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This is a term used every day in the financial services industry, but few know its origins and auspices.
Like a lot of improvements in financial services, especially securities ownership and transfer, the term and concept were born in the 1960s. The securities industry at that time had grown so big that it was a) buried in its own paperwork, and
b) not sufficiently "talking to itself" to avoid duplication and inefficiency. A byproduct was the frequent inability of industry participants to tell different securities issues apart, because there was no uniform identification medium in place. Thus, in 1964, the New York Clearing House Association approached the American Bankers Association to develop the Committee on Uniform Security Identification Procedures, and the resultant acronym CUSIP was launched. A securities issue was now made unique by its CUSIP number, and that standard continues to this day – not only for stocks but also bonds, U.S. Treasury securities, even certificates of deposit, commercial paper and bankers acceptances. Indeed, over 9 million securities issues have their own CUSIP number today.
An interesting final note is CUSIP Global Services, the parent organization keeping track of all CUSIP numbers, is managed by Standard & Poor's on behalf of the American Bankers Association. And Standard & Poor's is owned by The McGraw-Hill Companies, Inc. So, the "keeper of the keys" on securities identification in the largest financial marketplace in the world is actually under the control of a public company subsidiary rather than a government entity.
These are Securities and Exchange Commission (SEC) forms that largely reflect the agency's control over stock transfer agents in the U.S.
TA-1
This form is used by an entity registering as a transfer agent with the SEC for the first time. It elicits a great deal of information about an applicant which should provide comfort to both issuers and shareholders that not just any outfit is allowed to perform this function. The entity must show who owns and controls it; how it is funded/financed; whether it has pled guilty to or been convicted of a felony or misdemeanor in the past 10 years, or even "made a false statement or omission" or been proven "dishonest, unfair or unethical"; and where its operating locations will be. There is also a supplemental level of scrutiny placed on the applicant de facto by requiring it to give information such as its Financial Industry Number Standard (FINS number), which is assigned by the Depository Trust Company after its own vetting process. And finally, the TA-1 must be signed by the applicant's qualifying executive officer.
TA-2
This form is an annual report by transfer agents to the SEC on its activities in the preceding year. It elicits not only raw data like number of shareholders managed and transfers performed, but also disclosure about transfer turn-around times not met; transfer imbalances more than 30 days old ("aged record differences") and associated "buy-ins" where the transfer agent had to purchase and retire shares in the amount they were over-issued; plus changes in the agent's modus operandi such as whether it newly engaged an outside service provider to perform any of its functions (and, if so, whom). The form also requires disclosure on the frequency and number of "lost" shareholders searched by the transfer agent, and how many new addresses were found as a result of those searches.
So transfer agents have to toe a strict line with the SEC just to started, and then to stay in the business – not to mention also passing annual muster with bank regulators (if a bank transfer agent), their independent registered public accountants, as well as having corporate client satisfaction levels broadcast to the world by at least two outside surveying firms that post their results on-line.
For more on this topic, see our Fall 2008 article on "Performance Standards".
This term in the stock transfer industry has to do with "lost shareholders," or investors on a transfer agent's books who have a) failed to supply an updated address to the transfer agent, b) lost track of these shares, or c) passed away, without the estate knowing the shares exist. Actually, searches for these holders happen by law (SEC Regulation 17Ad-17) very quickly after the investor becomes lost, but mandated checking against prominent databases - the primary tool for such searches - is often not enough to effectively find these people. When they are not found, their property (e.g., sup- pressed dividends, and the underlying stock itself) must be turned over to the state of last known address ("escheated"), usually three years after the holder becomes lost.
