# Transfer Agent Regulations

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-32755

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** December 31, 2015
- **Citation:** 80 FR 81948

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
RIN 3235-AL55
[Release No. 34-76743; File No. S7-27-15]
Transfer Agent Regulations

AGENCY:

Securities and Exchange Commission.

ACTION:

Advance notice of proposed rulemaking; Concept release; Request for comment.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is publishing this Advance Notice of Proposed Rulemaking, Concept Release, and Request for Comment on Transfer Agent Regulations (“release”) to seek public comment regarding the Commission's transfer agent rules. The first transfer agent rules were adopted in 1977 and remain essentially unchanged. At the same time, transfer agents now operate in a market structure that bears little resemblance to the structure in 1977. The release, noting the importance of transfer agents within the national market structure, includes a history of transfer agent services and applicable regulations as well as an overview of current transfer agent services and activities, and requests comment on all topics. The release includes an Advance Notice of Proposed Rulemaking in specific areas, such as transfer agent registration and reporting requirements, safeguarding of funds and securities, and revision of obsolete or outdated rules, along with requests for comment, as well as a Concept Release and Request for Comment addressing additional areas of specific Commission interest, including processing of book-entry securities, broker-dealer recordkeeping for beneficial owners, transfer agents to mutual funds, and administration of issuer plans. The Commission intends to consider the public's comments in connection with any future rulemaking, and comments to the Advance Notice of Proposed Rulemaking will be used to further consider the sufficiency and scope of the rulemaking proposals described therein.

DATES:

Comments must be in writing and received by February 29, 2016.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (
http://www.sec.gov/rules/concept.shtml
);

• Send an email to
rule-comments@sec.gov.
Please include File Number S7-27-15 on the subject line; or

• Use the Federal eRulemaking Portal (
http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments to: Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-27-15. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (
http://www.sec.gov/rules/concept.shtml
). Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT:

Moshe Rothman, Branch Chief, Thomas Etter, Special Counsel, Catherine Whiting, Special Counsel, Mark Saltzburg, Special Counsel, Lauren Sprague, Special Counsel, or Elizabeth de Boyrie, Counsel, Office of Clearance and Settlement, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010 at (202) 551-5710.

SUPPLEMENTARY INFORMATION:

I. Introduction

II. The National Clearance and Settlement System: History and Background

A. Transfer of Certificated Securities

B. Transfer Agent Processes for Transferring Certificated Securities

C. Paperwork Crisis of the 1960s

1. Industry Responses (1968-1970)

2. Regulatory and Industry Responses (1971-1975)

3. Advent of the Modern Clearance and Settlement System (1975-Present)

III. Transfer Agent Role in Clearance and Settlement Processes

A. Types of Security Ownership

1. Registered Securityholders

2. Beneficial Owners

B. Clearance and Settlement Process

IV. Transfer Agent Regulation: Origins and Current Status

A. Federal Transfer Agent Rules

1. Registration and Annual Reporting Requirements

2. Processing, Reporting, Recordkeeping, and Exemptions: Rules 17Ad-1 through 17Ad-7 and Rules 17f-1 and 17f-2

3. Recordkeeping and Safeguarding Rules: Rules 17Ad-8 through 17Ad-13

4. Issue-Specific Rules: Rules 17Ad-14 Through 17Ad-21T

B. Bank and Internal Revenue Service Regulations

C. SRO Rules and Requirements Applicable to Transfer Agents

1. NYSE Requirements

2. DTC Requirements

D. Regulation of Transfer Agents Under State Law

V. Evolution of Recordkeeping, Transfer, and Related Transfer Agent Activities

A. Recordkeeping, Transfer, Issuance, and Corporate Actions

1. Recordkeeping: Rules 17Ad-9, 10, and 11

2. Securities Transfers, Exchanges, and Conversions: Rules 17Ad-9, 10, 12, and 19

3. Securities Issuance: Rules 17Ad-1 and 2

4. Corporate Actions and Related Services: Rules 17Ad-1, 6, 10, 12, and 13

B. Annual Meeting, Proxy-Related Services, and Securityholder Services and Communications

C. Regulatory Compliance and Reporting

VI. Advance Notice of Proposed Rulemaking

A. Registration and Annual Reporting Requirements

B. Written Agreements Between Transfer Agents and Issuers

C. Safeguarding Funds and Securities

D. Restricted Securities and Compliance With Federal Securities Laws

E. Cybersecurity, Information Technology, and Related Issues

F. Definitions, Application, and Scope of Current Rules

G. Conforming Amendments

VII. Concept Release and Additional Request for Comment

A. Processing of Book-Entry Securities

B. Bank and Broker-Dealer Recordkeeping for Beneficial Owners

C. Transfer Agents to Mutual Funds

1. Key Characteristics of Mutual Fund Transfer Agents

2. Increased Complexity

3. Compliance and Other Services

4. Broker-Dealer Recordkeeping for Beneficial Owners Who Invest In Mutual Funds

5. Discussion and Request for Comment

D. Crowdfunding

E. Administration of Issuer Plans

1. Third Party Administrators

2. Issuer Plans

3. Potential Broker-Dealer Registration Issues

4. Discussion and Request for Comment

F. Outsourcing Activities and Non-Qualifying Securities Serviced by a Registered Transfer Agent

G. Additional Request for Comment

I. Introduction

The United States' securities markets are indispensable to this country's and the world's economy. The Commission

believes that issuers, investors, and other participants in the securities markets must be served by a well-functioning national system for the clearance and settlement of securities transactions (“National C&S System”) that promotes safe, efficient, prompt, and accurate settlement transactions.
1

Critical to this mission is the development and maintenance of a comprehensive regulatory program that governs the functions of transfer agents and related industry segments critical to the proper functioning of the National C&S System, including entities that clear trades, provide custodial and safeguarding services, and perform other “back-office” functions within the securities industry.

1

See infra
Sections II and III of this release for additional discussion of the National C&S System.

As agents for issuers, transfer agents play a critical role with respect to securities settlement, though they rarely receive much public attention. Among their key functions, they may: (i) Track, record, and maintain on behalf of issuers the official record of ownership of each issuer's securities; (ii) cancel old certificates, issue new ones, and perform other processing and recordkeeping functions that facilitate the issuance, cancellation, and transfer of those securities; (iii) facilitate communications between issuers and registered securityholders; and (iv) make dividend, principal, interest, and other distributions to securityholders. A transfer agent's failure to perform its duties promptly, accurately, and safely can compromise the accuracy of an issuer's securityholder records, disrupt the channels of communication between issuers and securityholders, disenfranchise investors, and expose issuers, investors, securities intermediaries, and the securities markets as a whole to significant financial loss.
2

2
Maintenance of Accurate Securityholder Files and Safeguarding of Funds and Securities by Registered Transfer Agents, Exchange Act Release No. 19142, 2-3 (Oct. 15, 1982), 47 FR 47269 (Oct. 25, 1982) (“17Ad-9 through 13 Proposing Release”) (noting examples of substandard transfer agent performance presenting significant potential adverse consequences).
See also
Processing Requirements for Cancelled Security Certificates, Exchange Act Release No. 48931 (Dec. 16, 2003), 68 FR 74390, 74391 (Dec. 23, 2003) (“17Ad-19 Adopting Release”) (noting examples of substandard transfer agent performance and significant adverse consequences).

The securities markets and the National C&S System in which transfer agents operate have changed significantly since the Commission first began regulating transfer agents in the 1970s. The changes largely reflect a decades-long evolution from a manual securities settlement process focused on the processing of physical securities certificates to a highly automated electronic environment centered on the processing and transfer of electronic book-entry securities.
3

The changes also reflect significant technological and operational developments in other areas, as well as broader changes in the securities industry and the business and regulatory environments in which transfer agents operate.

3
Concept Release on Equity Market Structure, Exchange Act Release No. 61358, 2 (Jan. 14, 2010), 75 FR 3594, 3594 (Jan. 21, 2010). When securities are referred to as being in “book-entry” form, it means that the investor does not receive a certificate. Instead, a custodian, usually a broker or transfer agent, maintains electronic records showing that the investor owns the particular security. For additional discussion of book entry securities,
see infra
note 37.

As a result, the Commission has observed over time that transfer agents now perform a more diverse array of functions and services, many of which may not be fully addressed by the Commission's transfer agent rules. In addition, the Commission has observed that the manner in which transfer agents carry out their traditional functions may no longer be adequately addressed in the rules. The Commission's consideration of these observations has led it to include two interrelated approaches in this release. Under the first approach, the Commission believes it has identified a series of new and amended rules that, based on its current understanding of transfer agents and their functions, it intends to propose. These anticipated new and amended rules, which the Commission intends to propose as soon as is practicable, either individually or in groups or phases, and irrespective of any other changes to the transfer agent rules, are discussed in detail in the Advance Notice of Proposed Rulemaking found in Section VI. The Commission is soliciting public comment on the anticipated rulemaking proposals described in Section VI. Public feedback and data would assist the Commission in further refining and calibrating the anticipated proposals as well as other potential proposals.

Under the second approach, reflected in the Concept Release and Request for Comment contained in Section VII, the Commission discusses and requests comment regarding a number of additional transfer agent issues that primarily arise from the diverse array of transfer agent functions and services which have developed over time. Public comment on these additional issues will allow the Commission to evaluate the need for, and potentially develop, additional rulemaking proposals appropriately tailored to these complex areas. In undertaking these approaches, the Commission remains sensitive to whether any distinctions between the actual activities of transfer agents and what is contemplated by the Commission's rules may create undue uncertainty or risks for the National C&S System and the market participants that rely upon it, including investors, issuers, regulators, and transfer agents. As transfer agents continue to evolve in their roles and activities, any such distinctions, and the commensurate risks associated with them, may also grow.

We begin with an overview of the antecedents, advent, and subsequent history of the National C&S System, including a discussion of the “Paperwork Crisis” which helped precipitate the legislative amendments that gave rise to that system. We then describe the National C&S System and transfer agents' role within that system as it functions today, followed by a discussion of the current regulatory regime and the core functions performed by transfer agents. The remainder of the release consists of the two sections noted above: The Advance Notice of Proposed Rulemaking in Section VI and the Concept Release and Request for Comment in Section VII.

We are mindful that the role of transfer agents in the National C&S System and the need to address specific risks associated with transfer agents have been topics of discussion and debate, both within and outside the Commission, for many years.
4

We intend for this release to build on those discussions and therefore invite comment on the full range of topics and issues associated with transfer agents and their activities, regardless of whether and in which section those topics and issues are specifically addressed. Thus, while we set forth specific requests for comments, we welcome comments on any concerns related to transfer agent activities, the transfer agent regulatory program, or other areas of concern that commentators may have. We specifically invite comment on any possible regulatory actions regarding the issues and concerns described, including potential new rules or rule amendments or other reasonable regulatory alternatives, as well as any related evidence, quantitative and/or qualitative, relating to a potential

regulatory action. Comments received on either or both sections of the release will be considered in connection with any future rulemaking.

4
For example, in 2011 the Commission hosted a roundtable on the execution, clearance, and settlement of microcap securities which covered, among other topics, the role of transfer agents in the issuance and transfer of restricted securities.
See
transcript, available at
https://www.sec.gov/spotlight/microcap/microcaproundtable101711-transcript.txt
.

We are also mindful that market developments have occurred beyond the changes that are the focus of this release and that affect transfer agents. For example, transfer agents and market participants now often communicate with one another using structured data on electronic platforms. Data standardization efforts have emerged to further enhance these electronic communication methods, such as the international standards effort focusing on corporate actions, which may ultimately be used by transfer agents.
5

Although these issues are not specifically addressed herein, comments on, and specific data about, any such developments are welcome.

5

See, e.g.,
XBLR: The Business Reporting Standards,
https://www.xbrl.org/the-consortium/get-involved/corporate-actions-working-group/
.

The Commission is sensitive to the effects that could result from any regulatory action, and accordingly we also seek input on the economic effects or tradeoffs associated with any potential regulatory action, including any costs, benefits, or burdens of such action, and any effects on efficiency, competition, and capital formation. We are also mindful that the various aspects of the transfer agent regulatory program and securities transfer process that we address in this release are interconnected, and that changes to one aspect may affect other aspects, as well as complement or frustrate other potential changes. Therefore, we encourage the public to consider these relationships when formulating comments, and invite comment on whether alternative approaches, or a combination of approaches, would better address the concerns raised.

