On December 21, 2012, the SEC unanimously adopted rules required by the Dodd-Frank Act that require broker-dealers and certain other market participants to search for holders of securities with whom they have lost contact and provide notifications to persons who have not negotiated checks that have been sent to them.
The rules will become effective 60 days after they are published in the Federal Register, and compliance will be required one year later.1
Obligation to Search for Lost Securityholders
Amended Exchange Act Rule 17Ad-17 will require broker-dealers with customer security accounts to use reasonable care to ascertain the addresses of lost securityholders. Specifically, broker-dealers must conduct two database searches to ascertain the address of securityholders to whom any correspondence was sent and returned as undeliverable and for whom the broker-dealer has not received updated address information (“lost securityholders”). Under this rule, the broker-dealer must conduct mandatory searches through an information database service that contains addresses from the entire U.S. geographic area, contains the names of at least 50% of the U.S. adult population, is indexed by taxpayer identification number or name and is updated at least four times a year. 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 mandatory database searches must be conducted between three and twelve months from the later of
(i) the date upon which a correspondence is returned as undeliverable or
(ii) if a returned correspondence is re-sent within one month from the date it was returned and is again returned as undeliverable, the date on which the re-sent item is returned as undeliverable. The second required database search must be performed between six and twelve months after the first search.
The obligation to search does not apply when:
- the broker-dealer has received documentation that the securityholder is deceased,
- the total value of assets in the securityholder’s account is less than $25, or
- the securityholder is not a natural person.
1 Publication of these rules in the Federal Register may be delayed, pending review by the Office of Management and Budget.
Obligation to Send Notice to Unresponsive Payees
Broker-dealers, transfer agents, investment advisers, custodians, issuers, indenture trustees and any other person who accepts payments from an issuer of securities and distributes the payments to holders of the security will be required to provide written notice to any securityholders who do not negotiate a check sent to them within a specified period (generally six months).
There is an exception for unnegotiated checks worth less than $25.
The rule clarifies 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.
Recordkeeping and Procedure Requirements
Broker-dealers with customer accounts and transfer agents must maintain records demonstrating compliance with the lost securityholders rule, and broker-dealers and other persons subject to the unresponsive payee notification rule must maintain records demonstrating compliance with the unresponsive payee notification rule. These records must include written procedures that describe the entity’s methodology for complying with the rules.
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT:
https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf#page=495
DELAWARE LAWS
§ 1160 Abandoned property defined.
http://delcode.delaware.gov/title12/index.shtml
http://www.scotusblog.com/2016/06/three-way-fight-over-unclaimed-property/
http://www.scotusblog.com/2016/06/three-way-fight-over-unclaimed-property/
Posted Fri, June 10th, 2016 1:43 pm
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Three-way fight over unclaimed property
Seeking to bypass lower courts, a number of states have asked permission to sue each other directly in the Supreme Court in a high-stakes fight over millions of dollars’ worth of unclaimed property.
Delaware wants to sue two states, one of those states — Wisconsin — wants to sue Delaware, and twenty-one other states also want to sue Delaware.
At issue is which state has authority to claim ownership of an unclaimed check-like instrument that works as if it were a money order or traveler’s check, but is issued mainly by a bank or other financial institution in larger amounts, compared with the items issued by convenience stores or small businesses in smaller sums.
Delaware claims as its own all of these different instruments if unclaimed and if originally issued by a company with its legal home in Delaware, no matter where the instrument was issued.
The core legal issue in each of the new filings is whether a 1974 law with an assignment of priority of state ownership for unclaimed tangible property applies to the new instrument, which some 1,900 banks or other institutions across the country are using instead of cashier’s or teller’s checks.
Delaware says the law does not apply; the other states disagree.
The Supreme Court has issued three rulings on competing state claims to unclaimed intangible property; Congress has overruled one of those, in a 1974 law known as the Disposition of Abandoned Money Orders and Traveler’s Checks Act.
That law is at the center of the cases that have reached the Court under its “original” jurisdiction — that is, its authority to decide, in the fashion of a trial court, a legal dispute not decided by a lower court. This jurisdiction is often implicated in resolving disputes between states — as in the new filings over unclaimed property.
The Court has no binding obligation to take on such a case. However, if it does, it customarily names a “special master” to act like a junior judge to gather facts and make a recommendation for a decision. A special master’s report is not final unless it becomes the ruling of the Supreme Court.
While Delaware’s claims are at the center of this new financial fight between the states, the controversy actually turns on the specific financial instrument involved, and the Texas company that has been issuing those items, which it calls “official checks.” That company, MoneyGram Payments Systems, Inc., has its main business office in Texas but it is incorporated in Delaware.
It does business in all fifty states.
Its main business is as a kind of financial partner to banks and other institutions that prefer not to issue cashier’s checks or teller’s checks in their own name. MoneyGram does it for them, so it acts as the financial backer of its “official checks.”
That kind of transaction is conducted for some of the same reasons that stores do a business in money orders or traveler’s checks. The idea is that, in the form of a money order or traveler’s check, the piece of paper is a guaranteed form of payment that works like cash; in other words, it won’t “bounce” for lack of sufficient funds behind it.
Typically, this kind of instrument is in fairly small amounts.
But some financial institutions want to do business in larger amounts, so MoneyGram steps in and issues official checks, for which it receives fees from the financial institutions. MoneyGram also makes money by investing money that the financial institution has put up for the checks, pending the clearing (cashing, as it were) of the official checks.
If its official checks are abandoned or not claimed, MoneyGram has an understanding with Delaware that it will hand over the money involved to Delaware for that state’s own use. That is the way Delaware’s legal officials interpret prior Supreme Court rulings, which they say remain intact because the priority they assigned — to the corporate home of the issuing firm — was not overturned by the 1974 law.
That law, from Delaware’s perspective, dealt primarily with money orders and traveler’s checks, not the kind of instrument that is at the core of its business.
On May 26, Delaware filed its own request to pursue a lawsuit directly in the Supreme Court (Delaware v. Pennsylvania and Wisconsin) after those two states had filed lawsuits against Delaware in federal district courts — the normal path for federal law disputes.
Delaware has been seeking to have those lower court cases dismissed, on the theory that this kind of dispute between states belongs in the Supreme Court under its “original” jurisdiction.
In answering Delaware’s complaint, Wisconsin asked the Court to allow it to counter-sue Delaware in the Court.
Then, on Thursday, a group of twenty-one states filed their own original complaint (which has not yet been docketed) in the Court, making the same claim as Wisconsin: the unclaimed official checks belong to the states where they were purchased, not to Delaware as MoneyGram’s corporate home.
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