THE UNCLAIMED PROPERTY CONTINUUM

Transcription

1 THE UNCLAIMED PROPERTY CONTINUUM NEW SEC 17AD-17 REQUIREMENTS TO STATE UNCLAIMED PROPERTY COMPLIANCE TRIGGERS INACTIVITY VS. RETURNED MAIL SIFMA OPERATIONS CONFERENCE + EXHIBIT MAY

2 Panel Participants Sal Bianco, Director of the Governance Control Division, E*Trade Jeff Pickel, Director, Fidelity Nick Nichols, Chief Operations Officer, Keane Deb Zumoff, Chief Compliance Officer, Keane 2

3 Securities and Exchange Commission Rule 17Ad 17 Proposed Changes 3

4 Dodd Frank Mandate from Congress HR 4173 known as the Restoring American Financial Stability Act of 2010 was signed by President Obama on 7/21/10. SEC directed to make the following changes to its regulations: o First, the requirements of 17Ad 17 are to be extended to apply to brokers and dealers. o Second, a paying agent is required to send notice to each missing security holder when a check over $25 due to that security holder goes uncashed. The new rules ueswere eeto be formulated uatedby the escby SEC 7/21/11 / 4

5 July 27, First Request for Comment for SEC Study Comments were requested on the following issues: o o o o o o o o Effectiveness of existing regulatory standards of care for brokers Whether there were regulatory gaps Whether retail customers understand or are confused by different standards Examination and enforcement resources Existing state securities regulations Varied service levels provided by brokers to their retail customers Impact of regulatory change on broker retail customers related to fraud protection Potential costs to brokers from potential regulatory change None were provided at this time. 5

6 Keane Dialogue with SEC Division of Trading & Markets Initial conversation by phone Thursday, 9/16/10 4:00 pm If rules to be drafted by July 2011, will there be a grace period for implementation or will it be immediate? o Answer: Yes, there will be a grace period after the rules are drafted to allow for implementation. Rule > comment period > effective date. This will allow for the systems necessary to be developed. In terms of the definition of uncashed check payees as missing, will that label be modified to reflect the true nature of the item? o Answer: Not sure of the leeway allowed by the Act to change characterization ation of un cashed payees as missing. Realizes it causes confusion and will try to clarify but not change. 6

7 Keane Dialogue with SEC Division of Trading & Markets (Continued) Will the mailings on un cashed checks be a one time requirement or will multiple mailings be required until such time as the item escheats? Will quarterly mailings be considered as a best practice? o Answer: A single written notice is all that is required by the Act. So mailing is a one time only requirement. Semi annual or quarterly mailings might be considered as a best practice. In the scenario where a broker dealer utilizes a clearing firm, i.e., Wachovia/Wells Fargo and First Clearing, which entity will have the responsibility to conduct the mailing? o Answer: Not sure yet between a broker dealer and its clearing firm where the responsibility will lie for the mailing and the required searches. Commission realizes this could be an issue. They are working on it and further clarity will appear in the proposed Rule. Will these new rules cover retirement accounts also, i.e., uncashed checks for 401k distributions? o Answer: Not sure if the new rules will cover paying agents in the retirement arena. Off the top of his head he thought yes. They realize the definition of paying agent is nebulous. 7

8 More Keane Dialogue with SEC Division of Trading & Markets (continued) Conversation by phone Friday 1/21/11 4:00 pm Does a letter sent after the check remains uncashed for 90 days satisfy the new notice requirement? o This is probably ok, but the owner is technically not yet considered missing according to the new requirement. Commission staff is not 100% sure. The 6 7 month notice may still be required. Can you reinvest uncashed check proceeds if this is listed in the prospectus? o This has nothing to do with the proposed Rule. This impacts the net capital section under the customer protection rule 15C3 1 and 15C3 3. Please inquire with Randall Roy at

9 More Keane Dialogue with SEC Division of Trading & Markets (Continued) Does the uncashed check notice requirement apply to just dividend and interest checks or to all disbursements? o The Rule applies to any check/any disbursement. Willfollow up letters or additional database searches be required after the uncashed check notice. o No. The requirement is for one letter one time. 9