II. The National Clearance and Settlement System: History and Background

A. Transfer of Certificated Securities

Investment securities confer certain intangible rights and benefits upon the holder.
6

For example, the rights and benefits represented by a share of stock generally include the right to share in the capital and surplus of the corporation and receive certain other benefits and specified rights. Because securities confer intangible rights, historically the transfer of investment securities from one person to another has required special rules. In the past, the most common way to transfer investment securities, such as shares of stock, was to transfer a paper certificate that represents the benefits of ownership (“certificated security”).
7

Certificated securities have been issued in the United States since the 1700s
8

and are evidence that the owner is registered on the books of the issuer (or its transfer agent) as a securityholder.
9

Although the shares themselves represent an intangible right,
10

the certificate is a negotiable instrument under state law, which allows the registered owner of the certificated security to transfer the bundle of intangible rights to a third party.
11

6
Egon Guttman, Modern Securities Transfers § 1:5 (4th ed. 2010).

7
The Uniform Commercial Code (“UCC”) defines a “certificated security” as “a security that is represented by a certificate.” U.C.C. 8-102(a)(4). The UCC, which was first published in 1952, is a uniform act designed to standardize the law of sales and other commercial transactions in all 50 states. The UCC has the effect of law only when adopted by a state, and while it has been adopted by all 50 states, there are numerous state-by-state variations in the adopted texts.

8
The first major American issue of publicly traded securities occurred in 1790 when the federal government issued $80 million of bonds to refinance federal and state Revolutionary War debt. In 1792, five securities—two bank stocks and three government bonds—began trading on what was to become the New York Stock Exchange. For a historical discussion of the development of trading on the exchange,
see
Teweles and Bradley, The Stock Market 95-119 (6th ed. 1992).

9
Guttman,
supra
note 6.

10

Id.

11

Id.
at § 1:12.

This ability to transfer the rights associated with share ownership helps drive the securities markets.
12

Generally, under the UCC, “voluntary transfer of possession” is all that is required to effect such a transfer.
13

But in order to qualify as a “protected purchaser” under the UCC, and therefore acquire an interest in the security free of any adverse claim, the buyer must give value, not have notice of any adverse claim to the security, and obtain control of it.
14

Thus, for a buyer of registered certificated securities to achieve protected purchaser status, the voluntary transfer of possession could involve a significant amount of paperwork and manual processing, even in a direct transaction between a seller and a buyer:

[E]ither the certificate or a stock power must be indorsed, the signature guaranteed, authority to transfer title documented, and the stock certificate and the other documentation delivered, not to mention the registration of transfer on the stockholders list, the destruction of the old certificate and the issue of a new one.
15

12
Generally, the UCC governs the transfer of securities. For further discussion of the UCC,
see
Section IV.D.

13
Guttman,
supra
note 6, at § 1.11, U.C.C. 1-201(b)(14).

14
U.C.C. 8-303. “Control” over a registered security is achieved by obtaining control of the security indorsed to the holder or in blank, or if the issuer registers the holder in the securityholder list.
See
U.C.C. 8-106(b), off. cmts. 2-3.

15
David C. Donald, The Rise and Effects of the Indirect Holding System: How Corporate America Ceded Its Shareholders to Intermediaries 7 (Sept. 27, 2007),
available at http://ssrn.com/abstract=1017206.

Historically, transactions involving certificated securities effected on securities exchanges could be significantly more complex:

In sales and purchases by persons other than brokers and specialists, the owner of the security will instruct a broker to sell, the broker will transfer the order to the exchange floor/system or a market maker, where it will be matched wholly or partially with one or more buy orders. Once the order is executed, the seller will have to deliver the executed certificate(s) to his broker so that the selling broker can deliver it to the buying broker, market maker, specialist, or central counterparty. Once the buying broker receives delivery, she will have to deliver to the issuer's transfer agent with a request for registration of transfer on the stockholder list. The latter, after inspecting all necessary documentation, will register the transfer, cancel the old certificate, and issue a new certificate to the buyer. Thus, beyond indorsement of the certificate and its delivery, each stage of the transaction will demand the documents, guarantees and assurances that constitute “good delivery” on the respective exchange.
16

16

Id.
at 7-8.

B. Transfer Agent Processes for Transferring Certificated Securities

Historically, from the transfer agent's perspective, the transfer of certificated securities held by registered owners was a time-consuming manual process. First, the transfer agent would receive from the broker a bundle of documents (the “transfer bundle”) that typically included the following: (i) A “ticket” pinned to the bundle of documents that served as a transmittal letter and receipt;
17

(ii) transfer instructions telling the transfer agent what action to take; (iii) the security certificates of the selling securityholder; (iv) a power of attorney;
18

and (v) a “guarantee,”

typically affixed to the power of attorney or certificate, guaranteeing the genuineness of the signature of the selling securityholder indorsing the certificate over for transfer.
19

17
Historically, the term “ticket” referred to a broker-originated window ticket, which indicated the identity of the delivering broker, the securities, and the quantity. It would be prepared by a broker in triplicate and accompanied the transfer instructions and stock certificates when presented by the broker to the transfer agent for transfer. SEC, Study of Unsafe and Unsound Practices of Brokers and Dealers, H.R. Doc. No. 92-231, at 182 n.32 (Dec. 1971) (“Unsafe Practices Study”). Today, a ticket may provide similar information, either in electronic form, or in a highly structured and standardized paper form capable of being scanned and converted to electronic form.

18
A power of attorney may also be referred to as a “stock power” (or “bond power” with respect to debt securities) and grants legal authority to the registered securityholder's broker, to a transfer agent, or to another intermediary to transfer the

securityholder's securities ownership on behalf of the securityholder. A seller may use a power of attorney rather than indorse the assignment and transfer form on the back of the security certificate. For examples of forms of transfer and assignment (i) by stock power; (ii) by bond power; and (iii) by execution of the transfer and assignment form on the back of a security certificate,
see
Mark S. Rhodes, Transfer of Stock app. A § 678.3041 at forms 1-3 (7th ed. Apr. 2015).

19
North American Rockwell Information Systems Company, Securities Industry Overview, Final Report to the American Stock Exchange 47 (1969) (“Rockwell Study”).

As an example of the extensive process for transferring certificated securities, prior to 1975, for New York City transfer agents, nearly 90 percent of these transfer bundles were received from messengers at the transfer agent's “window,” which was a physical drop-off location at the transfer agent's offices, rather than through the mail, in which case the transfer bundles would be routed to the mail room.
20

Upon receipt at the window, the transfer agent would perform a visual reconciliation to confirm that the number of securities shown on the ticket matched the number on the certificates. If the transfer agent found a difference, the transfer would be rejected as “out of balance” and returned to the broker, a process known as a “window rejection.”
21

If no difference was found, the transfer agent would continue the process with a more detailed inspection, starting with a detailed review of signature guarantees, indorsements,
22

and attachments in order to determine if the certificates were in “good order” for transfer.
23

If the transfer agent found a deficiency, it would attach a rejection sheet to the certificate in question and return it to the broker, a process referred to as an “examination rejection.”
24

If the certificates were found to be in good order, the transfer agent would perform “stop checking,” the process of verifying each certificate number against a file it maintained listing certificates reported stolen, missing,
25

or with “stop transfers” or legal holds.
26

20
It was estimated at the time that New York transfer agents only received approximately 10 percent of certificates by U.S. mail. The pattern was the opposite for transfer agents outside of New York, which were estimated to receive the vast majority of certificates for transfer through the mail.
Id.
at 51.

21

Id.
at 47-52.

22
Transfer agents may have reviewed indorsements but generally did not maintain signature cards for each registered securityholder or otherwise verify authenticity of the signature by comparing it to specimen signatures. Rather, the signature guarantee provided by the broker was intended to provide assurance concerning the authenticity of the seller's signature. Today, the signature guarantee process has been enhanced and standardized through non-governmental Medallion guarantee programs. For additional information regarding Medallion guarantees,
see infra
note 267.

23
Rockwell Study,
supra
note 19, at 53.

24
It was estimated that, in the mid- to late-1960s, window rejections were as high as 20 percent and examination rejections were as high as 30 percent.
Id.

25

Id.
Today, there is a national system operated by the Securities Information Center (“SIC”) as the Commission's designee for maintaining a database concerning missing, lost, counterfeit, and stolen securities that “reporting institutions” (brokers, dealers, registered transfer agents, certain types of banks, and others) report information to and inquire into concerning the status of securities certificates.
See
Exchange Act Rule 17f-1, 17 CFR 240.17f-1. However, transfer agents still maintain their own lists of securities subject to stop transfers. For additional discussion of reporting requirements for lost and stolen securities,
see infra
Sections IV.A.1 and IV.A.2.

26
A “stop transfer” or a “stop order” is a demand made by a registered securityholder to an issuer that a security should not be transferred without the securityholder having an opportunity to assert a claim to the security, typically because the security has been destroyed, lost, or stolen.
See
U.C.C. 8-403; Guttman,
supra
note 6, at § B:11, form 62 (providing a form of stop transfer notice). Under U.C.C. 8-403, an owner's notification that a security certificate has been lost constitutes a demand that the issuer not register transfer. U.C.C. 8-403, cmt. 2 (2005). If, after a stop transfer demand has become effective, a certificated security in registered form is presented to an issuer with a request to register transfer (or an instruction is presented to an issuer with a request to register transfer of an uncertificated security), the issuer must promptly provide a notice with certain information to both the person who made the stop transfer demand and the person seeking to transfer the security.
See
U.C.C. 8-403(b). When a security has been destroyed, lost, stolen, or is otherwise missing, in addition to providing a stop transfer notice, a registered securityholder commonly will seek to replace the security. The process of replacement is described in detail
infra
in Section IV.A.2.

The next step was to prepare the transfer journal entries documenting the cancellation of the old certificate and the issuance of the new certificate.
27

Entering information into the transfer journal was considered the most time consuming part of the transfer process because it was a manual process, requiring gathering discrete pieces of information from different documents in the transfer bundle.
28

Concurrently, the transfer agent would cancel the old certificate and prepare a new certificate from the supply of blank certificates the transfer agent kept on hand.
29

27
This record may also be referred to as a “transfer blotter,” or a “transfer log,” among other terms. As used throughout this release, we refer to it as a “transfer journal.” A transfer journal is a continuous record of the transfer of ownership of securities, including the identity of the party presenting the item for transfer, whether the transfer was completed, and to whom the securities were made available

28
Rockwell Study,
supra
note 19, at 53.

29

Id.
at 53-54, 57. These blank certificates typically would have been ordered by a corporate officer of the issuer and been engraved by a bank note company before being delivered to the transfer agent. The engraving was both aesthetic and a security feature designed to prevent counterfeiting.
Id.
at 100. To avoid trading interruptions caused by running out of certificates, transfer agents had to carefully forecast certificate demand and monitor their inventory of blank certificates.
Id.
Today, it is the understanding of the Commission's staff that some certificates may not be engraved but are produced by transfer agents through “print-on-demand” services.

Prior to sending certificates to a registrar, the transfer agent's staff would perform several audits to verify the accuracy of the transfer journal and new certificate.
30

After completion of these audits, the transfer agent would send the certificates to a registrar, which would perform an additional audit or quality control check primarily focused on verification that the share quantities on the cancelled certificates and newly issued certificates matched and that the new certificates were not issued in a manner resulting in an overissuance.
31

If the registrar was independent of the transfer agent, as historically required by certain stock exchange rules, the transfer agent would remove the window tickets from batches of securities to be sent to the registrar, sequence the batches of old and new certificates separately by security issue, and send the bundles by messenger to the registrar, typically overnight.
32

The registrar would perform the audit described above, countersign the new certificates,
33

and then return them to the transfer agent.
34

The transfer agent would then need to reorganize the certificates and reattach them to their window tickets before sending the new certificates and accompanying documents to the designated receiving party, usually by messenger.
35

30

Id.
at 53. For additional discussion of the registrar function,
see, e.g.,

infra
Section II.C.1

31

Id.
at 53-54. For more information regarding overissuances,
see infra
note 235 and accompanying text.

32

Id.
at 53
.

33
Before the new certificate would be sent out to the designated receiving party, the transfer agent would also countersign the new certificate. Thus, new certificates typically would include the signature of an officer of the issuer and countersignatures by the transfer agent and registrar.

34
Rockwell Study,
supra
note 19, at 53.

35

Id.

