Lost Security Holders:

SEC Should Use Data to Evaluate Its 1997 Rule

GAO-01-978: Published: Sep 28, 2001. Publicly Released: Sep 28, 2001.

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One in eight Americans are entitled to unclaimed and abandoned assets, according to the National Association of Unclaimed Property Administrators. These unclaimed and abandoned assets include savings and checking accounts, securities, paychecks, insurance settlements, and utility and rental deposits. Most of this money is unclaimed because the owner moved and simply forgot about the account, changed his or her name, or died. After a period of dormancy, the funds are turned over to state unclaimed property offices. To protect investors, the Securities and Exchange Commission (SEC) adopted a rule in 1997 requiring transfer agents to search for lost security holders, maintain written procedures for searching for lost security holders, and annually report to SEC on the accounts of lost security holders. However, the rule excluded the broker-dealers that are involved in the buying and selling of securities and that hold the vast majority of owners' assets. Legislation was introduced in Congress in 2000 that would have expanded the SEC rule to cover broker-dealers. GAO surveyed broker-dealer and transfer agents survey respondents and found that the number of lost accounts was about two percent of total accounts. Survey respondents said that they believe the number of lost security holders has remained steady since 1998. Transfer agents and broker-dealers said that the main reason for lost accounts was that owners forgot to send a change of address when they moved. Both transfer agents and broker-dealers generally resorted to telephone calls and mailings to locate lost security holders, using each method at least 75 percent of the time. Transfer agents and broker-dealers used credit bureaus and professional search firms the least and found these methods to be the least effective. About 40 percent of the responding transfer agents and broker-agents spent less than $10 trying to locate each lost customer. SEC has been unable to use data provided by transfer agents to assess the operation of the 1997 rule because of differences in the way agents interpreted the questions. In addition, the requested information was insufficient for SEC staff to review the operation of the rule after three years as they were directed when the Commission adopted the rule. SEC relies primarily on its general inspections of transfer agents to ensure that these firms comply with the 1997 rule. SEC found violations in compliance with the 1997 rule's reporting and procedural requirements in about one quarter of the inspections it made between 1998 and 2000. Given that only transfer agents are covered by the 1997 rule, the extent of the lost security holder issue may be small.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To better determine the usefulness of the 1997 rule and to help ensure compliance with the rule, the Chairman of SEC should analyze the data submitted by transfer agents in conjunction with inspection results and GAO's survey data to assess the need for and scope of the 1997 rule.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC has a transfer agent database that it enters the filings that the 800 registered transfer agents make annually, including these entities' descriptions of their efforts and results from searches for lost security holders. What this data has shown is that no need to change the rule exists. The SEC staff hope to one day have the agents file electronically and in a set format that would improve the comparability of the data received, but no schedule for implementing such a system exists given all other priorities. Instead, SEC staff continue to use the examination process to analyze the extent to which agents comply with the 1997 rule requiring they search for lost security holders.

    Recommendation: To better determine the usefulness of the 1997 rule and to help ensure compliance with the rule, the Chairman of SEC should use the data submitted by transfer agents along with inspection results to target future transfer agent inspections.

    Agency Affected: United States Securities and Exchange Commission

    Status: Closed - Implemented

    Comments: SEC said that its staff are currently in the process of reviewing the data collected in the transfer agent database to assist in preparing for a series of examinations of transfer agents for compliance with the 1997 rule. In addition, SEC said that when examiners find serious deficiencies in a transfer agent examination, or if a transfer agent's response to a deficiency letter issued following an examination fails to indicate that adequate corrective action will be taken, SEC staff will conduct a follow-up examination.

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