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Trust Examination Manual

Section 11- Role Of The Transfer Agent

Section 3(a)(25) of the 1934 Act defines a "transfer agent" as any person who, on behalf of an issuer of securities or on behalf of itself as an issuer of securities, performs one or more of the following activities:

  • Countersigning securities upon issuance
  • Monitoring the issuance of securities with a view to preventing unauthorized issuance, a function commonly performed by a person called a registrar
  • Registering the transfer of such securities
  • Exchanging or converting securities
  • Transferring recorded ownership of securities by bookkeeping entry, without the physical issuance of securities certificates

Ownership of a security is expressed by the registration of a bond or stock  certificate. A purchaser of a security is entitled to a certificate registered in his or her name. There is an exception to this requirement in regards to debt issued by the United States government, which is issued in book-entry form. Book-entry ownership means that the ownership of bonds and bills issued by the United States government is recorded in computer records maintained by the Treasury, with no paper certificate issued. In the case of stock, the purchaser always has the right to receive a certificate of ownership. Virtually all securities are issued in registered form, which means that the person entitled to the security and to the rights associated with a security, such as voting rights for common stock, is specified in the books maintained by or on behalf of the issuer of the security.

In the past, debt securities, both corporate and government, were issued in bearer form, which meant that anyone possessing the physical certificate or any of the attached interest coupons, was entitled to payment upon presentation of the bond upon maturity or call, or to interest when the bond coupon was presented to a paying agent. The issuer of a bearer bond did not know the identity of the persons who owned the issuer’s bonds. Since bearer bonds are negotiable instruments, making them easily converted into cash without the ability to identify the parties receiving payment, concerns arose over the issue of taxpayers failing to declare interest income received on bearer bonds. In response, Congress passed the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). TEFRA prohibited the United States government from issuing bearer bonds and provided sanctions against corporations, municipalities, and other organizations issuing bearer obligations. The sanctions included disallowing the deduction of interest expense by issuers of bearer bonds and denying the holder of bear bonds the tax exemption for interest earned on the bonds. In addition, TEFRA imposed an excise tax equal to 1 percent of the principal amount of the debt multiplied by the number of years in the term of the bonds. These measures effectively ended the issuance of bearer debt instruments, and all debt securities are issued in registered form now.

Stock Transfer Agent

In view of the principal transfer agent functions described above, stock transfer agents occupy a central role in the issuance of securities and the subsequent transfer of such securities resulting from sales, purchases, reorganizations, tender offers, and other transfers of ownership.  In particular, stock transfer agents issue stock certificates representing increases in the number of shares outstanding, e.g., initial issuance, stock dividends, stock splits and dividend reinvestment programs.  As issued shares are traded on the open market, stock certificates are sent to the transfer agent who will cancel the shares registered in the name of the transferor (e.g. seller) and issue a stock certificate registered in the name of the transferee (e.g., buyer).  Central to transactions involving the transfer of securities is the maintenance of accurate ownership records with respect to issued securities, since it is the registered owners of the securities who enjoy the associated ownership rights, e.g., the right to dividends and to vote shares owned.  Transfer agents are responsible for maintaining current and accurate records with respect to issued securities.

In view of the large volume of stock market transactions, transfer agents must perform their duties with a high degree of speed and accuracy in order for securities markets to function efficiently.  In issuing or transferring stock certificates, transfer agents must examine all accompanying documentation, assignments and endorsements to ensure the propriety of the transfer and guard against fraudulent transfers, change recorded ownership to reflect the transfer and, in most cases, perform the role of stock registrar, which involves verifying the number of shares represented by the certificate(s) being issued against the number of shares represented by the stock certificate(s) being cancelled. The stock registrar function operates to guard against the overissuance of securities.  Finally, subsequent to cancellation, transfer agents must retain cancelled certificates in a secure location to ensure that they are not used in fraudulent transactions.

When an overissuance of securities occurs the number of share overissued must be reduced, either by recovering the overissued shares from those to whom they were issued or by the person or entity responsible for the overissuance buying that number of shares on the open market and retiring the shares, which in effect represents a loss to that person or entity.