In 1977, the concept of the “uncertificated security” was introduced in Article 8 of the UCC.
36

This innovation allowed issuers to issue uncertificated (
i.e.,
certificateless) book-entry securities, the transfer of which is

greatly simplified compared to the transfer of certificated securities because transfer can be effected and protected purchaser status can be achieved by simply registering the transferee's name on the books of the issuer.
37

36

See
U.C.C. 8-102(a)(18) (defining new term uncertificated security as “a security that is not represented by a certificate”); U.C.C. 8-101 (citing “Reasons for 1977 Change,” and introducing the subject of uncertificated securities).
See also
Egon Guttman,
Toward the Uncertificated Security: A Congressional Leap for States to Follow,
37 Wash. & Lee L. Rev. 717, 729-32 (1980).

37
Guttman,
supra
note 6, at § 6:4. Book-entry securities are discussed in more detail throughout the release, including in Sections III.A and VII.A.

C.
Paperwork Crisis of the 1960s

Prior to 1968, individual clearing brokers
38

found it necessary to maintain a relationship with a separate clearing agency for each securities exchange.
39

In the over-the-counter (“OTC”) market,
40

most securities transactions were settled without going through a clearing agency or were cleared by small user-owned clearing corporations. In either instance, brokers had to settle most transactions by physical delivery or receipt of certificates, and had to maintain an office or establish a correspondent relationship with an entity with an office near the clearing agency.

38
For further information on introducing and clearing brokers,
see
Figure 1 and accompanying text,
infra.

39
A clearing agency may be referred to as a clearing corporation or a depository, depending on its functions. Clearing corporations typically compare member transactions, clear, net and settle trades, and provide risk management services, such as trade guarantees. Depositories immobilize securities by holding them on deposit for their participants and effect transfers of interests in those securities through book-entry credits and debits of participants' accounts at the depository. For additional discussion,
see infra
Section III.
See also, e.g.,
Exchange Act Section 3(a)(23)(A), 15 U.S.C. 78c(a)(23)(A) (defining the term “clearing agency”); Clearing Agencies, SEC,
https://www.sec.gov/divisions/marketreg/mrclearing.shtml
(last visited Nov. 25, 2015).
Currently, DTC is both the only CSD in the United States and the only CSD registered with the Commission as a clearing agency.
See
Exchange Act Section 3(a)(23)(A), 15 U.S.C. 78c(a)(23)(A) (requiring CSDs to register with the Commission as a clearing agency).

40
The term “OTC” refers generally to securities that are not listed on a national securities exchange. Many equity securities, corporate bonds, municipal securities, government securities, and certain derivative products are traded in the OTC market. The OTC Bulletin Board (“OTCBB”), which is a facility of FINRA, for example, is an electronic inter-dealer quotation system that displays quotes, last-sale prices, and volume information for many securities that are not listed on a national securities exchange, including domestic, foreign and American depository receipts (ADRs). For additional discussion,
see, e.g.,
Over the Counter Market, SEC,
https://www.sec.gov/divisions/marketreg/mrotc.shtml
(last visited Nov. 20, 2015).

As trading volume increased throughout the 1960s and early 1970s, the burdensome manual process associated with transferring certificated securities created what came to be known as the Paperwork Crisis. It was, at the time, “the most prolonged and severe crisis in the securities industry”
41

since the Great Depression and to this day is one of the largest challenges the U.S. securities markets have faced. The manual settlement processes for certificated securities could not keep up with increasing trading volumes, deliveries to customers of both cash and securities were frequently late, and stock certificates were lost in the rising tide of paper. The substandard performance of transfer agents was “a significant contributing factor” to the Paperwork Crisis.
42

At times during 1967 and 1968, the New York Stock Exchange (“NYSE”) closed early on some days and during a substantial portion of 1968 closed entirely on Wednesdays to attempt to allow the brokerages and other firms to keep up with the volume.
43

41
Unsafe Practices Study,
supra
note 17 at 1.

42

Id.
at 37-8.

43

Id.
at 219, n. 4.
See also
New York Stock Exchange, Inc.,
Crisis in the Securities Industry, A Chronology: 1967-1970
10-16 (1971) (report prepared for the Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce of the U.S. House of Representatives).

In the immediate aftermath of the Paperwork Crisis, more than 100 broker-dealers went bankrupt or were acquired by other firms and “[t]he inability of the securities industry to deal with its serious operational problems . . . contributed greatly to the loss of investor confidence in the efficiency and safety of [the U.S.] capital markets.”
44

However, other consequences of the Paperwork Crisis were deeper and longer lasting. As discussed below, over the next years and decades, Congress, federal and state regulators, and industry participants, including brokers, dealers, banks, and securities exchanges, worked together to drastically reshape critical operational aspects of the securities industry, ultimately leading to major revisions to both federal and state securities laws, and the advent of the modern national market system and National C&S System as they exist today.

44
S. Rep. No. 94-75, at 3-4 (1975) (“Senate Report on Securities Act Amendments of 1975”) (report prepared by the Senate Committee on Banking, Housing, and Urban Affairs on the Securities Act Amendments of 1975). For additional information about the Paperwork Crisis,
see also
Unsafe Practices Study,
supra
note 17, at 13-30; Securities Transaction Settlement Concept Release, Exchange Act Release No. 49405 (Mar. 11, 2004), 69 FR 12922 (Mar. 18, 2004).

1. Industry Responses (1968-1970)

Formation of the Central Certificate Service (1968)

In immediate response to the Paperwork Crisis, regulators and industry participants studied and adopted alternative settlement systems and other potential options which might reduce or eliminate the problems associated with the traditional process for transferring certificated securities. First, in June 1968, the NYSE established the Central Certificate Service (“CCS”) as a division of the Stock Clearing Corporation. Broker-dealers and banks who were members of the NYSE were permitted to deposit their certificated securities with CCS, which would hold the certificates in custody and transfer them into the name of a CCS nominee.
45

The certificated securities deposited by that member would be represented by an appropriate book-entry credit reflected in that member's account at CCS. Because all securities held by CCS were registered in its nominee's name, deliveries of securities between CCS members could be effected by appropriate credits and debits to the members' securities accounts rather than by physical delivery of certificates. In this manner members' accounts would be debited and credited to reflect transactions among them, but the registered owner of the securities—CCS's nominee—would never change. Movement of certificates was thus eliminated, resulting in their “immobilization.”
46

At the time, CCS was the most prominent example of the central securities depository model discussed below in Section II.B.2. In 1970, CCS opened its services to members of the American Stock Exchange,
47

and in 1973 CCS changed its name to the Depository Trust Company (“DTC”).
48

45
Unsafe Practices Study,
supra
note 17, at 184. The registration of securities into the name of a nominee rather than the name of the investor is commonly referred to as “street name” registration, which stands for “Wall Street name.”
See
The Stock Market,
supra
note 8, at 249-251, 307. A nominee is usually a partnership formed exclusively to act as the record holder of securities and thereby to facilitate their transfer.
See
Preliminary Report of the Securities and Exchange Commission on the Practice of Recording the Ownership of Securities in the Records of the Issuer in Other than the Name of the Beneficial Owner of Such Securities 2-15 (Dec. 4, 1975) (“Preliminary Street Name Study”) (providing extensive discussion of the history of the practice of nominees and street name ownership, the scope of the practice, the concept of beneficial ownership and then-current practices). For further discussion of registered ownership and street name ownership (or beneficial ownership),
see infra
Section III.A.
See also infra
note 87, regarding DTC's nominee, Cede & Co.

46
Unsafe Practices Study,
supra
note 17, at 184.

47
The American Stock Exchange, a major New York securities exchange founded in 1908, operated for a century before being acquired by the New York Stock Exchange and ceasing operations as an independent entity in 2008.

48
For further discussion of DTC,
see infra
Sections II.C.3, III.B, IV.C.2.

Rockwell Study (1969)

Around the same time, the American Stock Exchange hired the North American Rockwell Information

Systems Company to study and appraise the securities industry's operations. In 1969, it produced the Rockwell Study. Among other things, the Rockwell Study found that the securities industry's operations were unnecessarily complicated and had not kept pace with technology and recommended that the actual physical movement of securities be reduced.
49

49
Rockwell Study,
supra
note 19.

To address unnecessary complexity, for example, the Rockwell Study focused on whether more efficient clearance and settlement of securities could be achieved by allowing single entities to perform both registrar and transfer agent functions. If so, the entity would need to function in a way that still would preserve the independent audit and shareholder protection function that a registrar historically was viewed, by many participants in the securities industry, as providing.
50

However, at the time when the Commission adopted the majority of its transfer agent rules in 1977 and 1983, independent registrars were still present in the marketplace and indeed were required by the NYSE until 1984.
51

50

See, e.g.,
Rockwell Study,
supra
note 19, at 101.

51
However, at that time, the American Stock Exchange did not require an independent registrar. Rockwell Study,
supra
note 19, at 101. In 1984, the Commission issued an order that approved an NYSE rule change that eliminated the requirement to use a separate transfer agent and registrar, subject to certain conditions. Securities Exchange Act Release No. 21499 (Nov. 19, 1984) (File No. SR-NYSE-84-33).

To reduce the physical movement of securities, the Rockwell Study recommended the establishment of individual transfer agent depositories (“TADs”), which was, at the time, a theoretical proposal that had not been implemented in any market.
52

As proposed, the TAD model would have established a national clearing system together with a decentralized network of individual transfer agent depositories. Securityholders would immobilize their certificated securities by depositing them for custody with the transfer agent for the issuer, effectively making each transfer agent an independent depository for its respective issuers. The transfer agent would maintain the issuer's register, or records of registered shareholders, in electronic form on behalf of the issuer and would settle transactions by debiting and crediting the securities accounts of the respective parties to the transaction on the issuer's register instead of delivering physical certificates.
53

Thus, the account on which transfers took place would also be the issuer's register, which would allow transfers to be effected by simply removing the seller's name from the register (
i.e.,
debiting the seller's securities account) and adding the buyer's name (
i.e.,
crediting the buyer's securities account). The national clearing system proposed under the TAD model would settle all securities transactions, both exchange and OTC trades, by receiving the compared trades
54

directly from the floor of the exchange and receiving OTC trades by messenger or other delivery service.
55

Compared trades would then be transmitted to the appropriate TAD, where, as noted above, the respective accounts of the parties would be credited and debited.
56

As with the CCS system established by the NYSE, the movement of certificates would be eliminated, resulting in their immobilization.

52
Rockwell Study,
supra
note 19, at 3, 9, 14, 31, 39, 43, 77, 98.

53
Rockwell Study,
supra
note 19, at 39-43.

54
Trade comparison, resulting in a compared trade, is the post-execution act of matching the two sides of a trade and confirming the existence of a contract and the trade's exact terms (security, parties, time of trade, number of units, and price), usually by the exchange. It is generally regarded as the first step in the clearance and settlement process.
See
The October 1987 Market Break, A Report by the Division of Market Regulation, 10-2, 10-4 (1988) (“October 1987 Market Break Report”).

55
Unsafe Practices Study,
supra
note 17, at 180.

56

Id.

Arthur Little Study (1969)

From July 1968 to April 1969, Arthur D. Little & Co. conducted a study for the National Association of Securities Dealers (“NASD”) on the problem of settlement fails,
57

titled, “The Multiple Causes of Fails in Stock Clearing in the United States With Particular Emphasis in Over-The-Counter Securities” (“Arthur Little Study”). Among other things, the Arthur Little Study compared the performance of two different types of clearing systems: (a) The “balance order system” used by the New York, American, and National OTC Clearing Corporations, and (b) the “net by net” or “continuous netting system” used by the Pacific Coast Stock Clearing Corporation and the Midwest Stock Exchange Clearing Corporation.
58

The study showed that the balance order system could reduce securities movement by approximately 25 percent and the continuous netting system could result in a 50 percent reduction.
59

The Arthur Little Study, along with the NASD, concluded that the best nationwide clearance and settlement system would be one consisting of interconnected regional clearing centers, each using the net by net (or continuous net settlement) system.
60

57
A settlement fail occurs if a seller does not deliver securities or a buyer does not deliver funds owed by the settlement date.