10 Proposed Regulation Finally Published Finally published 3/21/11; Comment Deadline 5/9/11 Proposed changes: o The words broker, or dealer are added to paragraph (a) following the rule s existing references to transfer agents. However, the Commission clarifies that [a]s a practical matter, however, the Commission preliminarily believes that the only brokers and dealers that would have obligations under the amended rule would be those that carry securities for the accounts of customers within the meaning of Exchange Act Rule 15c3 3. Such brokers and dealers generally are referred to as clearing firms (as opposed to introducing firms ) and tend to be the larger brokerage firms. 10

11 Proposed Regulation Finally Published (Continued) A paying agent will be required to provide written notification no later than 7 months after the sending of any uncashed check to each missing security holder to inform the missing security holder that they have been sent an uncashed check. The notification may be sent with a check or other mailing subsequently sent to the missing security holder but must be provided no later than seven months after the sending of the not yet negotiated check. Paying agent is definedasanyissuer, 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 security holders. 11

12 Proposed Regulation Finally Published (Continued) A person would be considered a missing security holder if a check is sent to the security holder and the check is not cashed before the earlier of the paying agent s next regularly scheduled check, or 6 months. Paying agents are excluded from the notification requirements if the check is worth less than $25. Paying agents will be required to keep records to demonstrate compliance with the rule. Records must be kept tfor at least t33 years. The previous year s records are to be kept in an easily accessible place. The Commission believes that the collection of information under the proposed is necessary to enable transfer agents, brokers, and dealers and paying agents, as custodians of records that determine the ownership of securities and the entitlement to corporate distributions, to reduce the number of lost and missing security holders. 12

13 Proposed Regulation Finally Published (Continued) Regulation 17Ad 17 will be re titled to demonstrate it applies to personnel other than transfer agents. Specifically, the Commission proposes to re title the rule Transfer agents, brokers, and dealers obligation to search for lost security holders; paying agents obligation to search for missing security holders. The SEC has preliminarily chosen one year from final action on the rule as an effective date. 13

14 Comments Requested Requests made for public comment: o The Commission has been directed to avoid requiring multiple paying py agents to send written notification to a missing security holder regarding the same not yet negotiated check. The Commission states that it does not believe that multiple notifications by different paying agents for a given check kis a likely l scenario under the proposed rule amendments because an issuer would not use two paying agents for the same distribution. However, the Commission requests comment on the likelihood of such an occurrence and, if such an occurrence is probable with any frequency, on ways to avoid it from happening. o Comment on how brokers and dealers anticipate complying with the proposed rule s requirement to search for lost security holders. 14

15 Comments Requested (Continued) Comment on whether the new term missing security holder, and its related requirements and timeframes will be confused with the rule s existing term lost security holder and its related requirements and timeframes. The Commission requests particular comment regarding whether brokers, dealers, and transfer agents, which are also included in the definition of paying agent, foresee issues that may result from the use of the two terms. The Commission requests cost data for implementation of the proposed revisions by industry participants. 15

16 Comments Requested (Continued) Comments on any burdens to commerce that might result from the proposed rule amendments. Commentators should provide empirical data to support their views. With respect to Section 17A(g)(2) s requirement that in preparing these amendments to Rule 17Ad 17 the Commission shall seek to minimize disruptions to current systems, the Commission requests comment on any potential disruptions that may result from the proposed revisions and how to minimize any such potential disruptions. Comments on the proposal to establish a compliance date for the amendments of one year following final action by the Commission. 16

17 Comment Summaries Use more distinctive language to avoid confusion between missing and lost security holders Exclude lost from missing security holder to avoid sending notices to bad addresses Lengthen the time period that triggers the obligation to send the uncashed check notice Allocate compliance burden to broker/dealer with face to face relationship with the customer Apply rule to only those checks issued after rule s effective date 17

18 Comment Summaries (Continued) Further define scope of rule in terms of which brokers, dealers and transfer agents are covered Add a cross reference to 17Ad 17 in the 15b rule series to ensure brokers are aware of rule Permit statement reflecting re depositing of uncashed checks into owner accounts as qualified notice Extend rule implementation from 12 to 18 months Recognize and provide guidance on potential for conflict with state unclaimed property laws Permit the use of electronic means to send notices 18

