United States: SEC Proposes Modernization Overhaul of Transfer Agent Rules

By Jon Luc Dupuy and Timothy Foley

The SEC is proposing to substantively overhaul the securities transfer agent regulatory framework, which has largely remained unchanged since the paperwork-based system of the mid-1970s. Since this time, modern-day transfer agent operations have expanded in scope and complexity, outpacing rules mainly established prior to the advent of the Internet. Many of the SEC’s proposed changes are designed to technologically neutralize the rules for adaptation to the modern environment, including utilization of distributed ledger technology. However, there are several changes that fund advisers and their transfer agents should specifically note:

• Rescission of Rule 17ad-4. The rule proposal would eliminate exemptions for turnaround, processing, and recordkeeping requirements for interests in registered open-end funds, limited partnerships, and dividend reinvestment plans under Rule 17ad-4.

• Lost Securityholder Requirements. In order to protect investors against an increased risk in escheatment of securities, the rule proposal would modify Rule 17ad-17 to create the new concept of an “inactive securityholder”, which would impose new notification requirements on transfer agents based on “account activity”.

• Restrictive Legend Safeguards. New Rule 17ad-31 would require safeguards regarding the placement and removal of restrictive legends on unregistered securities, including designation of relevant authorized personnel and imposition of a reasonable-basis belief requirement that no violation of Section 5 of the Securities Act is occurring through the removal of a legend.

• Enhanced Safeguarding Standards and Compliance Program Requirements. Current safeguarding standards would be broadened to address the electronic environment. The amendments would expressly extend the safeguarding rule to all asset types, impose bank account segregation requirements, business continuity planning, and a “comprehensive risk management framework to identify, measure, monitor, and mitigate material custody, operational, cybersecurity, and related risks.” In addition, new Rule 17ad-30 would impose a general written policies and procedures standard as a “uniform baseline compliance requirement” for transfer agents.

Comments to the rule proposal are due by 3 November 2026.