Category: securities

Britons Blindsided by U.S. Escheat Laws

Why Unclaimed Property “Activity” Standard Doesn’t Make Sense for Long Term Investments

Jessica Gorst-Williams, the “Agony Aunt” of U.K. newspaper The Telegraph recently ran an help column relating to a U.K. resident’s complaint that her shares were escheated to the State of Delaware without her knowledge. Accordingly to the unlucky shareholder, her shares were turned over to the state “because I had not made any contact with the company since receiving the shares, the necessity of which I had no prior knowledge.”  Ultimately, the shareholder had to submit her driver’s license, passport, bus pass (seriously), as well as a copy of the actual stock certificate.

After jumping through these hoops, did our heroine across the pond get her stock back? Not exactly. Instead, she got a check for $1, as the state had already liquidated the stock without her consent at the then-market value. This story is far from unique. Every year, certain states require broker/dealer firms to turn over stock positions, which are in many cases summarily liquidated, based upon nothing more than the fact that the account owner did not engage in activity during the previous 3-5 years.

By way of background, all states require the reporting and delivery of dormant securities positions. However, the manner in which this “dormancy” is measured differs among the states. There are generally two styles. In “Returned Mail” (sometimes called “RPO” (Returned by Post Office)) states, the three to five year time period after which the broker must turn over “abandoned” securities to the state does not begin to run until one or more mailed account statements are returned to the broker as undeliverable by the postal service. In “activity” states, on the other hand, the dormancy period begins to run immediately after the last owner-generated activity in the account. In other words, when you open up a brokerage account subject to the unclaimed property jurisdiction of an “activity” state, the dormancy period begins to run immediately. If you don’t trade in that account or engage in some other activity, your securities will be deemed abandoned at the end of three to five years.

While the passage of time alone might make sense to require the escheat of certain items (i.e., payroll checks – which generally aren’t held for a long time), it doesn’t make sense when it comes to securities accounts, many of which are being held for the long term. While investment advice is not something this blog is qualified to provide, it is nonetheless true that “Buy and Hold” (or passive investing) has been a popular investment strategy for decades. Thus, escheating securities to the state (where they may be quickly liquidated) simply because of a lack of activity seems inconsistent with how many owners utilize their investment accounts.

Adding financial insult to injury, the overwhelming majority of states do not hold those securities escheated to them in the name of the rightful owner. Instead, most states’ laws, including those that have adopted the recent 2016 Uniform Unclaimed Property Act, provide that the state may sell securities after three years, and that generally the rightful owner is entitled only to the proceeds of the sale. In other words, the owner loses any increase in value of those securities after they are sold by the state.


Unfortunately, it does not look like these practices are waning. For example, a bill currently making its way through the Arkansas legislature would permit the Administrator of unclaimed property in that state to sell escheated securities immediately upon receipt, instead of holding them for three years. Thus, the states’ every increasing appetite for unclaimed property has shifted the burdens of maintaining ownership squarely onto the shoulders of the owner. Now, more than ever, it is important for owners to keep tabs on their securities accounts, even if they are holding for the long term.

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.