U.S. SEC Proposes Overhaul of 1970s and 1980s Securities Holder Recordkeeping Rules, Including Reports on Blockchain and Other Distributed Ledger Use

The U.S. Securities and Exchange Commission (SEC), which oversees the U.S. securities market, proposed amendments on September 1 local time to bring rules governing entities that maintain securities holder records in line with electronic recordkeeping and blockchain environments. A transfer agent is an entity that maintains records of legal holders on behalf of a securities issuer and handles corporate actions such as ownership transfers, dividend payments and stock splits. The SEC said most current federal transfer agent rules were introduced in the late 1970s and early 1980s and have not been substantively amended since then. The SEC's 421-page proposal contains measures to change electronic recordkeeping and communication methods and modernize standards for managing data accuracy, cybersecurity and business disruption risks. Proposed revisions to Form TA-2, the annual activity report that registered transfer agents file with the SEC, include three reporting items related to distributed ledgers and tokenization. First is the number of securities for which the legally recognized final holder record was maintained using distributed ledger technology (DLT), in which multiple participants share, maintain and verify the same ledger. Second are the names of service providers and DLT platforms that supported representing securities in digital token form. Third is the number of tokenized securities by security type, divided between issuer-led arrangements and arrangements led by third parties without issuer involvement. The proposal would establish Rule 17Ad-30, requiring every registered transfer agent to establish and implement written compliance policies and procedures. Rule 17Ad-31 would require transfer agents to follow instructions only from employees designated by the issuer when adding or removing transfer restriction notations on securities, and would bar them from processing an unregistered securities transaction without a reasonable basis to conclude that the transaction does not violate, or lead to a violation of, registration requirements under the securities laws. It would also repeal Rule 17Ad-4, which exempts transfer agents handling certain types of securities and some small transfer agents from obligations including processing deadlines and record retention, making those obligations applicable to previously exempt entities as well. The proposal neither treats blockchain transaction records as automatically equivalent to legal holder records nor approves new tokenized products. Its approach is that, regardless of the electronic recordkeeping technology used, the final official record for a security would remain under the exclusive control and responsibility of the transfer agent responsible for recordkeeping. The comment period will run for 60 days after publication in the Federal Register, the U.S. government's official journal, and neither the final rules nor their effective date has been determined.