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SEC Allows Testing of Distributed Ledger System for Securities Settlement

 

The SEC’s Division of Trading and Markets has provided limited period no-action relief to beta test a service that will allow securities clearance using a distributed ledger system.  The 24-month relief would allow the applicant to operate a securities settlement service whereby securities and cash would be represented by digitized securities entitlements that would be exchanged in accordance with the underlying securities transactions.  Without no-action relief, the applicant would have to register as a clearing agency.  The SEC is allowing limited testing of the system without registration so long as the applicant follows strict guidelines that limit use of the system and volume.

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. 

OCIE Warns of Transfer Agent Failures to Safeguard Assets


The 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.