SEC Approves New Rules Regarding Lost Holders of Securities

The Securities and Exchange Commission today unanimously approved new rules requiring broker-dealers to conduct searches for holders of securities with whom they have lost contact. 

A similar rule already applied to recordkeeping transfer agents, who are the intermediaries between the clearing house and the broker-dealer.  The Dodd-Frank Wall Street Reform and Consumer Protection Act tasked the SEC with extending the application of this rule to broker dealers so that broker-dealers have the same obligation.

The new rules also require broker-dealers and other securities market participants to provide notifications to persons who have not processed checks that they have received in connection with their securities holdings. 

“For the first time, broker-dealers will have a duty to reach out and find those they have lost touch with.   It’s a straightforward rule with a common-sense objective,” said SEC Chairman Elisse Walter.  “Among other things, it will make it more likely that investors will get the money that they may not have realized is owed to them.”

Specifically, the new rules:

• Require broker-dealers to conduct certain searches for lost holders of securities that transfer agents currently are required to conduct.
• Require “paying agents” – including certain issuers, broker-dealers, transfer agents, and other entities – to notify certain persons – termed “missing securityholders” in the statute and “unresponsive payees” in the adopted rules – in writing that the paying agent has sent the person a check that has not yet been negotiated.
• Excludes paying agents from their notification requirement when the value of the not yet negotiated check is less than $25.
• Add a provision clarifying that the notification requirement for paying agents shall have no effect on a state’s ability to collect funds that it deems abandoned under so-called state escheatment laws.
• Add a conforming technical rule to help ensure that broker-dealers have notice of their new obligations regarding lost holders of securities and unresponsive payees.

The original rule – Rule 17Ad-17 – required only recordkeeping transfer agents to exercise reasonable care to ascertain the correct addresses of “lost securityholders” and conduct certain database searches for them.  This loss of contact can be harmful to holders of securities because they no longer receive corporate communications or the interest and dividend payments to which they may be entitled.  In addition, the securities and any related interest and dividend payments to which the holders of securities may be entitled are often placed at risk of being deemed abandoned under operation of state escheatment laws. 

The amendments will become effective 60 days after the date of publication of the release in the Federal Register.  The compliance date will be one year after the date of publication of the release in the Federal Register.

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The new rules are available in draft form while pending review at the Office of Management and Budget (OMB) of the major rule analysis under the Small Business Regulatory Enforcement Fairness Act.  After the OMB review is complete, the Commission will issue the rule release in final form and send it to the Federal Register for publication.