58

See
Arthur D. Little, Inc., The Multiple Causes of Fails in Stock Clearing in the United States 2414, 21-22 (“Arthur Little Study”). In the balance order system, after comparing the trades completed for the day by each clearing corporation participant, the clearing corporation would net each participant's trades in each security and issue orders for the net sellers to deliver, and the net buyers to receive, specific amounts of securities at the established settlement price directly from other participants. The duty to deliver and the duty to receive would be allocated in such a way that, for each issue traded, the net seller would have to make only one delivery and the net buyer would receive only one delivery, which could result in participants receiving from or delivering to other participants with whom they did not transact that day. In the net by net (or continuous net settlement system), each of the participant's trades in every security were netted for that day, so that each participant would be either a net seller or a net buyer for a particular security, and the duty to deliver the net sales or receive the net purchase would be added to any outstanding deliver or receive obligations of that participant in that security. In addition, all deliveries and receipts would be made to or from the clearing corporation, rather than between other participants, as in the balance order system. Unsafe Practices Study,
supra
note 17, at 167 n.6.

59
Unsafe Practices Study,
supra
note 17, at 167 n.6, 172.

60

Id.
at 174-5.

Formation of the National Clearing Corporation (1969)

In December 1969, the NASD formed the National Clearing Corporation (“NCC”) as the vehicle for developing and implementing a nationwide system of interconnected regional clearinghouses that would form a national OTC clearing system utilizing continuous net settlement. NCC took over the operations of the National Over-the-Counter Clearing Corporation and eventually grew to include OTC transactions in all issues listed on exchanges or included on the NASDAQ system.
61

In 1977, NCC merged with the clearing facilities of both the NYSE and the American Stock Exchange to form the National Securities Clearing Corporation (“NSCC”). The new entity provided clearing, settlement, risk management, and other services, including continuous net settlement of trades and payments, to its participants.

61
NASDAQ stands for National Association of Securities Dealers Automated Quotations and was founded in 1971 by the NASD as an electronic quotation system. It later developed into an electronic stock market, primarily focused on the OTC market and today is registered with the Commission as a national securities exchange under Section 6 of the Exchange Act.
See
Exchange Act Section 6, 15 U.S.C. 78f; Teweles,
supra
note 8, at 4-5, 371-2.

BASIC Study (1970)

In early 1970, around the same time that CCS extended its services to the American Stock Exchange, the Banking and Securities Industry Committee (“BASIC”) was formed by banking and

securities industry participants to find solutions to problems affecting both those industries.
62

After more than a year of review and analysis, BASIC advocated the immobilization of securities certificates through a “Central Securities Depository System for the entire securities industry comprised of regional depositories with an inter-connection between the depositories.”
63

There was also agreement that “the certificate must be eliminated, but that this will take time.”
64

62
BASIC was formed in March 1970 as an outgrowth of a joint committee established between representatives of the securities and banking industries in 1968. BASIC was sponsored by the NYSE and American Stock Exchange, the NASD, and the 11 New York Clearing House banks. Securities Industry Study, H.R. Rep. No. 92-1519, 64 (1972) (“Securities Industry Study”).

63
Unsafe Practices Study,
supra
note 17, at 171.
See also id.
at 184-188.

64

Id.
at 173.

2. Regulatory and Industry Responses (1971-1975)

Unsafe Practices Study (1971)

In 1970, Congress enacted the Securities Investor Protection Act of 1970 which established the Securities Investor Protection Corporation for the broad purpose of affording financial protection for the customers of registered brokers and dealers.
65

The act also directed the Commission to conduct a study into the causes and potential responses to the Paperwork Crisis.
66

In response, the Commission held meetings, a conference, and hearings that included participation by market participants and federal bank regulators to identify and correct operational and financial problems in the securities industry, and then produced the Unsafe Practices Study.
67

The Unsafe Practices Study in part concluded that the inherent inefficiencies and risks associated with the processing of physical securities certificates contributed to the Paperwork Crisis, and it was therefore necessary to reduce the amount of paperwork connected with securities transfers.
68

There was disagreement, however, regarding the best way to accomplish this goal.

65
The Securities Investor Protection Act of 1970, Pub. L. 91-598, 84 Stat. 1636 (Dec. 30, 1970), 15 U.S.C. 78aaa; S. Rep. No. 91-1218 (1970) (Report to Accompany S. 2348).

66
15 U.S.C. 78kkk(g).
See also
Unsafe Practices Study,
supra
note 17, at 11.

67

See
Unsafe Practices Study,
supra
note 17, at 31 (discussing a meeting of major SROs to discuss operational capacity in the securities industry, a conference on the stock certificate, a series of meetings with federal bank regulators regarding the regulation and performance of transfer agents, and hearings concerning restructuring of the securities markets).

68

Id. at 28.

Although it was generally recognized at the time that the complete elimination of certificated securities, known as “dematerialization,” was the best approach to eliminating the risks associated with the processing of physical securities, due to technological and legal impediments, dematerialization was viewed as a “utopian solution” that “would require very extensive legal work and lead time to implement.”
69

Indeed, as noted above, two of the leading proposed securities settlement models designed to reduce the amount of paperwork being discussed at that time—the central depository system represented by CCS and the TAD system—would have resulted in the immobilization of securities rather than dematerialization, and therefore were viewed as “interim measures for efficient operations” that could be taken immediately but would also “serve as building blocks for that ultimate objective” of dematerialization.
70

69

Id.
at 173, 194-95. For example, Delaware did not permit the issuance of “certificateless stock” until Section 158 of the Delaware General Corporation Law was amended in 1983.
See
Welch, Turezyn, and Saunders, Folk on the Delaware General Corporation Law § 158.4 (5th ed. 2013).

70
Unsafe Practices Study,
supra
note 17, at 173.

While there was widespread industry support for the TAD model, there were legal and technological impediments to its immediate implementation.
71

In contrast, the central depository system model had already been established on a limited basis as the CCS established by NYSE, although it had not been implemented on a national basis. The proposal being discussed at the time would use CCS as a starting point and gradually expand it into a New York central securities depository that would link to similar regional depositories of other major financial centers, thus resulting in each depository having an account at the others.
72

This would allow members of one depository to transact with members of, and effect the delivery of securities via, the other depositories.
73

Under this approach, no one depository would be restricted solely to the specific members or securities listed on a particular exchange. Like the TAD, this approach resulted in immobilization rather than dematerialization, but instead of a decentralized network of transfer agents acting as individual depositories for issuers, all paper securities certificates for all issuers would be deposited into one or more central pools and kept in custody by such central depositories. Under this model, the more certificates deposited into a central depository, the more efficient the system would be.

71
Unsafe Practices Study,
supra
note 17, at 173, 183-4, 194-5.

72
Unsafe Practices Study,
supra
note 17, at 184-5.

73

Id.
at 185.

Securities Industry Study (1973)

Following publication of the Commission's Unsafe Practices Study, the Senate Subcommittee on Securities conducted its own 18-month study, which resulted in the Securities Industry Study of 1973 Report (“Securities Industry Study”).
74

The Securities Industry Study found “two primary functional causes” for the Paperwork Crisis: (i) The securities industry had failed to develop a nationwide system for clearance and settlement of securities transactions; and (ii) there existed a lack of uniformity and coordination among the various methods of clearing and settlement in use. The Securities Industry Study's recommendations included the following: (i) That the Securities Exchange Act of 1934 (“Exchange Act”) be amended to “make it clear” that the Commission has the “power and the responsibility to direct the evolution of clearance and settlement methods employed by the national securities associations and by broker-dealers engaged in interstate commerce;” (ii) that legislation should “requir[e] clearing agencies and depositories to register with and report to the SEC and empower the Commission to review and amend the rules of such entities;” (iii) that “the Commission be directed to proceed with dispatch toward elimination of the stock certificate as a means of settlement between broker-dealers. . .”; and (iv) that “the Commission be directed to consider the practice of registering securities in `street name. . . .' ”
75

74
Securities Industry Study,
supra
note 62.

75

Id.
at 40.

1975 Amendments

The Securities Industry Study ultimately led to Congress enacting the Securities Act Amendments of 1975 (“1975 Amendments”),
76

which made sweeping changes to the federal securities laws, implemented many of the principal recommendations from the Securities Industry Study, and established both the national market system
77

and the National C&S System

as they exist today.
78

In particular, in the new statute, Congress directed the Commission to, among other things: (i) “facilitate the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities;”
79

(ii) “end the physical movement of securities certificates in connection with the settlement among brokers and dealers of transactions in securities;”
80

and (iii) establish a system for reporting missing, lost, counterfeit, and stolen securities.
81

76
Securities Acts Amendments of 1975, Pub. L. 94-29, 89 Stat. 97 (1975).
See also
S. Rep. No. 75, at 7 (1975).

77
Section 11A of the Exchange Act directed the Commission to facilitate the establishment of a national market system to link together the multiple individual markets that trade securities and achieve

the objectives of efficient, competitive, fair, and orderly markets, that are in the public interest, and protect investors.
See
Exchange Act Section 11A(a)(2), 15 U.S.C. 78k-1(a)(2).

78

See
Exchange Act Section 17A(a)(2), 15 U.S.C. 78q-1(a)(2). For legislative history concerning Section 17A,
see, e.g.,
S. Rep. No. 75, at 4 (1975); H.R. Rep. No. 229, at 102 (1975).

79
Exchange Act Section 17A(a)(2)(A)(1), 15 U.S.C. 78q-1(a)(2)(A)(1). For legislative history concerning Section 17A,
see supra
note 80.

80
Exchange Act Section 17A(e), 15 U.S.C. 78q-1(e).

81
Exchange Act Section 17(f)(1), 15 U.S.C. 78q(f)(1).

3. Advent of the Modern Clearance and Settlement System (1975-Present)

Early Proliferation of Clearing Agencies

Between 1968 and 1975, in addition to CCS (now known as DTC), several other securities depositories were established, including by the Midwest Stock Exchange, Inc., the Pacific Stock Exchange, and TAD Depository Corporation. The number of shares evidenced by certificates immobilized in depositories increased between 1968 and 1976 from approximately 400 million to over 4 billion.
82

On November 3, 1975, pursuant to its new authority and directives under the 1975 Amendments, the Commission adopted Rule 17Ab2-1(c)(1) and Form CA-1 for the registration of clearing agencies, including central securities depositories.
83

Later in 1975, the Commission granted temporary registrations as clearing agencies to nine entities, that were either clearing corporations or securities depositories.
84

Shortly after NSCC was formed in 1977 through the merger of NCC and the clearing facilities of the NYSE and American Stock Exchange, NSCC also sought, and was granted, temporary registration as a clearing corporation. The Commission also granted temporary registrations as a clearing corporation to the New England Securities Depository Trust Company and the Philadelphia Depository Trust Company in 1976 and 1979, respectively.
85

82
Final Report of the Securities and Exchange Commission on the Practice of Recording the Ownership of Securities in the Records of the Issuer in Other than the Name of the Beneficial Owner of Such Securities 55 (Dec. 3, 1976) (“Final Street Name Study”).

83

See
Exchange Act Rule 17Ab2-1(c)(1), 17 CFR 240.17Ab2-1(c)(1); Exchange Act Form CA-1, 17 CFR 249b.200.

84
The nine entities granted temporary registrations as clearing agencies were: (i) DTC; (ii) Bradford Securities Processing Services; (iii) Stock Clearing Corporation of Philadelphia; (iv) Midwest Securities Trust Company; (v) Options Clearing Corporation; (vi) Midwest Clearing Corporation; (vii) Pacific Securities Depository Trust Company; (viii) Boston Stock Exchange Clearing Corporation; and (ix) TAD Depository.

85
For more information regarding clearing agency registration standards and the history of those standards,
see
Regulation of Clearing Agencies, Exchange Act Release No. 16900 (June 17, 1980), 45 FR 41920 (June 23, 1980).

Advances in Technology (1976-Present)

Over the next several decades, factors such as technology enhancements and regulatory changes led to the increased prevalence of securities depositories, and many of them substantially expanded their services and participant base, especially DTC. Of particular note, in 1975, DTC introduced the Fast Automated Securities Transfer (“FAST”) Program, which was approved by the Commission in 1976.
86

Among other things, it reduced the costs and risks associated with moving street name securities between DTC and participants.

86
Securities Exchange Act Release No. 12353 (Apr. 20, 1976), 41 FR 17823 (Apr. 28, 1976) (File No. SR-DTC-76-3). The FAST Program was introduced in 1976 with ten transfer agents and 400 securities issues.
See
Securities Exchange Act Release No. 55816, 3 n.5 (May 25, 2007), 71 FR 30648 (June 1, 2007) (File No. SR-DTC-2006-16). By the end of 1984, 64 transfer agents held balance certificates valued at $580 billion in 11,442 securities issues.
See
The Depository Trust Company Annual Report 1984, at 16 (“DTC Annual Report”).