19 What s Next? Dialogue with Special Counsel to Division of Trading and Markets: o Telephoneconversations on2/16/12and4/4/12 o All comments were considered and reviewed by SEC General Counsel s office; about 1/3 were incorporated in final proposal o ProposedFinal Release hasbeendrafted; first 30pageslookgood good o Next Steps: o Review by new SEC Office of Risk and Finance o Review by SEC Office of Economic Affairs o Review again by SEC General Counsel o Final review by Commissioners themselves o Implementation 12 months from adoption date o Final release expected end of Q

20 17Ad-17 Revisions: Potential Impact Broker Dealer Perspective 1 Design, Implementation, Search and Mailing Costs Many Brokers may not have a process for external database searches Per item charges for search and postage Operations costs related to increase in call volumes and maintenance requests SEC Office of Management and Budget (OMB) estimated industry cost at $9.88m, SIFMA Comment letter estimated industry cost upward of $40m 2 Customer Dissatisfaction/Confusion Some customers do not want to be contacted about low dollar accounts and checks SIFMA Comment Requested increase in minimum threshold from $25 to $100 Customers often confused by letter. Common responses: I have lived here for 20 years!, Why do I need to contact you if you already have my address? 3 Final Ruling Detail is Critical Industry has been in a holding pattern awaiting final rule Hoping final rule will reflect the comments filed during the response period 4 Potentially Lower Escheat Volumes TA 17Ad 17 searches have proven effective at locating customers 20

21 State Unclaimed Property Compliance Triggers Inactivity vs. Returned Mail (RPO) 21

22 Strict Statutory Construction vs. Industry Practice State statutes can be broken into 4 categories: o RPO Only o Inactivity Only o RPO and Inactivity o RPO or Inactivity 22

23 RPO vs. Inactivity Generally (Without nuances for DRP and Non-Dividend Paying Entities) Inactivity Only RPO Only RPO and Inactivity RPO or Inactivity CO CT* DE* IL* KY MD MN MS ND OR PA* RI SD TN* WA PR ALBERTA, CANADA *Spring State AK VA VI. CA DC GA ID IA MA MI MO NE NY* UT WY AL AR AZ FL* HI IN KS LA ME MT NC NH NJ NM NV OH OK SC TX VT* WI WV The content of this document is provided for informational purposes only and should not be considered legal advice or legal opinion. This document contains information that is confidential, may be protected by the attorney/client or other applicable privileges, and may constitute non public information. 23

24 2011 Inactivity Variations 24

25 Strict Statutory Construction vs. Industry Practice (Continued) Some states distinguish between dividend paying holders and non dividend paying holders Some states have separate provisions for DRP and non DRP property p 25

26 What Constitutes Activity? Electronic contact vs. paper Non return of 1099s Verified internet contact (login and password required) Verified phone contact 26

27 Compliance Hurdles Information systems not tracking inactivity Inability to comply without significant manual research Firms grappling with methodologies to capture and audit inactivity States supplying conflicting explanations of date of last contact 27

28 Discussion Perspectives Operations perspective generally historically RPO driven o Corporate/equity issuers recent wave of 3 rd party multi state audits focusing on inactivity trigger On Line Broker perspective embraced notion of inactivity as escheatment trigger Mutual Fund perspective driving toward integration of RPO and inactivity triggers 28

29 Inactivity vs. Returned Mail OPERATIONS PERSPECTIVE 29

30 Background Commercial TA s maintain security holder information for more than 15,000 issuers and approximately 100 million accounts Historically, securities escheated only where the security holder was deemed lost per SEC Rule 17Ad 17 As states have become more aggressive in collection, re interpretation of state statutes hasbecomenecessary 30

31 Defining Inactivity Easier Analysis: o Dividend Paying Entities Difficult Analysis: o Non Dividend dpaying Entities o Dividend Reinvestment Accounts 31

32 Illinois Case Study

33 Impact Numbers for 6 major issuers (2009 versus 2010) Eligible for due diligence based on lost interpretation in 2009, contact interpretation in 2010 o 2009 Due diligence mailed to 5,300 holders holding 103, shares o 2010 Due diligence mailed to 25,900 holders holding 7,475,000 shares What does this cost? Example DRP 33

34 Current Enforcement & Political Landscape Impact of economic crisis on state budgets. Unclaimed property is a tremendous source of revenue to the states (currently holding over $35B) States are intensifying search for additional revenue without raising taxes. New Appointed or Elected Agency Heads Translation = Increasing Audits. States have tapped into unclaimed property funds to meet budget shortfalls. 34

