Although broker-dealers want to track down who owns unclaimed securities accounts they don’t want to comply with the Securities and Exchange Commission’s new proposed rules.
The SEC has underestimated the time and expense involved, according to the Securities Industry and Financial Markets Association, the influential broker-dealer trade group.
“SIFMA strongly supports protecting the rights and interests of shareholders who would be deemed lost or missing under the proposed rule and ensuring that reasonable efforts are undertaken,” wrote Tom Price, managing director of the Securities Industry and Financial Markets Association in his May 9 letter to the SEC. "SIFMA estimates that the number of searches and notifications could be significantly more than the Commission’s stated estimates – perhaps as much as four times more,” wrote managing director Tom Price in his letter on May 9. “SIFMA also believes that the Commission’s estimated costs are also low, particularly taking into account paper and the increased postage costs for each mailing.”
SIFMA wants the SEC to narrow the criteria it uses for determining which shareholders are lost. Doing so, reduces the number of shareholders which broker-dealers have to spend time and money tracking down.
SIFMA also wants only introducing brokers and not clearing firms to be required to track down lost shareholders. “While clearing firms do, in fact, carry the accounts of introducing brokers, it is the introducing broker that has the actual relationship with the customer account that has been introduced,” wrote Price, who was unavailable for further comment.
In March, the SEC proposed that broker-dealers and other paying agents to follow similar guidelines to transfer agents – recordkeepers of registered shareholder accounts – when it comes to tracking down so-called lost or missing shareholders. Those guidelines call for broker-dealers and other paying agents to make some attempt to find the shareholders before their accounts must be escheated or returned to the last known address of the investor. Comments were due by May 9.
In its request for comments, the SEC said that broker-dealers need only five minutes to search for a missing shareholder and update his or her address on its records. The total cost of searching databases and updating records would come to about $3 per account. Estimating about 250,000 shareholder accounts would be classified as lost annually, broker-dealers would spent a total of $750,000 annually. Most shareholders become lost either when they die or when they neglect to notify their bank or broker-dealer of a change in mailing address.
SIFMA’s response was one of 13 letters received by the SEC. Others filed by the American Bankers Association, broker dealers, transfer agents and the Securities Transfer Association indicated similar concerns.
The SEC’s proposal is an outgrowth of the Dodd-Frank Wall Street Reform Act—Section 929W—which calls for the SEC to set new policies for broker-dealers by July 2011 by extending the requirements of Rule 17ad17 to broker-dealers. That rule was adopted for transfer agents in 1997. Transfer agents service the accounts of registered shareholders – investors who want to hold their shares in their own name. Broker-dealers, by contrast, hold and service the shares of “beneficial shareholders.” Those shareholders’ shares are held in house accounts under the “street name” of the firms.
Two operations executives at New York brokerage firms contacted by Securities Technology Monitor said that their firms do try to search for shareholders of unclaimed accounts. “We use the rule of thumb of an uncashed check for about six months or a client statement or tax form returned as undeliverable to determine whether the shareholder should be considered lost,” said one operations executive. “We might send the check back to the same address seeking an update or in some cases call the client but it’s a large investor.”The operations executives were unaware of their firms’ procedures after the shareholder was classified as lost.
Under the SEC’s new proposal, broker-dealers would like transfer agents have to conduct two searches for the assumed lost shareholders through an information database. The first search must be conducted between three months and 12 months after the security holder is considered lost; the second search must be conducted six months to twelve months after the first search. The new proposal would apply to “paying agent” which the SEC defines as “any transfer agent, broker, dealer, investment adviser, indenture trustee, custodian or other person that accepts payments from the issuer of a security holder and distributes payments to shareholders.
The regulator also wants to require that broker-dealers and transfer agents maintain records that they have complied with its new rule for three years; the records must be in an “easily accessible” place for the first year. Broker-dealers would not have to track down owners of accounts with an aggregate value of less than $25. However, they would be required at some point to escheat or return the unclaimed funds or accounts to the state of the last known address of the investor. Just when that is depends on the state as each state has different timetables depending on the type of account. Each state also has a different form to fill out before the account is escheated.
Under the SEC’s new proposal, a security holder would be considered “missing” if a check sent by the broker dealer is not cashed after six months or before the paying agent sends the next regularly scheduled check – whichever comes first. SIFMA’s Price said that the definition will result in too many shareholders considered missing especially since the uncashed check could be for as little as $25.
“Broker-dealers may be engaged with the securityholder in the normal course of business and may issue checks for a multitude of business purposes,” wrote Price. “These checks are not necessarily related to scheduled dividend and interest payments as implied under this amendment, and therefore may not be expected to occur as a regularly scheduled payment.”
Price asked the SEC to eliminate from the definition of missing securityholder any shareholder whose checks can be redeposited by the broker dealer into the investor’s account. “Such a clarification would alleviate customer confusion in receiving a notification that they have not negotiated a check whose proceeds are already in their account,” he wrote. “In addition, this clarification would relieve broker-dealers from incurring unnecessary time and expense in a process to locate a missing securityholder based on an event (check not negotiated), when in actuality the securityholder is an active client, and therefore not missing.”
SIFMA also wants the SEC to limit the types of correspondence returned as undeliverable for the shareholder to be classified as lost. The trade group doesn’t want just any letter returned unopened to qualify the shareholder as lost and therefore trigger the requirement for the broker-dealer to track him or her down. “Unlike transfer agents, broker-dealers often send a wide variety of correspondence to customers, and imposing a designation such as this for any piece of returned mail regardless of the subject matter would be unnecessarily burdensome for broker-dealers,” wrote Price. “SIFMA proposes to limit the type of correspondence to returned annual tax forms, returned checks or account statements returned in two consecutive periods."
When it comes to notifying the shareholder that he or she has not cashed a check, SIFMA recommends that the Commission allow the notice to be sent electronically as long as the shareholder has approved electronic communications for the account. “SIFMA believes that this would be a particularly effective methodology of notifying customers of a returned check or item of correspondence since a customer may have moved by not changed its e-mail address,” wrote Price.
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