<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:67121.wais]
LOST SECURITY HOLDERS: REUNITING SECURITY HOLDERS WITH THEIR
INVESTMENTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
FINANCE AND HAZARDOUS MATERIALS
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
OCTOBER 4, 2000
__________
Serial No. 106-154
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
67-121CC WASHINGTON : 2000
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Finance and Hazardous Materials
MICHAEL G. OXLEY, Ohio, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana EDOLPHUS TOWNS, New York
Vice Chairman PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania ELIOT L. ENGEL, New York
CHRISTOPHER COX, California DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California BILL LUTHER, Minnesota
GREG GANSKE, Iowa LOIS CAPPS, California
RICK LAZIO, New York EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois RALPH M. HALL, Texas
HEATHER WILSON, New Mexico FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Bergmann, Larry E., Senior Associate Director, Division of
Market Regulation, Securities and Exchange Commission...... 4
Shamansky, Robert N., Benesch, Friedlander, Coplan & Aronoff;
accompanied by Daniel C. DeSimone, Office of Federal
Relations, National Association of State Treasurers........ 14
Material submitted for the record by:
Securities Industry Association, prepared statement of....... 30
(iii)
LOST SECURITY HOLDERS: REUNITING SECURITY HOLDERS WITH THEIR
INVESTMENTS
----------
WEDNESDAY, OCTOBER 4, 2000
House of Representatives,
Committee on Commerce,
Subcommittee on Finance and Hazardous Materials,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, Hon. Michael G. Oxley
(chairman) presiding.
Members present: Representatives Oxley, Shimkus, Ehrlich,
Towns, Barrett, and Luther.
Staff present: Shannon Vildostegui, professional staff
member; Robert Simison, legislative clerk; and Consuela
Washington, minority counsel.
Mr. Oxley. The subcommittee will come to order. The Chair
would recognize himself for an opening statement.
The market boom of the past decade was spurred by
technological progress that reduced costs of trading and
facilitated access to information. Opening a brokerage or a
mutual fund account is simply easier and cheaper than it was
just a few years ago, and that was before e-signature.
So, with millions of new investors opening accounts each
year, reliable data management systems are essential to a
properly functioning marketplace. To further complicate
matters, it is becoming the norm in the securities industry for
an account holder of securities to be held in ``street name.''
The investor never takes physical custody of the asset. Broker/
dealers, for example, hold the asset for the benefit of the
investor. Therefore, it is essential that account holder
information be accurate to avoid a situation in which an
investor loses an asset. This is no small task in an
environment that exchanges billions of shares of stock
annually.
The potential for investors being separated from their
assets exists, and the value of lost assets can be quite large.
This concern was brought to the attention of the industry and
the SEC in the early 1990's. In 1997, the SEC issued
regulations to address the problem. These regulations apply to
transfer agents who deliver assets to investors on behalf of
public companies. The regulations do not apply to other
entities that may hold assets for shareholders such as broker/
dealers or investment companies. However, all custodians of
shareholder property are covered under various State laws.
Laws vary from State to State but, generally, unclaimed
property escheats to the State after 7 years. Even with State
escheatment laws and SEC regulations, lost security holders
still exist. Some believe additional regulation may provide a
benefit in reuniting lost security holders with their assets.
As we consider this matter, it is important to understand
what the success rate is for returning securities and dividends
to their owners under current laws and regulations. We should
also consider the potential benefits of increasing efforts to
reach lost security holders. However, in doing so, it is
important to understand the costs involved and avoid forcing
shareholders to foot the bill for others who become lost by
their own fault.
Hopefully, our witnesses will shed some light on this issue
so that this committee might have a better understanding of the
situation. I thank the witnesses for coming and I look forward
to hearing what each has to say.
With that, let me now recognize the ranking member of the
subcommittee, the gentleman from New York, Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman, for holding
this hearing. As our distinguished witnesses will testify,
there are a relative small number of security holders that
become ``lost'' in our system. By lost, we mean that these are
investors who have lost contact with the financial institutions
or other entities holding some of their investments. While our
security holders become lost for a number of different reasons,
the Securities and Exchange Commission placed a great deal of
the burden for staying in contact with these lost investors on
the transfer agents monitoring these investments.
Specifically, in 1997, the SEC adopted new transfer agent
rules and amended other rules in an effort to require
uniformity and cost-effective actions to locate lost security
holders and reunite them with their assets. We are fortunate to
be joined here today by Larry Bergmann, who will discuss the
effectiveness of regulations like rule 17.
In closing, Mr. Chairman, I want to emphasize the
importance of this effort to our society. As Congress debates
numerous Social Security reform options, many of which include
placing a greater portion of America's retirement savings in
the financial markets, the importance of preventing lost
security holders becomes clear. The SEC conducted a survey of
the seven largest transfer agents and they estimated at least
94 million were in lost accounts. As we prepare to place a
greater emphasis on the financial markets for the retirement
securities of an increasingly mobile job force, we must take
action today to reduce the potential that security holder
accounts will be lost.
I salute you, Mr. Chairman, for holding this hearing today,
and I look forward to hearing from our witnesses and working
with you to begin to address these very important issues as we
talk about how we invest.
Thank you very much. I yield back.
Mr. Oxley. The gentleman yields back.
The gentleman from Illinois, Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman.
Just briefly, I too want to join the ranking member in
asking and following up on whether the 1997 SEC regulations
have been a help to this problem and, if not, what other things
can be adjusted to help, what other options are in place, and
just for my own sake, because this is my first term on this
subcommittee, to find out the extent of the lost security
holder problem and what percentage of investor assets are lost
and what this all represents. So that is why I am here, to
learn.
I thank you for holding the hearing, and I yield back my
time.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Paul E. Gillmor, a Representative in
Congress from the State of Ohio
Mr. Chairman, I want to thank you for calling this hearing on lost
security holders. I think this is an important issue and am glad you
have allowed us an opportunity to delve deeper into this subject.
Three years ago, in 1997, the Securities Exchange Commission (SEC)
finalized a rule to address the ``lost security holder'' problem. The
regulations, designed to speak to investors who have lost contact with
entities holding some property related to their investment, require
record keeping transfer agents to use appropriate caution in finding
the proper addresses of lost security holders. The 1997 regulations,
though, do not extend this reporting mandate to stock brokers, dealers,
investment companies or other traditional sources used as a caretaker
of a shareholder's property.
Today's hearing gives us a chance to examine whether the present
law is adequate for our nation's needs and I look forward to hearing
the testimony of our witnesses in this regard. Some have argued that
the SEC's regulations should be expanded to include all custodians of
shareholder property. Since security holders who are not reunited with
their property within five (5) to seven (7) years have their property
given to the state, I think it is essential that we understand if
enough shareholder protections are in place to prevent future
inadvertent losses of assets. I also look forward to the discussion as
to how the 1997 SEC regulations, as well as other Federal and state
statutes, have been effective in lowering lost security holder
problems.
Mr. Chairman, again, I want to thank you for calling this hearing.
Before I close my statement, I want to welcome fellow Buckeye Robert
Shamansky, who is visiting us from Columbus. As a former member of the
House and one who has been active in many public and private groups, I
think we will all find his testimony to be very enlightening.
As our country's citizens get more deeply in stocks and other forms
of investment, it is important that we ensure their long-term rights
and money is protected. I think today's panels will give us an
opportunity to look into some very significant questions.
______
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Thank you Mr. Chairman. It is no secret to those of us here today
that we have been experiencing a bull market for the last 10 years. As
the market has continued to flourish, we are seeing more investors than
ever before using securities investments when planning for their
future.
This being the case, it is necessary for us to ask whether these
investors have appropriate safeguards. America's retiree's can't fall
through the cracks of a system which handles millions of transactions
annually. While the SEC exists to protect investors, it is not in a
position to act as a liaison between an investor and their investment.
That is the responsibility of the public companies and the broker/
dealers who maintain the records for investors and their assets. Long
gone are the days when someone would buy a piece of stock and receive a
certificate for their purchase. Today, one is more likely to receive an
account statement showing an investor's current holdings, since more
and more securities are registered in ``street name''.
What would happen if the investor became separated from their
broker/dealer and became what is known as a ``lost security holder''?
We must encourage a system of personal responsibility coupled with
rules like those which were adopted by the SEC in 1997 to protect
investors in cases where they may become separated from their
investments, especially those who have become lost through no fault of
their own.
I look forward to hearing from our witnesses today and I yield
back.
Mr. Oxley. The gentleman yields back. To that end, we have
our first distinguished witness, who is Mr. Larry Bergmann,
Senior Associate Director for the Division of Market Regulation
at the SEC.
Mr. Bergmann, welcome to the subcommittee. We look forward
to your testimony.
STATEMENT OF LARRY E. BERGMANN, SENIOR ASSOCIATE DIRECTOR,
DIVISION OF MARKET REGULATION, SECURITIES AND EXCHANGE
COMMISSION
Mr. Bergmann. Thank you very much, Chairman Oxley and
Ranking Member Towns and members of the subcommittee. I
appreciate this opportunity to appear before the subcommittee
to testify about the SEC's efforts to reunite lost security
holders with their assets.
As one commentator has said, ``People get lost
inevitably.'' Sometimes it is the individual's fault; for
example, when they change addresses and forget to tell their
friends or businesses about their new address. Sometimes it is
a recordkeeper's fault, where they make perhaps an inaccurate
entry in their records. When this happens to a security holder
and the transfer agent attempts to communicate with the
security holder, the communication is likely to be returned as
undeliverable. This shareholder is then considered to be lost.
If a contact is not reestablished over a period of time, the
issuer must turn the assets over to the States under their
escheatment laws.
This morning I will discuss what the SEC has done to
address the situation. First of all, I think it is helpful to
consider how big this problem is. The Commission believes that
the number of lost security holders compared to the total
accounts at transfer agents is small. In 1997 we estimated the
figure to be 1.34 percent of total accounts. More recently, an
informal survey has been mentioned of transfer agents holding
about 75 percent of equity accounts, estimated that the
percentage was 2.23 percent. In 1997, we estimated the related
value to be $450 million, and our recent informal survey
indicated that this value is about $120 million, taking the 75
percent as being $94 million, which would give you a figure of
$120 million.
However, I think we have to keep these figures in
perspective. One other commentator stated that about 80 million
Americans are entitled to an estimated $300 billion in
unclaimed and abandoned assets. We believe that most of these
assets are held by entities that are not within the
Commission's jurisdiction and that the lost security holder
assets held by entities in our jurisdiction are a small
fraction of these total amounts lost or abandoned. This does
not mean, however, that the assets are unimportant, or that
reasonable efforts should not be made to reunite the holders
and their assets.
So what has the SEC done in this area? As has been also
mentioned, in 1997 we took action which we believed was
effective and prudent. Specifically, we adopted new transfer
agent rules and amended other rules that require uniform and
cost-effective actions to locate lost security holders. The new
rules were intended to collect data and better gauge the scope
of the problem.
Rule 17Ad-17 requires transfer agents to exercise
reasonable care to ascertain the correct addresses of lost
security holders. At a minimum, transfer agents must conduct
two searches using a robust information data base. Transfer
agents may not use any service designed to locate their
security holder that results in a charge to the security holder
until after the two data base searches have been completed.