Deep Search is a service offered by enterprising specialist firms to find undiscovered lost holders before escheatment is required. These firms do not just look at databases, they go through a whole host of intelligent, thoughtful steps to successfully find these people, because they are paid only if they find them; and, they are also paid a percentage of what they find. The main advantage of Deep Search is many investors are, in fact, found before their property is escheated (a messy event to "unwind"); and, the share- holder rather than the corporation pays the discovery cost. A couple of caveats about Deep Search, however, are some firms that perform it can charge a lot (too much?), like 35% of asset value; and/or they can neglect the smaller shareholder because a percentage of his/her found assets do not add up to that much. Since Deep Search is a service frequently offered through the stock transfer agent, there can also be some referral fees collected by the transfer agent, to engage the Deep Search firm, which go "unrecognized" and can add up to real money.
Bottom line: corporations should embrace Deep Search as a valuable function within the share- holder services industry, while at the same time kicking the tires now and again of who is actually performing the work, how, and for how much.
This is the movement of a corporation's shareholder information from one transfer agent's record keeping system to another. It usually occurs when a company picks a new transfer agent, although a corporation doing stock transfer in-house (using outside database software) could conceivably switch to a commercial transfer agent using that same software and thus avoid a conversion.
Is a records conversion a "big deal?" Not really, for three reasons: 1) data is now fully electronic, so it can readily be moved via magnetic tape or disk; 2) the better transfer agents update and balance their records daily, so a pre- and post-conversion data "scrub" is no longer necessary (or should involve minimal effort); and 3) electronic data conversions have taken place for decades, so the major transfer agents already have software programs in place to convert corporate records from any of their competitors to their own system, on fairly short notice.
The biggest issue with a records conversion is therefore not the technical aspect of it (which means it should also not be an expensive undertaking anymore) but rather the process of learning how records are newly captured/arranged, and how they can subsequently be retrieved by issuers and their shareholders. Bottom line: companies should consider a records conversion a speed bump worthy of respect, but not a brick wall that has to be avoided at all costs.
Transfer agents not only have to keep track of registered shareholders with share balances, but also those with zero balances who nonetheless need to remain on the agent's record keeping system - like those who received a dividend in the previous 12 months and must still be issued a 1099DIV. When an investor has zero shares and no residual reporting obligation attached to him, he is now considered an "inactive" shareholder (or "closed account" to some agents). Issuers should monitor how many such holders they are being charged for by their transfer agent, because some agents do not "purge" (archive) them as promptly as they should, like every 12-18 months.
As regular viewers of this web site know, we often take issue with the pricing and contract terms and conditions presented to corporations by some stock transfer agents. It will thus likely come as a surprise that we support transfer agents in their common practice of limiting their own liability on wayward stock transfers to the amount of fees the corporate client paid the agent in the preceding 12 months. Why? Because not only are such mistakes rare (and when they happen are usually corrected), but also because transfer agents handle thousands of transfers involving millions of shares and billions of dollars every week -- in some periods daily -- and they are simply not compensated nor financially set up to take on transaction risk beyond a client's annual fees. We, and consumers of the stock transfer product, should accept this as a simple matter of fact.
The "CAB" is a concept in the stock transfer industry that has been around since the 1980s. It is where a transfer agent enlists 12 to 20 clients who are large and/or complex in their service requirements, who are willing to convene one to four times a year, and who can honestly discuss with the agent's senior management what the agent is doing right and wrong, the functionalities the agent intends to develop and invest in, and what functionalities it plans to correct or divest. The meetings should be face-to-face, although conference calls can sometimes work, relating for example to subcommittee meetings. We at Shareholder Service Solutions® give a gold star to transfer agents who have a CAB. Embraced properly, this institution provides the transparency and sense of client-agent teamwork that fosters constructive communication and healthy long-term relationships across the agent's entire client portfolio.
Essentially the reverse of a regular auction. In a regular auction a price is bid up so the highest price can be achieved for the seller. In a Dutch auction the price is lowered to a point where both the seller is satisfied and a transaction can be fully consummated. Dutch auctions may be used to determine the highest stock price at which the full amount of subscriptions for a share offering can be achieved, or to fulfill the desired amount of a corporate share repurchase program at the lowest stock price for the company. Interestingly, "odd-lot" shares can be repurchased in this latter context before other (larger) holders' shares -- if the company wishes -- to facilitate the reduction of such holders who cost the company the most in record keeping and maintenance charges as a percentage of their lower investment value.
