Recordkeepers Seek New Rules for Unclaimed Securities Accounts

With billions of dollars in unclaimed US securities accounts at stake, stock transfer agents are now lobbying for changes — and some consistency — in outdated state rules.

As if tracking down the holders of unclaimed securities accounts weren’t hard enough for shareholder record-keepers, they must also deal with a multitude of conflicting and often confusing state policies for unclaimed property. The result: a lot of additional administrative work and costs which really don’t provide any value to registered investors.

The current Tower of Babel of rules about how stock transfer agents must handle unclaimed accounts for registered shareholders  actually leads to far more accounts being escheated, or transferred to state-managed coffers, than need be. No one will specify just how how much the number could be reduced, but it is clear that the escheated accounts do the states a lot more good than the investors who lose direct access to their accounts and the transfer agents who are stuck doing all the work.

Almost two decades after the last update to a so-called uniform act was unveiled, a group of shareholder recordkeepers, represented by the Securities Transfer Association (STA), is taking advantage of the opportunity to have its say.

The Uniform Law Committee (ULC) in Chicago is taking up the cause of revising the 1995 Uniform Unclaimed Property Act at the request of the National Association of Unclaimed Property Administrators (NAUPA), the American Bar Association, and the Unclaimed Property Professionals Association. NAUPA represents the interests of state unclaimed property specialists while the UPPA has corporations among its constituents.

As is often the case with any rules change which require a consensus, progress will come painstakingly slow. “Our drafting process for the new uniform act will take about two and a half years, and we expect a final draft to be completed by July 2016 so that it can be approved by the ULC at its annual meeting that month,” says John Sebert, executive director of the ULC, which consists of lawyers, judges and law professors appointed by the governor or public officials in each of the 50 states, District of Columbia, Puerto Rico and US Virgin Islands.

The phrase uniform in UUPA also doesn’t really mean what it seems. While the measure aims to provide uniform policies for states, only 41 have adopted the act in some fashion and some of those have adopted an older 1985 version. Three states — New York, Delaware and Massachussetts deviate the most from either version, say unclaimed property specialists who emphasize that states aren’t compelled to follow uniform legislation.

Even if it is one of numerous interest group, the STA’s early involvement could make the greatest difference to securities account holders in how the final rules pan out. The group’s membership consists of over 100 transfer agents servicing over 12,000 US corporations with an estimated 60 million registered shareholders — or shareholders holding their accounts in their own names on the books of issuers.

While transfer agents may be the most vocal in wanting change, broker-dealers and investment fund complexes will also benefit from their lobbying efforts. Broker-dealers, which service the accounts of street-name investors, and open-ended investment funds are also required to help reunite so-called lost shareholders with their unclaimed or dormant accounts and must also follow the mindboggling array of state statutes. By contrast to registered shareholders, street-name shareholders their accounts in the name of financial intermediaries and the SEC recently put them on an equal footing with registered investors; the securities watchdog mandated that broker-dealers and other paying agents follow the exact same rules as transfer agents in trying to track down the owners of unclaimed securities accounts.

Thirty eight representatives of organizations interested in unclaimed property matters attended the ULC’s first meeting on the issue last month. Others included the American Bankers Association, the National Association of Unclaimed Property Administrators (NAUPA), state treasurers, attorney generals, Council on State Taxation, American Council of Life Insurers and the Investment Company Institute (ICI), the Washington, D.C. trade group.

Unclaimed securities accounts represent only one of a multitude of accounts which corporations and their transfer agents escheat or transfer to state coffers each year, but the category still comprises a multibillion dollar bonanza for the states, which hold more than US$30 billion in all unclaimed property.

How it Works

Here is how states get their hands on unclaimed accounts: transfer agents must eventually escheat or transfer so-called lost or dormant accounts to a state, leaving an investor to track down and retrieve his or her account from a state treasurer or other government organization. Just which state gets the account varies: should the investor’s last known address be known, the account would be escheated to that state. If not, it would default to the state of the company’s incorporation, which is most often Delaware.

Accounts typically become unclaimed or lost when an investor forgets to tell a company’s transfer agent of a new address. When that happens, the transfer agent may receive mail back as undeliverable and the transfer agent must under SEC rules must make an attempt to find the investor by searching before classifying the account as abandoned. However, states differ as to when an account should be considered dormant and when it should be escheated to a state.

Understanding the differences is a mindboggling challenge. Here are just two examples. States that recognize that an account needs to be considered lost before it can be escheated could decide that the clock for potentially escheating the account starts from the last time the shareholder made positive contact. Alternatively, the account could be considered dormant as soon as a transfer agent receives a letter back marked as undeliverable.