As originally adopted, rule 17a-24 required transfer agents
to report annually to the Commission the aggregate number of
lost security holder accounts as of June 30 each year and the
total number of accounts represented by these lost security
holder accounts. The Commission also required information on
lost security holder accounts that were remitted to the State
under the escheatment laws to be reported.
When it proposed these rules, the Commission also asked for
comments about establishing a lost security holder data base
where certain entities that hold assets for others; for
example, transfer agents and broker/dealers, would file
annually with the Commission a list of the taxpayer information
numbers of all lost security holders in their records. We
suggested that this lost security holder data base could be
maintained by the Commission or its delegee, and that data base
could be searched by individuals, or it could be available for
commercial use. Most commentators objected to this idea. Many
commentators believed that such a data base would result in a
loss of privacy for security holders and others suggested that
it could be used for fraudulent means.
In response to these concerns, the Commission adopted a
rule requiring the aggregate reporting of information rather
than individualized data. The Commission focused on the need to
gather the data on lost security holders in order to better
obtain information as to the extent of the problem and whether
or not the searches that we required were effective.
What has happened since the rules were adopted? The search
requirements have been in effect since December 1997 and the
reporting requirement took effect in February 1998. The numbers
were to be reported on form TA-2, an annual transfer agent
filing due in August that reports data as of the preceding
June. Therefore, the first year's data was obtained in August
1999.
Unfortunately, we have encountered some difficulties with
the data requested in the forms. As transfer agents were
preparing to report this data, it became clear that the
questions on the form were subject to varying interpretations
and we would not get consistent information across transfer
agents. The Division of Market Regulation was also in the
process of overhauling Form TA-2 and, in light of the
experience with lost security holder information, we included
that in our review.
As a result, on March 23, 1999, the Commission proposed
changes to the reporting information about lost security
holders on Form TA-2, and these proposals were adopted on June
2 of this year. The report is now required to be filed on a
calendar year basis, and the first set of this new information
will be filed in March 2001 for calendar year 2000. We expect
that the revised reporting requirement will provide us with
more consistent and more accurate information.
In preparing for this testimony, we obtained a snapshot of
lost security holder activity from the seven largest nonbank
transfer agents. Approximately 990,000 accounts out of 44.5
million maintained by these agents, that is, 2.23 percent, were
considered to be lost. Of these accounts, 384,000, or 0.87
percent, were remitted to the States last year under the
escheatment laws.
I should point out that the estimated average balance of
these escheated accounts was $243.
All transfer agents with whom we spoke agreed that the
search requirements have substantially reduced the number of
lost security holder accounts. From anecdotal evidence it
appears that the agents currently find up to 60 percent of lost
security holder accounts when they submit these two data base
searches.
Another benefit achieved by the Commission rulemaking is
heightened awareness of the problem of lost security holders
and an effort to find other solutions to resolve this problem.
While our rules set the minimum requirements, one of the
largest transfer agents we understand is now moving to a new
process where the agent on a monthly basis sends a list to a
vendor who then conducts a search over three data bases, and we
believe, the agent believes this new process may improve its
percentage of finding lost security holders.
There has been some question as to why the Commission's
lost security holder rules only apply to transfer agents. While
the Commission's lost security holder rule by its terms only
applies to recordkeeping transactions, in effect, the rule
covers lost security holders of issuers and investment
companies for mutual funds because both of them must use
registered transfer agents to maintain their books and records.
Now that the Commission has clarified transfer agents'
obligations regarding lost security holders, we are researching
whether similar efforts should be extended to other entities
that hold assets for investors, such as broker/dealers.
From preliminary information about lost security holder
accounts held by broker/dealers, it appears that the lost
security holder situation is much smaller there. Of 39.8
million security holder accounts held by 17 representative
broker/dealers, only 0.79 percent were considered to be
accounts of lost security holders as defined in our rule.
However, we are currently reviewing whether rulemaking in this
area would be appropriate.
Mr. Chairman and members of the subcommittee, I hope this
overview has been helpful to you, and if you have any
questions, I will be happy to answer them.
[The prepared statement of Larry E. Bergmann follows:]
Prepared Statement of Larry E. Bergmann, Senior Associate Director,
Division of Market Regulation, U.S. Securities and Exchange Commission
Chairman Oxley, Ranking Member Towns, and Members of the
Subcommittee:
On behalf of the Securities and Exchange Commission (``SEC'' or
``Commission''), I appreciate this opportunity to appear before the
Subcommittee today to testify about the SEC's rules designed to reunite
lost securityholders with their assets.
As one commenter has said, ``People inevitably get lost.''
Sometimes it is the individual's fault, such as when he or she moves to
another town but forgets to give friends and businesses the new
address. Sometimes it is the recordkeeper's fault, possibly from the
result of an inaccurate entry in its records. In either case, when this
happens to a securityholder and the issuer's transfer agent attempts to
communicate with the securityholder, the communication is likely to be
returned as undeliverable. The shareholder is then considered ``lost.''
If contact is not reestablished with a securityholder prior to the
expiration of the appropriate state's escheat period, the issuer must
turn the securityholder's assets over to the state unclaimed property
administrator.
This morning I will discuss what actions the Commission has taken
to address this situation.
i. how big is the problem?
The Commission believes that the number of lost securityholders
compared to the total accounts held by transfer agents is small. In
1997, we estimated the figure to be 1.34% of total accounts. More
recently, an informal survey of seven large transfer agents,
representing about 75% of shareholder accounts, estimated that lost
securityholder accounts were 2.23% of total accounts. While the
proportion of lost accounts is small, the aggregate dollar amounts of
the assets in these accounts can be significant. In 1997, we estimated
the amount to be around $450 million. Our recent informal survey
estimated that at seven large transfer agents, the amount totaled about
$94 million. These figures must be put in perspective. For example, one
commentator has stated that ``about 80 million Americans are entitled
to an estimated $300 billion in unclaimed and abandoned assets.''
<SUP>1</SUP> We believe that most of these assets are held by entities
that are not within the Commission's jurisdiction, and the amounts
owing to lost securityholders by entities within our jurisdiction are a
tiny fraction of the total amounts lost or abandoned.
---------------------------------------------------------------------------
\1\ Dugas, ``Your Money,'' USA Today, Nov. 12, 1997, at p. 3B.
---------------------------------------------------------------------------
ii. what has the sec done in this area?
Transfer agents serve as the custodians of securityholder records
for issuers. In this capacity, transfer agents frequently are
responsible for disseminating shareholder communications and dividend
and interest payments. For various reasons, transfer agents
occasionally have outdated or incorrect addresses for some
securityholders. Regardless of how securityholders get lost, however,
the end result is the same--these shareholders do not receive dividend
and interest payments to which they are entitled and, if the error is
not corrected, may eventually lose the assets.
In 1997 the Commission took action that it believed would be
effective and prudent. Specifically, the Commission adopted new
transfer agent rules and amended other rules in an effort to require
uniform and cost-effective actions to locate lost securityholders and
reunite them with their assets. The new rules also were intended to
collect data to better gauge the scope of the problem.<SUP>2</SUP>
---------------------------------------------------------------------------
\2\ Securities Exchange Act Release No. 39176 (October 1, 1997), 62
FR 52229 (October 7, 1997)[S7-21-96].
---------------------------------------------------------------------------
Rule 17Ad-17 requires transfer agents to exercise reasonable care
to ascertain the correct addresses of lost securityholders. At a
minimum, transfer agents must conduct two searches using a robust
information database, as defined in the rule. Transfer agents may not
use any service designed to locate their lost securityholders that
results in a charge to a securityholder until after the two database
searches have been conducted. The search for the lost securityholder
must be based on the taxpayer's identification number (``TIN'') or the
name of the lost securityholder if a search based on the TIN is not
reasonably likely to locate the lost securityholder.
The rule requires that the transfer agent must conduct the initial
search between 3 and 12 months of a securityholder being classified as
lost. If the lost securityholder is not found, the transfer agent must
conduct a second search between 6 and 12 months after the initial
search. There are only three exceptions to the search requirement: (1)
where the value of all dividend, interest, and other payments due to
the securityholder plus the value of all assets listed in the
securityholder's account is less than $25; (2) where the transfer agent
has received documentation of the securityholder's death; and (3) where
the securityholder is not a natural person.
As originally adopted, Rule 17a-24 required transfer agents to
report annually to the Commission the aggregate number of lost
securityholder accounts as of June 30 of each year and the percentage
of total accounts represented by these lost securityholder accounts.
These figures were to be reported for specified periods of time: one
year or less, three years or less, five years or less, or greater than
five years. The Commission also required information on lost
securityholder accounts that were remitted to the state unclaimed
property administrators under state escheatment laws.
When it proposed these rules, the Commission also asked for
comments about establishing a lost securityholder database where
certain entities that hold assets for others (e.g., transfer agents and
broker-dealers) would file annually with the Commission a list of the
TINs of all lost securityholders contained in their records. This lost
securityholder database could be maintained by the Commission or its
delegee, and the database could be searched or obtained by private
entities that could create commercial databases. Most commenters
objected to this idea. Many commenters believed that such a database
would result in a loss of privacy for securityholders. Others suggested
that the database could result in fraudulent claims.
In response to these concerns, the Commission adopted a rule
requiring the annual reporting of aggregate rather than individualized
data. The Commission focused on the need to gather data on lost
securityholders in order to obtain better information as to the extent
of the lost securityholder problem and to assess the effectiveness of
search techniques employed by transfer agents.
iii. what has happened since the rules were adopted?
The search requirements have been in effect since December 1997.
The reporting requirement took effect in February 1998. The numbers
were to be reported on Form TA-2, an annual filing due in August that
reports data as of the preceding June. Therefore, the first full year's
data was obtained in August 1999. Unfortunately, we have encountered
some difficulties with the lost securityholder data requests in the
Form. As transfer agents were preparing to report this data, it became
clear that the questions on the form were subject to differing
interpretations, and that the data is not consistent across transfer
agents. In addition, recently the Division of Market Regulation has
undertaken a comprehensive overhaul of Form TA-2. In light of the
experience with the lost securityholder reporting provision, we
reviewed the lost securityholder questions as part of this process. As
a result, on March 23, 1999, the Commission proposed changes to the
lost securityholder reporting requirements as a part of the proposed
Form TA-2 changes.<SUP>3</SUP> The new Form TA-2 was adopted by the
Commission on June 2, 2000.<SUP>4</SUP> This report is now required to
be filed on a calendar year basis. The first set of this new lost
securityholder data will be filed in March 2001 for calendar year 2000.
We expect that the revised reporting requirement will provide us with
more consistent and more accurate data.
---------------------------------------------------------------------------
\3\ Securities Exchange Act Release No. 41204 (March 23, 1999), 64
FR 15310 (March 31, 1999) (Release proposing amendments to Rule 17Ac2-2
and related Form TA-2).
\4\ Securities Exchange Act Release No. 42892 (June 2, 2000), 65 FR
36602 (June 9, 2000) (Release adopting amendments to Rule 17Ac2-2 and
related Form TA-2).
