How to Help Shareholders Avoid Costs and Anxieties. By Megan Keefe Broadridge Financial Solutions

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1 How to Help Shareholders Avoid Costs and Anxieties By Megan Keefe Broadridge Financial Solutions

2 The escheatment process, which results in turning over unclaimed property to the state, generally is not well understood. However, its impact on public companies and their shareholders can be quite significant. Over the past decade, escheatment has become an even bigger issue as cash-strapped states seek to maximize revenue. This brief guide will help executives of public companies develop a basic level of knowledge about escheatment, with emphasis on steps they can take to anticipate and prevent problems, utilize transfer agents services, and avoid unnecessary costs and anxieties. Escheatment Basics Under state law, escheatment is triggered when securities issuers have had no contact with shareholders after a certain period of time, which varies by state. It gives the state the right to claim securities and uncashed checks, convert them to cash, and keep the cash until such time as the shareholder may reclaim the funds. In many states, escheatment is now the third largest line-item revenue source, and this has prompted states to become very aggressive in ensuring that companies comply with the law. Unfortunately for the shareholder, the concept of escheatment is not well known, as shareholders do not intentionally or willingly surrender valuable accounts or property to the state. As a result of increased escheatment over the last several years, companies have growing responsibilities and liabilities. For example: Registered shareholder complaints can increase when their property is escheated, especially if they aren t properly notified before securities or unclaimed checks revert to the state. State governments are aggressively auditing securities issuers to uncover enforcement cases and assess penalties. Escheatment audits involving securities can trigger general ledger audits, which may uncover other types of property that should have been remitted, such as uncashed vendor checks or unclaimed payroll funds. Essentially companies, more than ever, need to be in compliance to avoid penalties. Fortunately, there are ways to increase escheatment compliance and minimize the negative impacts and anxieties. Steps in the Escheatment Process To understand the process, let s focus first on four terms, each of which can trigger steps leading to escheatment. For registered securities holders, these terms may be encountered in the sequence shown in the flow chart below. Lost security holder A security holder to whom correspondence has been sent and returned as undeliverable, and for whom there is no better address information. Unresponsive payee A security holder who has been mailed a check valued at $25 or more that has remained uncashed for six months or more. Dormant account An account that has passed the state s applicable period of dormancy a time during which there has been no contact from the owner, as evidenced by records of the company or its transfer agent. Prior to remittance to the state, a final notice is sent by the account holder (e.g., brokerage account, transfer agent) to the account owner, declaring the account dormant. Abandoned property Property that has not been claimed by its owner, through a request or contact, after it has become a dormant account. This property must be reported by the company or its transfer agent to the state of the owner s last-known address. 2

3 1. Mail returned undeliverable or check is uncashed 2. Rule 17Ad-17 initiated 3. Broker-dealer or transfer agent must conduct a data base search for a correct address (undeliverable); or send a notice (uncashed). } 4. Final notice is sent to the holder, declaring account dormat. Dormancy Period (usually 3-5 years) 5. If there is no response, securities and uncashed checks are escheated by the state. } SEC enforcement State enforcement The first two definitions above pertain to Rule 17Ad-17 of the SEC. The last two definitions are applicable under state escheatment laws. The dormancy period generally is 3-5 years, depending on state law. The period in between the final notice (Step 4) and remittance to the state (Step 5) is set by state law and varies among the states. (In many states, it is 60 days.) Technically, it is the registered shareholder s responsibility to provide a deliverable address, cash checks, and keep in touch with the transfer agent. However, accounts go dormant for a variety of reasons including a change of address, the owner s incapacity, or inaccurate data on a transfer agent s master files. In the vast majority of cases, shareholders are not aware of the situation until property is escheated. The securities issuer s responsibility under state law include: 1) tracking unresponsive accounts and strings of uncashed checks through the dormancy period; 2) sending the account owner a final notice prior to reporting the property to the state; and 3) turning escheated checks and securities over to the state on a timely basis. (All uncashed checks in a string and the related securities are subject to escheatment.) For issuers who manage these responsibilities internally, the cost in staff time and money can be significant. 3