Prior to FAST, transferring securities to or from DTC on behalf of its participants required moving certificated securities back and forth between DTC and transfer agents. For securities being deposited with DTC, participants would send certificates to DTC, which would then send the certificates to the transfer agent for re-registration into the name of DTC's partnership nominee, Cede & Co.,
87

before returning the reregistered certificates to DTC. For securities being withdrawn from DTC, DTC would send the certificates registered in the name of Cede & Co. to the transfer agent for re-registration into the name designated by the withdrawing participant, and the transfer agent then returned to DTC both the reregistered certificate (which DTC would then deliver to the withdrawing participant or other entity designated by the participant) and a separate certificate registered in the name of Cede & Co. representing the remainder of DTC's position.
88

87
The name Cede & Co. was drawn from the term “certificate depository” and it was formed as a partnership partly because it was considered simpler to effect a transfer of securities registered in the name of a partnership nominee than in the name of a corporation. For more information about Cede & Co., including regarding the terms of its partnership agreement,
see
S. Rep. No. 93-62 (1974) (“
Disclosure of Corporate Ownership”).

88
Securities Exchange Act Release No. 60196 (June 30, 2009), 74 FR 33496 (July 13, 2009) (File No. SR-DTC-2006-16).

The FAST Program substantially reduced the movement of paper certificates by permitting transfer agents to become custodians for balance certificates registered in the name of Cede & Co. The balance certificate represents on the transfer agent's books the sum total of shares for that issue held by all of DTC's participants.
89

Participants maintain corresponding books representing their securityholder accounts held in street name. Then, when securities are deposited into or withdrawn from DTC, FAST transfer agents adjust the denomination of the balance certificates and electronically confirm the changes with DTC on a daily basis, with the corresponding participant accounts adjusted accordingly by DTC.
90

89

Id.
at 2-3.

90

Id.
For a description of early DTC rules relating to FAST,
see
Securities Exchange Act Release No. 13342 (Mar. 8, 1977) (File No. SR-DTC-76-3); Securities Exchange Act Release No. 14997 (July 26, 1978) (File No. SR-DTC-84-4); Securities Exchange Act Release No. 21401 (Oct. 16, 1984) (File No. SR-DTC-84-8; Securities Exchange Act Release No. 31941 (Mar. 3, 1993) (File No. SR-DTC-92-15); Securities Exchange Act Release No. 46956 (Dec. 6, 2002) (File No. SR-DTC-2002-15).

In 1983, DTC adopted technological enhancements to its Participant Terminal System which allowed participants to automatically match book-entry receive notifications and facilitate redelivery to other participants.
91

DTC also partnered with NSCC to provide an Institutional Delivery System which, through an interface with NSCC's continuous net settlement system (“CNS”), allowed brokers to net the often very large trades made for institutional customers instead of settling trade-for-trade at DTC. In 1996, the Direct Registration System (“DRS”) was implemented, which allowed investors to hold uncertificated securities in registered form directly on the books of the issuer's transfer agent.
92

DRS also allowed investors to transfer the shares to and from a brokerage account through FAST when they choose to sell or transfer the stock.
93

91
For discussion of “Dual Host PTS,”
see
DTC Annual Report,
supra
note 86, at 24-5.

92

See, e.g.,
Securities Exchange Act Release No. 37931 (Nov. 7, 1996), 61 FR 58600 (Nov. 15, 1996) (File No. SR-DTC-96-15) (approving establishment of DRS). Prior to the advent of DRS, unless they were held on a transfer agent's books through a direct stock purchase plan or dividend reinvestment plan, book-entry shares generally could only be held by beneficial owners in street

name through FAST. For more detail on DRS,
see infra
Section IV.C.2.
See also infra
note 144 (dividend reinvestment plan).

93
If the securityholder wants to sell the shares, they are transferred into a broker's account by means of an “Electronic Participant Instruction” through DTC's proprietary communication network, the Profile Modification System (“Profile”), through which the shares are re-registered in the name of Cede & Co.
See
Securities Exchange Act Release No. 60304 (June 30, 2009), 74 FR 33496 (July 13, 2009) (File No. SR-DTC-2009-11). For additional information,
see infra
note 309.

A number of legal and regulatory changes also led to increased participation at securities depositories among banks and broker-dealers. For example, in 1978, the UCC was revised to substitute the concept of delivery of securities specific to the physical delivery of certificated securities with the concept of “transfer” by book-entry on the books of a central depository.
94

As a result, the only book-entry transfers that qualified the transferee for protected purchaser rights under the UCC, as discussed above in Section II.A, were those made on the books of a clearing corporation.

94

See
U.C.C. 8-320.

In 1982 and 1983, the NASD and five stock exchanges, including the NYSE and American Stock Exchange, amended their rules to require their members to use a Commission-registered securities depository for the confirmation, affirmation and settlement of transactions in depository eligible securities if the member provides its customer with delivery-versus-payment privileges.
95

Delivery versus payment privileges allow payments to be made prior to or simultaneously with delivery of the securities. Because customers typically wanted those privileges, the rules had the effect of requiring the use of a registered securities depository to clear and settle institutional trades. As a result, DTC participation soared. In 1995 and 1996, several exchanges adopted uniform depository eligibility requirements, paving the way for an industry standard for depository eligibility determinations.
96

Finally, 1997 revisions to UCC Article 8 modernized securities holding rules by allowing depositories to make eligible additional foreign securities that are held through foreign custodians as well as other financial instruments.
97

New York's adoption of these revisions enabled DTC to use foreign banks as custodians. This increased DTC's ability to maintain custody of securities abroad,
98

which resulted in additional foreign securities and other financial products and instruments becoming depository eligible.
99

95
Securities Exchange Act Release No. 25120 (Nov. 13, 1987), 52 FR 44506 (Nov. 19, 1987) (File No. SR-NYSE-87-04).

96

See, e.g.,
Securities Exchange Act Release No. 35798 (June 1, 1995), 60 FR 30909 (June 12, 1995) (File Nos. SR-Amex-95-17, SR-BSE-95-09, SR-CHX-95-12, SR-NASD-95-24, SR-NYSE-95-19, SR-PSE-95-14, SR-PHLX-95-34); Securities Exchange Act Release No. 36788 (Jan. 26, 1996), 61 FR 3741 (Feb. 1, 1996) (File No. SR-CBOE-95-62).

97

See, e.g.,
U.C.C. 8-102(a)(7), (9), (17), 501, 506.

98

See
The Depository Trust Company 1998 Annual Report,
available at http://www.sechistorical.org/collection/papers/1990/1998_0101_DTCAR_1.pdf.

99
For example, DTC was able to expand eligible issues to include State of Israel bonds and Bankers' Acceptances, short-term debt instruments that are guaranteed by commercial banks.
See
The Depository Trust Company 1997 Annual Report,
available at http://www.sechistorical.org/collection/papers/1990/1997_0101_DTCAR.pdf.

Clearing Agency Consolidation (1980s-present)

Throughout the late 1980s and mid-1990s, DTC merged with or absorbed business from several other depositories, leading to its further growth. First, in April 1987, the Pacific Stock Exchange Board of Governors closed the Pacific Securities Depository Trust Company. Virtually all eligible securities in its custody were moved to DTC. Then, in 1995, DTC and NSCC worked together to absorb the business of Midwest Securities Trust Company and Midwest Clearing Corporation in light of the Chicago Stock Exchange's decision to exit the clearing and settlement business.

By the late 1990s, DTC had become the largest depository in the United States, and NSCC was the largest clearing agency.
100

On June 15, 1999, the Commission issued an order approving DTC's integration with NSCC.
101

The Commission's order authorized DTC and NSCC to restructure their boards of directors so that one board served both corporations.
102

The Depository Trust & Clearing Corporation (“DTCC”), a holding company, was subsequently formed with DTC and NSCC as its subsidiaries.

100
SEC Annual Report, 1997, tbl.3 (Clearing Agencies), at 179 and tbl.9 (Depositories), at 180.

101
Securities Exchange Act Release No. 41800 (Aug. 27, 1999), 64 FR 48694 (Sept. 7, 1999) (File No. SR-NSCC-99-10).

102

Id.

Today, DTC provides depository and book-entry settlement services for substantially all corporate and municipal debt, equity securities, asset-backed securities, and money market instruments available for trading in the United States.
103

It provides custody and asset services for securities valued at over $37 trillion.
104

Approximately 1.4 million settlement-related transactions, with a value of approximately $600 billion, are completed at DTC each day.
105

DTC provides three primary services: (i) Custody services; (ii) asset services, such as dividend and interest payment, reorganizations, and proxy services; and (iii) settlement services (through its interface with NSCC), all of which help facilitate the National C&S System mandated by the 1975 Amendments.

103

See
DTCC: Settlement & Asset Services, available at
http://www.dtcc.com/asset-services.aspx
(last visited December 11, 2015).
See also
DTCC,
Our Capabilities
17 (2014), available at
http://www.dtcc.com/~/media/Files/Downloads/About/DTCC_Capabilities.pdf.

104

Id.

105

Id.

III. Transfer Agent Role in Clearance and Settlement Processes

Because transfer agents operate within the National C&S System, it is important to understand that system, especially concerning the services transfer agents provide by maintaining accurate ownership records on behalf of issuers, facilitating the issuance or cancellation of securities, and distributing dividends within that system. Accordingly, this section provides a general overview of transfer agents' operations and processes within the National C&S System.

A.
Types of Security Ownership

Under the current centralized depository model in the United States, there are two types of securities owners: (a) Registered and (b) beneficial.

1. Registered Securityholders

Under state corporation law, certain securityholder rights commonly accrue only to those registered on the securityholder list and not to persons who may have an ultimate economic interest in the shares but who are not registered securityholders.
106

Registered securityholders (who may also be referred to as “holders of record”)
107

own and hold securities in “registered form.”
108

The UCC provides that an

“issuer . . . may treat the registered owner as the person exclusively entitled to vote, receive notifications, and otherwise exercise all the rights and powers of an owner.”
109

Registered securityholders are listed directly on the records of the issuer or the issuer's transfer agent under their own names.
110

The issuer or its transfer agent may have direct contact with the registered securityholder, keep the records that reflect the ownership interest of the registered securityholder, and provide services directly to the registered securityholder. These services may include issuing, cancelling and transferring shares, making distributions, providing communications and mailings from the issuer, and answering securityholder inquiries. Registered owners can hold their securities either in certificated form or in uncertificated (
i.e.,
book-entry) form, such as uncertificated securities held through DRS.
111

106

See, e.g.,
Del. Code Ann. tit. 8, § 219(c) (right to examine the stockholder list or to vote in person or by proxy at any meeting of stockholders limited to registered securityholders).

107

See
Exchange Act Rule 17Ad-9(a)(3), 17 CFR 240.17Ad-9(a)(3) (referring to “securityholder's registration”); Exchange Act Rule17Ad-9(a)(4), 17 CFR 240.17Ad-9(a)(4) (referring to “registered securityholder”); Exchange Act Rule 12g5-1, 17 CFR 240.12g5-1 (“securities shall be deemed to be `held of record' by each person who is identified as the owner of such securities on records of security holders maintained by or on behalf of the issuer”).

108

See
U.C.C. 8-102(a)(13). (“`Registered form,' as applied to a certificated security, means a form in which: (i) The security certificate specifies a person entitled to the security; and (ii) a transfer of the

security may be registered upon books maintained for that purpose by or on behalf of the issuer, or the security certificate so states.”)

109
U.C.C. 8-207.

110
Because a registered securityholder may be either a natural person or a legal entity, such as a partnership, trust, or corporation, transfer agents generally are familiar with issues that may arise with respect to a registered securityholder's legal status in connection with securities processing transactions.
See
Guttman,
supra
note 6, at § 5:19-5:28 (discussing different “aggregate” and corporate types of registered securityholders).

111
A registered securityholder's options for holding uncertificated securities, through DRS or otherwise, will be subject to the issuer's governing documents and the law of its jurisdiction of organization, as well as to other legal requirements that may apply to the issuer, such as rules of SROs such as DTC and national securities exchanges. For additional discussion of DRS,
see supra
note 92 and
infra
Section IV.

