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U.S. Securities and Exchange Commission

Testimony Concerning
Reuniting Securityholders With Their Investments

By Larry E. Bergmann,
Senior Associate Director, Division of Market Regulation
U.S. Securities & Exchange Commission

Before the House Subcommittee on Finance and Hazardous Materials,
Committee on Commerce

October 4, 2000

Chairman Oxley, Ranking Member Towns, and Members of the Subcommittee:

On behalf of the Securities and Exchange Commission ("SEC" or "Commission"), I appreciate this opportunity to appear before the Subcommittee today to testify about the SEC's rules designed to reunite lost securityholders with their assets.

As one commenter has said, "People inevitably get lost." Sometimes it is the individual's fault, such as when he or she moves to another town but forgets to give friends and businesses the new address. Sometimes it is the recordkeeper's fault, possibly from the result of an inaccurate entry in its records. In either case, when this happens to a securityholder and the issuer's transfer agent attempts to communicate with the securityholder, the communication is likely to be returned as undeliverable. The shareholder is then considered "lost." If contact is not reestablished with a securityholder prior to the expiration of the appropriate state's escheat period, the issuer must turn the securityholder's assets over to the state unclaimed property administrator.

This morning I will discuss what actions the Commission has taken to address this situation.

I. How big is the problem?

The Commission believes that the number of lost securityholders compared to the total accounts held by transfer agents is small. In 1997, we estimated the figure to be 1.34% of total accounts. More recently, an informal survey of seven large transfer agents, representing about 75% of shareholder accounts, estimated that lost securityholder accounts were 2.23% of total accounts. While the proportion of lost accounts is small, the aggregate dollar amounts of the assets in these accounts can be significant. In 1997, we estimated the amount to be around $450 million. Our recent informal survey estimated that at seven large transfer agents, the amount totaled about $94 million. These figures must be put in perspective. For example, one commentator has stated that "about 80 million Americans are entitled to an estimated $300 billion in unclaimed and abandoned assets."1 We believe that most of these assets are held by entities that are not within the Commission's jurisdiction, and the amounts owing to lost securityholders by entities within our jurisdiction are a tiny fraction of the total amounts lost or abandoned.

II. What has the SEC done in this area?

Transfer agents serve as the custodians of securityholder records for issuers. In this capacity, transfer agents frequently are responsible for disseminating shareholder communications and dividend and interest payments. For various reasons, transfer agents occasionally have outdated or incorrect addresses for some securityholders. Regardless of how securityholders get lost, however, the end result is the same - these shareholders do not receive dividend and interest payments to which they are entitled and, if the error is not corrected, may eventually lose the assets.

In 1997 the Commission took action that it believed would be effective and prudent. Specifically, the Commission adopted new transfer agent rules and amended other rules in an effort to require uniform and cost-effective actions to locate lost securityholders and reunite them with their assets. The new rules also were intended to collect data to better gauge the scope of the problem.2

Rule 17Ad-17 requires transfer agents to exercise reasonable care to ascertain the correct addresses of lost securityholders. At a minimum, transfer agents must conduct two searches using a robust information database, as defined in the rule. Transfer agents may not use any service designed to locate their lost securityholders that results in a charge to a securityholder until after the two database searches have been conducted. The search for the lost securityholder must be based on the taxpayer's identification number ("TIN") or the name of the lost securityholder if a search based on the TIN is not reasonably likely to locate the lost securityholder.

The rule requires that the transfer agent must conduct the initial search between 3 and 12 months of a securityholder being classified as lost. If the lost securityholder is not found, the transfer agent must conduct a second search between 6 and 12 months after the initial search. There are only three exceptions to the search requirement: (1) where the value of all dividend, interest, and other payments due to the securityholder plus the value of all assets listed in the securityholder's account is less than $25; (2) where the transfer agent has received documentation of the securityholder's death; and (3) where the securityholder is not a natural person.

As originally adopted, Rule 17a-24 required transfer agents to report annually to the Commission the aggregate number of lost securityholder accounts as of June 30 of each year and the percentage of total accounts represented by these lost securityholder accounts. These figures were to be reported for specified periods of time: one year or less, three years or less, five years or less, or greater than five years. The Commission also required information on lost securityholder accounts that were remitted to the state unclaimed property administrators under state escheatment laws.

