SEC Adopts New Obligations for Broker-Dealers and Paying Agents Regarding Lost Securityholders and Unresponsive PayeesJanuary 1, 2013
The Securities and Exchange Commission (the “SEC”) recently adopted amendments to Rule 17Ad-17 (the “Rule”) under the Securities Exchange Act of 1934 to implement certain requirements of the Dodd-Frank Wall Street Reform and Protection Act. The amended Rule: (1) requires broker-dealers to conduct searches for holders of securities with whom they have lost contact and (2) requires broker-dealers and other securities market participants to provide written notifications to persons who have not negotiated checks that have been sent to them.
The amendments to the Rule will become effective on March 25, 2013, and broker-dealers will be required to comply with the Rule by January 23, 2014.
Obligation to Search for Lost Securityholders
As amended, the Rule will require broker-dealers with customer security accounts to exercise reasonable care to ascertain the address of each securityholder to whom an item of correspondence that was sent has been returned as undeliverable and for whom the broker-dealer has not received a new mailing address (the “lost securityholders”). In exercising such reasonable care, broker-dealers must conduct two database searches, using at least one information database service, to ascertain the address of each lost securityholder. The first database search must be conducted between three and twelve months from the time a securityholder becomes a lost securityholder, and the second database search must be performed between six and twelve months after the first search. The searches must be conducted by taxpayer identification number, or if a search based on taxpayer identification number is not likely to locate the securityholder, by name. The securityholder may not be charged for these mandated searches.
The obligation to conduct database searches does not apply when (i) the broker-dealer has received documentation that the securityholder is deceased, (ii) the total value of assets in the securityholder’s account is less than $25 or (iii) the securityholder is not a natural person.
Obligation to Send Notice to Unresponsive Payees
The amended Rule requires a “paying agent,” which is defined to include any issuer, transfer agent, broker, dealer, investment adviser, indenture trustee, custodian, or any other person that accepts payments from an issuer of a security and distributes payments to holders of the security, to provide written notice to an “unresponsive payee” that a check has been sent and has not yet been negotiated. Under the Rule, a securityholder shall be considered an “unresponsive payee” if a check is sent to the securityholder and the check is not negotiated before the earlier of (i) six months from the date such check was sent or (ii) the paying agent’s sending of the next regularly scheduled check. Notification is not required where the value of the not yet negotiated check is less than $25. The SEC has clarified that the new notification requirement shall have no effect on a state’s ability to collect funds that it deems abandoned under state escheatment laws.
Every broker-dealer with customer security accounts and every paying agent is required to maintain records demonstrating compliance with the Rule, including written procedures that describe the methodology for complying with the search and notification requirements.