In order to perform these functions in a prompt and efficient manner, institutions acting as registered transfer agents need appropriate management oversight, experienced and knowledgeable staff, efficient operating procedures and effective internal controls.  The failure by a registered transfer agent to promptly and accurately transfer and record ownership of securities can result in securityholders suffering monetary damages by hampering their ability to buy and sell shares, or otherwise prevent shareholders from exercising the rights associated with stock ownership, such as the right to receive dividends and vote proxies.

Stock Registrar

As described above, the stock registrar's duty is to prevent the over- or under-issuance of securities, a condition referred to as an out-of-proof or out-of-balance condition. New York Stock Exchange rules allow an institution to serve as both a transfer agent and registrar for listed securities, other than its own. It is fairly common to find a transfer agent of an issue also serving the function of registrar.  Although rarely encountered, there are instances where banks serve as registrar without being appointed the transfer agent. In such a case the registrar is referred to as an "outside registrar". When an "outside registrar" is used, the transfer agent, after canceling the surrendered certificates and drawing up the replacement certificates, sends both the cancelled and replacement certificates to the registrar, who verifies that the shares represented by the replacement certificate(s) equals the shares represented by the surrendered stock certificates.

Bond Registrar

The issuers of bonds, such as corporate and municipal bonds, and other debt instruments, also require securities transfer services.   In the case of debt securities, however, the person or entity providing securities transfer and registrar services is referred to as the bond registrar.  The function of the bond registrar should not be confused with that of the stock registrar.   Often, the indenture trustee for the bond issue also serves as the bond registrar, although there can be a separate bond registrar for a bond issue. 

In the past, debt securities, both corporate and government, were issued in bearer form. However, with the enactment of TEFRA in 1982, the Act effectively ended the issuance of bearer debt instruments, and all debt securities are issued in registered form.  It is the bond registrar who maintains the records of registered owners and transfers ownership when bonds are subsequently acquired or sold. Interest and principal payments on registered bonds are made to the owners of record at the time when interest and/or principal are paid.

Mutual Fund Transfer Agent

A mutual fund transfer agent performs both the transfer agent and registrar functions.  Mutual fund transfer agents maintain records of shareholder accounts; calculate and disburse dividends; and prepare and mail shareholder account statements, federal income tax information and other shareholder notices.  Some mutual fund transfer agents may prepare and mail statements confirming shareholder transactions and account balances, and maintain customer service departments to respond to shareholder inquiries.

There are two types of mutual funds: closed-end mutual funds and open-end mutual funds.  In the case of closed-end mutual funds, there is a fixed number of shares authorized and outstanding.  Once issued, shares in closed-end mutual funds are traded in the market in the same manner as stocks.   With respect to open-end mutual funds, there is no fixed number of shares authorized and outstanding.  Open-end mutual funds will generally issue additional shares to investors wishing to invest in the fund.  An open-end mutual fund may, however, close the fund to additional investors.  In the case of an open-end mutual fund, the transfer agent faces a changing number of shares outstanding on a daily basis, increasing or decreasing depending upon the volume purchases and redemptions.  Open-end mutual funds greatly outnumber closed-end mutual funds.

Another important difference between mutual fund transfer and stock transfer is the general absence of physical certificates for mutual fund shares.  The owner of shares of stock have a right to a physical certificate.   Mutual funds, on the other hand, rarely issue physical certificates.  On infrequent occasions, a mutual fund may upon special request issue a certificate, for example in order for a shareholder to pledge shares as collateral for a loan.  The absence of physical certificates means that mutual fund transfer is a book-entry operations, with recorded ownership maintained in the transfer agent's computerized recordkeeping system.

A mutual fund's transfer agent is identified in the mutual fund's prospectus.  A mutual fund transfer agent must be a registered transfer agent.  See following section.  The operation of mutual funds is subject to the Investment Company Act of 1940 and regulation by the SEC.  

 

    Last Updated 05/10/2005

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