2. Beneficial Owners

The vast majority of securityholders in the U.S. are beneficial owners rather than registered owners.
112

Beneficial owners do not own the securities directly but generally have purchased them through an intermediary, such as a broker or a bank, and determined to hold them in street name through a book-entry account with that intermediary. The intermediary, rather than the transfer agent, maintains and updates the securityholder records, facilitates or executes transfers, and provides other services for the securityholder.
113

112
For more information regarding beneficial ownership,
see, e.g.,
Final Street Name Study,
supra
note 82; Concept Release On The U.S. Proxy System, Exchange Act Release No. 62495 (July 14, 2010), 75 FR 42982 (July 22, 2010) (“Proxy Concept Release”); Holding Your Securities—Get the Facts, SEC,
available at http://www.sec.gov/investor/pubs/holdsec.htm.

113
These transfer and recordkeeping services provided to beneficial owners by intermediaries may be referred to as “sub-transfer agent” services. For more information,
see infra
Section VII.B.

When securities are held in street name, there is a legal distinction between the nominee, who has legal status as the registered securityholder, and the person with economic or beneficial ownership of the security.
114

Securities held in street name are legally owned by and registered in the name of the depository's nominee (most often DTC's nominee, Cede & Co.). The individual investor's broker (or other intermediary) who is a member or participant of the depository will be identified on the books of the depository as having a “securities entitlement”
115

to a pro rata share of the fungible bulk of that security held by the depository.
116

Correspondingly, the individual investor will be identified on the books of the depository participant (his or her broker or other intermediary) as having a securities entitlement to a pro rata share of the securities in which the participant has an interest. At each level, the intermediary will be obligated to provide the entitlement holder with payments and distributions with respect to the financial asset and to exercise rights as directed by the entitlement holder.
117

A securities intermediary satisfies such duties where the intermediary acts as required by any agreement between the intermediary and entitlement holder.
118

The entitlement holder will be permitted to look only to the intermediary for performance of the obligations.
119

Other rights and interests that a beneficial owner has against a securities intermediary's property are created by agreements between the beneficial owner and the securities intermediary.

114
For additional detail concerning aspects of beneficial ownership,
see
Preliminary Street Name Study,
supra
note 45, at 9-11. For an example of reference in a rule of the Commission to “beneficial owner[s],”
see, e.g.,
Exchange Act Rule 13d-3, 17 CFR 240.13d-3 (determination of beneficial owner).

115

See
U.C.C. 8-102(a)(7) (defining “entitlement holder” as a person identified in the records of a securities intermediary as the person having a security entitlement against the securities intermediary); U.C.C 8-102(a)(17) (defining “security entitlement”); U.C.C. 8-102(a)(14) (defining “securities intermediary” as (i) a clearing corporation or (ii) a person, including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity); U.C.C. 8-503(b) (providing that an entitlement holder's property interest with respect to a particular financial asset under [U.C.C. 8-503(a)] is a pro rata property interest in all interests in that financial asset held by the securities intermediary).

116
For securities held in “fungible bulk,” there are no specifically identifiable shares directly owned by DTC participants. Rather, each participant owns a pro rata interest in the aggregate number of shares of a particular issuer held at DTC. In turn, each customer, such as an individual investor of a DTC participant, owns a pro rata interest in the shares in which the DTC participant has an interest.
See
Processing of Tender Offers Within the National Clearance and Settlement System, Exchange Act Release No. 19678, n.5 (Apr. 15, 1983), 48 FR 17603, 17605, n.5 (Apr. 25, 1983) (describing fungible bulk) (“Rule 17Ad-14 Proposing Release”); Office of Investor Education and Advocacy, Investor Bulletin: DTC Chills and Freezes, SEC (May 2012),
available at https://www.sec.gov/investor/alerts/dtcfreezes.pdf
(discussing fungible bulk).

117
U.C.C. 8-505, 506.

118
U.C.C. 8-505(a)(1), 506(1). In the absence of an agreement covering payments and distributions, the securities intermediary must exercise due care in accordance with reasonable commercial standards. In the absence of an agreement with respect to the exercise of rights as directed by the entitlement holder, the securities intermediary either must place the entitlement holder in a position to exercise the rights directly or exercise due care in accordance with reasonable commercial standards to follow the direction of the entitlement holder. U.C.C. 8-505(a)(2), 506(2).

119
U.C.C. 8-503(c) (referring only to “securities intermediar[ies]” with respect to enforcement rights that may be exercised by an entitlement holder).

B. Clearance and Settlement Process

The clearance and settlement process differs depending on the type of security being traded, how the security is held by the investor (
i.e.,
registered or beneficial form), the market or exchange on which it is traded, and the specific entities and institutions involved. Yet, regardless of the specific variables involved, the basic clearance and settlement processes are substantially similar. For illustration purposes, this section describes generally the clearance and settlement process for exchange-based equity trades held in street name.

All securities trades involve a legally binding agreement that sets forth the terms of the trade. In general, the “clearing” of those trades is the process of comparing and confirming the material terms of the agreement: (i) The identity of the buyer and seller; (ii) the identity and quantity of the securities being traded; and (iii) the price, date, and other material details of the trade.
120

Clearing can be “bilateral,” where the parties to the transaction work directly with each other to take the steps necessary to clear the transaction, or “central,” where a third party, such as a clearing agency, undertakes the steps necessary to clear the transaction.
121

120
October 1987 Market Break Report,
supra
note 54, at 10-2 through 10-5; Teweles,
supra
note 8, at 302-3.

121
Prior to the 1980s, central clearing predominantly involved a two-sided matching process conducted mainly by the exchanges, where an exchange collected trade data and passed that information to the clearing agency. After the October 1987 Market Break led to significant numbers of unmatched trades, the Commission recommended that automated systems should be used to facilitate comparison at or near the time of trade execution.
See
Securities and Exchange Commission Recommendations regarding the

October 1987 Market Break, contained in Testimony delivered by David S. Ruder, Chairman, Securities and Exchange Commission, before the Senate Committee on Banking, Housing and Urban Affairs, p. 23 (Feb. 3, 1988). The recommendation was subsequently adopted in stages.
See, e.g.,
New York Stock Exchange, Inc. “Overnight Trade Comparison,” adopted Aug. 14, 1989, Exchange Act Release No. 27096 (Aug. 3, 1989), 54 FR 33299 (Aug. 14, 1989).

Settlement is the fulfillment by the parties to the transaction of their respective obligations for the trade, usually by exchanging funds for the delivery of securities. For equities, settlement generally occurs three business days after the trade date (
i.e.,
“T+3”),
122

although other arrangements may be available by private agreement.
123

Delivery currently is far more likely to be by book-entry than by exchange of physical certificates. As previously discussed, the brokers' certificates in DTC's depository are held in fungible bulk and registered in the name of Cede & Co. to facilitate book-entry transactions involving electronic debits (on the seller's side) and credits (on the buyer's side) to the brokers' securities accounts at the depository rather than the movement of physical securities certificates. Because these shares are held in street name, DTC knows the names of the brokers who are DTC participants (often referred to as clearing brokers) but not the names of brokers who are not DTC participants (often referred to as introducing brokers) or either type of brokers' customers.
124

The brokers track the holdings of their customers who are the ultimate beneficial owners of the securities. For securities held in fungible bulk, rights are passed from record owner Cede & Co. through securities intermediaries to the ultimate beneficial owner.

122

See
Exchange Act Rule 15c6-1, 17 CFR 240.15c6-1. T (or T+0) is the day the trade is executed. The first business day following the trade date is T+1, and so on. Thus, assuming there are no non-business days in the week, a trade that is executed on a Monday (T or T+0) would settle on Thursday (T+3). A trade executed on Friday would settle on the following Wednesday (Saturday and Sunday are not business days, so T+1 is Monday, T+2 is Tuesday, etc.).

123

See, e.g.,
NYSE Rule 64 (2009).

124
For further information on introducing and clearing brokers,
see
fig.1 and accompanying text,
infra.

Equity trades that are cleared and settled through DTC's facilities are generally processed in NSCC's CNS system, with final settlement on the third business day after the trade is executed. NSCC has approximately 1,000 members, made up of brokers, dealers, banks, and other intermediaries. Using CNS, NSCC nets multilaterally all of the clearing participants' purchases and sales in each security to one security position per participant per day in order to arrive at a daily net settlement obligation for each participant. NSCC then makes deliveries only on the remaining net positions through settlement accounts that the participants hold with DTC (for securities) and the Federal Reserve System (for cash).
125

Because NSCC interposes itself between trading brokers on each trade and guarantees the settlement as each broker's counterparty,
126

each broker's settlement is with NSCC and DTC, not with the other clearing participant, which reduces the brokers' exposure to risk of default by other brokers (
i.e.,
counterparty risk). A broker can either settle each day or carry open commitments forward to net against the next business day's settlement (hence the continuous nature of CNS).
127

On the cash side of the trade, all money owed to or from a particular DTC participant will be netted down each day by NSCC to a single dollar amount, which reduces the amount of money firms need to have on hand to settle their obligations.

125
NSCC Rule 11, 68-74 (May 4, 2015),
available at

www.NSCC.com
(“Continuous Net Settlement”). The Federal Reserve System refers to the central bank of the United States, and is commonly referred to as the “Federal Reserve.” The Federal Reserve Board is the governing body for the Federal Reserve System.
See generally,
Federal Reserve,
http://www.federalreserve.gov/aboutthefed/default.htm.

126
NSCC Rule 11,68-74 (May 4, 2015),
available at www.dtcc.com;

see also
Becker and Etter,
International Clearance and Settlement,
14 Brook. J. Int'l L. 275, note 15 (1988); David M. Weiss, After the Trade is Made—Processing Securities Transactions 245-49 (2006) (“After the Trade is Made”).

127

See
October 1987 Market Break Report,
supra
note 54, at ch. 10, 1-12; Teweles,
supra
note 8, at 312-26.

The goal of netting is to minimize the number and value of transactions required for buyers and sellers (or the firms acting on their behalf) to settle their transactions. For example, if a broker purchases 100 shares of XYZ stock for a customer and sold 50 shares of XYZ stock for another customer, at the end of the day the broker's securities account at DTC would be credited with 50 shares of XYZ (the net difference between buying 100 shares and selling 50 shares). If the broker paid $25 per share to buy the 100 shares of XYZ and sold the 50 shares for the same price on the same day, at the end of the day the broker's cash account would be debited $1,250. The vast majority of equity trades handled by DTC clear and settle through NSCC's CNS, which, on average, results in an reduction of the volume of settlement transactions by approximately 98%.
128

As a result, on average, 99% of all trade obligations that occur in U.S. equity markets do not require the exchange of money.
129

128

See
DTCC's overview of NSCC, stating that NSCC's netting system results in “reducing the value of securities and payments that need to be exchanged by an average of 98% each day,”
available at http://www.dtcc.com/about/businesses-and-subsidiaries/nscc.

129
Virginia B. Morris and Stuart Z. Goldstein, Guide to Clearance and Settlement: An Introduction to DTCC, 8 (2009).

For illustration purposes only, Figure 1 below depicts one possible example of how an equity trade effected on a national securities exchange is cleared and settled, beginning with the buyer conveying an order to an executing broker. If the executing broker is a member of NSCC it may be referred to as a “clearing broker.” If it is not a member of NSCC, it may be referred to as an “introducing broker” or “correspondent broker,” depending on whether the broker carries and is responsible for the customer's account. Where the executing broker is a member of NSCC (
i.e.,
a clearing broker) it routes the order for execution to a national securities exchange. Where the executing broker is not a member of NSCC (
i.e.,
an introducing or correspondent broker) it routes the order to a clearing broker who will then route the order for execution to a national securities exchange. The national securities exchange matches the order with a corresponding sell order and then sends matched trade data to NSCC. NSCC nets these orders using its CNS system. If the securities are held in street name, there will be no change to the master securityholder file
130

maintained by the transfer agent and settlement will be effected by crediting and debiting the securities entitlement accounts of the buyer and seller, respectively. Thus, final settlement of the securities leg of the transaction will involve the following sequential steps: (i) The DTC securities account of the seller's clearing broker will be debited with the securities being purchased; (ii) NSCC's securities account at DTC will be credited with the securities purchased; (iii) the DTC securities account of the buyer's clearing broker will also be credited; and (iv) each broker will credit or debit their respective customers' securities accounts held with the broker. On the cash side, final settlement will involve the following sequential steps: (i) The Federal Reserve bank account of the buyer's clearing broker will be debited for the sale price of the securities; (ii) DTC's Federal Reserve bank account will credited for the sale price of the

securities; (iii) DTC will transfer this cash to the Federal Reserve bank account of the seller's Clearing Broker; and (iv) each broker will credit or debit its respective customers' cash accounts held with the broker.

