amount of insurance or bonding might 
reduce the risks posed by transfer agents to investors and other 
participants in the clearance and settlement system.
---------------------------------------------------------------------------

    \37\The STA proposed that every registered transfer agent 
maintain a level of insurance that will reasonably protect the 
transfer agent in the event it incurs liabilities in performing its 
transfer activities. The STA recommended that the Commission expand 
the Annual Study and Evaluation of Internal Accountant Control 
(``Internal Control Report''), under Commission Rule 17Ad-13, to 
require the auditor to determine the appropriate level of insurance 
to cover those liabilities. Specifically, the STA recommended that 
the Internal Control Report cover insurance or bonding protection 
including whether such coverage is adequate in light of its 
operational capability, level of net worth, nature and degree of 
financial exposure from its transfer activities, and cost of various 
insurance and bonding alternatives. The STA also recommended 
requiring bank and issuer transfer agents to comply with Rule 17Ad-
13 and to the proposed insurance requirements.
---------------------------------------------------------------------------

    The Commission invites commenters to address whether an insurance 
requirement for registered transfer agents would be necessary if a net 
worth requirement is adopted. Should an insurance requirement be 
imposed as an alternative to a net worth requirement? Assuming a net 
worth requirement is not adopted, are there safeguards other than an 
insurance requirement that might be appropriate?
    The Commission invites commenters to address the type and amount of 
insurance they believe should be required. Commenters addressing these 
issues also might consider the following questions. What criteria 
should be considered in determining the appropriate amount of insurance 
(e.g., volume of business, types of securities)? Should there be some 
minimum amount of insurance coverage coupled with subsequent increases 
reflecting the transfer agent's potential financial liability based on 
the dollar value of securities for which the transfer agent performs 
transfer functions? Is an insurance requirement necessary in light of 
NYSE and Amex rules? Should the Commission rely on the insurance 
requirements in the NYSE and Amex listing standards?

III. Request for Comment

    The Commission is interested in receiving comment on all aspects of 
transfer agent regulations in light of the upcoming change in 
settlement time frames. The Commission also invites comment on whether 
new transfer agent recordkeeping systems, as discussed in the Companion 
Release, justify new or different regulations to promote prompt, 
accurate, and safe transfer of securities. The Commission also invites 
commenters to address the costs associated with the proposed 
amendments, whether the proposed amendments would impose a burden on 
competition, and whether such a burden, if any, is necessary or 
appropriate to achieve the purposes of the Act.\38\ 
---------------------------------------------------------------------------

    \38\See 15 U.S.C. 78w(a) (1993).
---------------------------------------------------------------------------

