Category: securities

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.

Washington State Looks to Generate Revenue By Selling Others’ Stocks

The Washington State Department of Revenue recently published a proposal to immediately convert securities to cash upon receipt by the DOR.  As the proposal indicates, the current law requires DOR to wait at least three years before selling stocks that are reported as unclaimed property.  The Department anticipates that it will incur $1.3 million in commissions and fee payments to sell the stocks in connection with this “revenue generating” activity.

Assuming that the stocks are sold at market value, how will this increase revenue (especially in light of the commissions apparently charged by DOR’s stockbrokers)?  Well, while unclaimed securities are reported to the custody of the state, the state can’t use those shares as general revenue (you can’t build roads or schools with shares of stock).  By selling the stock immediately, the state is hoping to use the money immediately (while paying the sale price — less fees — to the owner).

This is an example of particularly owner-unfriendly regulation.  The proposed rule allows the state to immediately sell securities (given the current market, likely at a low price) and forces the holder to pay “administrative costs” to obtain the property.  Moreover, it is particularly inconsistent with the state’s role as mere custodian (as opposed to title owner) of the property.  While states are (quite understandably) looking to generate more revenue and are aggressively enforcing unclaimed property laws to that end, they should not be changing the rules to the detriment of the rightful owner.