The SEC Adopts New Obligations for Broker-Dealers Regarding Lost Securityholders and Unresponsive Payees

by Bob Hedstrom

On December 21, 2012, the Securities and Exchange Commission unanimously adopted rules required by the Dodd-Frank Act that require Broker-Dealers and certain other market participants to search for holders of securities with whom they have lost contact and provide notifications to persons who have not negotiated checks that have been sent to them.

The amended Exchange Act Rule 17Ad-17 will require Broker-Dealers with customer security accounts to use reasonable care to ascertain the addresses of lost securityholders. Specifically, Broker-Dealers must conduct two database searches to ascertain the address of securityholders to whom any correspondence was sent and returned as undeliverable and for whom the Broker-Dealer has not received updated address information (“lost securityholders”). Under this rule, the Broker-Dealer must conduct mandatory searches through an information database service that contains addresses from the entire US geographic area, contains names of at least 50% of the US Adult population, is indexed by taxpayer identification number or name and is updated at least four times per year. The searches must be conducted by taxpayer identification number, or if a search based on taxpayer identification number is not likely to locate the securityholder, by name. The securityholder may not be charged for these mandatory searches.

The amendments became effective March 25, 2013. The compliance date will be January 23, 2014.

Mandatory searches and Undeliverable Mail

The mandatory database searches must be conducted between three and twelve months from the later of:

  • The date upon which a correspondence is returned as undeliverable, or, if a returned correspondence is re-sent within one month from the date it was returned and is again returned as undeliverable, the date on which the re-sent item is returned as undeliverable.
  • The second required database search must be performed between six and twelve months after the first search

The obligation to search does not apply when:

  • The Broker-Dealer has received documentation that the securityholder is deceased
  • The total value of assets in the securityholder’s account is less than $25
  • The securityholder is not a natural person

Record Keeping and Procedure Requirements

Broker-Dealers with customer accounts and transfer agents must maintain records demonstrating compliance with the lost securityholders rule, and Broker-Dealers and other persons subject to the unresponsive payee notification rule must maintain records demonstrating compliance with the unresponsive payee notification rule. These records must include written procedures that describes the entity’s methodology for complying with the rules.
Per the National Association of Securities Dealers (NASD), firms that have been directed to undertake these steps have experienced difficulty in locating certain customers and former customers and obtaining trade data necessary to effectuate refunds. There is no comprehensive checklist of procedures for firms to follow, but firms must use their best efforts, taking all reasonable steps to locate customers and former customers.


Horizontech is well positioned to help Broker-Dealers comply with SEC Rule 17Ad-17

We have success in locating lost securityholders, as well maintaining systems, processes and procedures for managing and tracking undeliverable securityholder’s First Class mail. Broker-Dealers do not need to build a new system, or platform because we already have it in place. We can easily and quickly plug a number of solutions directly into any existing Broker-Dealer operation for complying with this rule, including integrated document capture (Cloud and non-Cloud) and address search.

Horizontech’s proprietary RMSLink software complies with Rule 17Ad-17 guidelines and automatically processes securityholder data through thousands of public and proprietary databases, including billions of records tied to US consumers. The Address Management, Standardization and Search software also provides multiple validation checks, comparing various linked large, compliant, data compilers through hundreds of algorithms. Horizontech’s workflow processes and systems automatically record address updates, re-sent communications and repeated undeliverable mail and reasons for non-delivery by the USPS.
The platform has been built and working for many years. No need to scramble and attempt at building internally what is extremely efficient for complying to 17Ad-17. And, by the way, can be up and running within 30 days post requirements authorization.
Horizontech is well positioned as an expert and market innovator for processes, systems and software for managing undeliverable mail and lost securityholders.
To Learn More on the ruling and what you must to do Comply: