Special feature - The changing world of stock transfer
Note: This special feature is sponsored by The Bank of New York
The stock transfer agency market continues to witness significant change. Fewer players, the introduction of new technology and evolving regulation present considerable challenges and opportunities, not only for those involved in the transfer agency business, but also for public corporations that rely on outside agents to maintain shareowner records and perform services that are quite visible to senior management.
During the past several years, the transfer market has undergone some degree of consolidation, as smaller agents continue to leave the business. Competition has generally been categorized into two tiers: large agents and smaller agents with a local presence. However, over the past year and a half, the landscape has changed considerably, led by the acquisition of one large agent and the recently announced exit of another small agent.
Prior to this contraction, agents were trying to purchase market share by driving prices down. In the face of price compression, agents position themselves based on relationship, technology, service quality and compliance postures. As transfer agents work to differentiate themselves from each other, issuers benefit from higher standards and customized solutions.
For corporations looking to select a transfer agent, the picture is particularly challenging. Jack Sunday, CEO of independent research house Group Five, explains: ‘This is a very mature market, and there is healthy competition between the top three or four providers.’ And the situation is only likely to continue as new requirements weed out the weaker providers. ‘I strongly suspect that we will see further consolidation leading to fewer choices for clients,’ he says. ‘A lot of the smaller players will move out of the market or be taken over.’
Ranked No. 1
Sunday points out that the results of the 2005 Shareowner Services Corporate Satisfaction Study support his point. The Bank of New York topped the list in the transfer agent industry for the fourth consecutive year, for agents managing more than 10 million shareowner accounts.
Sunday explains that while there has always been some similarity in the services provided, the results of the past few years show that the industry as a whole has improved its quality and breadth of services. More than 1,450 US corporations participated in the survey, representing about 39 million registered shareowners.
The task of selecting a transfer agent, once within the domain of corporate secretaries and investor relations officers, has more recently shifted to procurement professionals, whose focus is often limited to pricing. But there should be more to the selection process than simply price.
According to Gary Nazare, managing director of transfer agency services at The Bank of New York, corporations must look beyond price and basic transfer agency services. ‘There has been a gradual evolution of the market over the past several years, and this has led to certain expectations and efficiencies across the market as a whole,’ Nazare says. ‘This has a significant effect on the way services are priced and marketed.’
The price pressure experienced by agents from the competition has led to a need for greater operational efficiencies. ‘The primary question is, how do you cut costs while enhancing quality?’ explains Nazare. Typically, it’s about technology. Converting much of the information held on stock certificates and other paperwork into electronic format is essential to increasing operational efficiency and moving toward de-materialization.
‘The bank has invested heavily in an integrated imaging platform,’ Nazare notes. ‘We are committed to reducing the movement of paper throughout our organization, whether it is certificates or instructions, through the imaging of documents or through scannable stubs. Our state-of-the-art scanners read the document, link it to the appropriate account and, in some cases, process the entire transaction. We are cutting down on keystrokes in every transaction.’
One limitation working against the full utilization of new technology is the demographics of US shareowners. The registered shareowner is typically less comfortable accessing accounts online. Overall, the industry has a relatively low utilization of the web, but this is clearly improving. Many clients recognize the cost benefit of de-materialization (book entry positions versus expensive inventories of stock certificates) and, most notably, the electronic delivery of annual meeting materials.
‘We are looking at the front end to further empower clients and their shareowners through the web site,’ Nazare says. ‘Working together with our clients, we’re making inroads in this win-win opportunity.’
The stock transfer agency market – like the financial markets as a whole – has adapted to new regulations that change the way business is carried out. From anti-money laundering and the US Patriot Act to Gramm-Leach-Bliley and, of course, the effects of Sarbanes-Oxley, regulation is significantly more complex today than it was a mere five years ago.
The Bank of New York has a natural advantage in the management and monitoring of compliance issues, according to Nazare. This is largely due to the strong corporate governance culture throughout the bank. ‘We recognized the need for compliance professionals dedicated to our business line, and while that adds to our cost, it provides peace of mind to our clients,’ Nazare says. ‘We also have the advantage of compliance best practices as learned from 23,000 colleagues serving clients in 100 different countries throughout The Bank of New York network.
‘One of the main differentiators for the bank is the fact that we are very efficient at dealing with compliance issues,’ adds Nazare. ‘We have constant oversight from internal auditing, risk management and other levels as part of the larger bank business. Our compliance teams ensure that changes are implemented as regulations evolve.’
In addition to these compliance challenges, there are also impending changes in the SEC’s transfer agent rules that may require agents to rethink the delivery of some of their services. Significant changes are anticipated, and there has been much discussion regarding the role of transfer agents in administering dividend reinvestment and buy direct plans. Should this occur, the market might see even more consolidation.
Full suite of services
As governance and compliance issues continue to evolve along with the transfer agency business, it is also important for corporations to consider what other services their agent may be able to provide. Apart from the obvious benefit of greater support and knowledge, the corporate secretary or investor relations officer may be able to find some price efficiencies by conducting business at a ‘one-stop shop.’
In fact, Nazare points out that 75 percent of his stock transfer clients also have at least one other relationship with the bank. Clients have access to related services that are complementary to the transfer agent relationship, including cash management (controlled disbursement), employee plan administration and trade execution as well as global capabilities for processing merger and acquisition transactions. By positioning itself as an all-around ‘securities services provider,’ The Bank of New York is well placed not only to take advantage of changes in the industry, but also to be a driving force behind them.
Clearly, technology, service and regulatory concerns will continue to drive the market dynamics in the transfer agency industry. Corporate secretaries and investor relations officers will do well to consider all of these factors, as well as the overall strength and breadth of services offered.