---------------------------------------------------------------------------
In preparing for this testimony, we obtained a ``snapshot'' of lost
securityholder activity from seven of the largest non-bank transfer
agents. Approximately 990,900 out of 44,417,000 of the accounts
maintained by these agents, or 2.23%, were considered to be accounts of
``lost securityholders'' as defined in our rule. Of these accounts,
384,700 accounts, or 0.87% of the accounts maintained, with an average
account balance of $243, were remitted last year to state unclaimed
property administrators under state escheatment laws.
All the transfer agents with whom we spoke agreed that the search
requirements have substantially reduced the number of lost
securityholder accounts. From anecdotal evidence, it appears that
agents find current addresses for up to 60% of the lost accounts they
submit for database searches.
Another benefit achieved by the Commission's rulemaking is
heightened awareness of the problem of lost securityholders and an
effort to find innovative solutions to resolve the problem. While our
rules set minimum standards for lost securityholder searches, one of
the largest agents is now moving to a new process where the transfer
agent sends a lost securityholder file monthly to a vendor, who then
conducts a search across multiple databases (including all three credit
reporting agencies, the Internal Revenue Service and the Social
Security Administration). This new process may improve the percentage
of lost securityholders found.
There have been some questions raised as to why the Commission's
lost securityholder rules apply only to transfer agents. While the
Commission's lost securityholder rule by its terms only applies to
recordkeeping transfer agents, in effect, the rule covers the lost
securityholders of issuers and investment companies because both
investment companies and issuers of reporting companies must use
registered transfer agents to maintain their books and records. Now
that the Commission has clarified transfer agents' obligations
regarding lost securityholders, we are researching whether similar
efforts should be extended to other entities that hold assets for
investors, such as broker-dealers. From preliminary information about
lost securityholder accounts held by broker-dealers, it appears the
lost securityholder situation is much smaller than at transfer agents:
of 39,786,000 securityholder accounts held by 17 representative broker-
dealers, only 0.79% were considered to be accounts of ``lost
securityholders'' as defined by our rule. Nonetheless, we are currently
reviewing whether rulemaking in this area is appropriate.
Mr. Chairman and members of the Committee, I hope this overview has
been helpful for you. If you have any questions, I will try to answer
them.
Mr. Oxley. Thank you, Mr. Bergmann. Indeed we do have a few
questions.
I kind of got lost on the first part of your statement
regarding the percentage of lost securities. I started writing
down 1.34 percent and then I went to 2.4 percent. Could you
help us a little bit with that?
Mr. Bergmann. I wish I had a very good answer to this
question, but unfortunately, all of the information that we
have seen, including the ones generated by the Commission, have
been based on assumptions and estimates and extrapolations from
those numbers, and this has been part of the issue that the
Commission is hoping is addressed by its rules; that is, to get
consistent, accurate information from transfer agents who hold
these accounts, and to find out how big this problem is, and
whether or not any improvements are being made by the rules we
have adopted.
So that is the reason why you got different percentages.
Mr. Oxley. Okay. But we should not be particularly
concerned about the difference between 1.34 percent and 2.3
percent. The issue here, it is not overwhelming.
Mr. Bergmann. Exactly.
Mr. Oxley. And indeed the figure you used in terms of the
average account size of like $243, but is that also somewhat
apocryphal?
Mr. Bergmann. These are all estimates based upon informal
conversation.
Mr. Oxley. Okay. You mentioned the use of a robust
information data base. Are we talking about Internet
capabilities here?
Mr. Bergmann. Well, the data base I was referring to was
the data base held by credit agencies and the IRS, for example.
These are geographically broad and have a lot of depth to them.
So those are the data bases which are used by a transfer agent
looking for better addresses for security holders.
Mr. Oxley. So take us through how that works. Let's say
that there is an allegation that there is a lost security. What
obligation does the transfer agent have currently? How does he
go about his work?
Mr. Bergmann. Well, the sequence would be that a transfer
agent would send out a mailing of some kind to his security
holder and it gets returned as undeliverable. Then typically,
what the transfer agents do, although we don't require this, is
to immediately send it out again, because sometimes, it is the
fault of the deliverer, the Postal Service or whatever, and so
they try it again and actually a number of the problems are
taken care of in that way. However, if it is returned again,
then it is considered a lost security holder, and then the
transfer agent is obligated to perform two searches, as I
mentioned, the first one after at least 3 months, between 3 and
12 months, and then the second one between--up to 12 months
after the first one. So there is a hope that in the intervening
period, the address will have been corrected either by the
shareholder itself or in one of these data bases.
Mr. Oxley. Do you have any idea how many of these folks are
deceased?
Mr. Bergmann. I don't know the number, but we are advised
by the transfer agents that--well, again, I have heard 10
percent, but it would be an estimate.
Mr. Oxley. Only 10 percent?
Mr. Bergmann. I believe. That is a number I have heard,
although I could get back to you on that if you would like.
Mr. Oxley. Okay. Well, I was thinking about data bases and
robust information data bases and the like, and it struck me
that our son is in charge of his class reunion, and they have
this--there is this company, apparently, on the Internet that
can find your long lost classmates, and apparently pretty
successfully. So clearly, there is in today's modern Internet
world, the ability, I guess, to locate people. That is correct,
right?
Mr. Bergmann. I certainly believe it is.
Mr. Oxley. And somebody who has to do due diligence on
this, the transfer agent or even the broker/dealer, would be
considered not doing due diligence, would you say, if they were
not to use that great capability?
Mr. Bergmann. Well, we require that they use due diligence
and the rule requires them to use these data bases which, as we
understand it, is the best means to find new addresses, which
is what is required under the rule. I mean that is how you find
a lost security holder, is you get a new address.
So I think that what we require them to do as a minimum is
acceptable searching. Now, whether they want to go beyond that
and use other data bases, that would be certainly something
they could do.
Mr. Oxley. And you indicated that about 60 percent of the
searches are successful and returned to the owner.
Mr. Bergmann. Again, that is our information from these
transfer agents we contacted, yes.
Mr. Oxley. Also, can you do all of this that we talked
about, what you talked about by rulemaking, or do you need
statutory authority?
Mr. Bergmann. Well, it depends. We certainly believe we
have the statutory authority to require transfer agents to take
the actions that we--the rules we have adopted. There may be
some other areas--there have been various proposals requiring
transfer agents or even some other parties to take certain
actions and those might require legislation.
Mr. Oxley. Well, for example, extending it to broker/
dealers, does that require legislation or can you do it by
rulemaking?
Mr. Bergmann. We believe we have the authority to do that
under our existing legislation.
Mr. Oxley. So under what circumstances would you envision
that you would need further legislative authority?
Mr. Bergmann. Well, there have been some suggestions that
we somehow regulate these search firms, also called heir
finders. I think that would raise an area where they are
clearly not regulated by the Commission.
Mr. Oxley. What are they called?
Mr. Bergmann. Heir finders, or search firms.
Mr. Oxley. H-E-I-R.
Mr. Bergmann. Commercial enterprises are not within the
Commission's jurisdiction. However, as I say, with respect to
broker/dealers, we have thought about this issue and we have
discussed it with the Securities Industry Association, and I
think they point out a valid point, which is that the
relationship in a broker-dealer/customer relationship is
different from the transfer agent/shareholder relationship,
because there is an ongoing person usually assigned to deal
with that account and the activities are generally much more
extensive than in a transfer agent's account. So if a customer
loses touch with a broker/dealer, there is more incentive on
both sides actually to try to reestablish that contact. So that
is one reason why I believe the numbers which we have obtained
from the SIA about the number of lost security holder accounts
is very low.
Mr. Oxley. Part of it would be driven by April 15 every
year, I assume.
Mr. Bergmann. Exactly. There would be an annual
communication, typically with respect to all of these entities,
the transfer agents, mutual funds, broker/dealers, which if the
shareholder looked at it would provide perhaps some alert that
maybe they hadn't received something in the prior year, for
example, a check.
Mr. Oxley. Thank you.
The gentleman from New York.
Mr. Towns. Thank you very much, Mr. Chairman.
Let me ask, with the forms, now that they have been worked
on, do you feel that they are consistent enough to be able to
give you the kind of information you need, now that they have
been worked on? Do you feel very comfortable with them?
Mr. Bergmann. Yes. I think we have now asked the right
questions which will give us consistent information that we can
use as a baseline and a test as to whether or not it is
working.
Mr. Towns. When you talk about using the best means
necessary, what do you really mean? When you say use the best
means necessary, if the chance for an agent does not--I mean
the point is what would you consider that to be?
Mr. Bergmann. Well, that was a question before we adopted
the rules, first of all, what is a lost security holder and
what do they really have to do to satisfy their due diligence
obligation? What was the best means necessary? Our rules
defined what is the minimum standard that they have to do,
which are the two searches of a robust data base, as we were
discussing earlier. So that satisfies--I don't know if it is
the best, but that is adequate to address this problem. They
can go beyond that, as some transfer agents have done.
Mr. Towns. But you don't think that three would be
necessary?
Mr. Bergmann. No, we didn't.
Mr. Towns. Let me sort of--I know one thing in terms of
return mail would be one way, but what are some of the other
reasons you think people get lost in terms of----
Mr. Bergmann. Well, I think the three most common ones that
we have seen are moving without giving a forwarding address,
death, which I guess is the ultimate example of not giving a
forwarding address, and----
Mr. Towns. I think that person should be excused.
Mr. Bergmann. And the record holder just making a mistake
in his records.
Mr. Towns. Thank you.
Let me just sort of go back in terms of when you say
regulate search firms, basically what are you really talking
about there? I am trying to make certain that we have an
understanding.
Mr. Bergmann. There are some commercial enterprises which
identify individuals who may have assets that they have lost
contact with, and they provide a service to put the person back
into communication with their assets. It could be property, it
could be securities, it could be bank accounts or whatever.
Typically, they charge a percentage of the assets in order to
make this--put them back with their assets. Sometimes those
percentages can be quite high.
Mr. Towns. Last question, the privacy issue. Have you
thought about that at all in terms of now that you have had
some experience with the rule?
Mr. Bergmann. Well, we have thought about it a lot,
although largely we were going by the comments we received on
our proposal, and I think it was by a margin of 2 to 1, the
commenters objected to having a data base set up for a variety
of reasons. One of the commenters was Senator Arlen Specter,
for example, in raising the privacy issue. The concern was that
there would be private information about an individual's Social
Security number or their assets up on the Web site, or at least
publicly available through the Commission, and that would raise
a lot of concerns. So we felt it was not appropriate to adopt
that proposal at that time.
Once we get information about how these search requirements
that we have put in place are working, we may need to consider
further measures which might be other rulemaking and it might
be facilitating the establishment of a data base. But we
haven't made that decision yet.
Mr. Towns. But you don't see it as being something that we
would get involved with in terms of legislation? You think that
you could do it within the rules?
Mr. Bergmann. I think that we could do it within the rules.
