Cindy Nisley
President, Georgeson Securities
Unclaimed property compliance can be challenging for all holders but especially for issuers of securities. In addition to the trends of shorter dormancy periods and aggressive audit positions, more states are moving from a ‘lost’ standard to an ‘activity’ standard and adding death provisions.
Historically, issuers, states and auditors all relied on the lost standard – when mail was returned by the post office (RPO) the owner was deemed lost and if there was no owner activity, the shares would become eligible for escheatment. When an activity standard is used, owners need only to ignore their investments and related mail to become eligible for escheatment. The death provisions can further complicate escheatment by accelerating already shortened dormancy periods.
What is the risk for the issuer of securities?
The level of risk can vary by state. For example, states that have moved to an activity only standard may represent a higher risk. Under an activity standard, shareholders that use a ‘set it and forget it’ investment strategy are less likely to have activity on their account and may not even open the due diligence letter informing them of impending escheatment. When combined with other factors, such as the size of the account, this could increase the risk of shareholder market loss which could also increase the risk of shareholder litigation.
Other factors to consider are, if the state has a death provision, if the state makes efforts to contact the owner prior to selling the shares, and if the state pays the shareholder the current market value of the shares when the shareholder files a claim.
Risk may also be tied to your shareholder base. What percentage of your shareholders live in states with fewer protections? Looking at where your shareholders live, especially those with high value accounts, can help you make strategic decisions on where to best invest your resources.
What can issuers do?
Additionally, risk may be related to the actions, or inactions, of issuers. Several things can be done to protect shareholders. Education is important since most shareholders do not realize their shares can be remitted to a state and sold. Also, additional efforts to contact large value accounts at risk can reduce the potential for shareholder litigation.
Issuers can further protect themselves by confirming all shareholder activity is being tracked and provided to the transfer agent. For example, if an issuer is using a separate vendor for proxy voting, is that activity being provided to the transfer agent? If unrecorded contact – such as a shareholder voting their proxy – results in escheatment this could potentially raise the level of risk in a wrongful escheatment lawsuit.
In conclusion, unclaimed property compliance can be challenging. Issuers need to balance the risk associated with reporting shareholder property early (potentially resulting in unhappy shareholders) and the risk of reporting/remitting shareholder property late (potentially resulting in interest and/or penalty assessments for the states).
Steps issuers can take:
- Continue to educate shareholders and make them aware of escheatment requirements. Letters, webpages, and Computershare’s video series are just some of the options available.
- Analyze shareholder files so resources can be used strategically to lower risk. Identify shareholders at risk of escheatment. Where are they located? Are there high value accounts at risk?
- Review all types of shareholder contact and confirm all contact dates are being provided to the transfer agent. Keep in mind that some things an owner would consider contact or an indication of interest may not be included on the list of what a state deems allowable contact.
If you have questions about unclaimed property, please contact me at cnisley@georgeson.com.
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