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.

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

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.'').
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    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

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

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.
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    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    The Commission seeks comment on the following:

    18. Would the anticipated proposals described immediately above
appropriately

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.
---------------------------------------------------------------------------

    \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

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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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

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.'').
---------------------------------------------------------------------------

    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,

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.
---------------------------------------------------------------------------

    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).

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

    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

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

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

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

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