We haven't fully researched that, but I think we--at the time
we thought we had the authority to do that, if the Commission
was going to run it. If another entity was going to run it on
behalf of the Commission, such as our Securities Information
Center, I think that it is called, for the lost and stolen
securities program, that was based on legislation. The
Commission was authorized to hire an outside entity to run a
no-cost contract for that program.
So if we set it up that way, legislation might be required.
Mr. Towns. Thank you very much, Mr. Chairman. I yield back.
Mr. Oxley. Let me just follow up if I can before we turn to
our next witness. The gentleman from New York raised the
privacy issue. The same kind of issues could be addressed on
the fraud side. That is, if you put this information on the
Internet, are they similar concerns, fraud and privacy, or do
they have some new answers?
Mr. Bergmann. I think they are very similar. As a matter of
fact, I think every commenter that raised the privacy issue
also raised the fraud question.
Mr. Oxley. Very good.
Does the gentleman from Illinois have any questions?
Mr. Shimkus. Yes, sir. Thank you.
Mr. Bergmann, what procedures do those not covered by the
1997 regulations have in place to address lost security holder
issues?
Mr. Bergmann. I think we are probably talking about broker/
dealers, because they are probably the largest holders of
assets, customer assets in the securities area. We spoke to the
SIA, Securities Industry Association, about this, and what they
do is, as I mentioned before, the relationship is very
different between a broker/dealer and his customer and a
transfer agent and a shareholder. So if the firm loses contact
with the customer, typically an individual at the firm would go
out and try to find that individual to reestablish the link.
If that were unsuccessful, then we understand that the
firms actually do similar data base searches to what is
required under the transfer agent rule and they typically do a
couple of searches over a 2-year period. So we understand that
the process is quite similar to what we require for transfer
agents.
Mr. Shimkus. Thank you. Do you believe the potential
benefits of expanding lost security holder regulations would be
worth the potential cost?
Mr. Bergmann. Well, that is the at least $64 million
question, which was at the top of our list when we imposed the
rules that we did impose. So we thought it was--what we did was
a prudent first step, and we need to see how it works, and if
it does not work the way it should, we will have to consider
other cost beneficial measures.
Mr. Shimkus. That is all I have, Mr. Chairman. I yield
back.
Mr. Oxley. The gentleman yields back. Mr. Bergmann, thank
you very much for your participation in the panel.
Mr. Bergmann. Thank you very much.
Mr. Oxley. The Chair would like to call our second panel
and our witness, Mr. Robert Shamansky, from the law firm of
Benesch, Friedlander, Coplan & Aronoff in the capital city of
Ohio. For those members who do not know, Mr. Shamansky is a
former Member from Ohio, and I guess I am the only one who
served with you, Bob.
Mr. Shamansky. A long time ago.
Mr. Oxley. Welcome back to Washington. I know that through
the efforts of John Kasich, the entire issue was brought to our
attention, and I know you have been working with Congressman
Kasich on this issue for some time. So I am pleased that we
were able to schedule this hearing and give you an opportunity
to indicate your concerns about the present state of affairs
regarding lost securities.
So welcome, and we look forward to your testimony.
STATEMENT OF ROBERT N. SHAMANSKY, BENESCH, FRIEDLANDER, COPLAN
& ARONOFF; ACCOMPANIED BY DANIEL C. DeSIMONE, OFFICE OF FEDERAL
RELATIONS, NATIONAL ASSOCIATION OF STATE TREASURERS
Mr. Shamansky. Thank you, Mr. Chairman, and to members of
the committee, I appreciate this opportunity. It has been
mentioned that I am of counsel to my law firm, which means that
I am a lot older than they are.
I am here as an individual shareholder. I am the guy that
was lost. That is how I became aware of it. There is a full
page editorial in Money Magazine, the managing editor, in
January 1994 who wrote the following, talking about my
experience. They said, I asked the transfer agent, why didn't
you look me up in the phone book? And they said, well, we never
do that. And I said, really? How long would it have taken you
to find me if I owed you the $500? And that is the question
they do not want to answer.
I then approached now Senator Wyden, who is my
congressional classmate, and he made some inquiries into the
SEC, and reading again from Money Magazine's full page
editorial, the Securities and Exchange Commission estimates
that ``One shareholder account out of every 20 is lost, and
transfer agents are sitting on a staggering $10 billion worth
of securities accruing $500 million a year in dividends that
they are failing to deliver.'' This is what he wrote, after
having checked with the SEC.
Very frankly, I don't have a lot of faith in the expertise,
the numbers produced by the SEC. In their release in October
1997, they said that they originally thought there were 250,000
lost shareholders, but then they concluded that there were 3
million lost shareholders owed $450 million. I think you have
to recognize that they were off by a factor of 12, that is
1,200 percent. If you divide 250,000 into 3 million, you get
12. That is 1,200 percent. They didn't know that it was a
problem, but there is a problem, because I am living proof of
it.
Now, this is a national problem. The gentleman sitting here
with me is Dan DeSimone of the National Association of State
Treasurers, which is affiliated with the National Association
of Unclaimed Property, State Property Administrators. These are
the people in every one of our 50 States who have the job of
going and making sure that the citizens of the States get their
money. What we are talking about here is people getting their
money promptly, and this is where the States are saying don't
wait for our 5 years or 7 years or whatever to kick in when you
have the data right up to date.
Now, it is a very simple question, and mentioning John
Kasich, I think the members should know that John Kasich beat
me, defeated me, a Democrat, in 1982, and I am pleased to
acknowledge his splendid cooperation. This is not a partisan
issue. It is not a partisan issue that shareholders are
entitled to get their dividends. That is what we are talking
about. Nothing more than that.
With the illustration as to how things happen, I got out of
law school in 1950. That is 50 years ago. Had somebody
graduated from a medical school in 1950 and was still doing the
same kind of examination, using the same kind of technology
that he did 50 years ago, he would be sued all over the place
for negligence. What has happened here is that the securities
industries, as regulated by the SEC, did not do a thing when it
came to delivering the money they owed, the same technologies
that they were using simultaneously to collect money that was
due them, and there is simply no reason for that.
The national data bases that every person in this room, I
am willing to say, is in that, as your son found out for his
class reunion, we are all in there. And the cost, the SEC did
it, when they made the 1997 release, found that the cost, and
my own inquiry, it costs less than $1, they are all done on
tape, batches, electronic. It is like less than $1,
approximately $1, and takes less than a minute. And all of this
is done by the computer bases.
With respect to the Internet and the privacy issues which
were raised legitimately, I have to point out that the 50
States for decades have published people's names. There is not
one person here in any State and the District of Columbia that
there is a list saying somebody holds money for you. It does
not say how much, it just says, here is where you can find your
money.
Now, there have been no privacy or securities matters. It
is interesting to me that Mr. Bergmann asked the commenters.
The commenters he got responses from were the people who do not
want to give up the money. Why would they? Because for every
day that a dollar is left with these holders, they keep the
interest. They are the ones who keep the interest. When you
show up 3, 5, or whatever years later, they only give you
whatever the original amount was. Somebody else has kept that
money.
All we are saying is, anybody regulated by the SEC should
utilize this very cheap, very easy to use technology. This is a
list I got from my friends in the unclaimed property world: An
issuer, a broker, a dealer, mutual fund, investment company,
investment advisor, indentured trustee, custodian, anyone
holding money for someone else which is regulated by the SEC.
I want to dispel the notion here that we are not talking
about much money. A famous case, at least in this world, of
Delaware v. New York in the 1990's involved $890 million
disputed. Delaware claimed that from the State of New York, it
originated in the U.S. Supreme Court, that represented brokered
moneys held by brokered dealers for their customers. Now, when
you say small percentages, but of trillions of dollars, you are
talking about big money, in Senator Dirksen's range, billions
of dollars.
Now, it is easy to play the percentage thing. But for the
people who are lost and they are disproportionately older, and
oftentimes sick, they are the victims of this. All we are
asking is that the SEC, or the Federal Government one way or
the other, if there has to be legislation, simply have them use
the same tools they use when people owe them money.
Now, this is not a blame game. There are millions of
dollars represented by checks that have been sent out, but not
delivered, or sent out, and even if some old person, whatever
it is, does not cash it, it doesn't change the fact that that
money belongs to that person.
I met with these different transfer agents, the biggest in
the country. For those people who have shares of stock and get
quarterly checks, question: Why can't you in the next dividend
check on the stub simply say, previously we sent you a check,
it is not cashed. Please cash it, or notify us, 1-800, or e-
mail or whatever, and we will get your money to you. They
said--that is a couple of lines in their software program so
people could get their money and they will not do it, because
they do not want them found. That is the only conclusion. That
idea came from prudential insurance which sent a friend of mine
a letter that said we previously sent you a check, it isn't
cashed, please contact us. We are dealing with these millions
of checks that go out quarterly, and those computers know which
checks have not been cashed.
The main thing here is, it is the money we are talking
about belongs to individuals; there is not one penny of
government money, no tax money, no corporate money. This money
does not belong to any of these people we are talking about, to
treat them fairly. It belongs to us shareholders. The people
who hold it are making the interest on that, and the
shareholder does not.
So we have the technology and the way you correct that, you
simply tell the holder of the money, you have that money in an
account, you just call it a trust account for any of the
lawyers on the committee, it is the same money, except with
that moves on to the claimant or goes to the State, the States
are--they then get for their own citizens, they get the
interest earned by the citizen's money, instead of being
siphoned off. You are rewarding now the person who did not
deliver the money. That is wrong, and it makes no sense.
I would like to address the idea of the Internet. There are
no privacy problems because 50 States publish lists, a majority
of the States have their lists on the Internet and there are no
problems. I had our computer man check the list from the Swiss
Bankers Association of holocaust-era accounts that the American
Government and the World Jewish Community shamed the Swiss
Bankers Association into putting it on the Internet. They
suddenly found thousands of these accounts. And from my office
in Columbus, he entered the name Klein, and came up with three
hits. This is a technology which is everywhere today. It costs
nothing; there are not any costs. But it is a technology that
is available to give the citizen a chance to find himself his
money.
Reference was made to the heir finders or search firms. In
the world of unclaimed property among the States, they are
called other things sometimes, like vampires or whatever you
might suggest, because 25 percent to 50 percent is where--they
call you up and say well, for 25 to 50 percent, we will tell
you where your money is.
Now, the suggestion is not to regulate them, but for those
who hold the money before they engage them to say, we will do
so by open bidding and let the market, let some competition
come in here. Because the problem is, this is all done behind
closed doors. So you never know what is really happening. There
is no follow up on what they do. And I want you to know that my
friends in the transfer business have finally revealed why they
do not want this known. Because in Columbus, we would say,
kickbacks. I don't want to shock anybody here, but they are
dressed up as service fees or something like that.
The SEC has the power, and I think it has the duty, to tell
the holder of the money for someone else, the conditions under
which they turn those accounts over to these search firms for
25 to 50 percent that the owner has to pay, let's get it out in
the open, let's get market forces in there, and let's--and if
nobody is doing this, then there is no problem about kickbacks,
however it is dressed up. Let's get it out in the open.
