U.S. GOVERNMENT PRINTING OFFICE

67–121CC WASHINGTON : 2000

LOST SECURITY HOLDERS: REUNITING SECURITY

HOLDERS WITH THEIR INVESTMENTS

HEARING

BEFORE THE

SUBCOMMITTEE ON

FINANCE AND HAZARDOUS MATERIALS

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

OCTOBER 4, 2000

Serial No. 106–154

Printed for the use of the Committee on Commerce

(

2

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS

MICHAEL G. OXLEY, Ohio, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

Vice Chairman

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

STEVE LARGENT, Oklahoma

BRIAN P. BILBRAY, California

GREG GANSKE, Iowa

RICK LAZIO, New York

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

EDOLPHUS TOWNS, New York

PETER DEUTSCH, Florida

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

FRANK PALLONE, Jr., New Jersey

BOBBY L. RUSH, Illinois

JOHN D. DINGELL, Michigan,

(Ex Officio)

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3

C O N T E N T S

Page

Testimony of:

Bergmann, Larry E., Senior Associate Director, Division of Market Regulation, Securities and Exchange Commission ............................................. 4

Shamansky, Robert N., Benesch, Friedlander, Coplan & Aronoff; accompanied by Daniel C. DeSimone, Office of Federal Relations, National

Association of State Treasurers ................................................................... 14

Material submitted for the record by:

Securities Industry Association, prepared statement of ............................... 30

(III)

(1)

LOST SECURITY HOLDERS: REUNITING SECURITY HOLDERS WITH THEIR INVESTMENTS

WEDNESDAY, OCTOBER 4, 2000

HOUSE OF REPRESENTATIVES, COMMITTEE ON COMMERCE, SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS, Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2322, Rayburn House Office Building, Hon. Michael G. Oxley

(chairman) presiding.

Members present: Representatives Oxley, Shimkus, Ehrlich,

Towns, Barrett, and Luther.

Staff present: Shannon Vildostegui, professional staff member;

Robert Simison, legislative clerk; and Consuela Washington, minority counsel.

Mr. OXLEY. The subcommittee will come to order. The Chair

would recognize himself for an opening statement.

The market boom of the past decade was spurred by technological progress that reduced costs of trading and facilitated access

to information. Opening a brokerage or a mutual fund account is

simply easier and cheaper than it was just a few years ago, and

that was before e-signature.

So, with millions of new investors opening accounts each year,

reliable data management systems are essential to a properly functioning marketplace. To further complicate matters, it is becoming

the norm in the securities industry for an account holder of securities to be held in ‘‘street name.’’ The investor never takes physical

custody of the asset. Broker/dealers, for example, hold the asset for

the benefit of the investor. Therefore, it is essential that account

holder information be accurate to avoid a situation in which an investor loses an asset. This is no small task in an environment that

exchanges billions of shares of stock annually.

The potential for investors being separated from their assets exists, and the value of lost assets can be quite large. This concern

was brought to the attention of the industry and the SEC in the

early 1990’s. In 1997, the SEC issued regulations to address the

problem. These regulations apply to transfer agents who deliver assets to investors on behalf of public companies. The regulations do

not apply to other entities that may hold assets for shareholders

such as broker/dealers or investment companies. However, all

custodians of shareholder property are covered under various State

laws.

Laws vary from State to State but, generally, unclaimed property

escheats to the State after 7 years. Even with State escheatment

2

laws and SEC regulations, lost security holders still exist. Some believe additional regulation may provide a benefit in reuniting lost

security holders with their assets.

As we consider this matter, it is important to understand what

the success rate is for returning securities and dividends to their

owners under current laws and regulations. We should also consider the potential benefits of increasing efforts to reach lost security holders. However, in doing so, it is important to understand

the costs involved and avoid forcing shareholders to foot the bill for

others who become lost by their own fault.

Hopefully, our witnesses will shed some light on this issue so

that this committee might have a better understanding of the situation. I thank the witnesses for coming and I look forward to hearing what each has to say.

