Transfer agents: a valuable partner for private funds

For decades, transfer agents have played a critical role in the relationship between a company and its shareholders. 

In simple terms, a transfer agent is a financial services company that provides essential services to companies that issue securities. A transfer agent may be a bank, a trust company, a stand-alone transfer agent services provider, or an in-house team within a corporation or investment fund acting as the company’s own transfer agent. 

The main responsibility of a transfer agent is to keep track of the shareholders of the company. This includes keeping a record of who owns a company’s stocks and bonds and how these are held; issuing and cancelling certificates to reflect changes in ownership; paying out interest, cash and stock dividends, or other distributions to shareholders; and handling lost, destroyed or stolen certificates.

In addition, transfer agents can act as a proxy agent (sending out proxy materials), an exchange agent (exchanging a company’s stock or bonds in a merger), a tender agent (tendering shares in a tender offer), and a mailing agent (mailing the company’s quarterly, annual, and other reports).

Traditionally, transfer agents offered their services solely to publicly listed companies. Indeed, the Securities and Exchange Commission stipulates that companies issuing a ‘qualifying security’ – largely any company listed on a stock exchange – must, by law, use a registered transfer agent.

Transfer agents and funds

More recently, certain fund structures in the US are using transfer agents to deal with these shareholder matters – either because it is mandatory or because they see the clear benefits of doing so.

Publicly registered funds in the US, for instance – marketing investments to the broadest ‘retail’ investor base – are required by law to use a transfer due to the nature of the fund’s registration with the Securities and Exchange Commission (SEC). 

Because publicly registered funds can accept investments from relatively ‘unsophisticated’, non-accredited investors, the participation of a transfer agent provides essential investor protection. 

Funds operating under exemptions from SEC registration – those that are marketed to ‘sophisticated’, accredited investors – aren’t required to use a transfer agent, but often choose to do so because of the arms-length nature of the service. In addition, as some of these funds have an investor count in the hundreds or thousands, a transfer agent can help ease what can be a significant administrative burden.

Supporting alternative assets

Private funds – private equity, venture capital, private real estate funds – very much fall into this latter category. Historically, these types of funds had a low number of investors and weren’t subject to significant regulation, so they typically didn’t use a transfer agent. 

In recent years, however, private fund investor counts have increased, investor-related regulatory requirements have been introduced and fee compression and cost pressures have pushed more private funds to use transfer agents. 

While an in-house team may license a transfer agent to increase their efficiency, many investment funds employ a third-party ‘transfer agent of record’ as it satisfies the due diligence requirements of sophisticated and institutional investors.

This is because transfer agents themselves must adhere to prescribed standards. A Service Organization Control (SOC) audit, for example, examines the processes of transfer agents to verify that the systems and procedures employed are accurate and reliable. Many fund companies require an annual SOC audit of their transfer agent to meet their due diligence requirements.

Beyond basic transfer agent services

Whether a fund must employ a transfer agent by law or chooses to do so, the easing of the shareholder administrative burden can free up valuable time for the manager to focus on more value-added work. 

But the transfer agent can go beyond this – offering a more enhanced, far more customized and service-oriented offering to meet the needs of private funds.

Because a transfer agent is tasked with housing and maintaining some of the most critical information of a company – the investor database – it’s not unusual for them to offer additional services related to the investor experience, such as accounting and reporting for the assets of the fund. These services can go up to and including the whole back office of the fund company. 

In the context of an investment fund, a transfer agent could process capital calls, pay sales commissions to financial advisors, produce K-1 or 1099 tax documents and provide online account access to investors through an investor portal. 

A transfer agent that offers back-office services touching investors, assets and even sales teams is more generally understood as a full-service fund administrator. As the administrative and regulatory burden across the funds sector increases, it’s understandable why many private funds would choose to go some or all of the way down this route.