Category: securities industry

Securities & Exchange Commission Approves New Lost Shareholder Rules

On December 21, the U.S. Securities and Exchange Commission approved new rules requiring broker dealers to perform searches for “lost shareholders.”  Under preexisting law — specifically Rule 17Ad-17 — “transfer agents” (that is, those entities serving as the custodian of shareholder records for stock issuing companies) were required to perform searches for “lost shareholders” including, but not limited to, searching commercially available databases for new address information.

The new rules apply Rule 17Ad-17’s requirements to the broker-dealer firms that hold hundreds of thousands of customer accounts.  Generally, the new rule requires broker-dealers to search for “lost securityholders” by conducting two database searches.  One between three and twelve months of such securityholder becoming a lost securityholder, and the second between six and twelve months after the first search.  The rule defines “lost securityholder” as a customer to whom correspondence and/or account statements are returned as undeliverable.  Note also that the cost of the required searches may not be assessed against the lost securityholder or his or her account.

Of course, many brokerage firms already perform statutory due diligence when they receive account statements or other correspondence as undeliverable.  For two reasons, however, it could be argued that the new SEC rules are more likely to be effective than the due diligence requirements of most states’ unclaimed property laws.  First, the database searches required by the SEC rule are a higher standard of due diligence that most states’ unclaimed property laws.  Second, the SEC rule requires the holder to act much more quickly (i.e., 6 months as opposed to 3 years) than most state requirements.

A copy of the draft rule can be found here.  The new rule will become effective 60 days after it is published in the Federal Register, and broker-dealers will have one year from that date to come into compliance.

Interesting Two Part Series on Canadian Unclaimed Property

Over this past weekend, the Edmonton Journal ran an interesting two-part series on Canadian unclaimed property. Though the articles were similar to countless articles run in local papers throughout the U.S., they underscored two issues that have been discussed recently on this blog.  First, that many owners of unclaimed funds are not deceased, lost, or untraceable in any way, they simply have not claimed their funds.  Second, many of the entities having unclaimed funds can certainly use the extra money. 

The first article gives an overview of the Canadian unclaimed property law landscape and mentions, as have others, that there are often unclaimed funds belonging to well-known (and easily found) owners.  Not only are there the countless small-dollar (or, in this case, small Loonie) items that owners don’t claim, but there are also those, like the Canadian university discussed in the story, that refuse to claim property because of a good faith belief that the funds are not owed.  In many industries where there are a high volume of transactions between parties, such as the securities industry, calculation differences or balancing discrepancies are commonplace, and a frequent cause of unclaimed property.  When counterparties A and B cannot agree which of A or B are owed funds (especially when the amount at issue is small) the result is often that the broker holding the credit will escheat the funds as unclaimed property.  Though there is an objectively “correct” answer as to whether the funds are due to A or B, the funds instead wind up with neither A nor B; rather, the money winds up with the State.

The second article told the story of Rochelle Treister, who has been responsible for tens of thousands of dollars being sent to charities.  Is she a donor?  Not exactly.  Is she a fundraiser?  Kind of.  But she did not obtain this money by cold-calling donors or sending out unsolicited mailings.  Rather, Ms. Treister searched unclaimed property lists and similar databases for money being held in the name of various charities.  She made sure that charities received thousands of dollars by just ensuring they obtained funds that were already theirs.  That idea works in the United States as well.  For example, a search of the New York Office of Unclaimed Funds database discloses that the American Cancer Society, American Heart Association, and Komen Race for the Cure all have items being held by the OUF.  Ms. Treister’s idea is simple, but powerful.  Perhaps there will soon be a way for it to be adopted on a wide-scale basis.