January 12, 2015 / 6:16 AM / 6 years ago

SEC eyes transfer agents in new front against U.S. stock fraudsters

WASHINGTON (Reuters) - In their battle to root out microcap stock fraudsters, U.S. securities regulators are turning their attention to the obscure world of transfer agents, who are sometimes in a position to prevent scams, or help to enable them.

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

Transfer agents are back-office businesses hired by companies to keep track of shareholder records and changes in ownership. To date, the industry has been lightly regulated, despite its critical role in keeping track of stocks as they change hands, and the issuance of shares.

The U.S. Securities and Exchange Commission is in the early stages of drafting new rules for transfer agents.

Some officials want to get the agents to scrutinize more closely attempts by corporate insiders or large shareholders to remove private stock ownership restrictions so that shares may be sold in public markets, and deny requests that may seem suspicious.

Those planning on committing a stock fraud can lie to or mislead transfer agents so they can get restrictions on shares removed. They may, for example, allow unregistered shares to be traded. Unregistered shares are not supposed to be sold to the public under federal law, unless they meet certain exemptions.

Once the stock is freely tradable, the fraudsters pump up the price with promotional material, including phony claims about the company’s prospects, to dupe unsuspecting investors. The stock that was cleared by the transfer agent for trading is then sold, or “dumped,” by the scam artists, often leaving them with big percentage gains before the price collapses.

It is unclear exactly when the SEC may consider new rules or how they will look, though SEC Chair Mary Jo White said in a statement to Reuters that the agency plans to kick it off by publishing a high-level policy document that will be used to solicit public feedback and help formulate the rules.

“We must review our rules carefully and enhance our protections for investors and the markets,” she said.

SEC Democratic Commissioner Luis Aguilar said in an interview there is no doubt that transfer agents are gatekeepers who hold a “unique position” to identify and prevent unregistered, restricted shares from being sold illegally.

“The commission should adopt rules providing additional safeguards to protect against the unlawful distribution of unregistered securities,” Aguilar said.

He expressed frustration by the snail’s pace in getting the reform through especially as a 2012 law, the Jumpstart Our Business Startups (JOBS) Act, makes it easier for companies to raise larger sums of money without registering their securities.

There is some bipartisan support for rolling out new regulations for transfer agents. SEC Republican Commissioner Daniel Gallagher said in an interview that the current rules speak to a time when stock certificates were in paper, adding that new ones are woefully overdue.

There are currently about 450 transfer agents registered with the SEC, and the overall industry maintains roughly 276 million shareholder accounts for about 1.5 million issuers.

While they are required to register with the SEC, experts say it can take less than 90 minutes to fill out the form, which is not followed up by a rigorous review due to limited resources at the agency. Shops can be open for business 30 days after filing.

On average, the SEC conducts compliance exams at only between about 40 to 45 a year, prioritizing transfer agents considered higher risk.

Even some of the most basic industry best practices, such as requiring an attorney’s legal opinion prior to removing restrictions on shares, is not required by the SEC’s own rules.

“My joke is that it is harder to become a licensed hair dresser in New York than it is a transfer agent,” said R. Cromwell Coulson, the head of OTC Markets Group Inc, the marketplace for unlisted over-the-counter stocks. This opens the door to “some very small capitalized businesses without the proper controls,” he said.

The transfer agent industry is torn over just how much due diligence should be required, though there are many in the business, including its trade association, who say the lack of up-to-date regulations is absurd.


Some smaller firms say they want the SEC to give them more guidance so they don’t unwittingly enable a fraud and find themselves caught up in an SEC probe.

“The problem is, the SEC has not defined what red flags are,” said Kara Kennedy, the executive director for ClearTrust, a small transfer agent in Florida. “Let’s get in front of the SEC and lets ask for guidance. And if they won’t give it to us, let’s come up with a standard ourselves,” she said.

The transfer agent industry is split between operations housed in some of the nation’s largest financial firms and hundreds of mom-and-pop shops.

The blue-chip companies generally rely on some big transfer agent services operated by firms such as Computershare, American Stock Transfer & Trust Company, and Wells Fargo.

Many of the mom-and-pop firms operate out of tiny offices, or in some cases, out of people’s homes and cater to smaller companies, including the microcap companies. Microcap companies typically disclose less financial information than major companies and trade on a “Wild West” over-the-counter stock market where investors face the most risk.

Transfer agents make their money by charging companies who hire them a variety of fees, either through fixed pricing or on a transaction by transaction basis.


In 2014, the agency brought a handful of enforcement cases against transfer agents. Although some of these cases focused on disclosure violations, others uncovered more serious violations such as issuing fake stock certificates and stealing client money to pay business expenses.

But for cases where transfer agents themselves cannot be directly blamed for a fraudulent scheme, the SEC has sought to get more creative to hold them accountable as gatekeepers.

In September, the SEC charged New Jersey-based Registrar and Transfer and its former chief executive with ignoring red flags that helped pave the way for unregistered company shares to be sold and used for an alleged pump-and-dump scheme.

In the complaint, the SEC said the transfer agent, Registrar and Transfer Company, “rubber stamped” requests from a company executive to remove restrictions on unregistered shares so they could be issued to other people, including himself. The SEC said the transfer agent “disregarded” these red flags and issued the shares.

Registrar and Transfer, which has since been acquired by Computershare, and its former CEO Thomas Montrone, both settled the charges, with the firm agreeing to pay more than $127,000 in fines, disgorgement and interest. Computershare declined to comment.

Mark Harmon, an attorney with Hodgson Russ LLP who represented Montrone, declined to comment on the case. In general, though, he said he has noticed the SEC stepping up its scrutiny in this area.

“I have been representing transfer agents for the better part of 20 years, and I would say the frequency of SEC inquiries on these issues, and the depth at which they are doing it has increased in the last few years,” Harmon said.

Reporting by Sarah N. Lynch; Editing by Karey Van Hall and Martin Howell

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