SEC Settles Charges With Transfer Agent for Lost Securityholders

Who may be interested: Registered Investment Companies, Boards of Directors, Transfer Agents.

Quick Take: The SEC recently settled charges with a registered transfer agent for failing to take reasonable steps to find “lost securityholders” in situations where the transfer agent had possession of an investor’s securities but no longer had current contact or location information for that investor. As part of the settlement, the transfer agent agreed to request that its mutual fund clients periodically send out notifications to their client shareholder base informing them of the risk of escheatment and educating them on steps to take to avoid dormancy.

Mutual fund shares, like any asset, can be subject to state law escheatment regimes, under which “dormant” assets can be transferred to the state.  Rule 17Ad-17, adopted under the Securities Exchange Act of 1934, sets out minimum requirements that transfer agents must use when searching for lost securityholders, whose securities could be escheated. These minimum search requirements require transfer agents to conduct at least two database searches for the securityholder’s correct address, using the securityholder’s social security number or name. The SEC Order stated that the transfer agent’s policies and procedures violated these minimum search requirements due to certain restrictive search parameters. The SEC Order further stated that the transfer agent at times failed to follow its policies, and as part of an unwritten practice often added further restrictions to its search parameters.  According to the SEC, as a result, 78 shareholders lost the ability to reclaim $651,000 in escheated assets. 

Without admitting or denying the SEC’s allegations, the transfer agent agreed to cease and desist from further violations and pay civil penalties of $500,000. The transfer agent also agreed to request that its mutual fund clients periodically send notifications to their client shareholder base informing them of the risk of escheatment and educating them on steps to take to avoid dormancy. Further, the SEC Order required that the transfer agent certify, and provide written evidence showing, that it has complied with the undertakings made pursuant to the Order.  

SEC commissioners Hester Peirce and Mark Uyeda dissented from the SEC Order, which they deemed to be an example of regulation by enforcement. The two commissioners described the notification aspect of the settlement as effectively imposing a new substantive disclosure requirement on mutual funds. 

The SEC Order can be found here.

Commissioner Peirce and Uyeda’s joint statement on the SEC Order is available here.