Rule 17Ad-13 SUPPORTING STATEMENT-DGL REVISED

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
“Rule 17Ad-13”
A.

Justification
(1)

Necessity of Information Collection

As a result of the paperwork crisis that occurred in the late 1960s, during which the
number of securities transactions exceeded the securities industry's capacity to process those
transactions, Congress enacted the Securities Acts Amendments of 1975. 1 In order to establish a
national system for the prompt and accurate clearance and settlement of securities transactions,
Congress provided for a scheme of regulation with respect to the business of being a transfer
agent. Those amendments to the Securities Exchange Act of 1934 (the “Exchange Act”) require
transfer agents to meet minimum standards as established by the Commission in furtherance of
the purposes of the Exchange Act and generally to protect investors.
Transfer agents play an integral role in the national system for the clearance and settlement of
securities transactions. Transfer agents cancel certificates presented for transfer, issue new
certificates to the transferee and record the change of record ownership of securities on the
issuers’ securityholder records. They also prepare, maintain and certify securityholder records,
disburse dividend and interest payments and mail securityholder communications such as proxy
materials and annual reports to shareholders.
To the extent transfer agents fail to perform their activities promptly, accurately, and safely,
the entire clearance settlement and transfer process suffers. Substandard performance by transfer
agents can affect the accuracy of an issuers securityholder records and, thus, interrupt the
channels of communication between issuers and shareowners. Moreover, the absence of
adequate internal accounting controls in the operation of transfer agents and procedures for the
safeguarding of funds and securities in the possession or control of transfer agents can provide
the opportunity for significant financial loss to securityholders, issuers, financial intermediaries
and securities depositories.
Based on experience in the operation of the transfer agent regulatory program, the
Commission adopted Rule 17Ad-13 which was designed to require certain registered transfer
agents to obtain an annual report on the adequacy of internal accounting controls. Because the
safe and accurate flow and recording of a large volume of securities transfers is dependent upon
the adequacy, accuracy, and reliability of those controls and procedures, the Commission
believed that an adequate system of internal accounting controls and procedures for safeguarding
funds and securities was critical to the establishment of an accurate and safe clearance and
settlement system for securities transactions.

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Pub. L. No. 94-29, 89 Stat. 97 (June 4, 1975).

Rule 17Ad-13 exempts issuers that perform transfer agent functions solely for their own
securities and certain transfer agents that qualify under the rule as “small” transfer agents. The
rule also permits the federal bank regulatory agencies to exempt bank transfer agents subject to
their jurisdiction that are not otherwise exempt as small transfer agents or issuer-transfer agents,
provided that a report similar in scope to the report required by Rule 17Ad-13 is prepared by the
bank's internal auditors for the bank's board of directors or an audit committee of the board of
directors. The federal bank regulatory agencies have taken appropriate action and Rule 17Ad-13
applies primarily to professional independent transfer agents that perform transfer agent
functions on behalf of other issuers, including affiliated issuers. The Commission believes that
the benefits of Rule 17Ad-13 to the transfer agent community, public investors and the federal
regulatory agencies far outweigh the compliance costs placed on the approximately 100 transfer
agents subject to the audit requirement of the rule.
The report required by the rule must be prepared by an independent public accountant
and filed with the appropriate regulatory agency. The report is required to be prepared on the
basis of an annual examination of the internal accounting controls and procedures for
safeguarding funds and securities used in the transfer agent's operations. The accountant must
report and comment on any material weakness found to exist as of the date of the examination in
the system of internal accounting controls and in the procedures for safeguarding funds and
securities.
If the accountant's report specifies any “material weaknesses,” the transfer agent
receiving that report must indicate in writing to the appropriate regulatory agency and to the
accountant, within thirty calendar days of receipt of the accountant's report, the corrective action
taken, or planned to be taken, by the transfer agent. Sixty calendar days thereafter, the transfer
agent must obtain from the accountant and forward to the appropriate regulatory agency a
written statement regarding whether the corrective action has been implemented. If no
corrective action has been taken, the transfer agent must give reasons for this.
Finally, the rule requires that the accountant's report and all other documents required by
the rule be maintained for at least three years, and it must be maintained in the first year in an
easily accessible place.
The Commission believes that the benefits of this rule to the transfer agent community,
public investors, and the federal regulatory agencies far outweigh the compliance costs placed on
transfer agents. Transfer agents are fully informed of the adequacy of their systems of internal
accounting controls and their procedures for safeguarding funds and securities that come into
their possession or custody. That information facilitates transfer agent efforts to establish and to
maintain sufficient controls and procedures. In addition, public investors, who must use the
services of transfer agents to become record owners of securities issues, also should experience
fewer delays and inaccuracies in receiving their securities and related distributions from, and in
the recording of ownership interests by transfer agents.

