TheCorporateCounsel.net

Yesterday, the SEC announced proposed rules intended to modernize the regulatory scheme for registered transfer agents. Here’s the 421-page Proposing Release and here’s the two-page Fact Sheet.  This excerpt from the Fact Sheet says that the proposal would make the following changes:

– Amend the registration and annual reporting requirements for transfer agents, including the questions and instructions on Forms TA-1 and TA-2.

– Modernize the rules to reflect how transfer agents carry out their activities in light of technological advancements, including the use of electronic and blockchain-based recordkeeping and uncertificated securities.

– Establish new requirements related to turnaround, risk management, and inactive securityholders.

– Introduce two new rules addressing compliance and restrictive legends for registered transfer agents.

The proposed rule addressing restrictive legends is likely to be the most interesting part of the proposal for securities lawyers. The rule would require transfer agents to establish a reasonable basis for removing restrictive legends on a security, and would also create a safe harbor for establishing the existence of such a reasonable basis. Fitting into that safe harbor is where things get interesting.

The proposal offers two potential routes to that safe harbor (see the discussion beginning on p. 206 of the Proposing Release). One would permit the transfer agent to rely on its own efforts, but that would require the transfer agent to jump through several documentation and due diligence hoops. The second alternative would allow the transfer agent to rely on an opinion of counsel, but that opinion must be rendered by “counsel who is not an affiliate, officer, director, or employee of either the issuer or the individual or entity seeking to resell shares of the issuer.”

That language suggests that a transfer agent couldn’t fit into the safe harbor by relying on an opinion from the issuer’s in-house counsel. While I think it’s more typical for outside counsel to render these opinions, I know some public companies look to their in-house team to handle them. I also know that there have been some enforcement actions against lawyers who’ve rendered questionable legend release opinions, but I’m not aware of any involving in-house counsel, and this seems like overkill to me.

In either case, the transfer agent must also not be aware of any “red flags” with respect to the transaction for the safe harbor to apply. Examples of potential red flags are set forth on p. 205 of the Proposing Release, and while some are clearly problematic (e.g., incomplete or non-existent issuer SEC filings, inconsistent financial information and altered charter documents), others seem less clear-cut (e.g., issuers with several business combinations or large reverse stock splits), and without further clarification, may invite skittish transfer agents to see ghosts.

– John Jenkins