February 7, 1992
TO: SEC RULES MEMBERS NO. 6-92
OPERATIONS MEMBERS NO. 5-92
TRANSFER AGENT ADVISORY COMMITTEE NO. 7-92
RE: COMPLIANCE WITH NEW SIGNATURE GUARANTEE RULE
__________________________________________________________
A meeting of the Institute's Transfer Agent Advisory
Committee was held on Friday, January 31, 1992 in Washington to
identify problems and discuss compliance options in connection
with new Rule 17Ad-15 under the Securities Exchange Act of 1934
regarding acceptance of signature guarantees. The rule is
effective February 24, 1992. (For a copy of the final rule, see
ICI Memorandum to SEC Rules Members No. 2-92, Operations Members
No. 2-92, and Transfer Agent Advisory Committee No. 2-92, dated
January 17, 1992.) This memorandum provides a synopsis of the
rule, summarizes the discussion at the January 31 meeting and
provides additional information that may be helpful to ICI
members preparing to comply with the rule.
SYNOPSIS OF RULE
WRITTEN STANDARDS AND PROCEDURES
The rule requires registered transfer agents to establish
written standards and procedures for the acceptance of signature
guarantees from "eligible guarantor institutions," defined in
the rule to include banks, brokers, dealers, credit unions,
securities exchanges and associations, clearing agencies and
savings associations. The standards, as written or applied, may
not treat different classes of eligible guarantor institutions
inequitably. A transfer agent generally may not reject a
signature guarantee from an eligible guarantor unless the
guarantor does not satisfy the transfer agent's written standards
or procedures.
-2-
SIGNATURE GUARANTEE PROGRAMS
The rule which permits transfer agents to incorporate in
their written standards that they will (1) accept guarantees from
eligible guarantors who participate in a signature guarantee
program or (2) reject guarantees from eligible guarantors who are
not participants in a signature guarantee program. However,
transfer agents electing to accept guarantees only from
guarantors who are participants in a signature guarantee program
may not, for a six month transition period from the date their
written standards are established or revised accordingly, reject
guarantees from eligible guarantors because the guarantor is a
non-participant.
"Signature guarantee program" is defined in the rule as one
whose terms and conditions the transfer agent determines to
facilitate the equitable treatment of guarantors and to provide
adequate protection against risk of loss or the issuance of
unauthorized guarantees.
EXCLUSIONS
The rule provides that transfer agents are not prohibited
from rejecting certain items for reasons unrelated to acceptance
of the guarantor institution, for example, where the transfer
agent suspects forgery or believes that the transaction would
otherwise be wrongful. Also excluded are items rejected because
the person acting on behalf of the guarantor is not authorized
(provided the transfer agent keeps a list of authorized
signatories) or where the guarantor is a broker or dealer and is
neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
NOTIFICATION OF REJECTIONS
Transfer agents must notify guarantors and precentors of
any rejections and the reasons therefor within two days of any
rejections that are based on a determination that the guarantor
does not meet the written standards of the transfer agent.
Notification to the presenter may be accomplished by making the
rejected item available to the presenter. Notification to the
guarantor may be accomplished by telephone, fax or mail.
RECORDKEEPING
Every transfer must maintain a copy of the standards and
procedures in an easily accessible place and make a copy
available to any requesting person within three days of the
request. Transfer agents must also maintain, for a period of
three years following a rejection, a record of transfers
rejected, including the reason for the rejection, who the
guarantor was and whether the guarantor failed to meet the
transfer agent's written standards.
-3-
SUMMARY OF MEETING DISCUSSION
WRITTEN STANDARDS AND PROCEDURES
Options for complying with the written standards and
procedures requirement were discussed at length. The available
options appear to be as follows:
1. Accept from all eligible guarantors.
2. Accept from eligible guarantors meeting written standards.
3. Accept from eligible guarantors meeting written standards
and participants in approved signature guarantee program(s).
4. Accept only from participants in approved signature
guarantee program(s).
By the end of the meeting, virtually all attendees agreed
that the only realistic alternative at this time is to accept
signature guarantees from all eligible guarantor institutions and
indicated they would expect to establish their written standards
accordingly. Options 2 and 3 above were generally regarded as
not realistic at this time because transfer agents do not have
the resources to apply financial creditworthiness criteria, on an
ad hoc basis, to every eligible guarantor providing a signature
guarantee. Option 4 was viewed by most as not realistic at this
time because there currently is only one signature guarantee
program in existence (Securities Transfer Agents Medallion
Program or "STAMP") and it is not expected to be operational
until February 24, 1992, the effective date of the rule.