The cost is absolutely negligible. Because we are dealing--
it is all electronic, it is all on computers, and everyone who
holds money for someone else under the jurisdiction of the SEC,
especially the broker/dealers and anyone else, can all play by
the same rules. There is no special expertise. Either the SEC
or with me, it is simply common sense, and this is what we are
talking about.
[The prepared statement of Robert N. Shamansky follows:]
Prepared Statement of Robert N. Shamansky
The first thing that must be said is that promptly delivering
dividends to their rightful owners is not a partisan issue. No
Republican, nor any Democrat I have ever known, has ever been opposed
to that, nor will they ever be. As proof of that non-partisanship, I am
pleased to acknowledge that Representative John R. Kasich, Chairman of
the House Budget Committee, as you know, a Republican, who defeated me,
a Democrat, in November, 1982 in my effort to be re-elected to
represent the 12th District of Ohio in the United States House of
Representatives, has taken a leadership role in this effort to get our
capital markets to treat the individual investor in a fair manner,
which will ultimately improve our national economy by encouraging
everyone to invest in the national securities market, because he or she
will be treated fairly.
Frank Lalli, Managing Editor of Money Magazine, in his Editor's
Notes entitled, ``Playing Lost and Found with Your Money'' in the
January 1994 issue wrote:
``The Securities and Exchange Commission estimates that one
shareholder out of every 20 is `lost'. In all, transfer agents
are sitting on a staggering $10 billion worth of securities
accruing $500 million a year in dividends that they are failing
to deliver.''
My experience starting in 1993 has taught me to be skeptical of the
data advanced by the SEC's Division of Market Regulation (``Market
Reg.''). Even after being informed of the problem of ``lost''
securityholders, Market Reg. seriously underestimated the scope of the
problem. The remedies finally adopted by the SEC excluded a majority of
securities owners, e.g., customers of broker/dealers and mutual funds
among them. All securities owners ``lost'' before December 8, 1997 were
excluded from the new database check for good addresses, thus remaining
prey for the predations of search firms, who may have paid so-called
``service fees'' for obtaining lists from transfer agents.
In its Tuesday, October 7, 1997 release, the SEC in Footnote 39, on
page 52235 of the Federal Register, Vol. 62, No. 194, Rules and
Regulations, said the following:
``The Commission staff contacted several transfer agents to
obtain an estimated success rate. Only one of the transfer
agents contacted currently uses data base searches to find lost
securityholders. That transfer agent, which has been conducting
searches on a monthly basis for over a year, stated that its
success rate using data base searches is never less than 75%
and sometimes is as high as 94%. For purposes of the cost-
benefit analysis, the Commission is assuming a 60% success rate
in order to be conservative.''
My research leads me to believe that a 60% success rate is too
conservative, and that 70% to 80% is a reasonable rate, especially when
the search is made as early as possible.
With the lackluster performance from the SEC's Division of Market
Regulation, individual investors in every Congressional District in
this country must now rely on the Congress to help them get their own
dividend money back in a timely fashion. It is not only Money Magazine
and the Washington Post's Jane Bryant Quinn who have written on this
problem. Organizations like the National Association of State
Treasurers (``NAST''), whose state treasurer members in a majority of
states handle unclaimed property, and the affiliated National
Association of Unclaimed Property Administrators (``NAUPA'') have
expressed their views on needed changes to the SEC, but have failed to
get from the SEC needed help in obtaining better delivery of dividends
from paying agents to the owners of securities across the entire
country. Mr. John Rother, Director, Legislation and Public Policy for
the AARP, wrote me on May 12, 2000 that the issue of lost shareholders
will be brought to the attention of the AARP's policy body, the
National Legislative Council, when it meets this fall. (A
disproportionate number of ``lost'' securities owners are the elderly,
especially those who are sick.)
I have recently met in Washington with Senator Howard Metzenbaum in
his capacity as Chairman of the Consumer Federation of America on this
matter. Senator Metzenbaum told me he has expressed his interest in
this situation to Chairman Arthur Levitt of the SEC. Senator Metzenbaum
left with Chairman Levitt a copy of Jane Bryant Quinn's article on the
abuses of ``lost'' investors that still remain to be corrected after
the SEC's timid and inadequate rule change in 1997. (A copy of that
article is a part of this testimony.)
We are talking about ``real money'' here, that is billions of
dollars. It is also vital to understand that not one dollar of these
billions is coming from taxes at any level of government, whether it be
local, state, or federal. Equally important, not one dollar of these
billions is coming from any corporation or any other business. Every
one of these billions of dollars belongs without question to the
``lost'' owners of securities, which simply means the one obligated to
send the money to its rightful owner does not have a good address for
that owner; or in the case of mailed, but undelivered or uncashed
checks, won't tell the owner, even if the sender has a good address.
Millions of investors, unknown to them, are being denied billions
of their own dollars because of the practices of financial
organizations regulated by the United States Securities and Exchange
Commission (``SEC''). For the first time in history, American
households now have cumulatively more money invested in securities one
way or another than their total equity in their homes, so the work of
the SEC is more important to these millions of investors than ever
before.
It was not long ago that a very small percentage of Americans owned
stock or any other securities. In effect, only the few rich owned
securities, and those securities were represented by pieces of paper
called, for instance, stock certificates or bonds. The records of these
securities were kept in those days on other pieces of paper, like
ledgers or 3'' x 5'' cards or whatever. At that time, there was no way
that the outfit that held undelivered dividends for a security owner,
whose address had changed, could quickly and cheaply find a good
current address for that ``lost'' security owner.
All of that is different today--totally and spectacularly
different! First and most significantly, the number of persons with
investments in securities either directly or through various retirement
accounts is approaching 80 million. The values, of course, are in the
trillions of dollars.
It is a safe bet that virtually every person in this hearing room
today has some kind of a stake in securities, including even the young
people here. Owners of securities are not trying to hide from their own
dividends. Securities owners want to receive their dividends. If
``lost'' for any reason, they are found quickly and cheaply by
referring at the very least to one of the three national databases
which overwhelmingly list those who own securities. We--you and I--and
our family members and friends who have two nickels to rub together--
are in those databases for any number of reasons. All anyone has to do
is inquire, and for batch electronic inquiries, the cost can be close
to $1 per name and the time needed as short as a minute or less.
The spectacular growth of the securities markets in the United
States and elsewhere has been an outgrowth of the advances in
technology like computers and the Internet. In order to sell and make
money, the financial community is using the computer in all its various
forms. The financial community has logically used technology to collect
money from the public as quickly and as cheaply as possible.
The record also shows that the same financial community under the
jurisdiction of the SEC has consistently refrained from using those
same technologies when it comes to delivering monies belonging to the
millions of so-called ``lost'' securities owners, who are certainly
owed hundreds of millions, and most probably billions worth of shares
held in ``street name'' by broker/dealers or in mutual funds. The
needed fair treatment practices should apply to everyone in the
financial community, whom I call a ``paying agent,'' under the
jurisdiction of the SEC, which directly or indirectly undertakes to
deliver dividends, interest, or other valuable property rights to those
legally entitled to them. The paying agents include any issuer,
transfer agent, broker, dealer, investment company, mutual fund,
investment advisor, indenture trustee, custodian, or any other person
obligated to deliver dividends, interest or other valuable property
rights. All of these paying agents have the obligation to deliver
monies to their owners, and the technology to do so is already in place
and cheap and easy to use.
Because of my own direct experiences with the financial community,
as someone who had been ``lost'', in 1992 I approached my House
classmate, now Senator Ron Wyden of Oregon, to initiate a process,
which resulted in 1996 in the SEC's proposing simple changes in its
rules to treat ``lost'' shareholders better.
I regret to inform you, however, that the changes actually
implemented by the SEC on December 8, 1997, represent a classic case of
the ``Regulator captured by the Regulated''. For instance, the SEC in
1996 proposed changes to include recordkeeping broker/dealers as well
as transfer agents, but then reversed itself in 1997, saying that the
changes only applied to recordkeeping transfer agents, who transfer
shares worth less than the shares held by broker/dealers in ``street
name''. Besides transfer agents, the regulations regarding lost
securityholders should also apply--as I mentioned above--to broker/
dealers, corporate trustees, personal and institutional custodians and
mutual funds, and issuers who do their own transfer work, because
transfer agents maintain records for less than one-half (\1/2\) of the
total value of the securities in the United States. Much greater assets
are held in ``street name'' by broker/dealers and in mutual funds.
(Richard Lindsey, who was head of the Division of Market Regulation at
the SEC when it exempted broker/dealers from the new rules, then left
the SEC and went to work for Bear Stearns, one of the exempted broker/
dealers in New York.)
After issuing the rule change to take effect on December 8, 1997,
the SEC in a totally arbitrary and unjustifiable interpretation of the
rule change said that the requirement of looking up a ``lost''
shareholder twice in the national databases before turning over the
accounts to search firms that specialize in locating ``lost''
securities owners applied only to those lost after December 8, 1997.
This meant that 3 million ``lost'' securities owners owed $450
million--those are the SEC's numbers--were thrown to the dogs, i.e., to
the search firms. These search firms usually charge from 25% to 50% of
the money involved without the transfer agent ever having to use a
national database to locate a good address, which would potentially
save these 3 million people from $125 million to $250 million of their
own money. (The SEC had originally estimated that there were only
250,000 lost securityholders, but they later estimated that there were
really 3 million lost securityholders. This meant that the ``experts''
at the SEC were off by 1,200 percent, i.e., 3,000,000 divided by
250,000 equals 12.)
The lost securityholder regulations should apply to securityholders
who meet the $25.00 de minimis test adopted by the SEC in 1997, if
their checks remain uncashed for seven months. The next regularly-sent
dividend and interest checks should inform the payee that a previously
sent check had not been cashed, and the notice should request a call to
a toll-free number or other communication. There is a valuable
precedent from Prudential Insurance for notices like this, and I have
conferred with one of the most prominent transfer agents who verified
that this can be easily done through their computers at insignificant
cost.
All of the data on lost securityholders generated by transfer
agents, broker/dealers, et al., should be sent to the SEC for listing
on one Internet website. A majority of states put their unclaimed
property lists on the Internet, and the NAUPA has a website where it is
pooling various state lists. NAUPA created the website, because the SEC
proposed such a website for itself in its 1996 release for a proposed
rule change, only to reverse itself after it had been lobbied hard by
those who did not want lost securityholders found. Common among those
were search firms, ``heir-finders'', or locators (or vampires)
depending on who is describing them. The SEC already has had the
Thomson Financial Network operate the SEC's Lost and Stolen Securities
Program under the name of Securities Information Center (``SIC''),
which is designed to thwart trading in stolen stock certificates and
bonds. If the SEC has a website for its list of lost or stolen pieces
of paper, why can it not have a website for its list of the lost owners
of securities? Why should a piece of paper be treated better than the
owner of the piece of paper?
It must be pointed out that the United States Government and the
world Jewish community shamed the Swiss Bankers Association into
publishing on an Internet website a list of unclaimed Holocaust era
accounts, which the Swiss Bankers Association had previously maintained
had been lost or destroyed. (I checked this website from my office in
Columbus, Ohio for the name ``Klein'' and I came up with three hits.)
