On January 16th, The Securities and Exchange Commission (SEC) adopted amendments to Rule 17Ad-17 to implement the requirements of Section 929W of the Dodd-Frank Act. That section directs the SEC to revise Rule 17Ad-17, by extending the requirements of Rule 17Ad-17 to search for lost security holders from not only recordkeeping transfer agents but to brokers and dealers as well. The SEC is also adding a requirement that “paying agents” notify “unresponsive payees” that a paying agent has sent a security holder. a check that has not yet been negotiated. The amendments will become effective on March 25, 2013. The compliance date will be January 23, 2014.
Applicable for Transfer Agents
For the most part this rule does not affect transfer agents. However, the unresponsive payees will now need to be notified on any checks that have not yet been cashed for transfer agents that act as payment agents.
Applicable for Broker Dealers
Broker dealers now are required to comply with the same lost security holder rules that transfer agents must comply with, per this rule. This includes conducting address searches for lost security holders or shareholders that have bad addresses.
Effects on Shareholders
The implications embedded in this rule will be beneficial for shareholders who would have had some form of payment sent to them but would not have received it due to a bad or unknown address. Normally, once the bad address is updated by the transfer or payment agent, the account could be updated and the check would be sent out. If a new address was not obtained, the transfer agent would need to escheat the funds to the appropriate state of which the shareholder last resided. Thus, it is evident that adding a requirement to send additional notices to shareholders that have not cashed their check will not only help locate these shareholders’ addresses and avoid escheatment but will remind shareholders to cash their checks. This will improve efficiency of the paying agents’ responsibilities and protect shareholder’s interests.
However, shareholders who hold shares at a brokerage should be weary that their shares could get escheated. How could this happen? If a shareholder moves and forgets to update their address after several years (most states 2-5 years), then the entire brokerage account could be escheated to the state they last resided in. Why would this happen? Since brokerages hold shares electronically under their nominee name, they are required to escheat shares if the shareholder cannot be found. Again, escheatment would not be required if the shareholder held onto the property themselves, but this is not possible since the shares are in electronic form. Therefore, since the broker is holding onto the property through electronic means, they would be required to escheat the shares after the shareholder is deemed as lost for a certain period of time. On the other side of the spectrum, transfer agents who keep an electronic record of physical certificates, cannot escheat the shares even if the shareholder cannot be located or the certificate is lost because the transfer agent is not technically in possession of the shares. Thus, with the new rules, it may be more beneficial to hold physical share certificates rather than electronic certificates.
SEC Release 34-68668 – Lost Security Holders and Unresponsive Payees