How a Transfer Agent Works for You

Knowing the function of a transfer agent in an investment fund is critical to understanding how important it is to have the services of a transfer agent behind you.


How a Transfer Agent Works for You

A transfer agent is an integral part of the back-office procedure for investment funds issuing securities to investors. If your fund hasn’t yet issued shares but plans to do so soon, knowing the function of a transfer agent is critical to understanding how important it is to have the services of a transfer agent behind you. When considering the employment of a transfer agent for your back-office needs, it’s crucial not to overlook the potential for unnecessary expense, embarrassment and operational risk if you decide in favor of using in-house staff. Third-party transfer agent services represent efficiency, reliability and professionalism in the eyes of investors, advisors and others at every stage on the life of your fund. A transfer agent is a valuable operational partner.

New Investments and the Transfer Agent

The transfer agent role begins in the new investment process. Investors purchase shares in an investment fund which enable your acquisition of portfolio assets. These purchases can be made directly or via financial advisors. They may arrive at the transfer agent in the form of paper documents or via electronic subscription systems. Regardless of how new investments are received, they must be meticulously recorded in a uniform format in a specialized transfer agent system that allows for proper allocation, continued investor administration, payment of investor distributions and the production of tax forms.

A transfer agent used to issue paper certificates to investors, showing their share of ownership. Today, it is customary for the transfer agent to issue certificates electronically, saving both time and money for the issuer. The transfer agent not only issues certificates, but it also keeps track of who owns what, pays distributions to shareholders and acts as a intermediary for the fund in all securities transactions. The transfer agent serves as a liaison between the issuer and the investor in this capacity. The transfer agent is in charge of keeping proper records of all securities issued by the fund.

Data Stewardship at the Transfer Agent

When working with investors, a transfer agent is extremely vital for a private fund. A transfer agent, when used in conjunction with a capitalization table, allows the fund to keep track of who their investors are and how much equity they have, which is useful in future rounds of investment. The transparency and availability of account and fund information from the transfer agent boosts investor confidence. Through a web portal provided by the transfer agent, both existing and potential investors may examine accurate and full transfer agent information on the funds they are investing in.

Knowing how many units or what percentage ownership each investor owns is crucial for an investment fund’s business but it’s not always easy to figure out. A transfer agent manages complexities fund managers may not have considered. Many funds sell ownership to new investors in units which are easier to sell and understand than equity ownership. Later, certain new investors may negotiate side letters or unusual investment provisions that change the allocation calculation for other investors, essentially converting units into equity, generating a level of complexity that should be left to a professional transfer agent. Managing these calculations, producing statements and processing distributions based on the new allocations and effectively communicating this kind of fund activity to investors is the kind of complex back-office task best performed by an experienced transfer agent partner.

How to Evaluate a Transfer Agent Service Provider

The sensible option when selecting a transfer agent for your fund is the one that avoids the most unnecessary expenditures and time. This is the transfer agent who possesses the best combination of three crucial characteristics.

  • Experience – Your transfer agent should have a long history of administering a variety of fund types and asset classes including funds similar to your own. The firm should be an SEC registered transfer agent and have a process audit known as a SOC 1, Type II which examines the controls in place for service providers involved in financial transactions and financial reporting.
  • Technology – A specialized transfer agent system capable of housing all investor, advisor, transaction and historical data should be in place. The transfer agent system should be connected directly with all relevant outside parties and be able to process all back-office functions without exporting data or manipulating data outside the system. The transfer agent system should be integrated with the fund accounting system and an investor web portal and have reporting capability that gives you insight into the investor, sales and transaction activity of your fund. There should also be transfer agent system integrations with electronic subscription platforms and industry data aggregators to give your fund the widest visibility and the broadest array of options in how you operate.
  • Customer Service – Your transfer agent is your operational partner and your liaison with investors. Your transfer agent team should provide responsive, personalized service. It should never be necessary to wait on hold for another department, leave a voicemail or wait a day or more for a response to an email. The customer service of your transfer agent team represents you in interactions with investors, their financial advisors and others. Consider the reputation of your fund when considering the service approach of a transfer agent.

Leverage Your Transfer Agent's Experience

There are complexities to the back-office management of an investment fund that only a transfer agent understands. Equity, debt, bonds, debentures, convertibles, options, warrants, promissory notes and other securities instruments must all be handled in specific ways known only to an experienced transfer agent. Crowdfunding represents an additional new challenge to the back-office that demands the expertise of a transfer agent.

Importantly, transfer agent systems and services that are easily integrated with other capabilities add a valuable level of efficiency and compliance to their offering. Fund accounting, tax document production, investor web portal, financial and sales reporting and the printing and delivery of statements and checks can all be integrated with the transfer agent function. When services are integrated and bundled with a single transfer agent provider costs are reduced, prompt performance is enhanced, compliance is simplified and data security is maximized.

Private funds can benefit greatly from the services of a transfer agent. Managers can offload a challenging and fraught set of non-core functions while leveraging a thorough and accessible record of every aspect of the life of their fund. The ability to focus undistracted on investments and sales supported by professional transfer agent services for back-office processes is a competitive advantage for any manager of private funds.

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