Nikolas Sargeant
TL;DR
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The SEC has proposed updating transfer agent regulations that have remained largely unchanged since the late 1970s.
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The proposal addresses electronic communications, blockchain technology, tokenized securities and artificial intelligence.
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Transfer agents using distributed ledgers and smart contracts would need to manage new data-integrity, security and operational risks.
The U.S. Securities and Exchange Commission has proposed modernizing its rules for transfer agents to reflect advances in electronic markets, blockchain technology and tokenized securities.
The SEC announced the proposal on Tuesday, noting that the regulations have not received a significant update since they were introduced in the late 1970s.
Transfer agents maintain official records of securities ownership and process corporate actions such as dividend distributions and mergers. They also perform important functions during the clearing and settlement of securities transactions.
SEC Seeks to Reflect Modern Market Operations
The proposed changes would update outdated terminology and bring the rules in line with the electronic systems now used across financial markets.
SEC Chair Paul Atkins said the reforms would streamline the existing framework and account for the use of electronic communications and blockchain infrastructure in securities offerings and share transfers.
“This proposal would streamline and modernize the Commission’s rules to reflect transfer agents’ current processes and operations, including the use of electronic communications and blockchain technology in connection with securities offerings and the transfer of shares,” Atkins said.
According to an SEC fact sheet, the proposal would also revise requirements governing the use of electronic systems.
The proposed changes arrive as transfer agents increasingly interact with tokenized securities, distributed ledgers and smart contracts.
Some financial companies are exploring blockchain systems as an alternative way to maintain ownership records and process transfers. While the technology could improve efficiency, the SEC warned that it also introduces new operational and security risks.
In its 421-page proposal, the agency said transfer agents working with tokenized assets would need to address:
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Blockchain data integrity
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Security of tokenized securities
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Distributed-ledger operational models
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Smart-contract risks
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Oversight of automated systems
These concerns could become increasingly important as more securities are issued, recorded or transferred through blockchain-based infrastructure.
SEC Addresses AI and Automated Technologies
The proposal also covers the growing use of artificial intelligence and other automated systems by transfer agents.
Firms adopting such technologies would need appropriate internal controls and effective human oversight. They would also be responsible for accurately representing what their systems can and cannot do.
The SEC’s approach indicates that automation does not remove a transfer agent’s responsibility for maintaining accurate records and managing operational risks.
Several blockchain-focused companies have already registered with the SEC as transfer agents.
Injective recently secured registration, providing the blockchain project with a regulated framework for recording tokenized-asset ownership and tracking transfers.
Securitize and tZERO are also registered transfer agents and have become prominent participants in the expanding tokenized-securities market.
Updating the rules could provide these firms and traditional financial institutions with greater clarity about their responsibilities when using blockchain technology.