With that, let me now recognize the ranking member of the subcommittee, the gentleman from New York, Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman, for holding

this hearing. As our distinguished witnesses will testify, there are

a relative small number of security holders that become ‘‘lost’’ in

our system. By lost, we mean that these are investors who have

lost contact with the financial institutions or other entities holding

some of their investments. While our security holders become lost

for a number of different reasons, the Securities and Exchange

Commission placed a great deal of the burden for staying in contact

with these lost investors on the transfer agents monitoring these

investments.

Specifically, in 1997, the SEC adopted new transfer agent rules

and amended other rules in an effort to require uniformity and

cost-effective actions to locate lost security holders and reunite

them with their assets. We are fortunate to be joined here today

by Larry Bergmann, who will discuss the effectiveness of regulations like rule 17.

In closing, Mr. Chairman, I want to emphasize the importance

of this effort to our society. As Congress debates numerous Social

Security reform options, many of which include placing a greater

portion of America’s retirement savings in the financial markets,

the importance of preventing lost security holders becomes clear.

The SEC conducted a survey of the seven largest transfer agents

and they estimated at least 94 million were in lost accounts. As we

prepare to place a greater emphasis on the financial markets for

the retirement securities of an increasingly mobile job force, we

must take action today to reduce the potential that security holder

accounts will be lost.

I salute you, Mr. Chairman, for holding this hearing today, and

I look forward to hearing from our witnesses and working with you

to begin to address these very important issues as we talk about

how we invest.

Thank you very much. I yield back.

Mr. OXLEY. The gentleman yields back.

The gentleman from Illinois, Mr. Shimkus.

Mr. SHIMKUS. Thank you, Mr. Chairman.

Just briefly, I too want to join the ranking member in asking and

following up on whether the 1997 SEC regulations have been a

help to this problem and, if not, what other things can be adjusted

3

to help, what other options are in place, and just for my own sake,

because this is my first term on this subcommittee, to find out the

extent of the lost security holder problem and what percentage of

investor assets are lost and what this all represents. So that is why

I am here, to learn.

I thank you for holding the hearing, and I yield back my time.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. PAUL E. GILLMOR, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

Mr. Chairman, I want to thank you for calling this hearing on lost security holders. I think this is an important issue and am glad you have allowed us an opportunity to delve deeper into this subject.

Three years ago, in 1997, the Securities Exchange Commission (SEC) finalized a

rule to address the ‘‘lost security holder’’ problem. The regulations, designed to

speak to investors who have lost contact with entities holding some property related

to their investment, require record keeping transfer agents to use appropriate caution in finding the proper addresses of lost security holders. The 1997 regulations,

though, do not extend this reporting mandate to stock brokers, dealers, investment

companies or other traditional sources used as a caretaker of a shareholder’s property.

Today’s hearing gives us a chance to examine whether the present law is adequate for our nation’s needs and I look forward to hearing the testimony of our witnesses in this regard. Some have argued that the SEC’s regulations should be expanded to include all custodians of shareholder property. Since security holders who

are not reunited with their property within five (5) to seven (7) years have their

property given to the state, I think it is essential that we understand if enough

shareholder protections are in place to prevent future inadvertent losses of assets.

I also look forward to the discussion as to how the 1997 SEC regulations, as well

as other Federal and state statutes, have been effective in lowering lost security

holder problems.

Mr. Chairman, again, I want to thank you for calling this hearing. Before I close

my statement, I want to welcome fellow Buckeye Robert Shamansky, who is visiting

us from Columbus. As a former member of the House and one who has been active

in many public and private groups, I think we will all find his testimony to be very

enlightening.

As our country’s citizens get more deeply in stocks and other forms of investment,

it is important that we ensure their long-term rights and money is protected. I think

today’s panels will give us an opportunity to look into some very significant questions.

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

Thank you Mr. Chairman. It is no secret to those of us here today that we have

been experiencing a bull market for the last 10 years. As the market has continued

to flourish, we are seeing more investors than ever before using securities investments when planning for their future.

This being the case, it is necessary for us to ask whether these investors have

appropriate safeguards. America’s retiree’s can’t fall through the cracks of a system

which handles millions of transactions annually. While the SEC exists to protect investors, it is not in a position to act as a liaison between an investor and their investment. That is the responsibility of the public companies and the broker/dealers

who maintain the records for investors and their assets. Long gone are the days

when someone would buy a piece of stock and receive a certificate for their purchase. Today, one is more likely to receive an account statement showing an investor’s current holdings, since more and more securities are registered in ‘‘street

name’’.

