Bowing to concerns about the costs of compliance, the Securities and Exchange Commission is trying to figure out just how much broker-dealers, transfer agents and banks must spend to track down owners of unclaimed securities accounts before it issues a new rule.
The SEC wants to know “whether the proposed collection of information is necessary for the proper performance of the functions of the agency; the accuracy of the agency’s estimates of the burden of the proposed collection of information; ways to enhance the quality, utility and clarity of the information to be collected; and ways to mitigate the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology.”
The SEC' request was published in the Federal Register on August 2 and comments are due within the next two months.
In March, the SEC requested comment on whether broker-dealers and other paying agents would, like transfer agents, have to conduct two searches for the assumed lost shareholders through an information database. 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 securityholder’s new address. Shareholders typically become “lost” when they forget to inform their broker-dealer, a company’s shareholder recordkeeper, or other paying agent about a change of address.
The regulator also wants to require that broker-dealers and transfer agents maintain records that they have compiled with its new rule for three years. Broker-dealers would not have to track down owners of accounts with an aggregate value of less than $25. However, they would eventually have to escheat or return the unclaimed funds or accounts to the state of the last known address of the investor and each state has different rules on how that is done.
What did the SEC estimate? The annual cost for all transfer agents --companies servicing registered accounts -- to comply with its new proposal would come to $5.08 million. For all broker dealers affected it would be $9.88 million.
But the Securities Industry and Financial Markets Association (SIFMA), the trade group representing broker-dealers, counters that the SEC has grossly underestimated the cost of proposed new rules on broker-dealers and other paying agents. It could end up costing financial firms four times more than what the SEC has predicted, according to SIFMA's May 9th letter to the SEC.
The SEC’s new proposal on tracking “lost” shareholders is an outgrowth of the Dodd-Frank Wall Street Reform Act which called on the SEC to set new policies for broker-dealers by July 2011 by extending the requirements of Rule 17ad17 to broker-dealers and other paying agents. That rule was adopted for transfer agents in 1997.
In its letter to the SEC, SIFMA asked that the regulator narrow the criteria it uses for determining which shareholders are lost so that the number of shareholders broker-dealers would have to track down would be reduced.
SIFMA’s response was one of over a dozen comments received by the SEC but others filed by the American Bankers Association, broker- dealers, transfer agents and the Securities Transfer Association, the trade group for transfer agents also expressed concerns with the SEC’s proposal. Transfer agents service the accounts of registered shareholders while broker-dealers and other paying agents service the accounts of beneficial shareholders – those who hold their accounts in the name of a financial intermediary.
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