On December 21, 2012, the Securities and Exchange Commission (“SEC”) unanimously approved a Draft Final Rule requiring broker-dealers to conduct searches for holders of securities with whom they have lost contact. A similar rule already applies to recordkeeping transfer agents, who are the intermediaries between the clearinghouse and the broker-dealer. The new rules were brought about by the Dodd-Frank Wall Street Reform and Consumer Protection Act which tasked the SEC to extend the application of this rule to broker-dealers requiring of them a similar obligation. Additionally, the new rule requires, among other provisions, broker-dealers to provide notifications to persons who have not processed checks that were issued in connection with their security holdings.
The original rule Rule 17Ad-17 required only recordkeeping transfer agents to exercise reasonable care to ascertain the correct addresses of “lost security holders” and conduct certain database searches for them. However, specifically under the new rule:
- Broker-dealers must perform certain searches for lost holders of securities currently required of transfer agents
- “Paying agents” – including certain issuers, broker-dealers, transfer agents, and other entities – are required to give written notification to certain persons termed “missing security holders” in the statute and “unresponsive payees” in the adopted rules, that the paying agent has sent the person a check that has not yet been negotiated
- “Paying agents” are excluded from their notification requirement when the value of the outstanding check is less than $25.
- A provision was added to clarify 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
- A conforming technical rule was added to help ensure that broker-dealers have notice of their new obligations regarding lost holders of securities and unresponsive payees.
The Draft Final Rule is used to remedy the loss of contact which 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, which may lead to the possibility of the security holder losing the payment due to state escheatment laws. The new rules are available in draft form while pending review at the Office of Management and Budget (“OMB”). The compliance date with the next rule is effective one year from the date of publication in the Federal Register.
For additional information about this topic or any other compliance topic, please contact us at (619) 278-0020 to schedule a consultation.