More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in placeand to recognize that examiners are not the enemy.
The SEC announced recently that it had approved new rules governing how broker-dealers treat the lost holders of securities.
The approval, which was unanimous, requires BDs to conduct searches for holders of securities with whom they have lost contact. A similar requirement already existed for recordkeeping transfer agents, who are the intermediaries between BD and clearing house. The Dodd-Frank Act tasked the SEC with extending the rule to apply to BDs as well.
The new rules also require broker-dealers and other securities market participants to provide notifications to persons who have not processed checks that they have received in connection with their securities holdings.
SEC Chairman Elisse Walter (right) said in a statement, “For the first time, broker-dealers will have a duty to reach out and find those they have lost touch with. It’s a straightforward rule with a common-sense objective.” She added, “Among other things, it will make it more likely that investors will get the money that they may not have realized is owed to them.”
The original rule, Rule 17Ad-17, required only recordkeeping transfer agents to exercise reasonable care to ascertain the correct addresses of “lost securityholders” and conduct certain database searches for them. Holders of securities may experience financial harm because of loss of contact, since without it, they no longer receive corporate communications or interest and dividend payments to which they may be entitled.
Another risk to security holders out of touch with BDs and transfer agents is that their securities, and any related interest and dividend payments to which they may be entitled, often end up at risk of being deemed abandoned under operation of state escheatment laws.
The new rules add a number of provisions to safeguard lost holders of securities. They include:
- A requirement for BDs to conduct certain searches for lost holders of securities that transfer agents currently are required to conduct.
- A requirement that “paying agents,” including certain issuers, BDs, transfer agents, and other entities, notify certain persons—termed “missing securityholders” in the statute and “unresponsive payees” in the adopted rules—in writing that the paying agent has sent the person a check that has not yet been negotiated.
- An exclusion for paying agents from their notification requirement when the value of a check that has not yet been negotiated is less than $25.
- A new provision that clarifies that paying agents’ notification requirement shall have no effect on a state’s ability to collect funds that it deems abandoned under so-called state escheatment laws.
- A new conforming technical rule to help ensure that BDs have notice of their new obligations regarding lost holders of securities and unresponsive payees.
The amendments will become effective 60 days after the date of publication of the release in the Federal Register, and the compliance date will be one year after the date of the release’s publication in the Federal Register. The new rules are available in draft form while pending review at the Office of Management and Budget (OMB) of the major rule analysis under the Small Business Regulatory Enforcement Fairness Act. After the OMB review is complete, the Commission will issue the rule release in final form and send it to the Federal Register for publication.