A shifting foundation

Shareholder communication has been the focus of much recent debate. At the center of the conversation is reform of the system for voting shares at US public companies, otherwise known as proxy mechanics.

Much of the debate has focused on the legal and proxy solicitation aspects of the system and structural changes such as changes to Rule 452. But one important part of the shareholder communication machine that frequently gets overlooked is the transfer agent.

As public companies deal with significant developments at a regulatory level and adjust to an increasingly vocal shareholder community, many will face the additional challenge of finding a new transfer agent, or ensuring their existing agent is capable of dealing with this brave new world. The ground has shifted, and the next two years could mean significant change in how things are done; some will keep up, others won’t.

When it comes to transfer agents, most issuers’ biggest concern is expense. ‘There really is a lot going on and the first question from issuers is nearly always, How much is this going to cost me?’ says Anthony Thalman, managing director of shareholder services at BNY Mellon Shareowner Services. Despite this intense focus on cost, however, Thalman does not believe it is the primary reason for an issuer to switch agents. ‘Generally, an issuer changes to a different transfer agent because of quality,’ he maintains. ‘It is not really about price. They make it a price play but that is not the real reason for most transfer agent moves.’

Ken Staab, national sales director at American Stock Transfer and Trust Company, agrees. ‘More quality, lower fees, better delivery – that is what it is all about,’ he comments.

Standing out from the crowd
If issuers are focused on price but the underlying concern is quality of service, what then are the elements that separate one transfer agent from another? This is a difficult question. The significant change taking place in the market in terms of regulation and shifting moods is, in many ways, making the business of being a transfer agent more expensive. Given the market’s current competitiveness, however, it is extremely difficult for agents to pass on these costs.

‘Regulatory changes – like the implementation of cost-basis accounting, new filing and processing changes, escheatment and several proposals that have yet to become law – are changing the nature of our business,’ Thalman says. ‘We are looking at different ways in which files move, different ways in which reporting has to be handled by issuers, the speed at which those reports have to be made – real time versus overnight – and how all that is coming together.

‘Many of the things transfer agents traditionally did are highly commoditized, so we as a business and as an industry need to find new ways to add value. This primarily involves offering more shareholders more services to keep them within your business.’

There are still areas for growth, Staab suggests. ‘It is a commoditized business and – in some part – over-priced at the top end but there is room, pricing-wise and structure-wise, particularly for fully integrated services,’ he explains.

He believes issuers and investors have considerable appetite for a transfer agent offering that brings together a range of services like fully integrated proxy services and a cost-basis facility.
‘There is a real opportunity for growth both here in the US and internationally,’ Staab points out. ‘And not just in the proxy or transfer services but also in different product lines such as corporate actions business and asset recovery business.’

Getting to know you
While regulatory change has had some impact on transfer agents and the way they do business, some of the pending legislation is likely to have a far more significant effect on transfer agents’ relationship with investors and issuers.

‘Right now there is not a lot of meat to chew on in terms of understanding the regulatory impact on the transfer agent business,’ explains Charles Rossi, executive vice president of client services at Computershare. ‘What we are waiting for is the concept release from the SEC. That is likely to see changes to things like the non-objecting beneficial owner/beneficial objecting owner distinction. We hope it will contain the facility for issuers to communicate directly with shareholders without going through the existing circuitous route.

‘We are hopeful it will mean issuers having the ability to choose who they want to do their printing, mailing, tabulation and communications. If that were to happen, it would be a significant opportunity for transfer agents to improve their businesses.’

Thalman agrees a shift in the proxy distribution market would be extremely significant. ‘If the decision was made to break up the monopoly on proxy distribution services and offer up the Street lists, it would have a huge impact on transfer agents,’ he says. ‘Firstly, as most transfer agents are their own solicitors or have a relationship with one, it would drive additional business. It would also drive a huge amount of work toward the issuers because clients would likely just hand that extra work to the transfer agents.

‘Many agents are not staffed for that so it would require a period of adjustment. We recognize that we will handle the registered side and Broadridge will handle the Street side, and we base our costs on how many deals and how many registered holders we have to deal with.

‘This number does not change all that much, so if it suddenly did that would be a massive challenge. It would be a good problem to have but it would involve a great deal of adjustment to staffing and strategy. It would be a stress on operational quality, although ultimately a good thing.’

New focus
‘I think you will see a more focused approach on getting shareholders to vote and making them realize how important their vote really is,’ adds Rossi. ‘There is going to be a definite reengagement. What can you do to help us communicate more effectively and efficiently with our owners?’

And what form might that communication take? Will people migrate away from paper toward electronic means? Agents will need to look internally to figure out logistics for handling the increased volume. The Street side holding tends to be fairly significant compared with the registered side, so agents will need to look at their infrastructure to ensure they can deal with the increased internet and phone traffic, and determine the best methods of communication and the most appropriate types of outreach campaigns to get the vote out.

Staab sums it up: ‘It is a question of quality at a time when quality seems to have gone out of vogue.’