unclaimed property audits & the brokerage industry · keane dialogue with special counsel to...

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Keane Web Seminar

Unclaimed Property Audits & the Brokerage Industry

September 27, 2012

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Agenda and Speakers

Today’s Agenda:

An update on where the revisions to SEC Rule 17Ad-17 stand currently

Escheatment based on contact, RPO and/or combination of the two

The rise of brokerage audits and the reasons behind them.

Best practices to prevent and/or prepare for a third-party audit.

Preparing for 2013 and beyond.

Keane’s Speakers:

Valerie M. Jundt, Managing Director

Debbie L. Zumoff, Chief Compliance Officer

Michael Ryan, Senior Vice President

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Dodd Frank Mandate from Congress

HR 4173 known as the Restoring American Financial Stability Act of 2010 was signed by President Obama on 7/21/10.

SEC directed to make the following changes to its regulations:

First, the requirements of 17Ad-17 are to be extended to apply to brokers and dealers.

Second, a “paying agent” is required to send notice to each “missing security holder” when a check over $25 due to that security holder goes un-cashed.

The new rules were to be formulated by the SEC by 7/21/11

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SEC 17Ad-17 in Context of Escheatment

Search & Mail I (Search I is required 3 – 12 months after account is coded lost)

Due Diligence (2-6 months prior to escheatment)

Escheatment

Search & Mail II

(Search II is required 6 – 12 months after the 1st search is conducted)

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Proposed Regulation Finally Published

Finally published 3/21/11; Comment Deadline 5/9/11

Proposed changes:

The words “broker, or dealer” are added to paragraph (a) following the rule’s existing references to transfer agents. However, the Commission clarifies that “[a]s a practical matter, however, the Commission preliminarily believes that the only brokers and dealers that would have obligations under the amended rule would be those that carry securities for the accounts of “customers” within the meaning of Exchange Act Rule 15c3-3. Such brokers and dealers generally are referred to as “clearing firms” (as opposed to “introducing firms”) and tend to be the larger brokerage firms.”

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Proposed Regulation Finally Published (continued)

A “paying agent” will be required to provide written notification no later than 7 months after the sending of any uncashed check to each “missing security holder” to inform the missing security holder that they have been sent an uncashed check. The notification may be sent with a check or other mailing subsequently sent to the missing security holder but must be provided no later than seven months after the sending of the not yet negotiated check.

“Paying agent” is defined as any issuer, transfer agent, broker, dealer, investment adviser, indenture trustee, custodian or any other person that accepts payments from an issuer of securities and distributes payments to security holders.

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A person would be considered a “missing security holder” if a check is sent to the security holder and the check is not cashed before the earlier of the paying agent’s next regularly scheduled check, or 6 months.

Paying agents are excluded from the notification requirements if the check is worth less than $25.

Paying agents will be required to keep records to demonstrate compliance with the rule. Records must be kept for at least 3 years. The previous year’s records are to be kept in an easily accessible place. The Commission believes that the collection of information under the proposed is necessary to enable transfer agents, brokers, and dealers and paying agents, as custodians of records that determine the ownership of securities and the entitlement to corporate distributions, to reduce the number of lost and missing security holders.

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Regulation 17Ad-17 will be re-titled to demonstrate it applies to personnel other than transfer agents. Specifically, the Commission proposes to re-title the rule “Transfer agents’, brokers’, and dealers’ obligation to search for lost security holders; paying agents’ obligation to search for missing security holders”.

The SEC has preliminarily chosen one year from final action on the rule as an effective date.

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Comment Summaries

Use more distinctive language to avoid confusion between “missing” and

“lost” security holders

Exclude “lost” from “missing” security holder to avoid sending notices to

bad addresses

Lengthen the time period that triggers the obligation to send the un-

cashed check notice

Allocate compliance burden to broker/dealer with face to face

relationship with the customer

Apply rule to only those checks issued after rule’s effective date

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Comment Summaries (continued)

Further define scope of rule in terms of which brokers, dealers and

transfer agents are covered

Add a cross-reference to 17Ad-17 in the 15b rule series to ensure brokers

are aware of rule

Permit statement reflecting re-depositing of uncashed checks into owner

accounts as qualified notice

Extend rule implementation from 12 to 18 months

Recognize and provide guidance on potential for conflict with state

unclaimed property laws

Permit the use of electronic means to send notices

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What’s Next?

Keane Dialogue with Special Counsel to Division of Trading and Markets:

Periodic Telephone conversations (Feb, Apr, July, Sept 2012)

All comments were considered and reviewed by SEC General Counsel’s office; about 1/3 were incorporated in final proposal

Proposed Final Release has been drafted; first 30 pages look good

Next Steps:

o Review by new SEC Office of Risk and Finance - completed

o Review by SEC Office of Economic Affairs - completed

o Review again by SEC General Counsel – still pending

o Final review by Commissioners themselves

Implementation 12 months from adoption date

Final release now expected end of 2012

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17Ad-17 Revisions: Potential Impact on Broker Dealer Population

Design, Implementation, Search and Mailing Costs Do Brokers have a process for external database searches?