When it proposed these rules, the Commission also asked for comments about establishing a lost securityholder database where certain entities that hold assets for others (e.g., transfer agents and broker-dealers) would file annually with the Commission a list of the TINs of all lost securityholders contained in their records. This lost securityholder database could be maintained by the Commission or its delegee, and the database could be searched or obtained by private entities that could create commercial databases. Most commenters objected to this idea. Many commenters believed that such a database would result in a loss of privacy for securityholders. Others suggested that the database could result in fraudulent claims.

In response to these concerns, the Commission adopted a rule requiring the annual reporting of aggregate rather than individualized data. The Commission focused on the need to gather data on lost securityholders in order to obtain better information as to the extent of the lost securityholder problem and to assess the effectiveness of search techniques employed by transfer agents.

III. What has happened since the rules were adopted?

The search requirements have been in effect since December 1997. The reporting requirement took effect in February 1998. The numbers were to be reported on Form TA-2, an annual filing due in August that reports data as of the preceding June. Therefore, the first full year's data was obtained in August 1999. Unfortunately, we have encountered some difficulties with the lost securityholder data requests in the Form. As transfer agents were preparing to report this data, it became clear that the questions on the form were subject to differing interpretations, and that the data is not consistent across transfer agents. In addition, recently the Division of Market Regulation has undertaken a comprehensive overhaul of Form TA-2. In light of the experience with the lost securityholder reporting provision, we reviewed the lost securityholder questions as part of this process. As a result, on March 23, 1999, the Commission proposed changes to the lost securityholder reporting requirements as a part of the proposed Form TA-2 changes.3 The new Form TA-2 was adopted by the Commission on June 2, 2000.4 This report is now required to be filed on a calendar year basis. The first set of this new lost securityholder data will be filed in March 2001 for calendar year 2000. We expect that the revised reporting requirement will provide us with more consistent and more accurate data.

In preparing for this testimony, we obtained a "snapshot" of lost securityholder activity from seven of the largest non-bank transfer agents. Approximately 990,900 out of 44,417,000 of the accounts maintained by these agents, or 2.23%, were considered to be accounts of "lost securityholders" as defined in our rule. Of these accounts, 384,700 accounts, or 0.87% of the accounts maintained, with an average account balance of $243, were remitted last year to state unclaimed property administrators under state escheatment laws.

All the transfer agents with whom we spoke agreed that the search requirements have substantially reduced the number of lost securityholder accounts. From anecdotal evidence, it appears that agents find current addresses for up to 60% of the lost accounts they submit for database searches.

Another benefit achieved by the Commission's rulemaking is heightened awareness of the problem of lost securityholders and an effort to find innovative solutions to resolve the problem. While our rules set minimum standards for lost securityholder searches, one of the largest agents is now moving to a new process where the transfer agent sends a lost securityholder file monthly to a vendor, who then conducts a search across multiple databases (including all three credit reporting agencies, the Internal Revenue Service and the Social Security Administration). This new process may improve the percentage of lost securityholders found.

There have been some questions raised as to why the Commission's lost securityholder rules apply only to transfer agents. While the Commission's lost securityholder rule by its terms only applies to recordkeeping transfer agents, in effect, the rule covers the lost securityholders of issuers and investment companies because both investment companies and issuers of reporting companies must use registered transfer agents to maintain their books and records. Now that the Commission has clarified transfer agents' obligations regarding lost securityholders, we are researching whether similar efforts should be extended to other entities that hold assets for investors, such as broker-dealers. From preliminary information about lost securityholder accounts held by broker-dealers, it appears the lost securityholder situation is much smaller than at transfer agents: of 39,786,000 securityholder accounts held by 17 representative broker-dealers, only 0.79% were considered to be accounts of "lost securityholders" as defined by our rule. Nonetheless, we are currently reviewing whether rulemaking in this area is appropriate.

Mr. Chairman and members of the Committee, I hope this overview has been helpful for you. If you have any questions, I will try to answer them.

1    Dugas, "Your Money," USA Today, Nov. 12, 1997, at p. 3B.

2    Securities Exchange Act Release No. 39176 (October 1, 1997), 62 FR 52229 (October 7, 1997)[S7-21-96].

3    Securities Exchange Act Release No. 41204 (March 23, 1999), 64 FR 15310 (March 31, 1999) (Release proposing amendments to Rule 17Ac2-2 and related Form TA-2).

4    Securities Exchange Act Release No. 42892 (June 2, 2000), 65 FR 36602 (June 9, 2000) (Release adopting amendments to Rule 17Ac2-2 and related Form TA-2).