What would happen if the investor became separated from their broker/dealer and

became what is known as a ‘‘lost security holder’’? We must encourage a system of

personal responsibility coupled with rules like those which were adopted by the SEC

in 1997 to protect investors in cases where they may become separated from their

investments, especially those who have become lost through no fault of their own.

I look forward to hearing from our witnesses today and I yield back.

4

Mr. OXLEY. The gentleman yields back. To that end, we have our

first distinguished witness, who is Mr. Larry Bergmann, Senior Associate Director for the Division of Market Regulation at the SEC.

Mr. Bergmann, welcome to the subcommittee. We look forward

to your testimony.

STATEMENT OF LARRY E. BERGMANN, SENIOR ASSOCIATE DIRECTOR, DIVISION OF MARKET REGULATION, SECURITIES

AND EXCHANGE COMMISSION

Mr. BERGMANN. Thank you very much, Chairman Oxley and

Ranking Member Towns and members of the subcommittee. I appreciate this opportunity to appear before the subcommittee to testify about the SEC’s efforts to reunite lost security holders with

their assets.

As one commentator has said, ‘‘People get lost inevitably.’’ Sometimes it is the individual’s fault; for example, when they change addresses and forget to tell their friends or businesses about their

new address. Sometimes it is a recordkeeper’s fault, where they

make perhaps an inaccurate entry in their records. When this happens to a security holder and the transfer agent attempts to communicate with the security holder, the communication is likely to

be returned as undeliverable. This shareholder is then considered

to be lost. If a contact is not reestablished over a period of time,

the issuer must turn the assets over to the States under their

escheatment laws.

This morning I will discuss what the SEC has done to address

the situation. First of all, I think it is helpful to consider how big

this problem is. The Commission believes that the number of lost

security holders compared to the total accounts at transfer agents

is small. In 1997 we estimated the figure to be 1.34 percent of total

accounts. More recently, an informal survey has been mentioned of

transfer agents holding about 75 percent of equity accounts, estimated that the percentage was 2.23 percent. In 1997, we estimated

the related value to be $450 million, and our recent informal survey indicated that this value is about $120 million, taking the 75

percent as being $94 million, which would give you a figure of $120

million.

However, I think we have to keep these figures in perspective.

One other commentator stated that about 80 million Americans are

entitled to an estimated $300 billion in unclaimed and abandoned

assets. We believe that most of these assets are held by entities

that are not within the Commission’s jurisdiction and that the lost

security holder assets held by entities in our jurisdiction are a

small fraction of these total amounts lost or abandoned. This does

not mean, however, that the assets are unimportant, or that reasonable efforts should not be made to reunite the holders and their

assets.

So what has the SEC done in this area? As has been also mentioned, in 1997 we took action which we believed was effective and

prudent. Specifically, we adopted new transfer agent rules and

amended other rules that require uniform and cost-effective actions

to locate lost security holders. The new rules were intended to collect data and better gauge the scope of the problem.

5

Rule 17Ad-17 requires transfer agents to exercise reasonable

care to ascertain the correct addresses of lost security holders. At

a minimum, transfer agents must conduct two searches using a robust information data base. Transfer agents may not use any service designed to locate their security holder that results in a charge

to the security holder until after the two data base searches have

been completed.

As originally adopted, rule 17a-24 required transfer agents to report annually to the Commission the aggregate number of lost security holder accounts as of June 30 each year and the total number of accounts represented by these lost security holder accounts.

The Commission also required information on lost security holder

accounts that were remitted to the State under the escheatment

laws to be reported.

When it proposed these rules, the Commission also asked for

comments about establishing a lost security holder data base where

certain entities that hold assets for others; for example, transfer

agents and broker/dealers, would file annually with the Commission a list of the taxpayer information numbers of all lost security

holders in their records. We suggested that this lost security holder

data base could be maintained by the Commission or its delegee,

and that data base could be searched by individuals, or it could be

available for commercial use. Most commentators objected to this

idea. Many commentators believed that such a data base would result in a loss of privacy for security holders and others suggested

that it could be used for fraudulent means.

