The use of distributed ledger technology and digital tokens could revolutionize securities settlement and transfer agency processes. Securities settlement could happen more quickly with fewer transaction costs. The SEC (and the applicant) deserve credit for allowing this testing period before requiring full-blown registration.
SEC’s Office of Compliance Inspections and Examinations has issued a Risk Alert
citing transfer agents for deficient safeguards and lost securityholder
procedures. Reporting on 75 transfer
agent examinations over three years, OCIE observed misappropriation of
shareholder funds and theft of physical certificates, inadequate account
reconciliation processes, commingling of funds, and failures to secure physical
access. OCIE also observed failures to
adequately search for lost securityholders including neglecting to send written
notices. OCIE recommends heightened
policies and procedures, fund segregation, frequent reconciliations, locked vaults,
video cameras, periodic audits, and controls around lost property. OCIE published the Risk Alert “in order to
encourage TAs to review and strengthen their applicable policies, procedures,
and controls related to their paying agent operations.”
This is the regulatory warning shot for transfer agents. Expect sweeps and enforcement actions to follow. This Risk Alert also puts registered funds and their Boards and CCOs on notice that they should consider oversight procedures.