Industry Table Talk: Transfer Agents Discuss Unclaimed Property
By John Buonomo, Executive Director AST, Rob Franz, Senior Director - Compliance, Broadridge, John Ulla, Chief Operating Officer, Continental Stock Transfer & Trust
December 19, 2019
December 19, 2019
Transfer agents act as a liaison and record keeper between a company and their investors. Transfer agents maintain investor’s account records, issue and cancel certificates, process investor mailings, ensure investors receive their due interest and handle other shareholder/investor concerns. Many companies utilize transfer agents but some companies act as their own. Unclaimed property poses a unique challenge for transfer agents as many investors and shareholders do not understand that if they do not vote proxy, cash their dividend checks or log into their account then their account becomes dormant and eventually remits to the state.
Some of the largest transfer agents work with Keane and were gracious enough speak with us regarding the transfer agent industry and its intersection with unclaimed property; AST Financial’s Senior Vice President, John Buonomo, Broadridge Financial Solutions, Inc.’s Senior Director, Robert Franz and Continental Stock Transfer & Trust’s Chief Operating Officer, John Ulla.
Introduction to the Industry
For readers who may be unfamiliar with the transfer agent arena (or the securities industry in general), please give a brief overview of how unclaimed property impacts your niche on a day-to-day basis.
John Buonomo: Unclaimed property has an effect on all facets of the transfer agency industry. The importance of establishing contact with the transfer agent has grown; therefore, it is important to vote your proxy, cash your dividend checks, and log on to your account to check your balance. Failure to maintain contact results in your property being remitted to the states.
Rob Franz: Shareholder contact details within records are subject to change on a daily basis. Without consistent reminders to update account details to ensure there is no interruption in communication about their holdings, shareholders may forget about certain securities resulting in property being deemed dormant and potentially eligible for delivery to the State as unclaimed property.
John Ulla: In addition, unclaimed property adds a significant burden and expense to transfer agents’ overall process. Obviously, trying to accommodate the needs of the various states and jurisdictions is a difficult task, as well as staying updated on the rules and regulations. So, that in itself has a major impact on a day-to-day basis to transfer agents.
From a high level perspective, how do transfer agents typically mitigate their unclaimed property risk?
JU: Most transfer agents in this day and age have processes and procedures in place, to mitigate risk for unclaimed property. The reputation and financial risks are just too great for transfer agents not to have strict processes in place. There are various regulatory requirements that transfer agents need to follow, such as 17Ad-17 mailings for unresponsive payees, as well as the unresponsive payee mailings for checks. We work with Keane because, quite frankly, with the maintenance and the technical understanding of the rules, regulations and the changing environment, it makes more sense for us to work with somebody who specializes in that rather than try and maintain that process in-house.
RF: In compliance with 17Ad-17, transfer agents execute searches for shareholder accounts deemed lost and solicit confirmation to update individual account records, thereby establishing current contact and reducing the amount of eligible accounts to be considered for escheatment. Transfer agents may also include property not yet eligible but which may be considered eligible during the next cycle in due diligence initiatives in order to garner as many responses as possible ahead of state deadlines.
JB: In order to mitigate risk, you need to drive contact with holders. Messages on statements, proxy material that outline the importance of maintaining contact are the easiest and most effective way. Additionally, good outreach programs to folks who’s accounts are about to become dormant or who maintain uncashed checks on the file will greatly mitigate risk.
What are the unclaimed property risk factors that transfer agents should consider in order to achieve or maintain compliance with statutes, rules, and regulations?
RF: Transfer agents should monitor state unclaimed property regulations or partner with a firm/organization that does so. Upon confirmation of changes, unclaimed property procedures should be amended accordingly. So, it’s almost a constant state of diligence.
JU: Every state has their own nuances to the rules. Every state is constantly changing. And every state institutes additional rules that are not even in their regulations, which makes it increasingly difficult to manage the function.
JB: More states are enacting regulations that allow them to levy penalty and interest assessments. Some of these assessments are based on interpretation of the regulations already on the books. This is a major risk factor from a financial and reputational perspective.
JU: Additionally, we have the extra burden, now, of these additional privacy rules that are coming into play with the states, such as the new California rule and the GDPR. These cause trepidation for transfer agents, especially those that partner with outside entities due to the risk factors associated with these new rules and putting our shareholder information out there with other organizations.
How are issuers informed of their shareholders’ current account status or uncashed checks? How are they prompted to ensure the account stays active? Who takes the action?