4 Helping to Avoid Escheatment with Proactive Shareholder Contact Public companies can educate and remind their shareholders on actions they can take to avoid escheatment, which include: Cashing a dividend check Having a dividend check electronically deposited through ACH Automatically reinvesting a dividend Voting a proxy Updating shareholder contact information If a company is audited by a state or third-party consultant (most often Kelmar and Associates), any documented shareholder-initiated contact generally will suffice for avoiding escheatment. In fact, each shareholder-initiated contact resets the clock to day zero, for purposes of the dormancy period. However, a pure shareholder initiated contact, such as a request to update account records, generally does not reset the period. One benefit of utilizing shareholder contact services is to avoid running down the dormancy clock to the point-in-time at which the final notice must be sent, forewarning escheatment in as few as 60 days. There are several creative ways transfer agents can proactively attempt to contact shareholders with whom contact has been lost for a period of time, such as two years. For example: The transfer agent can insert buckslips into proxy statements, encouraging any vote (yes or no) as an indication of contact. The shareholder portal can provide proactive notifications to shareholders, urging them to update your records or vote your proxy. These messages can pop up each time the shareholder visits the portal, until shareholder contact is initiated. If companies want their transfer agent to proactively contact shareholders by phone, recorded calls can serve as a record that will withstand a state/kelmar audit. With proper controls in place, companies can then update the date-of-last-contact in the shareholder s online record. If any of these reminders are successful in engaging the shareholder, companies can reset the dormancy clock to day zero. Shareholder Education Shareholders can be educated on escheatment requirements and prevention techniques. For example, an informative FAQ on the topic can be posted on the Investor Relations tab of your website. Your transfer agent s relationship managers also can make sure your staff understands the requirements of both SEC and state rules and their associated liabilities. (Note that the two sets of rules have separate, very different requirements, and they are often confused.) Pre-Escheatment Transparency To avoid unpleasant surprises to shareholders, companies can have their transfer agent provide a pre-escheatment analysis, listing all accounts that will become eligible for escheatment in the near future. Additionally, your transfer agent can update records, avoid escheatment executive property and reach out to key shareholders. Costs of Transfer Agent Escheatment Services Escheatment is a complex process and can be costly for public companies and their shareholders alike. While a cost burden such as this should not become a profit center for transfer agents, unfortunately it has been, in some cases. It s best to have an open dialogue with your transfer agent about which escheatmentrelated services are included in scheduled costs and which (if any) are billed at extra costs. If additional fees can t be avoided, at least they should not be a surprise. 4

5 Summary We hope this guide has increased your knowledge of the escheatment process, which in turn may help: 1) your company meet all requirements of both the SEC and states; and 2) your shareholders avoid costs and anxieties involved in the loss of personal property. Your transfer agent can be a source of creative ideas and solutions for minimizing escheatment issues. In fact, you should expect proactive shareholder contact and education programs from your transfer agent. The bottom-line goal is to minimize the number of your shareholders who ever see an escheatment notice. In escheatment cases that are unavoidable, your transfer agent can help you meet responsibilities and minimize liabilities as time-effectively and cost-efficiently as possible. Contact Us To further discuss the information in this document, please call us toll-free at or info@broadridge.com. About Broadridge Broadridge Financial Solutions, Inc. (NYSE:BR) is the leading provider of investor communications and technology-driven solutions for brokerdealers, banks, mutual funds and corporate issuers globally. Broadridge s investor communications, securities processing and business process outsourcing solutions help clients reduce their capital investments in operations infrastructure, allowing them to increase their focus on core business activities. With over 50 years of experience, Broadridge s infrastructure underpins proxy voting services for over 90% of public companies and mutual funds in North America, and processes more than $5 trillion in fixed income and equity trades per day. Broadridge employs approximately 6,700 full-time associates in 14 countries. For more information about Broadridge, please visit broadridge.com. No part of this document may be distributed, reproduced or posted without the express written permission of Broadridge Financial Solutions Inc Broadridge Financial Solutions, Inc. Broadridge and the Broadridge logo are registered trademarks of Broadridge Financial Solutions, Inc. MKT_615_14