130

See infra
Sections IV.A.3 and V.A. for additional description and discussion of transfer agents' role and responsibilities with respect to the master securityholder file.

EP31DE15.009

IV. Transfer Agent Regulation: Origins and Current Status

This section provides a general overview of the federal and state law and other requirements, such as those of self-regulatory organizations (“SRO”), that apply to transfer agents and their activities. We begin with a review and discussion of each of the Commission's current transfer agent rules, then briefly discuss banking regulations and taxation-related requirements that may apply to transfer agents.
131

We then review the requirements of SROs that apply to transfer agents, particularly DTC and NYSE rules. Finally, we discuss the regulation of transfer agents under state law. Later, in Sections V, VI, and VII of the release, we discuss issues and concerns related to modern transfer agent activities and seek comment on the best approach to addressing them.

131

See
Section IV.B,
supra,
for discussion of bank transfer agents. Transfer agents that are not banks may be referred to as non-bank transfer agents.

A. Federal Transfer Agent Rules

Prior to 1975, most transfer agents were banks or trusts.
132

There was no federal regulation of transfer agents and transfer agents were subject to state law, generally pursuant to UCC

provisions.
133

Transfer agents were also subject to stock exchange requirements regarding securities processing. For example, in 1869, the NYSE adopted a requirement that all shares of NYSE-listed companies must be registered at a bank or other agency.
134

As another example, the “Chambers Street Rule” of the NYSE required transfer agents to maintain offices for transfer south of Chambers Street in New York City.
135

The American Stock Exchange had similar requirements in its Rule 891.
136

132
Unsafe Practices Study,
supra
note 17, at 38.

133
For a discussion of state law requirements impacting transfer agent processes,
see supra
Sections II and III.

134

See
Facts and Figures, Historical, Chronology of New York Stock Exchange (1792-1929),
available at

http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=2169&category=4
.

135

See
Jerry W. Markham, A Financial History of the United States: From Christopher Columbus to the Robber Barons (1492-1900) 288 (2002).

136

See, e.g.,
Securities Exchange Act Release No. 37562 (Apr. 25, 1996), 61 FR 43283 (Aug. 13, 1996) (File No. SR-DTC-96-09) (mentioning American Stock Exchange Rule 891 requirements). These requirements were criticized by non-New York banks providing transfer agent services as many banks viewed providing transfer agent services as an important part of providing the full-service relationship it was believed was desired by corporate borrower clients.
See
Charles Welles,
The Great Paper Fight: Who Will Control the Machinery?,
Institutional Investor (May 1973), Hearings on S.2058 before S. Comm. on Banking, Hous. and Urban Affairs, Subcomm. on Securities, 93rd Cong. 334 (1973). The NYSE amended the Chambers Street Rule in 1971, permitting out-of-town transfer agents to act as listed company transfer agents, subject to certain conditions including that they maintain a “drop” office in lower Manhattan. In 2005, the Commission issued an order that approved an NYSE rule change that eliminated the Chambers Street Rule. Securities Exchange Act Release No. 51973 (July 5, 2005), 70 FR 40094 (July 12, 2015) (File No. SR-NYSE-2004-62).

The 1975 Amendments gave the Commission regulatory authority for the first time over transfer agents.
137

Section 3(a)(25) of the Exchange Act defines a “transfer agent” as any person who engages on behalf of an issuer of securities or on behalf of itself as an issuer of securities in:

137

See
S. Rep. No. 75, 57-58 (1975) (to accompany report S. 249). S. 249 is the principal legislative history of the Securities Acts Amendments of 1975 of which the transfer agent legislation was a part.

(A) Countersigning such securities upon issuance;

(B) monitoring the issuance of such securities with a view to preventing unauthorized issuance (
i.e.,
a registrar);
138

138
For additional information regarding “registrars,”
see supra
note 51 and Sections II.B and II.C.1 and
infra
notes 298, 299, 320, 341 and Section IV.C.1.

(C) registering the transfer of such securities;

(D) exchanging or converting such securities; or

(E) transferring record ownership of securities by bookkeeping entry without the physical issuance of securities certificates.
139

139
Exchange Act Section 3(a)(25), 15 U.S.C. 78c(a)(25). Note that any insurance company or separate account which performs such functions solely with respect to variable annuity contracts or variable life policies which it issues or any registered clearing agency which performs such functions solely with respect to options contracts which it issues is excluded from the definition of “transfer agent” under the Exchange Act.
Id.

Section 17A(c)(1) of the Exchange Act requires any person performing any of these functions with respect to any security registered pursuant to Section 12 of the Exchange Act or with respect to any security which would be required to be registered except for the exemption contained in subsection (g)(2)(B) or (g)(2)(G) of Section 12 (“Qualifying Security”) to register with the Commission or other Appropriate Regulatory Agency (“ARA”).
140

With respect to any transfer agent so registered, Section 17A(d)(1) of the Exchange Act authorizes the Commission to prescribe such rules and regulations as may be necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.
141

Once a transfer agent is registered, either compulsorily or voluntarily,
142

the Commission “is empowered with broad rulemaking authority over
all
aspects of a transfer agent's activities as a transfer agent.”
143

140
Exchange Act Section 17A(c)(1), 15 U.S.C. 78q-1(c)(1). Additionally,
see infra
Section IV.B for discussion of bank ARAs.

141
As noted in the Committee Report which accompanied Section 17A(d)(1) of S. 249, the precursor to Section 17A(d)(1) of the 1975 Amendments, Congress intended to “. . . empower[ ] [the Commission] with broad rulemaking authority over all aspects of a transfer agents' activities as transfer agent.” Senate Report on Securities Act Amendments of 1975,
supra
note 44, at 57.

142
There is no statutory or other prohibition on voluntary registration as a transfer agent, although it is relatively uncommon.
See generally,
Exchange Act Section 17A(c), 15 U.S.C. 78q-1(c).
See also infra
Section VII.B.1, discussing the practice of voluntary registration as transfer agents by certain third party administrators (“TPA”).

143

See
Senate Report on Securities Act Amendments of 1975,
supra
note 44. The Committee Report elaborated that it expected the Commission's regulations “to include, among other matters, minimum standards of performance, the prompt and accurate processing of securities transactions, and operational compatibility of and cooperation by transfer agents with other facilities and participants in the securities handling process.”
Id.

Beginning in the late 1970s and early 1980s, the Commission adopted a series of transfer agent rules designed to regulate the basic recordkeeping and processing functions performed by transfer agents. The rules primarily related to routine transfers of certificated equity and debt securities and generally covered three areas: (i) Registration and annual reporting requirements; (ii) timing and certain notice and reporting requirements related to securities transaction processing (referred to as “turnaround rules”); and (iii) recordkeeping and record retention rules and safeguarding requirements for securities and funds.

As discussed more fully below, processing obligations related to mutual funds, dividend reinvestment plans (“DRIPs”),
144

and limited partnerships were expressly exempted from most of the processing and recordkeeping rules because at the time, the Commission believed that the activities required for the redemption of investment company shares and shares purchased or sold through a DRIP were significantly different from those required for the transfer of stocks and bonds.
145

Although the Commission has made modest revisions to the initial transfer agent rules and has added several new rules since the adoption of those earlier rules, the core registration, processing, recordkeeping, and safeguarding rules remain substantially unchanged, and the exemptions for mutual funds, DRIPs, and limited partnerships have not been revisited.

144
DRIPs allow investors who already own an issuer's stock to reinvest their cash dividends by purchasing additional shares or fractional shares directly from the issuer or the issuer's transfer agent, without going through a broker. Most DRIPs require the investor to become a registered securityholder, as opposed to a street name holder.

145

See
Regulation of Transfer Agents, Exchange Act Release No. 13636 (June 16, 1977), 42 FR 32404, 32408 (June 24, 1977) (“Rule 17Ad-1 through 17Ad-7 Adopting Release”).

1. Registration and Annual Reporting Requirements

The rules setting forth the registration, annual reporting, and withdrawal requirements for transfer agents are found in Exchange Act Rules 17Ac2-1 (application for registration), 17Ac2-2 (annual reporting), and 17Ac3-1 (withdrawal from registration).

Rule 17Ac2-1 and Form TA-1

Before a transfer agent may perform any of the statutory transfer agent functions defined in Section 3(a)(25) of the Exchange Act for a Qualifying Security, it must apply for registration by submitting Form TA-1 (Uniform Form of Registration as a Transfer Agent and for Amendment to Registration) to its ARA and its registration as a transfer agent with its ARA must have become effective.
146

Form TA-1 requires a

transfer agent seeking to register to disclose information including the following: (a) General identification information
147

about the transfer agent and whether it is part of any service company arrangements;
148

(b) the identity of its direct and indirect owners and other control persons;
149

and (c) whether it or any of its control affiliates has been subject to investment-related criminal prosecutions, regulatory actions, or civil actions.
150

The registration automatically becomes effective 30 days after the Form TA-1 is filed, unless the ARA takes affirmative action to accelerate, deny, or postpone registration in accordance with the provisions of Section 17A(c) of the Exchange Act.
151

A registrant must amend its Form TA-1 within 60 days following the date on which information reported therein becomes inaccurate, incomplete, or misleading.
152

For transfer agents for whom the Commission is their ARA, they must file Form TA-1 and amendments thereto electronically on the Commission's EDGAR system and each answer provided by the transfer agent is required to be formatted as an XML data tag.
153

146
Exchange Act Section 17A(c)(1), 15 U.S.C. 78q-1(c)(1); 17 CFR 240.17Ac2-1; SEC Form TA-1, 17 CFR 249b.100. Once registration has become

effective, a transfer agent may be subject to censure, suspension, limitation, or revocation of its registration if the transfer agent or any person associated with the transfer agent fails to obey Commission rules or violates certain of the securities laws. Exchange Act Section 17A(c)(3), 15 U.S.C. 78q-1(c)(3); Exchange Act Section 17A(c)(4)(C), 15 U.S.C. 78q-1(c)(4)(C).

147
SEC Form TA-1, Items 1-7 (concerning basic identification information (such as name, contact person, phone number, address and email address), identification numbers including the transfer agent's file number and FINS number, and information concerning service company arrangements in which the registrant may be involved). The file number for a transfer agent registered with the Commission would be the file number assigned by the Commission. A FINS number, short for Financial Industry Number Standard, is a unique five digit number issued by DTC and used by the securities industry as a means of identifying financial institutions in automated data processing systems.
See
Notice of Assumption or Termination of Transfer Agent Services, Exchange Act Release No. 35039 n.12 (Dec. 1, 1994), 59 FR 63656 (Dec. 8, 1994) (“Adopting Release for Rule 17Ad-16”);
See
Becoming a DTC-Eligible Agent, DTCC,
http://www.dtcc.com/asset-services/agent-services/dtc-eligible-agent
(information provided by DTCC, the parent company of DTC, including a form for authorizing DTC to issue a FINS number).

148
For definition of “service company,”
see infra
note 241 and accompanying text.

149
SEC Form TA-1, Items 8 and 9, 17 CFR 249b.100.

150
SEC Form TA-1, Item 10, 17 CFR 249b.100.

151
Exchange Act Rule 17Ac2-1(a), 17 CFR 240.17Ac2-1(a); SEC Form TA-1, General Instruction G, 17 CFR 249b.100. Note that the 30-day time period in Exchange Act Rule 17Ac2-1(a), 17 CFR 240.17Ac2-1(a), is shorter than the Exchange Act's 45-day time period for applications to be effective. Exchange Act Section 17A(c)(2), 15 U.S.C. 78q-1(c)(2).

152
Exchange Act Rule 17Ac2-1(c), 17 CFR 240.17Ac2-1(c); SEC Form TA-1, General Instruction H, 17 CFR 249b.100.

153
Exchange Act Rule 17Ac2-1(d), 17 CFR 240.17Ac2-1(d); Electronic Filing of Transfer Agent Forms, Exchange Act Release No. 54864, 5 (Dec. 4, 2006), 71 FR 74698 (Dec. 12, 2006) (“Electronic Filing of Transfer Agent Forms Release”).