There is no reason why the few big American banks or other financial
houses, which control the biggest transfer agents, do not do what the
Swiss showed can easily be done, i.e, put on the Internet an SEC list
of lost securityholders, which is what the states are already doing
with their unclaimed property lists without any security or privacy
concerns.
Based on my experience over the last twelve years, I believe there
is sufficient interest in the private sector to distribute the
information on the Internet at no cost to the SEC once the information
has been delivered electronically to the SEC. There is, of course, no
reason to publish on the Internet the amount owed the lost
securityholders, nor the quantities of securities owned by the lost
securityholder. All that is needed is the simple fact that John Q.
Public is owed something by an identified and reachable source like a
transfer agent, etc. This is exactly what all fifty states and the
District of Columbia are doing annually in newspapers and now on the
Internet without privacy or security problems.
Money due lost securityholders, which is held by any paying agents,
must be held in trust accounts so that the securityholder will get the
interest earned by his or her dividends. Right now, unbeknownst to
them, millions of ``lost'' securities owners are making interest free
loans to those who are holding their money, and who won't tell the
securities owners where their money is. In other words, the non-
delivering holders of these monies are being rewarded for not telling
the rightful owners where their money is.
A 1992 United States Supreme Court case vividly illustrates why
broker/dealers must treat their lost customers, who bought stock held
in the broker/dealers' ``street names,'' just like all of the other
paying agents. The case of Delaware v. New York, 507 U.S. 490, 113
S.Ct. 1550 (1992) is where New York and Delaware each claimed under
their respective unclaimed property laws approximately $890 million in
dividends and their underlying stock generated in ``street name''
accounts owned by securityholders, who were ``lost'' customers of the
major broker/dealers headquartered in New York City, but incorporated
in Delaware. (Investors who leave their securities in ``street name''
with a broker/dealer can be as easily lost as any name on any transfer
agent's list.) The SEC was right when it originally proposed in 1996 to
apply the rules to broker/dealers. It was wrong when it exempted them.
Another important reason for requiring that securityholders' money
be held in trust accounts can be gleaned from the $63.5 million in
fines in addition to the return of $19.1 million illegally taken by
Bankers Trust Corporation of New York in early 1994. This $19.1 million
was taken from unclaimed property due to lost customers of the bank,
and it was illegally used to falsely increase the profits of the bank,
instead of sending that money to the states as required.
A long line of state cases hold that undelivered dividends are held
in constructive trust for the shareholders. Placing undelivered
dividends in trust accounts ends the abusive practice of unknown non-
interest bearing loans to the party that did not deliver the dividends
as in the Delaware v. New York case and with reducing the chance for
outright theft as in the Bankers Trust case.
If a search firm/heir-finder/locator is engaged by any transfer
agent, et al., to locate lost securityholders at a cost to the
securityholder after the obligatory two database checks, those lost
securityholder accounts should be placed with search firm/heir-finder/
locators only on the basis of open bidding by these search firm/heir-
finder/locators for batches of such accounts, each account in each
batch to receive due diligence with reporting to the SEC of their
search results. In fact, the National Association of Unclaimed Property
Administrators has urged the SEC to protect lost securityholders from
the excessive charges of from 25% to 50% by these search firms/heir-
finders/locators. There absolutely must be an explicit prohibition of
kick-backs from these search firms/heir-finders/locators to those who
place these lost accounts with them for locating the rightful owners.
These kickbacks clothed in such euphemistic names as ``service fees''
are outrageous examples of conflicts of interest.
The United States of America, through its many departments and
agencies, holds great sums of money due others. The Federal Government
should create a commission or some other entity to locate all money
owed to others. (See partial list of federal departments and/or
agencies which hold money for others attached.) The U.S. Government
should put the information on one Internet website; and then the
Federal Government should simplify the method whereby any claimant can
obtain his or her money from any department or agency of the United
States Government. There is simply no reason for the U.S. Government
not to use currently available technology to unite people with their
money now held by the U.S. Government. The same principle applies to
the securities industry.
No state law is changed by any of the suggestions made above. These
regulations will only affect those who come within the clear
jurisdiction of the Securities and Exchange Commission. The National
Association of Unclaimed Property Administrators and the National
Association of State Treasurers has encouraged the SEC to unite lost
securityholders with their money years before the money becomes
``unclaimed property'' due for delivery to the states. The elected
state officials know that it is the intent of the state laws on
unclaimed property to have their respective citizens get the money that
is due them; it simply makes no sense to those elected state officials
to force their lost securityholder citizens into giving interest free
loans without their knowledge to those that are holding money belonging
to the lost securityholders, who are residents of their respective
states.
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Mr. Oxley. Thank you, Mr. Shamansky.
Let me begin by asking you details of in your particular
case how the securities happened to be lost or how they lost
you. You are obviously not dead, so you passed that barrier.
Take us through how this happened.
Mr. Shamansky. In 1988 my CPA, I was gathering up my 1099s.
I had inherited a number of stocks from my late aunt, and some
time had passed and I gathered up in 1988 the 1099s for 1987. I
sent them out, but I knew I had inherited some stock from the
Limited headquartered in Columbus, but I didn't have a 1099 so
I called my friends----
Mr. Oxley. That is a good stock, by the way.
Mr. Shamansky. It goes up and down. Go to the transfer
agent in New York and they told me, yes, we didn't send you a
1099 and I said why not, and they said, well, we didn't send
you any dividend either. I said, oh. Why not? They said we had
an address of 88 E. Gay Street, but I am at 88 E. Broad Street
right across from the statehouse, so they had the wrong
address. I said, why didn't you look me up in the phone book?
They said they never do that. Even if they were negligent, they
said we don't look you up, you got to look us up. If I were
dead or sick or whatever it is. They have the money and it is
our problem. I had to ask them logically, well, what would you
have done had I owed you the $500? In the meantime, someone
else was keeping my money. At that time it was $500. It was an
accumulation of dividends.
So I came into this with the awareness and I couldn't
understand why the transfer agent acted that way when I was
easily findable. It is just--there is no cause. And the SEC
itself says in their 1997 release the cost is negligible.
Mr. Oxley. So basically, they have no incentive whatsoever;
as a matter of fact, they have a disincentive.
Mr. Shamansky. Right, exactly.
Mr. Oxley. And what were the, for example, the tax
consequences in your aunt's estate----
Mr. Shamansky. If I may suggest, sir, the stocks, the
estate had been distributed, so I was then the owner, and I
was--I really wanted to report, I mean I wanted to report my
taxes. They didn't--and if a check comes back, they stop
sending it. It seems strange that they stop sending it. My
experience with the Massachusetts Financial Services, the
original mutual fund, I got a letter, a notice saying that if I
didn't get ahold of them, $80 some of a dividend check was
going to get escheated to the State of Ohio, and, Mr. Chairman,
they had been sending me communications all the time. They knew
that I had not cashed that check and they were still sending me
stuff, and I was still getting it, and they never bothered to
tell me that that check was still out.
Mr. Oxley. You were getting that at the 88 East Broad
address?
Mr. Shamansky. Yes. And all of this information, there are
three big data bases. Shareholders are not trying to hide from
their money. This is not debt collection. This is not deadbeats
who do not want to be found. These are shareholders who want
their dividends, and the technology is there, and these outfits
will not use it.
Mr. Oxley. Let me ask you this. I am trying to recall.
There is a division in the State treasurer's office, the
unclaimed funds?
Mr. Shamansky. It is the Department of Commerce now in
Ohio.
Mr. Oxley. And they on occasion will print in newspapers.
Mr. Shamansky. Exactly.
Mr. Oxley. And they are required to did that?
Mr. Shamansky. Yes, sir, by law. I couldn't put a wig on
and say I am Mary Poppins, give me somebody else's money. There
are no privacy concerns, there are no security concerns.
Whether those lists are published in the newspapers in every
State or now in a majority of the States have these lists on
the Internet. Why should not--why did the SEC say, oh, all of
these things. And you notice they talked about what the
commenters, the people who commented were those who do not want
us found. That is the only reasonable conclusion you can reach.
Mr. Oxley. Well, now, in Ohio, for example, does the law
now require the Internet posting as well as the newspaper
posting.
Mr. Shamansky. I don't know whether the law requires it,
Mr. Chairman. But it is just current technology. Why wouldn't
you? It is a list.
Mr. Oxley. And that is on there until somebody claims it,
right?
Mr. Shamansky. Sure, sure.
Mr. Oxley. So your name is on there apparently forever
until it is claimed?
Mr. Shamansky. We are suggesting nothing that is not
already done, it is just simply saying no longer can you
pretend that this technology isn't there.
Mr. Oxley. And your proposal is that in the situation of an
escheatment----
Mr. Shamansky. Mr. Chairman, we are coming in before then,
because----
Mr. Oxley. Right. But I gathered from your testimony that
in the case of escheatment that the State of the domicile of
the holder, of the stockholder ought to be the one that gets
the money, is that correct?
Mr. Shamansky. That is the way it is, yes. The broker/
dealers or the transfer agents or whatever it is, whoever is
holding that money, would send it to Ohio or to the 50 States
and the District of Columbia. We are changing--the discussion
that I am making changes no State laws whatsoever.
Mr. Oxley. The escheatment laws are different, though, in
each State, are they not?
Mr. Shamansky. Yes. The periods range from 3 years to 5
years to 7 years. But the important thing here is, we are not
dealing with State unclaimed property and the escheatment laws.
What we are saying is that the technology available to the
transfer agents and the other houses and financial institutions
regulated by the SEC has this technology and before you turn
this money over to these heir finders, you have to look people
up in the phone book. Why would you give my money to an heir
finder who is going to charge me 25 to 50 percent and you won't
look me up in the phone book first? That is basically what we
are talking about. And cumulatively, we are talking about very
serious money. Forget the percentages. In a multi-trillion
dollar economy, we are talking about really a lot of money.
Mr. Oxley. Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman.
You used some pretty strong terms.
Mr. Shamansky. Yes, sir, I did.
Mr. Towns. The term ``kickback.''
Mr. Shamansky. Yes, sir. In Ohio we would call it that.
Mr. Towns. What do you mean? Could you just walk me through
it in terms of how you get a kickback?
Mr. Shamansky. Sure. We are talking about these companies
that cultivate these relationships with these big transfer
agents or whoever is holding the money. Before they turn it
over to these accounts, before the holder of the money turns
the money over to the States, like Ohio says, you have to send
a notice to the last address, oftentimes they say, you also
have to make an attempt to find that person. So these outside
companies come in, get these accounts, and then they do the
searching, and for 25 to 50--it is basically cherry picking
too. In other words, they only bother with the big ones.
So if you have real money coming to you, they will say, we
will tell you you are owed $10,000, you pay us $2,500 to $5,000
and I will tell you where your money is. In the meantime, the
people who have this money, they did not look you up. They do
not have to. And what happens is, the search firm, the reality
is, I have been informed, and I hope it is not true, gives
service fees, in quotation marks, service fees to the outfit
that turned the accounts over to them. Let's hope it isn't
true, but the consequences are startling.
Mr. Towns. Thank you.
Mr. Shamansky. And there is no reason not to prohibit it.
