SEC Calls for More Vigilance from Transfer Agents - What Does This Mean for Issuers?

United States | January 19, 2015

In an effort to reduce the incidence of stock fraud, the SEC recently announced it is in the early stages of drafting new rules that would potentially increase the role of transfer agents in preventing securities scams. These new rules can help curb the occurrence of fraud by being more proactive in setting legal opinions and scrutinizing shareholder requests.

Role of the Transfer Agent

Transfer agents serve as a line of defense, described by the SEC as gatekeepers who assist shareholders in lifting certain stock restrictions in order for those shareholders to transfer shares. 

The two most prevalent of these restrictions are:

  1. Control Person Restriction - in which a company insider holds shares that are not freely trading in the public marketplace, and 
  2. New Issue Restriction - in which someone not affiliated with the company holds shares that have just been issued. 

SEC Rule 144 "provides an exemption and permits the public resale of restricted or control securities if a number of conditions are met, including how long the securities are held, the way in which they are sold, and the amount that can be sold at any one time." Essentially, those restricted shares cannot be traded in the public marketplace because there isn't enough information for the average investor to make an informed decision about buying or selling them.

Restricted Shares

Most of the time, restricted shares are held in registered form, i.e. in the shareholder's name, as contrasted with being held in the name of a broker-dealer where the shareholder has an account. To trade them, the restriction must be lifted by presenting an opinion letter from a lawyer to the transfer agent noting that the holder has met certain conditions. As an example, this may include a length of time and/or that the shares have been registered and that information about the issuer is now public, therefore the shares should be free and clear to trade. Transfer agents serve as the last line of defense when a shareholder wants to move these restricted shares into the public marketplace without some type of lifting of that restriction. 

Fraudulent Activity

Over the years, the industry has witnessed an evolving regulatory landscape and an increased amount of fraudulent activity such "pump and dump" schemes, where someone who holds shares solicits buyers (the pump) to drive up the price of the shares before selling (dumping) them into the marketplace. Unfortunately, fraud still exists and issuers need to do their homework when hiring a firm to draft an opinion letter, ensuring they employ a reputable one.

What's Next?

It is too soon to say exactly what will change as a result of the new SEC rules. Meanwhile, AST continues to review and monitor our procedures to ensure we are effectively meeting the needs of our clients. With over 43 years of experience, AST has stringent policies and procedures in place to verify that appropriate documentation is received before lifting stock restrictions and there are no indications of unusual activity. We will keep you posted as the SEC rulemaking situation evolves.

For more information on AST's transfer agent services, please call (888) 267-8625 or email