From Bob Irvine: President, and Jennfer Borden: Executive Vice President/General Counsel of UPRR
Q. For years the Optimizer has been concerned about changes in state unclaimed property practices and interpretations, changes that could limit investors’ options around certain investment strategies. Are investors in vehicles like dividend reinvestment plans in danger of having their investments prematurely escheated and liquidated?
Borden: The short answer is, yes. Investors who utilize DRP’s, as well as people who invest in non-dividend paying stocks, are absolutely at risk of having their holdings escheated and liquidated. Bob and I have been working exclusively in the escheat arena for a combined 50 years. The traditional interpretations of escheatment have always contemplated that the owner is “lost” – unreachable and therefore incapable of control- ling their assets. In fact, the SEC implemented Rule 17Ad-17 in the mid-‘90’s to mandate the outreach to investors that would prevent them from being deemed lost.
But this concept and the federal regulatory requirement are completely undermined by current trends to focus on “activity”, rather than whether or not the investor is lost. The reason so many people are incensed by it is the fact that there is simply no requirement that investors be “active”. So states utilizing an inactivity standard are capitalizing on the fact that the vast majority of investors are decidedly inactive. DRP’s are set up for the convenience of the investor – they grow their investment in their chosen stock, without the need to cash dividend checks that for the majority of investors are often in small denominations. There are some excellent stocks that do not pay dividends, but are extremely valuable to their investors. In both cases, the investor does not have the “opportunity” to demonstrate activity by cashing a check. As such, some states deem these investors to be inactive and subject to escheatment, even though the investors are anything but lost.
Irvine: Since they are not lost, the SEC’s requirements will never kick in. So the federal legislative intent to prevent the disenfranchisement of investors has been thwarted. The states utilizing the inactivity standard will argue that if the issuers perform due diligence, then the owners can prevent their stock from being escheated by responding. Here’s the problem with that line of thinking: it ignores the reality that many people will not take action on an account that they do not believe is at risk. It simply creates a new burden on the investor to take action, a burden that is not dictated by securities law, which should be the controlling law. Irvine: Securities regulators are the experts in protecting investors, not unclaimed property administrators. Unfortunately, when administrators utilize the inactivity standard and promptly liquidate the shares, they are depriving the investors of the correct value of their property, something the SEC works to preserve.
Q. Considering the increased focus by states on securities as potential unclaimed property, what are the biggest obstacles public companies are facing in maintaining shareholder communications?
Borden: The SEC’s requirement to search for lost shareholders is triggered when two pieces of mail have been returned to the transfer agent. So, if a state insists on escheating “inactive” shareholders who are not lost, the searches and mail outreach mandated by Rule 17Ad-17 will never occur. The result is, holders will have to choose between comply- ing with federal law or the state’s interpretation of its unclaimed property law. It seems fairly obvious that state law should yield to the federal law, but so far the auditors who are promoting the inactivity standard seem deaf to this issue.
Irvine: An even bigger concern for the issuer is dealing with a share- holder who has just learned that a state unclaimed property offi has liquidated their stock. The issuer has simply followed the direction of the state, but will be the one who receives the consternation of the shareholder, who will wonder how statutes designed to protect people from losing their assets could have been responsible for them losing their assets. This truly creates a quagmire for the issuer.
Borden: I would add that sending due diligence letters to investors who are simply doing what they are supposed to do – buying and holding investments – creates confusion. Think about it for a minute: the investor receives a statement that indicates her holdings. The next month, the investor receives a letter at the same address indicating that those shares are in danger of escheating. It creates needless confusion.
Irvine: In the case of shares that have been liquidated, the shareholder will not take comfort in learning that the liquidation could have been avoided if they had simply responded to the due diligence letter. With all the unsolicited mail we receive each day, is it any surprise that many due diligence letters will go unanswered? Forget about confusion, this will result in needless escheatment.
Q. Are there other changes that have had a negative impact on businesses and investors? Have there been any state law changes that actually assist businesses in becoming compliant or maintaining shareholder contact?
Borden: States that liquidate shares shortly after receipt don’t give shareholders time to discover and claim their property, potentially lead- ing to loss in value with no notice. As we saw in California, this is a violation of the shareholder’s constitutional rights.
Irvine: On the bright side, some states will not liquidate until the owner’s information has been published once, and some states are prohibiting the use of contingent fee auditors. Both initiatives will protect issuers and their shareholders.
Unfortunately the majority of states still do use contingent fee auditors, notwithstanding clear guidance from the U.S. Supreme Court that a fi interest in the outcome of an audit removes the auditor’s objectivity, thus rendering the audit unconstitutional. There are dozens of issuers who are currently challenged by the auditors’ demands, where their sampling methods are unreasonable, the documentation demands are burdensome, and the auditors’ interpretations are suspect. The strategy of the auditors seems to be to fi about everything in order to exhaust the holder into acquiescing on legitimate issues. Hopefully a federal court will have the opportunity to weigh in on these tactics in the near future so that issuers and their shareholders’ concerns will be heard in an objective forum.
Q. The unclaimed property compliance landscape seems to be shifting constantly. With so many fast-changing laws and rule changes what can companies do to keep up and remain compliant?
Irvine: We keep our clients informed about all pending changes and the impact on them, and issuers stay informed of developments through active participation in groups like the SSA and STA. As a service provider, we constantly strive to be ahead of the curve, to steer the discussion, and help influence the outcome in the most practical manner for our clients. We constantly monitor legislative and regulatory updates, as well as political trends that potentially impact our clients. We are proud that our experience allows us to be proactive thought leaders.
Q. How is UPRR helping public companies and their investors to solve some of the problems that have been created by the shifting unclaimed property landscape?
Irvine: With our Pre-Escheat Location Program, we are able to identify accounts that are at risk of escheatment, and provide the company direction on where proactive outreach is desirable. Then we utilize our proprietary search techniques to fi owners or their heirs, so that the appropriate contact is made on the account. Regardless of whether a state uses a “lost” standard or an “inactivity” standard for purposes of determining escheatability, the primary objective should always be to stay in contact with the owner.
Borden: Owners benefit when they can actively control their accounts, and issuers benefit from reduced escheatment, and reduced risk posed by liquidations.
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