Rule 17Ac2-2 and Form TA-2

All registered transfer agents, regardless of their ARA, must file an annual report with the Commission using Form TA-2 (Form for Reporting Activities of Transfer Agents Registered Pursuant to Section 17A of the Securities Exchange Act of 1934).
154

Form TA-2 covers a calendar year reporting period that ends on December 31
155

and must be filed by March 31 of the year following the end of the reporting period. Form TA-2 must be filed electronically on the Commission's EDGAR system and each answer provided by the transfer agent is required to be formatted as an XML data tag.
156

154
Exchange Act Rule 17Ac2-2(a), 17 CFR 240.17Ac2-2(a); SEC Form TA-2, 17 CFR 249b.102 (Form for Reporting Activities of Transfer Agents Registered Pursuant to Section 17A of the Securities Exchange Act of 1934).

155
Exchange Act Rule 17Ac-2-2(b), 17 CFR 240.17Ac2-2(b).

156
Exchange Act Rule 17Ac2-2(c), 17 CFR 240.17Ac2-2(c); Electronic Filing of Transfer Agent Forms Release,
supra
note 153, at 5.

Form TA-2 requires transfer agents to identify and report on the use of service companies, or other transfer agents, in connection with their transfer agent activities. It also requires transfer agents to provide annual data regarding the transfer agent's compliance with the turnaround rules. Additionally, the form requires transfer agents to provide the Commission with updated information about their business activities, including accounts administered, items received,
157

turnaround performance, total amounts of funds distributed, and lost securityholder accounts.
158

157

See generally,
Section IV.A.2 for discussion of “item.”

158

See generally,
SEC Form TA-2, 17 CFR 249b.102.

Rule 17Ac2-2 provides exemptions from completing certain sections of Form TA-2 for small transfer agents and for transfer agents that outsource their work completely to service companies. If a registered transfer agent received fewer than 1,000 items for transfer in the reporting period and did not maintain master securityholder files for more than 1,000 individual securityholder accounts as of December 31 of the reporting period, it is only required to complete Questions 1 through 5, 11, and the signature section of Form TA-2.
159

A named transfer agent that engaged a service company to perform all of its transfer agent functions during the reporting period is only required to complete Questions 1 through 3 and the signature section of Form TA-2.
160

159
Exchange Act Rule 17Ac2-2(a)(1), 17 CFR 240.17Ac2-2(a)(1).

160
Exchange Act Rule 17 Ac2-2(a)(2), 17 CFR 240.17Ac2-2(a)(2).

The Commission, other ARAs and members of the public (including issuers and investors) use information on Forms TA-1 and TA-2. The Commission's EDGAR database provides a means through which information on these forms can be searched and retrieved. The Commission uses the information on Form TA-1 to review an entity's application for registration as a transfer agent and to maintain current information about transfer agents. The Commission uses information on Form TA-2, as well as information on Form TA-1 and amendments thereto, for several purposes, including: (i) To determine the nature of the business conducted by a transfer agent, (ii) to monitor transfer agent activities and to evaluate compliance with Commission rules, and (iii) to inform Commission transfer agent policymaking.
161

In connection with monitoring of and checking regulatory compliance by transfer agents, the Commission's examination and inspections program may use the information on Forms TA-1 and TA-2 to plan their site visits in connection with an exam. The examination staff of the Commission may also use the information on Forms TA-1 and TA-2 to identify particular issues to focus on during an exam or to analyze industry trends and to provide basic census information concerning registered transfer agents. In addition, Form TA-1 and TA-2 data provide the Commission with information about securities processing issues that may need to be addressed by Commission rulemaking. Form TA-1 and TA-2 data is also used by the Commission to assist it in evaluating the costs and benefits of potential rulemaking.

161

See
Adoption of Revised Transfer Agent Forms and Related Rules, Exchange Act Release No. 23084 (Mar. 27, 1986), 51 FR 12124 (Apr. 9, 1986) (“Revised Transfer Agent Forms and Related Rules”); Electronic Filing of Transfer Agent Forms Release,
supra
note 153, at 5.

Rule 17Ac3-1 and Form TA-W

Pursuant to Rule 17Ac3-1, a registered transfer agent may voluntarily withdraw its registration by filing Form TA-W (Notice of Withdrawal from Registration as a Transfer Agent) with

the relevant ARA, disclosing, among other things, any actual or potential claims or legal proceedings against the transfer agent, its reasons for withdrawing or ceasing to function as a transfer agent, and whether one or more successor transfer agents will take over the maintenance of its transfer books.
162

Withdrawal from registration automatically becomes effective 60 days after filing Form TA-W, unless the Commission or applicable ARA finds it in the public interest to take affirmative action to accelerate, deny, or postpone the request.
163

162
Exchange Act Rule 17 Ac3-1, 17 CFR 240.17Ac3-1; Exchange Act Section 17A(c)(3)(a), 15 U.S.C. 78q-1(c)(3)(A); SEC Form TA-W, 17 CFR 249b.101 (Notice of Withdrawal from Registration as a Transfer Agent).

163
Exchange Act Rule 17Ac3-1(b), 17 CFR 240.17Ac3-1(b).

2. Processing, Reporting, Recordkeeping, and Exemptions: Rules 17Ad-1 Through 17Ad-7 and Rules 17f-1 and 17f-2

On June 16, 1977, the Commission adopted Rules 17Ad-1 through 17Ad-7 as a set of performance standards for transfer agents.
164

These turnaround and processing rules were “designed to protect investors . . . and to contribute to the establishment of the national system for the prompt and accurate clearance and settlement of transactions in securities by,” among other things, “assuring that the transfer agent community performs its functions in a prompt, accurate and more predictable manner.” The rules primarily focused on establishing minimum performance and recordkeeping standards for routine transfers of certificated equity and debt securities and the prompt and accurate cancellation and issuance of certificated securities.
165

The rules were also designed to provide an early warning system to alert issuers and regulatory agencies when the performance standards are not being met, prohibit under-performing transfer agents from expanding their operations, require transfer agents to respond promptly to certain written inquiries regarding items presented for transfer, and require the maintenance and preservation of certain records necessary for regulatory authorities to monitor and enforce transfer agent compliance with the turnaround rules.
166

The specific processing, reporting, and retention requirements were metrics-based and, at the time, considered to be those necessary to ensure that transfer agents adequately performed their functions and that the Commission and other ARAs would be able to monitor transfer agents' compliance with the turnaround rules.
167

Further, the new transfer agent rules established by the Commission were designed not only to ensure that transfer agents meet prescribed performance standards for their core recordkeeping and transfer activities, but to ensure they would be regulated appropriately in the context of the National C&S System and that any problems meeting these performance standards would not negatively impact individual investors or the clearance and settlement system as a whole.
168

Each rule is discussed in detail below.

164
Exchange Act Rules 17Ad1-7, 17 CFR 240.17Ad-1-7.

165

See
Rule 17Ad-1 through 17Ad-7 Adopting Release,
supra
note 145, at 32404.

166

Id. See also
Exchange Act Rules 17Ad-1-7, 17 CFR 240.17Ad-1-7.

167
Rule 17Ad-1 through 17Ad-7 Adopting Release,
supra
note 145, at 32410.

168
Rule 17Ad-1 through 17Ad-7 Adopting Release,
supra
note 145, at 32407 (noting the importance of avoiding impediments to “the Commission's efforts to provide necessary or appropriate regulations for transfer agents in the broader context of the establishment of a national system for the prompt and accurate clearance and settlement of securities transactions.”).

Rule 17Ad-1
defines the relevant terms used throughout the rules. One of the most important is “item,” which is defined as the certificates of a single issue of securities presented under one ticket,
169

and is the basic unit for which the turnaround and other processing requirements apply.
170

The other key definitions in Rule 17Ad-1 are “transfer” and “turnaround.” “Transfer” of a certificated security (where an outside registrar is not involved) is the completion of all acts necessary to cancel the certificate, issue a new one, and make it available to the presentor, and “turnaround” for an item (where an outside registrar is not involved) is completed when transfer is accomplished.
171

169
Exchange Act Rule 17Ad-1(a)(1), 17 CFR 240.17Ad-1(a)(1) (definition of “item”).
See supra
note 17 (describing tickets).

170
Rule 17Ad-1 through 17Ad- Adopting Release,
supra
note 145, at 32404.

171
Exchange Act Rule 17Ad-1(d), (e), 17 CFR 240.17Ad-1(d), (e).

Rule 17Ad-2
sets the basic performance standards for transfer agents.
172

Transfer agents who are not acting as a registrar must turnaround within three business days of receipt at least 90% of all “routine items”
173

received by the transfer agent during any month.
174

Non-routine items must receive “diligent and continuous attention” and must be “turned around as soon as possible.”
175

Routine items that are not turned around within three business days nevertheless must be “turned around promptly.”
176

Registered transfer agents acting as a registrar must “process” at least 90% of all items received during any given month no later than noon of the next business day for any item received after noon and no later than the opening of business on the next business day for those items received at or before noon.
177

If a transfer agent fails to meet the performance standards for turnaround set forth in Rule 17Ad-2 with respect to any month, it must notify the Commission and the transfer agent's ARA if it is not the Commission within 10 business days of the end of the month, provide certain turnaround data regarding specific numbers and percentages of items, explain the reasons for the failure, identify what steps have been taken to prevent future failures, and provide certain data regarding routine items that have not been turned around and have been in the transfer agent's possession for “more than four business days.”
178

Similar notification requirements apply where a transfer agent acting as a registrar fails to meet the processing performance standards.
179

172
As discussed in more detail
infra
in Section IV.C.1, the NYSE imposes a 48 hour turnaround requirement.

173
Routine items are defined by Rule 17Ad-1(i), 17 CFR 240.17Ad-1(i). They are generally defined in the negative such that most items are considered routine so long as they do not require the requisition of a new certificate that the transfer agent does not have on hand, are not subject to a stop order, adverse claim, or other restriction on transfer, do not require certain additional documentation or review to complete the transfer, do not involve a transfer in connection with certain types of corporate actions, do not include a security of an issue which within the previous 15 business days was offered to the public pursuant to a Securities Act registration statement in an offering of a non-continuing nature, and do not include a warrant, right or convertible security either presented for transfer within five business days before rights expire or change or presented for exercise or conversion.

174
Exchange Act Rule 17Ad-2(a), 17 CFR 240.17Ad-2(a). We note that with automation, these standards are substantially easier to meet than when the rule was adopted in 1977.

175
Exchange Act Rule 17Ad-2(e), 17 CFR 240.17Ad-2(e).

176

Id.

177
Exchange Act Rule 17Ad-2(e), 17 CFR 240.17Ad-2(b).

178
Exchange Act Rule 17Ad-2(c), 17 CFR 240.17Ad-2(c).

179
Exchange Act Rule 17Ad-2(d), 17 CFR 240.17Ad-2(d).

Rule 17Ad-3
provides limitations on the expansion of transfer agent activities if a transfer agent is unable to meet the minimum performance standards established by Rule 17Ad-2. Any transfer agent that is required pursuant to Rule 17Ad-2 to provide notice for failure to meet the performance standards for three consecutive months is prohibited from taking on new issues or providing new services for existing

issues.
180

Further, if a transfer agent fails to turnaround or process at least 75% of all routine items, it must notify the chief executive officer of each issuer for which the transfer agent acts.
181

Thus, Rules 17Ad-2 and 17Ad-3, taken together, provide an early warning system to alert issuers, the Commission and other ARAs of untimely performance and potential problems.

180
Exchange Act Rule 17Ad-3(a), 17 CFR 240.17Ad-3(a). Such limitations on the business of the transfer agent continue until there has been a period of three successive months in which no notices have been required.

181
Exchange Act Rule 17Ad-3(b), 17 CFR 240.17Ad-3(b).

Rule 17Ad-4
provides certain exemptions from the turnaround, processing, and recordkeeping rules.
182

Rule 17Ad-4(a) creates an exemption from Rules 17Ad-2, 17Ad-3, and 17Ad-6(a)(1)-(7) for the processing of interests in limited partnerships, DRIPs, and redeemable securities issued by investment companies registered under Section 8 of the Investment Company Act of 1940 (“Investment Company Act”), which are also known as open-end funds.
183

In 1977, the rationale for providing the exemption for interests in limited partnerships was “the low volume of transfers of such interests,”
184

while the rationale for providing the exemption for DRIPs was the Commission's view at the time that transfer agents' processing for DRIPs “require[s] procedures significantly different from the procedures required to transfer ownership of stocks and bonds.”
185

182
Exchange Act Rule 17Ad-4, 17 CFR 240.17Ad-4.

183
Investment Company Act Section 8, 15 U.S.C. 80a-8.
See generally,
Section VII.C for discussion of transfer agents for invest

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-32755. Public record. Not legal advice.