The Unseen Dangers of Not Having a Stock Transfer Agent

Hiring a stock transfer agent relieves your leadership team of the administrative burden of tracking and registering shareholders. Offloading the reporting, recordkeeping, and communications of stock transactions can give you peace of mind and help you reduce your SEC compliance risk. Keep reading to learn more about the importance of stock transfer agents.

The Importance of Stock Transfer Agents 

A stock transfer agent is a third party acting on behalf of a company or mutual fund. These professionals maintain your investor cap table to help ensure that stock transfers move smoothly and comply with SEC regulations.

Stock transfer agents add value and reduce risk by proficiently handling the following tasks:

  • Recordkeeping to track changes in ownership. Transfer agents issuing cancelled stock certificates to reflect purchased and sold shares. They also pay dividends to shareholders.
  • Intermediary for listed company. According to the SEC, stock transfer agents can also take on additional roles, including paying cash, interest and dividends. They can also send out proxy materials and perform some administrative tasks.
  • Assist with stolen, destroyed, or lost certificates.

Transfer agents play a critical role in organizing and planning your company’s stock transactions — from complying with daily cutoff times for stock transfers to helping investors understand their rights.

Pitfalls of Companies Without a Transfer Agent

Handling the recordkeeping and stock transfer agency in house introduces the following risks:

  • Failure to complete a transaction promptly because of technical or paperwork issues.
  • The company may not have the support staff to provide sufficient investor support, such as share transfers, SEC and UCC compliance, DTC and broker integration and other crucial functions.
  • More likelihood for undetected theft and stock transfer mismanagement.
  • Institutional investors may be more unlikely to invest if you don’t have a third-party independent transfer agent running things.
  • You also give up the cost savings realized by outsourcing to a professional stock transfer agent that knows what they’re doing.

Basically, DIY stock transfer management isn’t a great idea. If you do manage transfer agent and investor management duties in-house, check with your risk management team. Ensure that you are fully insured against any negligence or malfeasance that may occur —and prepare to be regularly audited by the SEC for transfer agent rule compliance.

On the other hand, you could also outsource the securities transfer processes, putting them into the hands of a seasoned SEC-registered transfer agent that is used to complying with SEC rules and guidelines.

So, how does a stock transfer agent mitigate SEC compliance risk?

Mitigating SEC Regulatory Risk

The SEC enumerates the duties of a stock transfer agent as well as the responsibilities of these entities. The responsibilities of a stock transfer agent include keeping the securities safe and handling transactions in a manner that minimizes loss, theft, and destruction. Additionally, the SEC expects transfer agents to protect funds against misuse.

The OCIE has found numerous issues with in-house stock transfer agents. These risks include the following:

  • Certificate theft: OCIE staff found that in-house TAs were misappropriating shareholder funds and stealing certificates.
  • Failure to document policies and procedures: Internal TAs observed by OCIE staff didn’t have adequate documentation of procedures, policies, or controls. Some TAs lacked policies and procedures for check handling, bank reconciliation, and other activities.
  • Inadequate account reconciliation measures: For example, the OCIE staff noticed the comingling of TA operating funds and shareholder funds without appropriate reconciliation measures.

Reducing Company and Investor Liability

Are you ready to minimize company and investor liability? Utilizing a stock transfer agent allows you to uphold your fiduciary commitment to shareholders.

Investor liabilities might include:

  • Not processing stock transfers according to rules or in a timely manner, which may induce shareholder liability if the stock price drops.
  • Lost certificate replacements and shareholder adverse claims on such replacements.
  • Restricted Stock and Legal Disputes regarding timeliness and accuracy of compliance with SEC rules. Such liability and fines may come from the SEC or investor legal groups.
  • Improper stock powers with invalid signor with faulty or no medallion guarantee, exposing the company to the full value of the stock.
  • Many other nuances and requirements may result in increased liability if procedures are not followed correctly.

Engaging a stock transfer agent is the best way to manage your shareholders, outsource investor support, comply with federal and state regulations, maintain security holder records, changes of ownership and dividend distribution. This reduces your total liability and helps stock transfers go off without a hitch.


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