The four key changes securities transfer agents want implemented, based on a letter sent to the UCC in February: states should hold securities accounts for a minimum of two years before they liquidate them; states should not consider accounts unclaimed just because shareholders don’t expressly contact their transfer agent; states should ensure that their rules not conflict with the responsibilities of transfer agents defined by the Securities and Exchange Commission; and states should treat foreign investors in US securities the same way they would US shareholders.

Contentious Issue

Among the four, the one which will likely provoke the most debate, according to Paul Griffith, co-chair of the unclaimed property committee for the STA, is just when a shareholder should be considered lost. The reason: states which say that shareholders’ accounts should be considered dormant or abandoned if their owners don’t communicate with a transfer agent for about three years are likely to be holding more escheated accounts than others with more stringent rules. Two of those states are Illinois and Delaware.

What does that mean? Say an investor reinvests dividends to buy more shares in a corporation — a common scenario for investors in utility or consumer product companies. What reason would an investor have to communicate with a company if all it wants to do is build a retirement nest egg. Under the rules of Illinois and Delaware, a transfer agent would have no choice, but to escheat an account to one of those states even if the investor is not lost. The transfer agent, explains Griffith, would be required to initially send the shareholder a due diligence letter and if the shareholder doesn’t respond between 45 days and 90 days, off the account would go to a state.

“We would just like to ensure that when we do escheat an account to a state it is because the investor is really lost,” says Griffith, who is also a manager of shareholder service operations for Computershare, the largest US transfer agent.

And just what happens when a state does get its hands on unclaimed securities accounts? It can liquidate the account and use the monies to close budgetary gaps. Of course, the state will return the value of the account to an investors who eventually discovers their accounts have been escheated to a state. But who is to say investors will receive the current market value of the account? Some states liquidate accounts immediately, so if the investor finally tracks down his or her account at the state years later he or she could easily lose out on the current market value, explains Griffith.

No wonder states are eager to get their hands on unclaimed securities accounts as quickly as possible. Some will even go as far as to require that the accounts be escheated before transfer agents have a chance to diligently look for the shareholder. Such a search typically begins after the transfer agent has received a letter posted as “undeliverable.”

“We typically fall on the side of being conservative and conduct the due diligence required by the SEC in tracking down the investor,” says Griffith. “However, the SEC’s rules affect transfer agents and broker-dealers, while state rules relate to the holders of the unclaimed accounts — that means the issuers themselves.”

Bottom line: should a state treasurer ask the transfer agent to escheat an account, all the transfer agent can do is oblige and send over the account. Of course, it will notify its client — the company that it has done so.

By requiring states to allow the transfer agents to search for the holders of unclaimed accounts first, transfer agents stand a good chance of finding them. By some estimates, about 40 percent of investors will be found which means that states receive that many fewer accounts.

Foreign investors appear to be the most vulnerable to having their unclaimed accounts escheated because current state laws do not directly address foreign investors in US securities. As a rule of thumb, unclaimed accounts will be escheated to the state of incorporation of a US company, which in the majority of cases is Delaware and that state apparently has a very loose interpretation of just what a dormant or lost account is. As a so-called “pure contact state” which means that if there is no contactfor a certain period of time, there is no requirement that the transfer agent receive returned mail as undeliverable.

In addition, foreign shareholders might be receiving dividend checks in US dollars and decide not to cash each check quickly due to bank fees. They may opt to accumulate the checks until the value is high enough to request a single replacement check. By the time the new scenario happens, the account could well be considered dormant and must be escheated to a state coffer. While Delaware makes no specific reference to lost foreign accountholders in its statutes, it has made it clear that it expects to receive the accounts based on Supreme Court rulings.

Sebert won’t speculate which aspects of the rules under consideration will be the most contested. However, he says that many of the issues posed in the STA’s letter are being addressed by the ULC’s drafting committee. The committee will “consider addressing” the remaining issues during the fall of 2014 and the first half of 2015, he adds.

Although transfer agents insist they are helping registered shareholders by ensuring that as few investor accounts are escheated to a state as possible, they acknowledge they also have a vested interest in changing state rules and ensuring consistency. They do have their own operating costs to manage.

Transfer agents charge fees to track down lost investors and some issuers will outsource the escheatment work to third party specialists; transfer agents will charge issuers for sending those specialists the necessary data on lost shareholder accounts.

However, some transfer agent firms might rely on internal escheatment units to do the administrative work and will have to either incorporate the costs into their contracts with issuers on a per account basis or require separate fees be paid. Either way, not all issuers will be happy paying the bill. And investors do suffer when accounts are escheated.