35 Current Enforcement & Political Landscape (continued) More audits; more aggressive stance during audit New players/limited or little specific UP experience Reduced dormancy periods Looking for new abandoned property types (e.g. digital property; uninvoiced receipts) Refusal to waive interest for non compliance under audit Goodnews perhaps greater willingness to permit voluntary disclosure to bring in revenue while avoiding costly audits 35

36 Legislative & Regulatory Trends Changing Reporting Deadlines To Collect Property Faster (MI and TX) Adding New Rules Or Policies To Cut Administrative Burdens Or Reduce The Ability To Reunite The Owner With Their Funds (RI) Adding New Rules To Respond To Unique Situations (NV) Specific Authority To Contract For Audits And Create An Estimate 36

37 Inactivity vs. Returned Mail ONLINE BROKER/DEALER PERSPECTIVE 37

38 Customer Date of Last Contact (DOLC) Owner generated activity precludes escheatment. E*TRADE utilizes a Data Warehouse as the information hub for readily accessing and managing customer data records. o The following modes of interaction qualify to update a customer s contact date thereby preventing escheatment. Inbound Phone / IVR Inbound Fax Inbound Mail User Web Login In Person Secure Message / General Transactions (bookkeeping) Bank & Brokerage Transactional Codes Details are captured through a variety of internal applications which are then fed and stored centrally in a Data Mart 38

39 New SEC Rule 17Ad-17 Proposals Evolving regulatory landscape in unclaimed property and the new impact to broker dealers Dodd Frank Act signed into law July, 2010 (expansion of current SEC rules and more active role in federal government). Enhancements to the due diligence process (additional searchrequirements) requirements) Broker Dealer vs. Transfer Agent Broker Dealer Customers (security holders) are active and are offered many different products and services that go beyond a Transfer Agent process Process ability to credit Customers Brokerage Account for un cashed checks Customers (security holder) have the ability to log in to their accounts for various reasons as an Investor and are delivered Statements 39

40 Inactivity vs. Returned Mail MUTUAL FUND PERSPECTIVE 40

41 Federal Regulations vs. State Law SEC Rule 17Ad 17 Transfer Agent: shareholder is lost if mail is returned by post office (RPO) to the fund company as undeliverable o The returned piece of mail may be r ed to shareholder within 30 days of the first piece of mail being returned Two external database searches must be performed. o First search between 3 and 12 months of RPO Event o Second search conducted between 6 and 12 months of the First Search Excludes accounts worth less than $25, non natural persons, deceased customers State Regulations Certain states assert a no contact or inactivity escheatment trigger which maysupplement or replace RPO Investors who don t affirmatively contact the financial institution, and do not have customer initiated transactions in their account can have their account considered unclaimed property even though shareholder mail is not RPO Contact standards vary by state. Some states require contact with the customer to be in writing. 41

42 Challenges and Issues Associated with Inactivity/No Contact Defining Contact among states with no contact standard o There isno uniformdefinition of what constitutescontact contact There are various systems infrastructure challenges to gathering contact information from various sources Phone, Branch and Correspondence channels may operate independently Intermediary relationships pose particular challenges Federal regulations, based on RPO, are more consistent with a firm s fiduciary responsibility to it s customers Increase in volumes Customer confusion Lack of uniformity in standards leads to inefficiency 42

43 Inactivity Based Escheatment Review requirements of state regulations o Dormancy Period, Triggering Event, Due Diligence Requirements Define Contact and Activity elements that need to be documented to substantiate lastcontact o Verified phone calls, web log in, customer initiated transactions, customer correspondence, etc. Establish Date of LastContact field on recordkeeping platform o To be populated by the date of the activities listed above Develop state specific logic to ensure that accounts are identified in a timely manner o Consider state s dormancy period and time required to locate customers Allow time for mandated state due diligence efforts Additionaldue due diligence efforts maybe advisable Develop and/or logic by state to trigger dormancy period via traditional RPO date or date of last contact o RPO accounts are still abandoned 43

44 The Bright(er) Side of Inactivity Customers are not lost o High success rates for due diligence programs Opportunity to establish proactivecommunication communication with customers o Verify account registration information o Open dialogue with customers regarding investment options o Reinforce that the firm values each customer relationship 44

45 Thank You Sal Bianco com Jeff Pickel Nick Nichols Deb Zumoff 45