On December 21, 2012, in response to a mandate under the Dodd-Frank Act, the SEC adopted amendments (the “Amendments”) to Rule 17Ad-17 under the Securities Exchange Act of 1934 (the “Rule”) to (1) extend to broker-dealers the existing obligation of recordkeeping transfer agents to search for securityholders with whom they have lost contact and (2) require broker-dealers and other securities market participants to provide written notification to persons who have not negotiated checks sent to the securityholder. The SEC adopted the Amendments largely as proposed. Addressing requests for exemptions or exceptions from the Rule for certain categories of persons submitted in public comment on the SEC’s proposal to amend the Rule, the SEC stated that the Amendments were consistent with the statutory directives contained in the Dodd-Frank Act and that exercising exemptive authority at the adopting stage would be premature.
Obligation to Search for Lost Securityholders
As amended, the Rule applies to broker-dealers that have customer security accounts that include accounts of “lost securityholders.” The Rule defines a “lost securityholder” as a 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. Accordingly, any broker-dealer that has customer security accounts will have to determine whether any of its customers have become lost securityholders for purposes of the Amendments.
The Amendments require that broker-dealers subject to the Rule exercise reasonable care to ascertain the correct addresses of lost securityholders and, in exercising such reasonable care, conduct certain database searches for them, at no charge to the securityholder. Specifically, such database searches must be conducted between three and twelve months after a securityholder becomes a lost securityholder and between six and twelve months after the first search. To account for instances in which an item of correspondence was returned because of simple addressing or delivery error, the Amendments provide that if the sender resends the returned item within one month of its return, the sender does not have to consider the securityholder lost until the item is again returned as undeliverable.
A broker-dealer’s search obligation does not apply to lost securityholders when (i) it has received documentation that the securityholder is deceased, (ii) the aggregate 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 Amendments require a “paying agent,” defined to include any issuer, transfer agent, broker, dealer, investment adviser, indenture trustee, custodian, or any other person that accepts payments from the issuer of a security and distributes the payments to the holders of the security, to notify, in writing, an “unresponsive payee” that a check has been sent and has not yet been negotiated. Under the Amendments, a securityholder is considered an “unresponsive payee” if a check sent to the securityholder by the paying agent is not negotiated by the earlier of (i) the sending of the securityholder’s next “regularly scheduled check,” or (ii) six months after the sending of the check. Although the Amendments do not define what is meant by “regularly scheduled check,” the SEC stated that it is “interpreting the term to include not only checks for interest and dividend payments but also any other regularly scheduled periodic payments from an issuer of securities to be distributed to securityholders as a class.” Thus, “regularly scheduled check” for this purpose would not include checks for payment solely to an individual shareholder and not to a class of securityholders. The notification required by the Amendments must be sent within seven months after the sending of the not yet negotiated check and must inform the unresponsive payee that the person has been sent a check that has not yet been negotiated. The Amendments permit such notification to be sent along with a check or other mailing subsequently sent to the securityholder.
The Amendments also provide that a securityholder is no longer an unresponsive payee when the securityholder negotiates the check or checks that caused the securityholder to be considered an unresponsive payee. As a consequence, if an unresponsive payee negotiates the applicable check or checks prior to the expiration of the six month time period provided under the Amendments, the paying agent is not required to send a notification. A paying agent is also not required to send a notification if the value of a not yet negotiated check is less than $25.
Every recordkeeping transfer agent, every broker or dealer that has customer security accounts, and every paying agent is required to maintain records to demonstrate compliance with the Rule, including written procedures that describe the methodology for complying with the search and notification requirements.
No Effect on State Escheatment Laws
The Amendments include a provision clarifying that the notification requirements have no effect on state escheatment laws.
The compliance date for the Amendments is January 23, 2014.