Direct Stock Purchase Plans ("DSPPs") can be offered by most public companies listed on a major stock exchange. They are a means for registered shareholders to buy more stock directly from the company, paying purchase fees usually lower than a broker's. DSPPs typically carry maximum monthly investment amounts and no share price discount, but a waiver discount feature allows a waiver of such maximums, and a share price discount, if the right (large) investor comes along. Corporations can raise substantial equity capital quietly and cost-effectively through "Waiver Discount DSPPs." If you are an issuer with potential interest in this concept call your transfer agent, phone us at 415-472-2238, or email us.
This is medium through which people can own stock in a foreign company that they otherwise could not, because the stock is traded far away in its home country... in its own currency. DRs are issued by a trust company or security depository in the buyer's home country, and evidence ownership interests in the underlying foreign stock. DRs are traded like stock on the buyer's domestic exchanges. Holders of DRs receive dividends, can participate in dividend reinvestment, and experience share appreciation (or loss) just like with the underlying stock. There are dozens of American Depository Receipts (ADRs) traded on the NYSE, NASDAQ and AMEX, evidencing ownership in prominent foreign companies like Reuters and BASF.
This innocuous-sounding term, well known to most people, deserves a few words as it relates to the stock transfer business. Some transfer agents religiously pass back expenses associated with handling stock transfer clients and their shareholders... "at cost." Others do in many cases, others in some cases, others rarely do; meaning, they add a little something on to their cost. Their justification for this is they have to manage the relationships with the "expense creators" (printers, distributors, sub-contractors, insurers) which their clients would otherwise have to do themselves; so, why shouldn't they be compensated for that? Our answer: That's fine!... Just as long as you make this practice crystal clear to your clients on a regular basis.
This is a common term in the billing practices of stock transfer agents. Like a lot of things, it has positive and negative ramifications. Flat fees typically mean that no matter how many stock transfers or shareholder inquiries an agent handles in a month, it will charge the corporate client a set monthly fee. Variable fees are when there is a charge for a transfer, for a shareholder letter, for a dividend check, etc. Flat fees by and large are preferable, because they tend to make budgeting and billing simpler. However, corporations still need to periodically a) confirm the flat fee remains appropriate, or has perhaps become a little high relative to the company's likely falling registered shareholder base; b) verify what in fact is included in the flat fee, so it knows what isn't (poison pill agency? OFAC charges?); and c) check whether flat fees that shareholders pay continue to "fit the transaction," like what a holder pays to replace a lost dividend check that is a small dollar amount (if such fee is not covered by the company)
National Change of Address (NCOA) is a service provided by the United States Postal Service. It facilitates the updating of people's addresses so that misrouted and misplaced mail is minimized, and it saves mailing cost because NCOA participants receive pre-sort discounts. The way it works is large record keepers, like stock transfer agents, qualify for pre-sort mail discounts as NCOA participants by checking all its (shareholder) addresses against the NCOA file twice a year. Addresses that "differ" are then verified with the individual by the record keeper. As a corporate client you should ask your transfer agent 1) if it is, in fact, an NCOA participant, and 2) if you, the corporation, benefit from pre-sort discounts NCOA gives to the agent. "Yes" to #1 means there is less chance certificates, statements, dividend checks and proxy materials fail to reach shareholders in a timely manner, and "yes" to #2 means you are saving money.
The Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury administers and enforces sanctions against targeted foreign countries, terrorists, international narcotics traffickers and similar individuals. Stock transfer agents are among asset record keepers required to prevent these individuals/entities from using its systems without detection, and interception, by Treasury authorities. Public companies should ask their transfer agent how it performs this function exactly, and how the agent's cost to perform the function is passed back to its clients.
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