SEC Calls for Collaboration to Modernize Transfer Agent Rules and Embrace Tokenized Securities

Statement Summary

In a recent address, the SEC's Director of the Division of Trading and Markets emphasized the importance of communication and cooperation between the SEC and the securities industry, harkening back to historical examples of engagement. The discussion focused on ongoing modernization efforts for transfer agent rules, particularly in light of emerging technologies like tokenized securities. The Commission seeks industry feedback on key questions regarding digital identifiers for transfer agents and the adaptation of rules to address inactivity in escheatment laws. Additionally, the newly introduced Innovation Exemption enables Tokenized Securities Venues to facilitate trading under specific conditions. The Director reiterated the necessity for regulations to be technologically neutral and urged industry participants to report any regulatory challenges encountered in the evolving landscape.

Original Statement

Good afternoon. Peter [Duggan], thank you for that kind introduction. I am pleased to join you all today. My career has been primarily focused on secondary trading, so your community is somewhat foreign to me. But I take comfort that former capital markets friends have joined your merry band, such as Brett “Energizer Bunny” Redfearn, now of Securitize, and “Handsome” Tom Farley, architect of the Bullish-Equiniti combination. I appreciate your hospitality and hope that we newbies can work to extend and enhance, rather than disturb or displace, the crucial role that you and your colleagues play in the securities market ecosystem.

I speak today in my official capacity as the Commission’s Director of the Division of Trading and Markets. Please understand that my remarks do not necessarily reflect the views of the Commission, the Commissioners, or my Division colleagues.

John Evans served as SEC Commissioner from March 3, 1973 to December 2, 1983, the third-longest tenure in agency history. With experience as an economist and Senate Banking Committee staff director, Commissioner Evans was “well prepared for service at the SEC.” He arrived at a propitious time, just before the 1975 amendments to the Securities Exchange Act. These sweeping amendments laid the foundation for the National Market System—and brought transfer agents into the agency’s ambit. In a speech titled “Transfer Agents Meet the SEC” in October 1975, Commissioner Evans said the following to your community:

“It is our responsibility and your responsibility to assure that improper regulation is avoided, that the benefits of regulation outweigh the burdens, and that costs of regulation are held to an absolute minimum, consistent with the protection of investors and the public interest. How successful we are in accomplishing these goals will depend to a great degree on communication, understanding, and cooperation between the SEC and your industry, and a sensitivity and willingness on our part to tailor registration, recordkeeping, and reporting requirements, as well as performance standards and other regulations, to types of transfer agents and to investor and public needs.”

Rick Ketchum led our Division as Director for nearly seven years – from June 1984 to May 1991, another third-longest tenure. The Division was then known as “Market Regulation.” Speaking to the Security Industry Association’s Operations Conference in May 1985, Rick noted that:

“The industry has been exploring new exciting technologies, like light signatures, that create machine-readable certificates and offer real protection against counterfeiting and theft of securities certificates. Those technologies, in our view, could greatly increase the integrity of securities certificates, especially if the technology is linked to Securities Information Center, the Commission’s facilities manager for the Lost and Stolen Securities Program. Indeed, those technologies offer the securities industry tantalizing possibilities that could reduce the processing inefficiencies inherent in physical certificates.”

These two concepts – cooperation between the Commission and industry and exciting technology creating tantalizing possibilities – are particularly relevant today. I believe that the Commission’s comprehensive proposal to modernize transfer agent rules is consistent with these concepts. I understand that two of my colleagues – Tina Barry and Kevin Schopp – were with you yesterday to discuss this proposal. In addition to Tina and Kevin, credit for the proposal goes to Jeff Mooney and Elizabeth Fitzgerald, Associate and Assistant Director in our Office of Clearance and Settlement, respectively. And our former colleague Moshe Rothman, who I believe is in the audience today, was long the driving force behind this important multi-year initiative. I hope that many of you will provide feedback on the proposal, and to Commissioner Evans’ point, particularly with respect to empirical data regarding costs and benefits.

As many of you know, Commissioner Hester Peirce was a long-standing proponent of modernizing transfer agent rules. When the Commission issued the proposal, Commissioner Peirce offered four questions for public feedback. I would highlight two of these for your consideration. First, in connection with tokenized securities, should transfer agents be allowed to use digital identifiers, such as email or wallet address, instead of the traditional name and physical address requirement? Second, how do we best tailor transfer agent rules to address the growing challenge of inactivity standards in state escheatment laws? We seek your best advice on both of these key questions.

Under the leadership of Chairman Atkins, a Division priority is facilitating activity in tokenized securities in a measured fashion that protects investors. To this end, the Commission approved the Innovation Exemption on September 17. The Innovation Exemption is a five-year, conditional exemption from the definition of “exchange” for Tokenized Securities Venues, or “TSVs.” TSVs allow permissioned participants to trade tokenized NMS stocks via automated market makers. Among other conditions, TSVs must be U.S. persons, operate on public, permissionless blockchains, and are subject to volume limits. Any tokenized NMS stock available to trade on a TSV must carry all the same rights and privileges as the underlying security. Given the role played by an issuer’s transfer agent, I anticipate that some of you will be part of this novel framework.

Beyond NMS stocks, innovators have begun to tokenize a wide array of assets, such as private equity and credit, as well as real estate and treasury repos. If any of you are involved in these developing markets, and you encounter regulatory hurdles or other roadblocks to progress, I ask that you bring them to us. Modernization of legacy infrastructure furthers the Commission’s mandate to protect investors, promote capital formation, and improve market efficiency.

Because technology is ever-evolving, particularly in this industry, the Commission’s rules and regulations must be technologically neutral. What is important is that you meet your regulatory responsibilities, not whether you do so on or off-chain. It is also reasonable for you to work with third party vendors, with the understanding that your regulatory responsibilities remain yours alone.

We have come a long way from 1975 and 1985. Today’s light signatures and machine-readable certificates are distributed ledgers, digital wallets, and smart contracts. But the promise of possibilities unlocked by novel technologies, and the necessity of constructive communication and cooperation between the public and private sectors, remain as salient as ever. And the need for trusted agents to help the issuers and investors they serve is acutely important during periods of rapid technological change.

Thank you for your time and attention. I look forward to your questions and comments.