Mind you, we are not regulating the search firm. Please
understand that. We are saying to the financial entity
regulated by the SEC, you don't--you don't give these accounts
to anybody on that basis. We are not regulating anybody. You
don't need statutory authority to tell the holder that you
already have authority over, don't do that practice.
Mr. Towns. The privacy issue, you don't see that as an
issue at all?
Mr. Shamansky. The history of it is with every State and
the District of Columbia, there is--it is simply, the old
expression, a red herring. It does not exist. The experience of
all of the 50 States show that. If you lose a stock, you have
to go through all kinds of hoops to get the stock back. The
idea of the SEC--yes, I had to point out to them, and I am glad
Mr. Bergmann acknowledged, the SEC has on the Internet a whole
list of stocks that have been lost and stolen securities. So if
you lost a stock or it was stolen or a bond or something, it is
listed already, and yet there is no problem with that.
So it is very selected precedent, shall we say, that they
choose to acknowledge. There is precedent for all of the things
that are being suggested here.
Mr. Towns. Thank you very much. I have no further
questions, Mr. Chairman.
Mr. Oxley. The gentleman from Illinois, Mr. Shimkus.
Mr. Shimkus. Perfect timing. I am glad I got back.
It is an honor to meet you, sir, and to have you, and they
should have put honorable up there instead of mister. I was
going to cut into the chairman's opening comment, but we are
pleased to have you here. As a relatively new Member, I have
great appreciation for those who have come before us and tried
to make this system work.
I want to apologize because I have been in and out on the
phone and I may ask something that has already been asked, but
you sat in during Mr. Bergmann's statement and his question and
answering, and of course he is gone, which is always telling,
that they are not going to stay around to hear the opposing
view.
Do you agree with Mr. Bergmann's prepared statement saying
that the lost security holders compared to the total accounts
held by the transfer agents is small? I know you have addressed
that.
Mr. Shamansky. The only honest answer is, if you are going
to play the percentage game of what, what we are having here is
a small percentage of trillions as opposed to 25 percent of
$10. And we are talking about what we have to do to strengthen
our national economy, the market economy, is to assure the
individual investor that if you put your money in the market,
you are going to be treated fairly, and that is the essence of
the security and exchange laws of our country. You want to tell
your constituent he is going to be treated fairly, even if he
does not cash the check, the next dividend checks that comes by
on the stub, the same stamp, the same envelope, the same piece
of paper says a previously sent check of yours is not cashed,
and they will not do that. Prudential Insurance does.
Mr. Shimkus. I found your opening testimony telling when I
always have citizens who may say they have a hard time getting
ahold of me. I say, well, my phone number and my address is in
the phone book. I mean look it up. Fortunately I don't have a
lot of constituents who call me at home, but it is there, it is
not any big secret.
I also appreciate your comments on, I always like to, when
you follow the money, you answer a lot of questions. And the
issue about holding really what I would then term the principal
for years, and then someone would appear, and then get in
essence the principal back without any other rate of return.
Mr. Shamansky. Correct.
Mr. Shimkus. I think we need to probably fully explore
that, as to what is fair and what should be compensated to the
lost person based upon--I mean, again, follow the money. If
there was a disincentive to lose people, maybe a financial
disincentive, maybe they would be a little more vigilant in
ensuring that. But in siding with--you know, in today's
society, when we are going to be able to track people going
from point A to point B on their cell phones, I mean losing
people is going to be more difficult, but we still seem to do
it.
Mr. Shamansky. What we are talking about here today is the
fact that technology has changed, and whatever might have been
a decent excuse, and as a lawyer, the word ``reasonable'' is
terribly important to me. What was reasonable in the 1930's
when you are dealing with 3 by 5 cards is unreasonable today.
It was not negligent then, it is negligent now, because the
technology has overcome.
A surgeon today has to use all of the latest techniques
when he is operating that did not exist 30 years ago, but he
cannot keep operating as if it were 30 years ago. That is what
we are talking about. The cost is absolutely negligible.
Mr. Shimkus. I was reminded, and in fact, for some reason I
pulled up my Web page this morning, I think it was an accident,
because I never look at my own Web page, but then my staff
reminded me that we have an IRS listing of lost income tax
returns on our Web page for the people of our district, which
brings up, and we not only in this subcommittee, but on the
full committee, we are always debating privacy, encryption,
security of data bases, and I know you probably went over that
with the ranking member a little bit, but can you for me talk
about the privacy of security holders and data base protection?
Mr. Shamansky. Every State, your State, as I remember,
Illinois, every State has lists of unclaimed property.
Mr. Shimkus. Our State treasurer, I see.
Mr. Shamansky. Okay. And all we are saying is, the States
have been doing this for decades. They don't have privacy
problems, they don't have security problems. The list on the
Internet is nothing but a list, like in the Chicago Tribune.
You don't put the money down there, you don't tell--you don't
say that Bob Shamansky had so many shares of the Limited; you
just say that Manufacturers Hanover or whomever it is that
holds the money is holding money, period. That is all.
The reason you are not going to have a problem is because a
lot of them may be a dollar or $2, I mean you simply don't--
what happens in the present system is this cherry picking goes
on. The heir finders or search firms, they only take the big
ones, they are not going to bother with the little ones. So the
people who get hit are really hit hard, and there is no reason
for any of it, because we are dealing in batches. It is all on
tape, it is all through the Internet. My testimony came from my
Columbus office to the printer here and it came into the
committee all on e-mail, and technology has made this
difference.
You mentioned about the IRS. On the last page of my
testimony is a partial list of the Federal agencies and
departments which hold money for thousands of citizens. The
suggestion is, as a precedent, the Federal Government should
have one site for all of these and you would only have to go to
the one site. The technology is there. The cost is negligible.
I urge the members here of the fact that maybe 20 more million
homes have access, have computers at home, and if the Federal
Government would simply coordinate its information, what a boon
it would be to anybody, regardless of all the different
organizations, arms, departments, or whatever, agencies that
have money for someone else.
Mr. Shimkus. Thank you.
Mr. Chairman, if I could just finish up, I used to be a tax
collector in my previous life. We called it county treasurer in
the State of Illinois. We collected property taxes, and we had
a requirement by State law to publicly notice those people who
failed to pay their taxes and then when we were going to settle
the tax bill we had to publicly notice that. It did not bring
any comfort to the person whose taxes we ended up selling, but
it did provide me with a lot more leverage when these very
angry taxpayers came in to say it was in this paper on this
date, publicly noticed. So when people lose their assets, lose
their assets over the statute of limitations, I do not think it
is beyond our scope to make sure that the public has every
opportunity to--and defend ourselves before the statute of
limitations runs out--that they have every opportunity to
easily access unclaimed property.
Mr. Shamansky. It is simply a list which is on there any
time I choose to look myself up on the list. It truly is that
simple. The idea that there is a lot of high technology, a lot
of all these legal or whatever problems, it is not true. I am
here because it is not true.
Mr. Shimkus. Thank you, Mr. Chairman. I yield back.
Mr. Oxley. Thank you. Spoken like a true tax collector, I
might add.
Bob, it is good to have you back.
The gentleman from New York.
Mr. Towns. Thank you very much. I just want to make certain
that I am clear on one issue.
When it comes to the interest, I thought it was--I am not
sure in terms of how it works, and maybe you can help me with
this. I thought that the interest, the State received all of
the interest along the line.
Mr. Shamansky. That is fine, and let me clarify that, if I
may. If you have a bank account, a savings account, say, in a
bank in your district and that bank account, I think in New
York it may be 3 years now instead of 5, and it has been
earning interest during that 3 years, when the bank sends along
to, I think it is the State treasurer in New York, or whoever
it is that takes it, that is one account. But we are talking
about something different here.
The broker/dealer incorporated in Delaware but has an
office in New York City, but the shares are in street names, it
means it is in the broker/dealer's name, and the broker/dealer
gets the money, the dividends that year. However, it is holding
it in its account, when it, if it loses me or I am lost to it,
when it sends the money on to Ohio, it only sends the dividend.
In the meantime, it has been holding that money. And money,
Congressman Towns, is never idle. Every single second that
money is working, and the broker--that is why you have the case
of Delaware v. New York involving $890 million. This is big
money. So that interest--and it is a very simple solution. The
money is simply held in a trust account. The same holder, the
same outfit that gets the money just puts it--instead of its
account, it puts it in the trust account for its customers.
That seems to me eminently fair, and no problem to do. Do they
want to give up that windfall? No. Should they have had the
windfall in the first place? No.
Mr. Towns. Thank you very much. I am happy to know there is
life after you leave this place.
Mr. Oxley. Bob, thank you. It is good to have you with us.
The subcommittee stands adjourned.
[Whereupon, at 11:15 a.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of the Securities Industry Association
Chairman Oxley, Ranking Member Towns, and members of the
Subcommittee, the Securities Industry Association (``SIA'')
<SUP>1</SUP> appreciates the opportunity to share our views on the
Money Return Act of 2000, H.R. 3997, a bill designed to improve systems
for the delivery of dividends, interest, and other valuable property
rights to lost securityholders. The securities industry strongly
supports the goals of the proposed legislation but we question whether
legislation is necessary to accomplish these objectives. Moreover, we
respectfully disagree with the notion of subjecting the industry to
potentially devastating civil liability in the absence of a record of
clear abuse.
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\1\ The Securities Industry Association (``SIA'') brings together
the shared interests of nearly 800 securities firms, employing more
than 380,000 individuals, to accomplish common goals. SIA members--
including investment banks, broker-dealers, and mutual fund companies--
are active in all phases of corporate and public finance. The U.S.
securities industry manages the accounts of more than 50 million
investors directly and tens of millions of investors indirectly through
corporate, thrift, and pension plans, and accounts for $270 billion of
revenues in the U.S. economy.
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Customers are the lifeblood of the securities industry. They are
our single most important asset and we have strong incentives to
maintain frequent contact with them. Consequently, the incidence of
lost securityholders in the brokerage industry is low, primarily
because firms have stringent procedures in place and act quickly to
locate a securityholder who becomes ``lost.''
H.R. 3997 would, among other things, extend to all paying agents,
including broker-dealers, obligations to exercise due diligence in the
delivery of dividends, interest, and other valuable property rights to
their owners by requiring them to conduct data base searches, similar
to those required of transfer agents.<SUP>2</SUP> Paying agents that
fail to exercise due diligence shall be liable to any lost
securityholder or class of lost securityholders for damages, which may
be trebled if the court determines that such failure constitutes gross
negligence.
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\2\ 17 CFR 240.17Ad-17.
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We respectfully submit that legislation is unnecessary as
sufficient economic incentives exist to ensure the industry's due
diligence in serving its customers. The SIA agrees that data base
searches are an effective method of locating lost securityholders. In
fact, most broker-dealers have been employing this technology for many
years.
