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The Dodd-Frank Act’s Requirements for Locating Security Holders

April 1, 2011

Photo by Antojo. Some rights reserved.

The Dodd-Frank Act (“the Act”) requires the SEC to extend to brokers and dealers the requirement of Securities Exchange Act Rule 17Ad-17 to search for lost security holders. The Act also: adds to Rule 17Ad-17 a requirement that “paying agents” notify “missing security holders” in writing that the paying agent has sent the missing security holder a check that has not yet been negotiated; adds to Rule 17Ad-17 an exclusion for paying agents from the notification requirements when the value of the not yet negotiated check is less than $25; and adds to Rule 17Ad-17 a provision clarifying that the written notification requirements shall have no effect on State escheatment laws.

Broker-Dealers’ Duty to Search for Lost Securities Holders

The proposed obligation to search for lost security holders would apply to all brokers and dealers. As a practical matter, however, only brokers and dealers that carry securities for customers would be subject to the new rule. Introducing firms are unlikely to be affected by the proposed rule. The obligation to search for missing security holders is also accompanied by an obligation to maintain records that would demonstrate compliance with the rule. These records would have to be maintained for at least three years.

Paying Agents’ Notifications

The proposed rule would also require “paying agents” to provide a single written notification to each missing security holder that the missing security holder has been sent a check that has not yet been negotiated. That notification must be sent no later than seven months after the sending of the not yet negotiated check. A “paying agent” would include any issuer, transfer agent, broker, dealer, investment adviser, indenture trustee, custodian, or any other person that accepts payments from the issuer of a security and distributes the payments to the holders of the security. A security holder will be considered a “missing security holder” if a check is sent to the security holder and the check is not negotiated before the earlier of the paying agent sending the next regularly scheduled check, or 6 months.

Compliance Period

To give brokers, dealers, and paying agents sufficient time to develop systems to comply with the proposed amendments, the SEC proposes to establish a compliance date for the amendments of one year following the date on which the Commission takes final action on this proposal.

Comments should be submitted on or before May 9, 2011. View the proposing release and text here.

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