Transfer Agent Penalized for Allowing Escheat; SEC Commissioners Dissent
Commentary by Steven Lofchie
A transfer agent settled SEC charges for "fail[ing] to exercise reasonable care to ascertain the correct address of lost securityholders" and allowing those securityholders' assets to be "handed over to state governments – escheated – as unclaimed assets."
In an Order, the SEC found that the transfer agent failed to fulfill the required search obligations to obtain the correct addresses of lost securityholders. As a result, assets of 78 "lost" securityholders were escheated to state governments. The SEC concluded that the transfer agent failed to satisfy the requirements of Exchange Act Rule 17Ad-17 ("Lost securityholders and unresponsive payees").
To settle the charges, the transfer agent agreed to (i) cease and desist from further regulatory violations, (ii) a censure, (iii) pay a $500,000 civil monetary penalty and (iv) comply with the additional undertakings set forth in the Order, including that the transfer agent ask mutual fund clients to periodically send out notices to their shareholders on the risks of escheatment.
In a joint statement, SEC Commissioners Hester M. Peirce and Mark T. Uyeda criticized the SEC for "us[ing] an enforcement action as a substitute for notice and comment rulemaking." They stated that the Order effectively establishes a "substantive new disclosure requirement" that directs the transfer agent to request its mutual fund clients to educate their shareholder clients about the risk of escheatment and to regularly update their addresses. The Commissioners argued that such a request creates the implication that mutual funds’ existing disclosure requirements regarding escheatment are "inadequate."
Commentary
The Commissioners' dissent is not with the fact that the transfer agent was subject to an enforcement action - taking the facts of the Order as true, the transfer agent did not satisfy its obligation to conduct a diligent search for shareholders. The dissent is directed to the undertaking that would require the transfer agent to request its mutual fund clients to themselves take actions that are not required by law. As the dissenting Commissioners observe, if the SEC believes that mutual funds have an obligation to educate their clients as to escheatment, the SEC should propose a rule to that effect, rather than try to establish a new standard of practice by means of an enforcement action brought against a transfer agent.