JU: SEC 17Ad-17 rules were amended in the late 2000s to include unresponsive payee mailings. So, transfer agents are required to do semi-annual mailings for checks older than 6 months. Complying with the regulatory rules goes a long way towards ensuring that the accounts stay active.
RF: Upon the completion of the unclaimed property analysis process each cycle, issuers are provided with a listing of accounts and corresponding property details (shares and cash) for all eligible property. This can be used by issuers to perform their own supplemental outreach. Issuers have the ability to make the necessary updates to accounts following contact with the shareholder via the transfer agent’s Issuer Portal. And then, of course, the issuer can make the necessary updates for those accounts if it’s relevant or correct.
JB: With AST, issuers are informed via an online reporting tool that enables them to drill down into the details of the open checks on their file. This will enable them to work with us as the Transfer Agent and their shareholders to perform targeted mailings and outreach programs that unite the shareholder with the amount owed to them and also prevent forwarding to the states.
JU: The transfer agent, proxy company (like Broadridge) or the issuer can take action to inform shareholders.
What other strategies can transfer agents use to offset the potential costs and/or other negative consequences of noncompliance impacting their unclaimed property exposure and liability?
JB: Notification, notification, notification. Transfer Agents have plenty of “white space” on statements, proxies, checks, etc. to provide a notice if a shareholder has not contacted them in over a year, or if the shareholder has uncashed checks.
RF: Establishing a procedural and systemic means for swift updating and retrieving of contact details is important to make sure everything is processed consistently.
JU: On a quarterly basis, we send our files to the National Change of Address Database (NCOA). And any differences in our records to the NCOA records result in an additional mailing to both the old and the new address. So, we go the extra mile to get better addresses for these shareholders. In addition we partner with Keane to do pre-escheatment location services, where our clients are willing to engage in such. We’ve also added a process for shareholders who access their account online; if their account is in a lost status, they are required to acknowledge that their address on record is correct or provide an updated address. Either of these actions will remove the trigger.
RF: We have something similar with our shareholder portal. Our shareholder call center also has alerts to let them know if an account requires authentication or updates.
Transfer Agents & Unclaimed Property
Based on your own experience, how complex is managing unclaimed property across a significant number of clients? What have you found to reduce the volume of escheatable accounts?
JB: The complexity does not come from the significant number of clients, it comes from the inconsistency in state requirements. Again, having a good outreach program greatly reduces the volume of escheatable accounts. We have also found that the SEC adding unresponsive payees to the requirements of 17Ad-17 have reduced our volume. That makes sense as anything that drives contact will reduce the escheat liability.
RF: By establishing programs that make it easy to have shareholders sign up for direct deposit (in order to have dividend payments immediately distributed to accounts), the number of uncashed checks eligible for escheatment can be reduced. Resources spent educating shareholders about the possibility of escheatment can offset costs in the long run. For example, considering enclosure reminders re: unclaimed property to all shareholders, not just eligible accounts, can result in more frequent contact with owners.
Are your clients concerned with the importance of retaining shareholder accounts? What efforts does your company take to keep clients informed of state requirements and best practices to prevent escheatment of customer accounts?
RF: This is a matter of issuer preference. Some issuers will take a more proactive approach on unclaimed property matters than others. It is important for transfer agents and clients to discuss approaches for unclaimed property.
JU: Yeah, I agree with Rob 100%. Continental sends a quarterly newsletter out to our issuers with generally one or two articles pertaining to industry updates on abandoned property.
JB: Clients are concerned with the effect escheatment has on their shareholder bases as it creates a shareholder relations nightmare with the complaints lodged (even if, as in almost all cases, the account was escheated properly and according to law). AST has regular client webinars and newsletters that provide updates on industry happenings, penalties, audits and regulatory changes.
RF: Broadridge offers client forums and educational webinars to ensure our clients are aware of our commitment to complying with all state laws and understand how their individual shareholder base can be impacted by unclaimed property regulations.
From a high-level perspective as a transfer agent, do you view the range of escheat issues as a revenue creating product line, or a potential matter of liability and compliance risk that you are obligated to handle?
JU: We don’t view this as a revenue creating product line at all. We’re happy to break even in performing the function. It’s more a matter of liability and compliance risk.
RF: I agree, escheatment issues are a liability and compliance risk that Broadridge works to resolve, with the issuer as a partner to handle reporting, remittance, audit inquiries, state penalties, and requests for documentation.
Are you aware of any industry initiatives that attempt to counterbalance the states’ increasingly aggressive enforcement of unclaimed property laws?
JB: The industry supported RUUPA (the Revised Uniform Unclaimed Property Act) which would have brought some uniformity to the numerous regulations amongst the states. However, states are choosing what sections of RUUPA that they are enacting to law, and adding other regulations.
JU: As an industry, the Stock Transfer Association represents transfer agents and they do work with experts in the industry to lobby the states and to try and get the states to adhere to standardized rules or take a different view on some of the regulations that they attempt to impose.
Unclaimed Property Best Practices for Transfer Agents
What are the advantages and disadvantages of outsourcing unclaimed property efforts versus keeping them in-house for a transfer agent?
RF: The advantages are fewer handoffs in a complex process. For example, shareholder files aren’t sent to a third party for analysis, and processing and contact updates can be applied to previously eligible accounts in near real-time. The disadvantages are that the customization opportunities are reduced; requests for contact updates or eligibility removals are translated from issuer to transfer agent to vender, and can be misinterpreted or not completed in a timely manner.
JU: I guess the advantages and disadvantages are based on the type and size of the organization. An advantage of outsourcing is that you don’t have the cost of maintaining the process in-house and all that it entails. So, I think, depending on the size of the organization as well as the resources available, outsourcing to an expert in the field far outweighs the benefit of trying to keep it in-house.
JB: The most distinct advantage to outsourcing is keeping up with the ever changing regulations, and ensuring systems are updated accordingly.
As a transfer agent, how do you address the company’s compliance with newly-enacted RUUPA requirements in certain states, such as tracking the confirmation of death on an account or the use of electronic communications for outreach efforts?
JU: Most transfer agent systems are able to track data such as confirmation of death and communications. The bigger problem is going out and looking for the information that isn’t in the system.
JB: We do run the database against the Death Master Index to obtain a date of death and rely on our unclaimed provider to perform the filings in accordance with the laws.
JU: I think the bigger issue with all of these RUUPA requirements is trying to know what to do as well as fend off a lot of these third party audit firms who are coming in with their own processes or their own interpretations of these regulations.
How does your company handle reporting securities with little to no value? What issues arise from these efforts?
JB: We rely on our service provider to handle this.
RF: Broadridge considers all accounts eligible for escheatment, regardless of the value of the account. No account will be omitted from reporting based on account value, including accounts with restricted shares.
JU: Continental agrees with the position of escheating all property except for restricted securities as our interpretation of the rules is that they’re not issued stock until the restriction is lifted. Unfortunately, most states want the property to have a value, which isn’t the case with valueless properties. Then it becomes an issue of constantly monitoring the asset for when it does reach a valuable threshold for processing. But if there is any cash on hand related to those shareholders, the states want the cash without the stock. So, it becomes an extra issue to monitor this.
Transfer Agents & Keane’s Services
As a result of Keane’s Owner Location services, what benefits have you seen in relation to managing your unclaimed property compliance?
JB: We have seen the benefit of establishing contact with dormant, lost or deceased accounts.
JU: Obviously the outreach has helped greatly in reducing the number of eligible accounts for escheatment year over year. Those additional outreaches are additional opportunities for shareholders to make contact with us.
How have the results discussed in the previous question impacted the overall health of the company’s unclaimed property compliance?
JU: By doing additional outreach, you’re reducing your pool of potential accounts to escheat, which reduces your risk factor when it comes to overall abandoned property compliance or noncompliance, right? So, from that perspective, it’s an extremely beneficial process.
JB: Any time you can mitigate risk and exposure to liability it’s a positive sign for the overall health of the program.
How does your company ensure they are handling unclaimed property efforts using the most accurate and up-to-date information?
JB: Industry expert releases (such as Keane’s), outside counsel dedicated to unclaimed property issues and participation in industry groups and associations. We sit on the board of these associations and actively participate in all committees related to unclaimed property.
RF: I agree, transfer agents should monitor state unclaimed property regulations or partner with a firm or organization that does so. Also, once you’ve confirmed changes, there needs to be a process to amend your unclaimed property procedures accordingly.
What are the benefits to your clients when accounts are successfully retained prior to escheatment?
RF: If accounts are successfully retained prior to escheatment, that’s an opportunity to educate instead of to react or inform. A lot of shareholders don’t understand unclaimed property so it’s always good when you’re able to retain the account and avoid a confrontation.
JB: Client benefits are: continued shareholder engagement, potential additional investments and a positive shareholder relations experience.
JU: If clients took a deep dive and good look at the benefits of maintaining shareholder contact, they would understand that it’s in their best interest and overall more cost effective for them to utilize outreach services.