In response to these concerns, the Commission adopted a rule requiring the aggregate reporting of information rather than individualized data. The Commission focused on the need to gather the

data on lost security holders in order to better obtain information

as to the extent of the problem and whether or not the searches

that we required were effective.

What has happened since the rules were adopted? The search requirements have been in effect since December 1997 and the reporting requirement took effect in February 1998. The numbers

were to be reported on form TA-2, an annual transfer agent filing

due in August that reports data as of the preceding June. Therefore, the first year’s data was obtained in August 1999.

Unfortunately, we have encountered some difficulties with the

data requested in the forms. As transfer agents were preparing to

report this data, it became clear that the questions on the form

were subject to varying interpretations and we would not get consistent information across transfer agents. The Division of Market

Regulation was also in the process of overhauling Form TA-2 and,

in light of the experience with lost security holder information, we

included that in our review.

As a result, on March 23, 1999, the Commission proposed

changes to the reporting information about lost security holders on

Form TA-2, and these proposals were adopted on June 2 of this

year. The report is now required to be filed on a calendar year

basis, and the first set of this new information will be filed in

March 2001 for calendar year 2000. We expect that the revised reporting requirement will provide us with more consistent and more

accurate information.

6

In preparing for this testimony, we obtained a snapshot of lost

security holder activity from the seven largest nonbank transfer

agents. Approximately 990,000 accounts out of 44.5 million maintained by these agents, that is, 2.23 percent, were considered to be

lost. Of these accounts, 384,000, or 0.87 percent, were remitted to

the States last year under the escheatment laws.

I should point out that the estimated average balance of these

escheated accounts was $243.

All transfer agents with whom we spoke agreed that the search

requirements have substantially reduced the number of lost security holder accounts. From anecdotal evidence it appears that the

agents currently find up to 60 percent of lost security holder accounts when they submit these two data base searches.

Another benefit achieved by the Commission rulemaking is

heightened awareness of the problem of lost security holders and

an effort to find other solutions to resolve this problem. While our

rules set the minimum requirements, one of the largest transfer

agents we understand is now moving to a new process where the

agent on a monthly basis sends a list to a vendor who then conducts a search over three data bases, and we believe, the agent believes this new process may improve its percentage of finding lost

security holders.

There has been some question as to why the Commission’s lost

security holder rules only apply to transfer agents. While the Commission’s lost security holder rule by its terms only applies to recordkeeping transactions, in effect, the rule covers lost security holders of issuers and investment companies for mutual funds because

both of them must use registered transfer agents to maintain their

books and records. Now that the Commission has clarified transfer

agents’ obligations regarding lost security holders, we are researching whether similar efforts should be extended to other entities

that hold assets for investors, such as broker/dealers.

From preliminary information about lost security holder accounts

held by broker/dealers, it appears that the lost security holder situation is much smaller there. Of 39.8 million security holder accounts held by 17 representative broker/dealers, only 0.79 percent

were considered to be accounts of lost security holders as defined

in our rule. However, we are currently reviewing whether rulemaking in this area would be appropriate.

Mr. Chairman and members of the subcommittee, I hope this

overview has been helpful to you, and if you have any questions,

I will be happy to answer them.

[The prepared statement of Larry E. Bergmann follows:]

PREPARED STATEMENT OF LARRY E. BERGMANN, SENIOR ASSOCIATE DIRECTOR,

DIVISION OF MARKET REGULATION, U.S. SECURITIES AND EXCHANGE COMMISSION

Chairman Oxley, Ranking Member Towns, and Members of the Subcommittee:

On behalf of the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’),

I appreciate this opportunity to appear before the Subcommittee today to testify

about the SEC’s rules designed to reunite lost securityholders with their assets.