Moreover, even if STAMP finds acceptance among the guarantor
community, it will take time for a sufficient number of
guarantors to enter the program to make this option viable for
transfer agents.
Fund groups that have trustee approval to waive signature
guarantees for all but a relatively limited set of transactions
(for example, where the dollar threshold beneath which guarantees
are not required is relatively high), may consider the
application of financial criteria to individual guarantors a
feasible activity.
CERTAIN CREDIT UNIONS
The group considered an issue briefly discussed in the
SEC's adopting release regarding the authority of state chartered
credit unions to issue signature guarantees. While the
definition of "eligible guarantor institution" in the rule
includes, in effect, all credit unions, the release qualifies the
-4-
definition to guarantors that are "authorized" to provide
signature guarantees. While it is believed that most state
credit unions are probably authorized under state law to provide
guarantees as an "incidental power" or "goodwill service," there
is no general authority that can be cited as in the case of
federal credit unions and the other classes of guarantor
institutions.
The Institute is investigating whether state chartered
credit unions without authority to provide signature guarantees
can be easily identified and listed. In the meantime, the
release permits transfer agents to require assurance from
guarantors of their signature guarantee authority to the extent
it is not a matter of general knowledge. Therefore, it appears
that transfer agents may include in their written standards and
procedures a requirement that state chartered credit unions
furnish a citation of their authority to provide signature
guarantees without running afoul of the rule's "inequitable
treatment" prohibition.
MODEL WRITTEN STANDARDS
The Securities Transfer Association (STA) is currently
preparing a model set of written standards for its membership and
has agreed to make this document available to the Institute for
distribution to the ICI membership. The STA model is expected to
be completed and available within a week.
Participants at the Institute's January 31 meeting were
requested to provide copies of their written standards to the
Institute when they are completed. The ICI staff will then be
able to advise members as to the development of any generally
accepted approaches and associated language.
COMMUNICATION OF WRITTEN STANDARDS
The group addressed the question of whether prospectuses
would need to be stickered on or before February 24, 1992 to
reflect the written standards. The consensus was that stickering
would not be necessary and virtually all participants indicated
they would expect to provide prospectus disclosure about their
transfer agents' written standards in their funds' next regular
amendments.
It was noted that shareholder servicing staff will need to
be educated about any new or changed standards and procedures to
be able to apply the requirements and explain them to
shareholders.
-5-
MODIFICATION OF WRITTEN STANDARDS
There appears to be nothing prohibiting a transfer agent
from changing its written standards and procedures whenever it
wishes (until prospectuses are revised to reflect the established
standards). Therefore, transfer agents may consider fine-tuning
their standards and procedures as necessary or desired as
experience is gained under the rule.
RECORD RETENTION
The rule is not completely clear on which rejections must
be maintained in a separate record for the required three year
period. There is a question as to whether the requirement
relates only to those rejections caused by failure of the
guarantor to meet the transfer agent's standards, or all rejected
items for any reason whether or not signature guarantees were
required, or something in between. Based on informal
discussions with the SEC staff, the staff preliminarily seems to
favor an interpretation requiring that transfer agents maintain a
record of every rejected item for which a signature guarantee was
required, irrespective of the reason for the rejection.
STAMP
STAMP is a program developed under the sponsorship of the
STA that will enable eligible guarantors to obtain surety bonds
in amounts ranging from $100,000 to $1 million to satisfy claims
of transfer agents where guarantors cannot respond. In addition,
STA will obtain a $10 million liability insurance policy to
satisfy claims in excess of a guarantor's surety bond limit. STA
expects to increase the policy limits to the $50-$100 million
range within five years. STAMP will be governed by an
independent board of individuals representing financial service
groups. The program will be administered by Kemark Financial
Services. Kemark expects to begin disseminating STAMP marketing
materials to the guarantor community within the next week. The
Institute will obtain copies of STAMP materials for distribution
to the ICI membership for your information and review along with
the STA model written standards as soon as they become available.
*****************************************
We will keep you informed of significant developments in
connection with implementation of this rule and we will forward
any relevant materials and information to you as they become
available.
Donald J. Boteler
Assistant Vice President-
Operations