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The proposal was published in the Federal Register on March 18. Broker-dealers will have about one year to follow the new rule once it is passed by the SEC. Comments are due by April 30.
The SEC’s proposal is an outgrowth of the Dodd-Frank financial reform legislation—Section 929W—which calls for the SEC to set new policies for broker-dealers by July 2011. That meant extending the requirements of Rule 17ad17 to broker-dealers. That rule was adopted for transfer agents in 1997.
“Some broker dealers had previously adopted a search model for lost account owners based on the SEC 17Ad-17 requirement,” says Christa DeOliveira, an unclaimed property senior consultant with Ryan, a Dallas-based tax services firm. “However, because they were not obligated to do so or regulated in their approach, the ones that voluntarily conducted searches, could modify the process to suit their internal operations.
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 12 months after the first search. The shareholder is considered lost when correspondence sent to the shareholder’s address on file is returned as “undeliverable” by the post office and the transfer agent has not received any information regarding the securityholder’s new address.
The new proposal would apply to “paying agent,” which the SEC defines as “any transfer agent, broker, dealer, investment advisor, indenture trustee, custodian or other person that accepts payments from the issuer of a security holder and distributes payments to shareholders. Although that definition appears pretty broad, the SEC said that practically speaking, only brokers which ”carry” customer accounts – such as clearing brokers -- would be affected; Introducing brokers would not.
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.
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.
Financial firms often lose track of investors when they change addresses or don’t claim a dividend check. Last year, the National Association of Unclaimed Property Administrators estimated that state treasurers held a total of $33 billion in unclaimed assets, reflecting everything from a savings account to a securities account. States are required to return to the unclaimed assets to either their owners or heirs of the owners, when they file the correct paperwork -- a process which could take up to six months, say some unclaimed property experts. Before that occurs, states can use the funds to shore up any budgetary deficits.
Recognizing the potential costs to broker-dealers, the SEC said that it wanted to “minimize disruptions to current systems” and requested information on how much broker-dealers would have to spend implementing the new rule. The regulator estimated that broker-dealers will be searching for about 250,000 shareholders annually at a cost of about $3 per shareholder would come to about $750,000 annually for the entire brokerage industry. However, those costs don't include additional recordkeeping work or escheating the unclaimed accounts to state treasuries.
