Sifma has been one of the first industry groups to raise concerns about the Securities and Exchange Commission’s (SEC) proposals regarding the introduction of new requirements for broker-dealers and transfer agents to collect data on lost or missing security holders. The association (one of around a dozen to respond initially) is asking the regulator to provide more guidance on when a security holder is to be deemed as “missing” rather than an “active client”, and how all of this differs from a “lost” security holder; semantics are therefore very much a concern.
At the root of it, the amendments would impose certain obligations on broker-dealers to search for lost security holders and would also require that transfer agents provide a single written notification within a designated timeframe to each missing security holder that they have been sent a cheque that has not yet been negotiated. It would also require both broker-dealers and transfer agents to maintain records that they have compiled with its new rule for a period of three years. The aim is therefore to ensure that reasonable efforts are made (and an audit trail is present) to locate security holders that may have dropped off the radar.
However, Sifma is keen for more clarity on the terms that the SEC is using in its paper, which is available for comment on by the industry for the next two months. There is some confusion about the definition of a “missing” security holder versus on that is considered “lost”, as well as the timeframes and conditions regarding the determination of these categories.
On this note, the association states in its letter: “Sifma believes that if a broker-dealer is able to redeposit the funds into the account after receiving a returned cheque or as a matter of practice deposits a non-negotiated cheque into the account after specified time period, that security holder should not be considered missing for the purposes of this rule. Such a clarification would alleviate customer confusion in receiving a notification that they have not negotiated a cheque whose proceeds are already in their account. In addition, this clarification would relieve broker-dealers from incurring unnecessary time and expense in a process to locate a missing security holder based on an event (cheque not negotiated), when in actuality the security holder is an active client and, therefore, not missing.”
Sifma is keen for the “missing security holder” moniker to be changed to something less misleading such as “unresponsive payee”, given that the definition is to do with whether negotiation has taken place regarding payments.
The shareholder is considered lost when correspondence sent to his or her address on file is returned as undeliverable by the post office and the transfer agent has not received any information regarding the security holder’s new address. On this subject, Sifma suggests that there should be a limited definition with regards to correspondence between these security holders and broker-dealers or transfer agents when determining whether they are “lost”, rather than being required to monitor any returned communications.
The SEC estimates that the annual cost for all transfer agents to comply with its new proposal will be around the US$5.08 million mark, whereas for broker dealers it would be around US$9.88 million. With regards to the SEC’s call for a review of these cost estimates, the association reckons that the regulator’s original figures are “extremely low” and actual costs could be four times more for both broker-dealers and transfer agents.
In order to keep some costs down, Sifma suggests that electronic communications to these lost and missing security holders should be a preferred option.
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