IV. Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``Analysis''), in accordance with 5 U.S.C. 603, as amended by 
the Regulatory Flexibility Act (``RFA'') regarding the proposed 
amendments to Rules 17Ad-2, 17Ad-10, and 17Ad-12.
    The Analysis notes that the proposed rule changes would affect 
approximately 393 low volume transfer agents that qualify as ``exempt 
transfer agents'' within the meaning of Rule 17Ad-4(b). Furthermore, 
the Analysis notes that the proposed rule changes would affect 174 
transfer agents that perform transfer functions for depository eligible 
securities. The proposals would affect all transfer agents, including 
issuer, bank and small mutual fund transfer agents, that handle book-
entry securities.
    The Analysis notes the Commission's belief that the majority of the 
174 transfer agents performing transfer functions for depository 
eligible securities affected by the proposed rule change to Rule 17Ad-2 
will not incur significant additional compliance costs because many of 
these registered transfer agents currently comply with the proposed 
rule changes. Moreover, many transfer agents performing transfer 
functions for issues listed on the NYSE are presently required to 
transfer securities within 48 hours of receipt. The Analysis, 
therefore, notes the Commission's belief that the new transfer 
turnaround time frames will have a practical effect only on those 
transfer agents that are currently not subject to the NYSE requirement.
    The Analysis states that the proposed amendment to Rule 17Ad-10, to 
require that exempt transfer agents update the master securityholder 
files every 10 days of transfer instead of 30 days, will not impose 
significant cost on exempt transfer agents because these exempt 
transfer agents are low volume transfer agents (i.e., transfer agents 
that process fewer than 500 items in a six month period). The 
Commission believes that 10 days is sufficient time to allow such small 
transfer agents to update their master securityholder files. The 10 day 
updating requirement is the same requirement for transfer agents that 
employ batch posting systems and thus should not significantly effect 
small transfer agents that employ such systems. In addition, the 
Commission believes that the benefits to investors outweigh any 
additional cost to comply with the 10 day updating requirement.
    The Analysis also notes the Commission's belief that the additional 
requirements to have a Securityholders' Bank Account in Rule 17Ad-12 
will not impose significant cost on registered transfer agents, 
including exempt transfer agents, because most registered transfer 
agents that currently handle dividends, interest, or funds involving 
DRSPPs currently maintain accounts at banks similar to the 
Securityholders' Bank Account. For those registered transfer agents 
that do not have such accounts, the Commission stated that it believes 
that establishment and maintenance of such an account will not impose 
significant cost on registered transfer agents.
    The Commission has considered alternatives to the proposed rule 
changes consistent with the requirements of the RFA. The alternatives 
have been fully considered as to their economic impact and compliance 
with the statutory objectives. The Commission has not found an 
acceptable alternative to the proposed rule changes. Accordingly, the 
Commission does not believe that the proposal would impose undue costs 
on small transfer agents, and that any costs incurred by transfer 
agents who do not currently comply with these proposed rules would be 
outweighed by the benefits that would accrue to the securities 
industry.
    A copy of the Analysis may be obtained by contacting Michele 
Bianco, Attorney, Division of Market Regulation, U.S. Securities and 
Exchange Commission, 450 5th Street, N.W., Washington, D.C., 20549, at 
202/942-4187.

V. Text of the Amendments

List of Subjects in 17 CFR Part 240

    Transfer agents; Reporting and recordkeeping requirements; 
Securities.

    For the reasons set out in the preamble, the Commission proposes to 
amend Part 240 of Chapter II of Title 17 of the Code of Federal 
Regulations to read as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for Part 24D continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *


Sec. 240.17Ad-2  [Amended]

    2. By amending Sec. 240.17Ad-2(a) by removing the phrase ``three 
business days'' and adding in its place ``two business days''.
    3. By amending Sec. 240.17Ad-2(c) by removing the phrase ``four 
business days'' and adding in its place ``three business days''.
    4. By amending Sec. 240.17Ad-2(e)(1) by removing the phrase ``three 
business days'' and adding in its place ``two business days''.
    5. By amending Sec. 240.17Ad-2(e)(2) by removing the phrase ``five 
business days'' and adding in its place ``three business days''.


Sec. 240.17Ad-10  [Amended]

    6. By amending Sec. 240.17Ad-10 by removing paragraph (a)(2)(i) and 
redesignating paragraphs (a)(2)(ii) and (a)(2)(iii) as paragraphs 
(a)(2)(i) and (a)(2)(ii).
    7. By amending Sec. 240.17Ad-12 to add paragraph (b) to read as 
follows:


Sec. 240.17Ad-12  Safeguarding of funds and securities.

* * * * *
    (b) Reserve account for the exclusive benefit of securityholders. 
Every registered transfer agent shall maintain with a bank or banks at 
all times a ``Bank Account for the Exclusive Benefit of 
Securityholders'' (hereinafter referred to as the ``Securityholders' 
Bank Account''), and it shall be separate from any other bank account 
of the transfer agent. Every registered transfer agent at all times 
shall maintain in such Securityholders' Bank Account all 
securityholders' funds in its custody and possession that are related 
to its transfer agent activities.

    Dated: December 1, 1994.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30128 Filed 12-7-94; 8:45 am]
BILLING CODE 8010-01-P-M