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 issuers 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.
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