On March 18, 2011, the SEC proposed to revise Rule 17Ad-17 of the Securities Exchange Act of 1934 relating to transfer agents' obligations to search for lost securityholders, to:
- extend to brokers and dealers the requirement to search for lost securityholders;
- add a requirement that "paying agents" notify "missing securityholders" in writing that the paying agent has sent the missing securityholder a check that has not yet been negotiated;
- add an exclusion for paying agents from the notification requirements when the value of the not-yet-negotiated check is less than $25; and
- add a provision clarifying that the written notification requirements shall have no effect on state escheatment laws.
The SEC adopted Rule 17Ad-17 in 1997 to address situations where transfer agents lose contact with securityholders by requiring the transfer agents to conduct database searches for lost securityholders, as the loss of contact can be harmful to securityholders because they no longer receive corporate communications or the interest and dividend payments to which they may be entitled. Additionally, their securities and any related interest and dividend payments are often placed at risk of being deemed abandoned under operation of state escheatment laws.
The proposed amendments are designed to implement the directive of the Dodd-Frank Act to extend the application of Rule 17Ad-17 to brokers and dealers. Brokers are generally defined as any person engaged in the business of effecting transactions and securities for the accounts of others. A dealer is defined as any person engaged in the business of buying and selling securities for such person's own account through a broker or otherwise. According to the proposal, the SEC believes as a practical matter that primarily large clearing firms will have obligations under the amended rule because such firms carry securities for the accounts of its customers, as opposed to introducing firms, which do not.
Pursuant to the proposal, there would be a requirement that a paying agent must provide written notification no later than seven months after the sending of any not-yet-negotiated check to each missing securityholder to inform the missing securityholder that a not-yet-negotiated check has been sent. A paying agent would be 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 securities and distributes payments to securityholders." A person would be considered a missing securityholder if a check is sent to the securityholder, and the check is not negotiated before the earlier of the paying agent sending the regular scheduled check or the elapsing of six months after the sending of the not-yet-negotiated check. A paying agent, however, would be excluded from the notification requirements if the value of the not-yet-negotiated check is less than $25. The notification requirement imposed on paying agents would have no effect on state escheatment laws; therefore, it would not effect the time periods used in state escheatment laws to determine account dormancy.
The proposed amended rules would also require paying agents to maintain records, for a period of not less than three years with the first year in an easily accessible place, to demonstrate their compliance with the rule.
In order to provide paying agents with sufficient time to develop systems to comply with the proposed amendments, the SEC proposes to establish a compliance date for the amendments of one year following the date on which the SEC takes final action on the proposal.
Comments on this proposal are due no later than May 9, 2011.