I n its most limited sense, a transfer agent is an agnostic third-party entity required to process a transfer of a company’s securities from one investor to another. Some companies are required to use a transfer agent due to the nature of their registration with the Securities and Exchange Commission. Other companies are not required to use a transfer agent but choose to because of the arms-length nature of the transfer agent service and because other back office services may be offered by the transfer agent. Still, others that are not required to use a transfer agent, process transfers themselves.
Publicly traded companies, mutual funds and private capital funds, if they have large numbers of investors, often utilize a transfer agent to keep track of the individuals and entities that own their securities. The transfer agent will enter new investment information into a transfer agent system, manage the investor database on behalf of the company and keep the investor profiles updated. With all the investor information at hand, the transfer agent is then able to process various back-office activities of the company including paying distributions to the investors, managing proxy voting and communicating with the investors on behalf of the fund. In the context of an investment fund, a transfer agent would also process capital calls, pay sales commissions to financial advisors, produce K-1 or 1099 tax documents and provide online account access to investors through an investor portal.
According to the Securities and Exchange Commission, transfer agents perform three main functions:
- Issue and cancel certificates to reflect changes in ownership. For example, when a company declares a stock dividend or stock split, the transfer agent issues new shares. Transfer agents keep records of who owns a company’s stocks and bonds and how those stocks and bonds are held—whether by the owner in certificate form, by the company in book-entry form, or by the investor’s brokerage firm in street name. They also keep records of how many shares or bonds each investor owns.
- Act as an intermediary for the company. A transfer agent may also serve as the company’s paying agent to pay out interest, cash and stock dividends, or other distributions to shareholders. In addition, transfer agents act as a proxy agent (sending out proxy materials), an exchange agent (exchanging a company’s stock or bonds in a merger), a tender agent (tendering shares in a tender offer), and a mailing agent (mailing the company’s quarterly, annual, and other reports).
- Handle lost, destroyed, or stolen certificates. Transfer agents help shareholders and bondholders when a stock or bond certificate has been lost, destroyed, or stolen.
In many cases, you can find out which transfer agent a company uses by visiting the investor relations section of the company’s website. You can also use the Securities Transfer Association website, a private trade organization of transfer agents.
A transfer agent may be a bank, a trust company, a stand-alone transfer agent provider or a team within a corporation or investment fund acting as the company’s own transfer agent. An in-house team may license a transfer agent system to increase their efficiency without the licensor being the ‘transfer agent of record. Many investment funds, however, employ a third-party transfer agent even if it is not required. Having a third-party ‘transfer agent of record’ satisfies the due diligence requirements of sophisticated and institutional investors.
For private investment funds, transfer agents have traditionally had a limited role. Public registered funds with the SEC were required to use an SEC-registered transfer agent. These tended to be large funds with many thousands of non-accredited investors. Private funds, however, (private equity, venture capital, private real estate funds) typically had few investors and were not subject to significant regulation and so, typically, did not use a transfer agent. In recent years, private fund investor counts have increased, investor-related regulatory requirements have been introduced and fee compression and cost pressures have pushed more private equity funds to use transfer agents. Today, sophisticated investors and institutions like pension funds expect an investment fund under consideration to employ a transfer agent as a standard of operational professionalism.
A Service Organization Control (SOC) audit examines the processes of transfer agents to verify that the systems and procedures employed are accurate and reliable. Many fund companies will require an annual SOC audit of their transfer agent to satisfy their due diligence requirements.
Because a transfer agent is tasked with housing and maintaining the most critical information of a company, the investor database, it is not unusual for a transfer agent to offer additional services related to the investor experience and even accounting and reporting for the assets of the fund: services up to and including the whole back office of the fund company. A transfer agent that offers extensive back-office services touching investors, assets and even sales teams is more generally referred to as a fund administrator.
About Phoenix American
Phoenix American Financial Services provides full-service fund administration, accounting, transfer agent and investor services as well as sales and marketing reporting to fund sponsors in the alternative investment industry. The Phoenix American Aircraft Group provides administration and accounting services for securitizations specializing in the commercial aviation leasing industry. The company is a subsidiary of Phoenix American Incorporated along with Phoenix American SalesFocus Solutions, providers of the cloud-based MARS CRM, Sales and Marketing Reporting and Compliance Management solutions for banks, insurance companies, asset management firms and other financial service organizations. Phoenix American was founded in 1972 and is headquartered in San Rafael, CA.