The handling of shareholder funds by transfer agents (“TAs”) has long been an examination priority of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”). Recently, OCIE issued a Risk Alert (the “Alert”) highlighting common compliance issues and best practices for TAs. For investment advisers (“Advisers”) utilizing TA services, a review of the Alert can provide important insight into TA compliance risks.
Two rules form the basis of TA obligations with respect to safeguarding client assets. The Safeguarding Rule requires any registered TA in possession of shareholder funds or securities to ensure, in light of all the facts and circumstances, that the funds or securities are held in safekeeping and protected from misuse. The Lost Securityholder/Unresponsive Payee Rule requires that TAs who maintain an official list of individual securityholder accounts search for lost securityholders and send notices to unresponsive payees. With respect to these rules, OCIE has highlighted the following as common regulatory deficiencies:
To address these common regulatory deficiencies, OCIE encouraged TAs to consider implementing the following best practices:
Advisers rely on TAs to perform critical services. While the Alert highlights serious compliance deficiencies that are common among TAs, it also provides a roadmap for evaluating the compliance practices of TAs. An Adviser can work with legal counsel to further reduce the risk associated with TA services, regardless of whether the Adviser’s relationship with its TA is new or ongoing.
If you have any questions about the Alert or the regulation of TAs generally, please feel free to contact us.
John I. Sanders and Ali Fenno are associates based in the firm’s Winston-Salem office.