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Further, while an independent audit will not replace examinations by the federal
regulatory agencies charged with inspecting registered transfer agents, those agencies can
enhance their ability to focus on those transfer agents that are experiencing serious difficulties.
More importantly, the federal regulatory agencies can rely, in the first instance, on the efforts of
transfer agents and their accountants to remedy any problems without extensive government
involvement.
The Commission adopted Rule 17Ad-13 pursuant to authority under Sections 17, 17A
and 23(a) of the Act, 15 U.S.C. 78q, 78q-l and 78w(a).
(2)

Purpose and Use of the Information Collection

The report required under Rule 17Ad-13 is used by transfer agents to evaluate and, where
necessary, improve the adequacy of their internal accounting controls and procedures for the
safeguarding of funds and securities in their possession or control. The report also is used by the
appropriate regulatory agency in examinations of transfer operations. The Commission believes
that if the accountant reports were not prepared, serious transfer agent deficiencies in the
safeguarding of securities and funds could go undetected and unremedied and result in
substantial losses to public investors.
(3)

Consideration Given to Information Technology

There are no legal or technical obstacles which if removed would reduce burdens.
(4)

Duplication

For transfer agents affected by Rule 17Ad-13, the information required by the rule is not
otherwise available.
(5)

Effect on Small Entities

Small transfer agents are exempt from Rule 17Ad-13.
(6)

Consequences of Not Conducting Collection

The Commission believes that less frequent audits would greatly increase risks posed to
public investors and the securities industry by transfer agent deficiencies in the safeguarding of
securities and funds or operational difficulties.
(7)

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

There are no special circumstances. This collection is consistent with the guidelines in 5
CFR 1320.5(d)(2).

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(8)

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments
on this collection was published. No public comments were received.
(9)

Payment or Gift

Not applicable.
(10)

Confidentiality

This rule does not involve the collection of confidential information.
(11)

Sensitive Questions

No questions of a sensitive nature are asked. The information collection does not collect
any Personally Identifiable Information (PII).
(12)

Burden of Information Collection

Approximately 100 independent, professional transfer agents must file an annual report
prepared by an independent accountant. The time burden for each transfer agent to file this
report with the Commission is minimal or 0.
(13)

Costs to Respondents

As noted above, approximately 100 independent, professional transfer agents must file
the independent accountant's report annually. The Commission estimates that, on average, each
report can be completed in 120 hours resulting in a total of 12,000 hours annually (120 hours x
100 reports). The burden was estimated using Commission review of filed Rule 17Ad-13 reports
and Commission conversations with transfer agents and accountants. The time required to
prepare the accountant’s report varies with each transfer agent depending on the size and nature
of the transfer agent’s operations. The Commission estimates that on average 120 hours are
needed to perform the study, prepare the report, and retain the required records on an annual
basis. Assuming an average hourly rate of an independent accountant of $60, the average annual
total cost of the report is $7,200. The total annual cost for the approximate 100 respondents is
approximately $720,000.
(14)

Costs to Federal Government

Cost to the Federal Government results from appropriate regulatory agency staff time,

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and related overhead devoted to review of Rule 17Ad-13 reports. Although staff time necessary
for review will vary with each report. The Commission estimates that, on average, 1 hour of staff
time is needed to review each of the approximate 100 reports received annually. Based on these
estimates and the GSA Guide to Estimating Reporting Costs (1973), the annual cost to the
Federal Government totals approximately $3,426.00.
(15)

Changes in Burden

The overall burden has changed from a total of $1,080,000 to $720,000. The burden has
changed because the number of respondents decreased from 150 to 100.
(16)

Information Collection Planned for Statistical Purposes

Not Applicable. The information is not used for statistical purposes.
(17)

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the expiration date.
(18)

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.
B.

Collection of Information Employing Statistical Methods
This collection does not involve statistical methods.

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