Unfortunately, we are not aware of any industry-wide statistics on
lost securityholders; however, we believe the problem has been grossly
overstated. Based on an informal survey of SIA member firms, we
estimate that less than 1% of all customer accounts held at broker-
dealers, which number in the tens of millions, are ``lost.'' Therefore,
we are confident that broker-dealer practices have been effective in
locating lost securityholders and minimizing the amount of securities
industry assets that escheat to the states. Moreover, we believe that
regulations adopted in 1997, which impose due diligence obligations on
transfer agents, have further reduced the number of lost
securityholders. Without some evidence that current industry practices
are ineffective, additional legislation at this time would appear to be
a solution in search of a problem.
HOW SECURITYHOLDERS BECOME ``LOST''
Abandoned property is tangible or intangible property that is
unclaimed by its rightful owner. Although it seems inconceivable that a
securityholder would ``abandon'' their property, for a variety of
reasons, a considerable number of securityholders are ``lost'' each
year when dividend or interest payments, or other correspondence sent
to the securityholder, are returned as undeliverable. Although
abandoned property is not unique to the securities industry, lost
securities have been the subject of several news reports over the last
several years.<SUP>3</SUP> Other forms of abandoned property include,
for example, savings and checking accounts, uncashed payroll checks,
utility and rental deposits, retirement benefits, safe deposit box
contents, tax and fee refunds, old life insurance policies, and
accident benefits. Indeed, virtually every industry contributes to the
hundreds of millions of dollars turned over to states each year under
abandoned property laws.
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\3\ See, e.g., Quinn, Calling All--Some?--`Lost' Securities Owners,
The Washington Post, June 28, 1998.
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In the securities industry, securityholders may become lost through
no fault of the financial institution holding the assets. The most
common situation occurs when a securityholder relocates and leaves no
forwarding address. Additionally, a transfer of beneficial ownership,
e.g., through inheritance, can also result in a securityholder becoming
lost. As a result, the securityholders do not receive principal,
interest, or dividend payments to which they are entitled, and the
property ultimately can escheat to the state after the time period
established under the applicable state abandoned property laws.
Customers of a broker-dealer who hold their securities in street-
name on the books of the broker-dealer are less susceptible to becoming
lost. Their securities are transferred by the broker-dealer, along with
shares held by other customers in the same security, into nominee name
and held at a securities depository, where purchases and sales are
reflected as book entry movements in the account of the broker-dealer
participant.
When securities are held in street-name, dividends and interest are
credited to the account of the broker-dealer on the depository's books,
and in turn to the customer account on the broker-dealer's books.
Brokerage customers, because their underlying assets are held on the
broker-dealer's books, are diligent about maintaining contact with the
firm. Likewise, the firm has an economic incentive in maintaining
contact with the securityholder who may purchase additional securities
through the broker-dealer. Consequently, very few broker-dealer
customers actually become ``lost.'' If an account statement of such a
securityholder is returned as undeliverable, diligent efforts, often at
considerable expense to the firm, are undertaken to relocate the
customer.
The more common situation where a securityholder is likely to
become ``lost'' is when the original shares are held directly by the
securityholder and, because the securityholder has moved without
leaving a forwarding address, dividends and interest checks mailed to
the securityholder by the transfer agent are returned as undeliverable.
Unlike a brokerage account where the underlying securities are in the
account, the amounts due to a lost securityholder on the books of a
transfer agent can be minimal and may not justify the expense of
extensive search procedures. However, as discussed in more detail
below, the SEC has adopted rules requiring transfer agents to conduct
data base searches when such a securityholder becomes lost.
BROKER-DEALERS EMPLOY EFFECTIVE PROCEDURES TO LOCATE LOST
SECURITYHOLDERS
Securityholders represent a continuing stream of income for a
broker-dealer and so the incentive to maintain close contact is great.
Contact between the registered representative and the customer is
frequent and the instances where an account holder is truly lost are
few. Nevertheless, because the industry is holding huge sums of money
on behalf of millions of investors, inevitably broker-dealers will have
abandoned property that will escheat to the state each year. Broker-
dealers generally have stringent procedures in place to locate lost
securityholders before this happens.
Typically, broker-dealers handle three kinds of abandoned property.
Generic abandoned property is the underlying assets, usually
securities, in an account in which the broker-dealer has lost contact
with the beneficial owner. Dividends and interest paid on the
underlying securities can also cause cash to accrue in the beneficial
owner's account. Finally, there is abandoned property that results from
the failure of financial institutions to collect dividends and interest
from each other.<SUP>4</SUP>
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\4\ For example, a security held by a customer in street name is
sold shortly before a dividend is declared and paid. If the security
has not been transferred into the name of the financial institution
that purchased the security on behalf of a customer, the selling
financial institution will receive the dividend. In such a case, the
customer that purchased the security before dividend date will be
credited with the dividend on payable date but the selling financial
institution will have a dividend overage. The financial institution
holding the security on behalf of the purchasing customer will have to
make a claim against the selling financial institution for that amount.
Because some financial institutions are not diligent about researching
and collecting these amounts from each other, this discussion does not
focus on this form of abandoned property. In these cases, however, all
beneficial owners have been credited with the appropriate dividends and
interest.
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Accounts generally are considered abandoned if correspondence is
returned as undeliverable anywhere from two to five times. Because
self-regulatory organization (``SRO'') rules require that quarterly
account statements be sent to customers, <SUP>5</SUP> within four
months from the date of the first failed delivery, efforts may be
underway to locate the lost securityholder. In most cases, the branch
office where the account is maintained is notified and the registered
representative is directed to try to obtain a current address. If the
branch office is unable to make contact with the securityholder, the
account is coded as undeliverable and is moved to an unclaimed property
account range for the purpose of calculating the time of dormancy under
state abandoned property laws. It remains here until it is required to
be turned over to the state pursuant to state abandoned property laws,
generally between three and seven years.
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\5\ See, e.g., New York Stock Exchange Rule 409 and National
Association of Securities Dealers Rule 2340.
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Although the account has been moved to an unclaimed property range,
efforts to locate the lost securityholder continue. Broker-dealers
routinely search automated data bases such as leading credit bureaus by
name and social security number in an effort to locate a current
address. Other methods include using CD-ROM technology for searching
telephone directories, and inquiring at the bank where previous
disbursement checks were presented to learn if the bank has a current
address.
Broker-dealers also may use professional search firms such as
EquiSearch and Keane Tracers that charge a fee but employ more thorough
search techniques. In no case is the fee passed on to the
securityholder. The timing of such a search varies among broker-dealers
but generally is conducted approximately two years after the recoding
of the account. The waiting period is used because many accounts are
reactivated during this period through internal efforts at the firm.
SIA believes these methods have proven to be effective in locating
lost securityholders. Although we are not aware of any industry-wide
statistics on the number of lost securityholders, over the last several
years, in connection with SEC initiatives in this area, SIA polled
member firms in an effort to quantify the amount of money escheating to
the states each year from the brokerage industry as a result of lost
securityholders. In May of 2000, we collected information from 17 firms
representing a cross section of the industry. We extrapolated using
numbers provided by this representative sampling and estimate that the
number of lost securityholder accounts in relation to the total number
of accounts is approximately 8/10 of one percent, <SUP>6</SUP> an
impressive statistic given the tens of millions of customer accounts
that broker-dealers service.
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\6\ Seventeen reporting firms had 315,841 lost securityholder
accounts out of 39,786,203 total accounts.
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SEC ACTIONS THAT ADDRESS LOST SECURITYHOLDERS
As we have noted, the SIA believes there is a higher incidence of
lost securityholders when a securityholder who holds shares directly
relocates without leaving a forwarding address and simply forgets about
dividend and interest payments that may be forwarded by the paying
agent. In 1997, the Commission acted to address this situation by
adopting Rule 17Ad-17, which imposes an affirmative obligation on
transfer agents to search for lost securityholders.<SUP>7</SUP> At a
minimum, transfer agents must conduct two searches using an information
data base. In addition, transfer agents may not use any service
designed to locate their lost securityholders that results in a charge
to a securityholder until after two data base searches have been
conducted. In adopting Rule 17Ad-17, the Commission directed its staff
to review the operation of the adopted rules after three years and to
report back to the Commission on its findings.<SUP>8</SUP>
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\7\ Securities Exchange Act Release No. 34-39176 (October 1, 1997),
62 FR 52229.
\8\ Id. At 52229. At the same time it adopted Rule 17Ad-17, the
Commission adopted Rule 17a-24, which required transfer agents to
disclose the aggregate number of lost securityholder accounts as of
June 30 of each year and the percentage of total accounts represented
by such lost securityholder accounts. This was designed to assess the
effectiveness of the search requirements of Rule 17Ad-17.
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In June 2000, the Commission revised the reporting obligations,
requiring information to be submitted on Form TA-2, the annual report
filed by all registered transfer agents, and rescinded Rule 17a-
24.<SUP>9</SUP> In adopting the amendments, the Commission stated that
the new reporting requirements should enable the Commission to assess
the scope of the lost securityholder problem and to assess the
effectiveness of the search requirements of Rule 17Ad-17 more
effectively. We believe when the Commission reviews this data, it will
see that the magnitude of the problem is much less than news reports
and other alarmists have projected. We urge the Subcommittee to
evaluate this information before determining that additional measures
are necessary to locate lost securityholders.
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\9\ Securities Exchange Act Release No. 34-42892 (June 2, 2000), 65
FR 36602.
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COMMISSION-RUN DATA BASE IS UNNECESSARY AND WOULD BE INCOMPLETE
The bill also would require the Securities and Exchange Commission
(``Commission'') to establish, or provide for the establishment of, a
web-based data base that would contain the names of lost
securityholders, paying agents, and issuers. Paying agents would be
required to report information on lost securityholders to the
Commission or its designee on a periodic basis.
As a practical matter, the web-based data base provided for in the
bill would be inferior to public and private data bases that already
exist. Because it would contain information only on securityholders, it
would be an added level of bureaucracy that duplicates more complete
information on unclaimed property from all sources that currently is
available in other data bases. It is our understanding that most states
now post information on unclaimed property on the Internet. The
National Association of Unclaimed Property Administrators (``NAUPA'')
provides a link to these websites and also sponsors Missingmoney.com, a
database containing unclaimed property records from participating
states, that is searchable on the web. It is a free source for
unclaimed property searches sponsored by participating states and the
NAUPA.
Finally, the bill would establish a new federal agency to collect
and publish information on unclaimed property held by the U.S., and to
establish procedures for restoring such monies to rightful owners. The
SIA believes there is simply no justification for creating another
bureaucracy with such a narrow purpose, particularly in light of the
proliferation of web-based databases that will enable owners to quickly
and easily search for property they have inadvertently abandoned.
CONCLUSION
Despite inflammatory projections of millions of lost
securityholders owed billions of dollars in dividends and interest, SIA
believes the securities industry does an exemplary job of locating lost
securityholders and reuniting them with their assets. Broker-dealers
maintain close relationships with customers and have stringent
procedures in place to locate securityholders who become lost. Informal
survey results indicate that lost securityholders represent less than
\8/10\ of 1 percent of all accounts held by broker-dealers. We
respectfully submit that economic incentives, not legislation, ensure
the industry's due diligence in serving its customers. Furthermore,
advances in technology and public and private sector initiatives are
making quicker and more thorough searches possible at little or no
cost. The proposed bill is a solution for a problem that is deminimis.