The evolving world of stock transfer and the challenges that lie ahead
Over the past twelve months we have witnessed an intense period of change for stock transfer agents, from regulatory and technological developments to shifts in client relationships and requests for increased services. In some ways, the whole role of the transfer agent is evolving, and with more changes on the horizon, this evolution is by no means complete.
Ask any transfer agent about industry developments over the past year and one of the first responses will refer to consolidation. Mergers in the stock transfer world have been a main topic of discussion, and look set to stay that way. ‘The industry continues to consolidate in and on top of itself, and there are persistent rumors about additional consolidation,’ says Ken Staab, senior vice president and national sales director at the American Stock Transfer & Trust Company (AST).
According to Barton Hill, chief marketing officer at Mellon Investor Services, consolidation has pushed companies to find ways to differentiate themselves. ‘Value propositions are becoming elevated as everyone tries to stand out,’ he explains.
Expanding services
One way transfer agents have adjusted is by increasing the breadth of their services, something overburdened clients have been demanding. ‘Many customers have seen a turnover in staff, or they are growing without being able to add staff, so we’re being asked to do more,’ says Lennie Kaufman, executive VP and general manager at Wells Fargo Shareowner Services.
‘Prior to the past twelve months, the driver for change in the industry was most likely the transfer agents themselves,’ adds Hill. ‘Recently clients have come to us saying that the landscape has changed and that they need us to help them deal with new situations.’
‘You’ll see transfer agents expanding into employee plan and proxy services,’ notes Kevin Brennan, managing director of transfer agency services at the Bank of New York. ‘Some are currently involved in solicitation, some in distribution, and we think you’ll see a continuation of this expansion going forward.’ Brennan adds that clients benefit from the bank’s expertise in cash management, ADRs and corporate trust, solidifying relationships with an expanding client base.
‘In the past there may have been four vendors providing four services, but now we’re seeing tremendous interest in shrinking that four to two or one,’ adds Hill. ‘The place we’re seeing that consolidation is in the linkage between transfer agents and employee stock plans. Many companies are changing their employee compensation plans from being heavily stock option-based to being based on restricted stock, stock appreciation rights and performance shares.’
Staab adds that AST is launching an employee stock plan division complementing the acquisition of Wachovia Bank’s stock transfer and employee plan services portfolio.
Another new situation concerns the issue of dematerialization. The rule changes requiring book entry or a direct registration system (DRS) filed by the NYSE, Nasdaq and Amex – which will affect new issuers coming to market after January 2007 and existing companies by January 2008 – suggest that a huge reduction in stock certificates is fast approaching.
As a result of dematerialization, among other things, the SEC is expected to come out with new rules for stock transfer agents in the third or fourth quarter of this year. What these rules will require is unclear, but it is believed that they will include changes to turnaround times for processing shareholder requests and the frequency of communication with shareholders. Some transfer agents have already established an inhouse compliance group to help prepare for the changes.
‘There is concern at the commission that as we continue to dematerialize, the books and records of the transfer agents will become official records of client companies,’ explains Charles Rossi, executive vice president of client services at Computershare. ‘The commission wants to preserve the soundness of the marketplace, so we believe it may impose certain rules on transfer agents requiring them to have insurance, audits and annual certifications about the adequacy of their backup procedures and business continuity plans.’
Technology shift
One technological development is web access to proxy materials, another key part of dematerialization. Under SEC proposals, shareholders will receive proxy materials in electronic form unless they take affirmative action to receive a hard copy. ‘I think we have to get behind technological developments that can lead to a paperless environment,’ says Staab. ‘Stock transfer agents have an opportunity to use technology to enhance the stock transfer process, and we should be investing in it.’
‘Currently, somewhere below 15 percent of investors use the web to do business beyond simple tasks such as checking their balances,’ says Brennan. Reasons for this hesitancy include being unaware of the possibilities and not trusting the security of the internet. Brennan says the Bank of New York is trying to overcome these attitudes through advertising, communication with clients and assurances on web security. ‘It can be challenging to change investor behavior, but we think our coordinated efforts will help move web usage to more than 20 percent in the next couple of years,’ he comments.
Marlayna Jeanclerc, manager of the stock transfer group at National City Bank, adds: ‘Over the past year, the majority of our new business has come from IPOs, and all of these have been very interested in online shareholder access and electronic proxy voting. Some of our more long-term clients haven’t seen the need to get too web-savvy.’
‘The topic of web and data security has become unavoidable in any conversation with clients over the past year,’ adds Hill.
A further area for concern among stock transfer agents is over-voting. ‘We get a lot of questions about how over-voting impacts a company, what we do as an agent when we act as their tabulator and inspector of elections and what we’re doing to prevent over-voting at the annual meeting,’ says Kaufman.
In response to the over-voting situation, the SEC asked the Securities Transfer Association (STA) to compile over-voting statistics for the past annual meeting season. The findings are currently being processed.
Proxy communications and the use of ADP as a third party have also come under scrutiny by a Business Roundtable-led coalition that includes Niri and the STA. ‘Most brokers and banks authorize ADP to distribute and tabulate their proxies, and the coalition is recommending that public companies themselves have some choice in who does this,’ comments Rossi.
With all these aspects of the stock transfer agent world under scrutiny and undergoing change, it’s hard to predict how the industry will look in the next five or ten years. There are a lot of questions from investors, issuers, agents and regulators right now; perhaps the coming months will bring some answers.