SEC eyes transfer agents in new front against US stock fraudsters
Wednesday, 14 January 2015 01:00
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Reuters: In their battle to root out microcap stock fraudsters, US 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.
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 US Securities and Exchange Commission is in the early stages of drafting new rules for transfer agents.
Some officials want to get the agents to scrutinise 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.
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, prioritising 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.
