The implications of 17ad-13 for you
The role of transfer agents may not be on your radar, but it probably should be. Grant Thornton Advisory Services Managing Director Erik Horton notes that “the trend toward outsourcing financial activities, and the sensitivity of the data involved, have led to increased scrutiny, especially in the area of regulatory compliance.”
With a few exemptions not relevant here, the SEC Exchange Act Rule §240.17ad-13 requires registered transfer agents and/or registrars to file annual reports, prepared by independent accountants who review their internal accounting controls and procedures. The reports confirm that accepted accounting procedures were followed, flag any material inadequacies, describe corrective actions and note current status.
The reports are especially concerned with changes in ownership, dividend disbursement or reinvestment, interest payments, and initial offerings.
Consequences and concerns
The failure to file with the SEC and appropriate agencies could result in your transfer agent being subject to both scheduled and surprise SEC compliance audits, in addition to financial sanctions.
While the responsibility for compliance under Rule 17ad-13 is wholly with the transfer agent, this is still a concern for the companies who engage the transfer agent. Besides the inconvenience, an audit of your transfer agent could indirectly cast doubt upon your own controls with both internal stakeholders and external auditors.
3 actions you can take
While transfer agent malfeasance may not be your direct responsibility, it could be your problem. To minimize the risk of issues caused by noncompliance, start here:
- Choose carefully. Be scrupulous about selecting your transfer agent as well as any co-transfer agents and registrars. Check their current compliance. Understand exactly what services they are providing and any they may outsource.
- Take control of your controls. Horton explains: “This is an opportunity for companies to focus on their own controls and practices. At Grant Thornton, we’ve identified a number of controls and best practices around recordkeeping, transaction/distribution accuracy, conflict/error resolution and physical security. Look to those areas.”
- Integrate with your SOC 1 efforts. There is an opportunity for transfer agents to leverage existing controls included in their SOC 1 report(s). Ideally, you should be able to “test once, apply many” across multiple compliance frameworks.
The regulation of third-party service providers is an emerging — or at least an intensifying — phenomenon. It highlights the level of importance the asset management industry places on compliance and the on-going monitoring of vendor management. Fortunately, with Rule 17ad-13, there are a few clear steps you can take.
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