What will the per item charges be for search and postage?

How about Operations costs related to increased call volumes/maintenance requests

SEC Office of Management and Budget (OMB) estimated industry cost at $9.88m, SIFMA Comment letter estimated industry cost upward of $40m

Customer Confusion? How will customers respond to contact about low dollar accounts and uncashed checks

SIFMA Comment Requested increase in minimum threshold from $25 to $100

Customers often confused by letter. Common responses: “I have lived here for 20 years!”, “Why do I need to contact you if you already have my address?”

Final Ruling Detail is Critical Industry has been in a holding pattern awaiting final rule

Hoping final rule will reflect the comments filed during the response period

Potentially Lower Escheat Volumes TA 17Ad-17 searches have proven effective at locating customers

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State Unclaimed Property Compliance Triggers Contact vs. Returned Mail (RPO)

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Strict Statutory Construction vs. Industry Practice

State statutes can be broken into 4 categories:

1. RPO Only

2. Contact Only

3. RPO and Contact

4. RPO or Contact

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RPO vs. Contact Generally

The content of this document is provided for informational purposes only and should not be considered legal advice or legal opinion. This document contains information that is confidential, may be protected by the attorney/client or other

applicable privileges, and may constitute non-public information.

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Inactivity Only RPO Only RPO & Inactivity RPO or Inactivity

CO ND AK CA NE AL NH

CT* OR VA DC NY* AR NJ

DE* PA* VI GA TN* AZ NM

IL* RI ID UT FL* NV

KY SD IA WY HI OH

MD WA MA IN OK

MN PR MI KS SC

MS AB MO LA TX

ME VT*

MT WI

* = Spring State NC WV


2012 Contact Variations

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What Constitutes Contact?

Electronic contact vs. paper

Non-return of 1099s

Verified internet contact (login and password required)

Verified phone contact

Trades

Liquidations

Cashing of checks

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Compliance Hurdles

Information systems not tracking contact

Inability to comply without significant manual research

Firms grappling with methodologies to capture and audit contact

States supplying conflicting explanations of date of last contact

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Discussion Perspectives

Operations perspective generally – historically RPO driven

Brokerage and Mutual Fund industries – recent wave of 3rd party multi-state

audits focusing on contact trigger

On-Line Broker perspective

Some have embraced notion of contact as escheatment trigger

Mutual Fund perspective

Driving toward integration of RPO and contact triggers

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Contact vs. Returned Mail OPERATIONS PERSPECTIVE

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Background

Commercial TA’s maintain security holder information for more than 15,000 issuers and approximately 100 million accounts

Historically, securities escheated only where the security holder was deemed “lost” per SEC Rule 17Ad-17

As states have become more aggressive in enforcement based upon contact trigger, re-interpretation of state statutes has become necessary

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Defining Contact

Easier Analysis:

Dividend Paying Entities

Difficult Analysis:

Non-Dividend Paying Entities

Retirement Accounts

Brokerage Accounts

Dividend Reinvestment Accounts

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Illinois Case Study- 2010

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Impact

Numbers for 6 major issuers (2009 versus 2010)

Eligible for due diligence based on “lost” interpretation in 2009, “contact” interpretation in 2010

2009 – Due diligence mailed to 5,300 holders holding 103,000 shares

2010 – Due diligence mailed to 25,900 holders holding 7,475,000 shares

Imagine the cost implications!

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Contact vs. Returned Mail

Mutual Fund Perspective

(Brokerage Similar?)

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Challenges Associated with Contact

There are various systems and infrastructure challenges to gathering contact information from various sources

Phone, Branch and Correspondence channels may operate independently

Intermediary relationships pose particular challenges

Federal regulations, based on RPO, are more consistent with a firm’s fiduciary responsibility to it’s customers

Increase in volumes

Customer confusion

Lack of uniformity in standards leads to inefficiency

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Contact Based Escheatment

Review requirements of state regulations Dormancy Period, Triggering Event, Due Diligence Requirements

Define “Contact” and “Activity” elements that need to be documented to substantiate last contact Verified phone calls, web log in, customer initiated transactions, customer

correspondence, etc.

Establish Date of Last Contact field on recordkeeping platform To be populated by the date of the activities listed above

Develop state specific logic to ensure that accounts are identified in a timely manner Consider state’s dormancy period and time required to locate customers

o Allow time for mandated state due diligence efforts

o Additional due diligence efforts may be advisable

Develop “and/or” logic by state to trigger dormancy period via traditional RPO date or date of last contact RPO accounts are still abandoned

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The Bright Side of Contact

Customers are not lost

Owner outreach and mandated due diligence programs should be successful

Opportunity to establish proactive communication with customers

Verify account registration information

Open dialogue with customers regarding investment options

Reinforce that the firm values each customer relationship

Cross-sell opportunities

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Audits

Audits

Audits

Here They Come !

