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SEC probes transfer agents who hunt for stockholders

By JUDITH BURNS
Dow Jones Newswires

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Securities regulators are probing potential conflicts of interest and kickbacks between transfer agents and search firms hired to look for lost investors in databases, according to individuals familiar with the matter who spoke on condition of anonymity.

Acting on an anonymous tip, SEC examiners began an investigation in April that uncovered such revenue-sharing deals. The probe has since expanded to about 50 of the largest U.S. transfer agents. A handful of transfer agents and search firms have received subpoenas.

Regulators are scrutinizing whether transfer agents are directing shareholders to do business through search firms with whom they have revenue-sharing agreements. The SEC also is said to be investigating whether transfer agents overcharge shareholders who buy or sell shares through affiliated brokerage firms.

Transfer agents are subject to strict SEC rules as they help companies pay stock, dividends, interest or cash to investors. They also assist investors to exchange or tender stock amid mergers and tender offers, and are required to reach out to "lost" shareholders, those who have had two mailings returned as undeliverable.

For lost investors due $25 or more, the SEC requires transfer agents to conduct two database searches at no cost to the shareholder. Transfer agents often pay search firms a few pennies per name to do the job. Only after two database searches fail to yield results may transfer agents run deeper searches, usually on a contingency basis by search firms, sometimes the same firm that does the initial database searches.

Investors tracked down by search firms through a deep-search process are told they have an unclaimed asset but receive few details until they sign a contract agreeing to a finder's fee for the search firm, sometimes 30 percent or more of what they are owed.

Regulators are looking at whether transfer agents are making good-faith efforts to conduct initial searches at no cost to shareholders, as required. They also are probing whether transfer agents may favor deep searches by search firms who turn over a portion of their finder's fee.

Douglas Johnson, president of Keane, a West Conshohocken, Pa., search firm, said fee-splitting is an "archaic" way of business that few transfer agents still use. He said Keane has been contacted by the SEC and is cooperating fully with the inquiry, which he sees as part of a push to update rules in this area.

"We understand the SEC is looking at absolutely every aspect of what the transfer agents are doing," Johnson said.

Individuals familiar with the investigation said it could result in fraud charges against transfer agencies with undisclosed revenue-sharing deals. Charges are less likely to be brought against search firms, which the SEC does not regulate.
 
Making fraud charges stick against transfer agents may be tough. Some securities lawyers question whether the SEC can make a case that agents have an obligation to tell investors or corporate clients about financial arrangements with search firms.

Unlike broker-dealers, transfer agents aren't specifically required to disclose third-party payments.

Among transfer agents, revenue sharing appears to be the exception rather than the rule. But regulators reportedly have found an array of complicated arrangements between some search firms and transfer agents. Some provide for an equal sharing of contingency-fee payments, while others involve waiving or discounting fees on low-cost initial searches in exchange for a stake in the more lucrative deep-search business.

Corporations that use transfer agents are thought to be in the dark about such deals, which can be lucrative, generating millions of dollars in payments each year in some cases. Such payments could pose conflicts for transfer agents dealing with investors who want to avoid paying finder's fees.

Regulators reportedly were told of one investor contacted by a search firm who sought to tender shares to the transfer agent, only to be rebuffed and told to deal with the search company. In addition to possibly violating tender-offer rules, the transfer agent received a kickback from the search firm for some of its contingency fees, creating a strong incentive to direct business there regardless of the cost to investors.

Top transfer agents include the Bank of New York, Mellon Investors Services and Equiserve. Their spokesmen declined to comment or weren't available to comment.