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The Audits are Coming!

The Brokerage and Mutual Fund industries have both seen an increase of audits from third-party audit firms.

The three main players are:

Xerox Unclaimed Property Clearinghouse (Formerly ACS)

Kelmar

Verus

Why?

Third-party audit firms believe the brokerage industry has not been in compliance with reporting “dormant” accounts.

Many brokerage firms only escheat based on “lost”.

Whistleblower Incentives

Brokerage industry not subject to SEC17Ad-17 search yet.

Abundance of unknown property continues.

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Audits – The States

The Brokerage industry has not been a focus with most states; exception of Delaware and New York.

Kelmar currently has roughly 15 states under agreement for brokerage audits. Majors states include:

CA

IL

MA

NJ

PA

Verus has reached out to various states to get them on board.

Xerox (ACS) is latest third-party firm to get moving.

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Audits – What are they looking for?

Brokerage firms that have never escheated

Brokerage firms escheat only based on RPO?

How firms are tracking contact by the investor?

How many returned mailings before a firm codes an account lost?

Death Master Searches; huge success in insurance audits.

Un-reconciled differences – the “unknown” funds.

Why such a big difference of “unknown” funds among firms?

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Audits – Why now?

Many have asked why now?

Increased competition among the third-party firms.

Insurance audits resulted in huge settlements.

More lost and dormant accounts prior to SEC 17Ad-17 becomes effective.

More brokerage firms are looking at Contact.

Retirement accounts are becoming of age.

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Current Enforcement & Political Landscape

Impact of economic crisis on state budgets.

Unclaimed property is a tremendous source of revenue to the states

Currently holding over $35B

States are intensifying search for additional revenue without raising taxes.

New Appointed or Elected Agency Heads

Translation = Increasing Audits.

States have tapped into unclaimed property funds to meet budget

shortfalls.

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Current Enforcement & Political Landscape (continued)

More audits; more aggressive stance during audit

New players/limited or little specific UP experience

Reduced dormancy periods

Looking for new abandoned property types (e.g. digital property; un-

invoiced receipts)

Refusal to waive interest for non-compliance under audit

Good news – perhaps greater willingness to permit voluntary disclosure

to bring in revenue while avoiding costly audits

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Legislative & Regulatory Trends

Changing Reporting Deadlines To Collect Property Faster (MI and TX)

Adding New Rules Or Policies To Cut Administrative Burdens Or Reduce

The Ability To Reunite The Owner With Their Funds (RI)

Adding New Rules To Respond To Unique Situations (NV)

Specific Authority To Contract For Audits and Create an Estimate

Whistleblower Incentives

States are sending invoices for interest & penalties AND audit costs!

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So, How do I plan for 2013?

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Preparing for 2013 and Beyond

Audits

Be proactive

SEC 17Ad-17

It’s coming

Realize the benefits

Understanding the costs

o System updates for tracking RPO’s

o Savings on reducing mailings

o Search and mailing costs

o Savings on reduced escheatment

Dormancy Periods

Will continue to be shortened

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Audits – Going Forward

I got the letter!

Review Debbie’s and Val’s presentation

Get management onboard

I did not get the letter!

It is a matter of time

Prepare like you will/did

Keep management updated on what is going on

Stay involved with SIFMA’s UP Committee

Plan to attend UPPO’s Annual Conference in March

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SEC 17Ad-17 – Friend or Foe

Friend Reduced due diligence

Reduced escheatment

Retained assets

Uniformed process for coding accounts lost

Reduced mailings to bad address

Time to implement

Foe When?

System changes

Management involvement

Search requirements

Time constraints to code accounts lost

Does not help with escheatment due to Contact

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Dormancy Map

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Dormancy Periods Shorter, Shorter, Shorter

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Where do I go from here?

Establish and TEST internal policies & procedures

Early Remediation of potential unclaimed transactions

Employ internal research and external communication efforts

Reconcile and Update Vendor and Customer files

Motivate Staff to consistently engage in remediation

Staying current is easier than researching in audit mode

Maintain Documentation – this is critical

Confirm your company’s Filing Status (parent vs. subsidiaries filings) and Past Reporting Practices

Play Mega Millions!

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Best Practices

Support Proactive Due Diligence to maintain contact with vendors and customers.

Identify areas of Potential Exposure (current and past due)

Consider an independent specialist to partner with you

Consider Voluntary Compliance Agreements (VDA’s) in jurisdictions where exposure exists

Implement strong written Policies & Procedures to identify, track, and report unclaimed property

Establish a Committee Approach to address changes that could impact unclaimed property; for example mergers & acquisitions, accounting program changes, new IT systems…

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Thank You

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Debbie Zumoff [email protected]

Valerie Jundt [email protected]

Mike Ryan [email protected]

mailto:[email protected]



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