As one commenter has said, ‘‘People inevitably get lost.’’ Sometimes it is the individual’s fault, such as when he or she moves to another town but forgets to give

friends and businesses the new address. Sometimes it is the recordkeeper’s fault,

possibly from the result of an inaccurate entry in its records. In either case, when

this happens to a securityholder and the issuer’s transfer agent attempts to communicate with the securityholder, the communication is likely to be returned as unVerDate 11-MAY-2000 10:28 Jan 04, 2001 Jkt 067705 PO 00000 Frm 00010 Fmt 6633 Sfmt 6621 E:\HEARINGS\67121.TXT pfrm02 PsN: 67121
7

1Dugas, ‘‘Your Money,’’ USA Today, Nov. 12, 1997, at p. 3B. 2Securities Exchange Act Release No. 39176 (October 1, 1997), 62 FR 52229 (October 7,

1997)[S7-21-96].

deliverable. The shareholder is then considered ‘‘lost.’’ If contact is not reestablished

with a securityholder prior to the expiration of the appropriate state’s escheat period, the issuer must turn the securityholder’s assets over to the state unclaimed

property administrator.

This morning I will discuss what actions the Commission has taken to address

this situation.

I. HOW BIG IS THE PROBLEM?

The Commission believes that the number of lost securityholders compared to the

total accounts held by transfer agents is small. In 1997, we estimated the figure to

be 1.34% of total accounts. More recently, an informal survey of seven large transfer

agents, representing about 75% of shareholder accounts, estimated that lost

securityholder accounts were 2.23% of total accounts. While the proportion of lost

accounts is small, the aggregate dollar amounts of the assets in these accounts can

be significant. In 1997, we estimated the amount to be around $450 million. Our

recent informal survey estimated that at seven large transfer agents, the amount

totaled about $94 million. These figures must be put in perspective. For example,

one commentator has stated that ‘‘about 80 million Americans are entitled to an estimated $300 billion in unclaimed and abandoned assets.’’ 1 We believe that most of

these assets are held by entities that are not within the Commission’s jurisdiction,

and the amounts owing to lost securityholders by entities within our jurisdiction are

a tiny fraction of the total amounts lost or abandoned.

II. WHAT HAS THE SEC DONE IN THIS AREA?

Transfer agents serve as the custodians of securityholder records for issuers. In

this capacity, transfer agents frequently are responsible for disseminating shareholder communications and dividend and interest payments. For various reasons,

transfer agents occasionally have outdated or incorrect addresses for some

securityholders. Regardless of how securityholders get lost, however, the end result

is the same—these shareholders do not receive dividend and interest payments to

which they are entitled and, if the error is not corrected, may eventually lose the

assets.

In 1997 the Commission took action that it believed would be effective and prudent. Specifically, the Commission adopted new transfer agent rules and amended

other rules in an effort to require uniform and cost-effective actions to locate lost

securityholders and reunite them with their assets. The new rules also were intended to collect data to better gauge the scope of the problem.2

Rule 17Ad-17 requires transfer agents to exercise reasonable care to ascertain the

correct addresses of lost securityholders. At a minimum, transfer agents must conduct two searches using a robust information database, as defined in the rule.

Transfer agents may not use any service designed to locate their lost securityholders

that results in a charge to a securityholder until after the two database searches

have been conducted. The search for the lost securityholder must be based on the

taxpayer’s identification number (‘‘TIN’’) or the name of the lost securityholder if a

search based on the TIN is not reasonably likely to locate the lost securityholder.

The rule requires that the transfer agent must conduct the initial search between

3 and 12 months of a securityholder being classified as lost. If the lost

securityholder is not found, the transfer agent must conduct a second search between 6 and 12 months after the initial search. There are only three exceptions to

the search requirement: (1) where the value of all dividend, interest, and other payments due to the securityholder plus the value of all assets listed in the

securityholder’s account is less than $25; (2) where the transfer agent has received

documentation of the securityholder’s death; and (3) where the securityholder is not

a natural person.

As originally adopted, Rule 17a-24 required transfer agents to report annually to

the Commission the aggregate number of lost securityholder accounts as of June 30

of each year and the percentage of total accounts represented by these lost

securityholder accounts. These figures were to be reported for specified periods of

time: one year or less, three years or less, five years or less, or greater than five

years. The Commission also required information on lost securityholder accounts

that were remitted to the state unclaimed property administrators under state

escheatment laws.

8

3Securities Exchange Act Release No. 41204 (March 23, 1999), 64 FR 15310 (March 31, 1999)

(Release proposing amendments to Rule 17Ac2-2 and related Form TA-2). 4Securities Exchange Act Release No. 42892 (June 2, 2000), 65 FR 36602 (June 9, 2000) (Release adopting amendments to Rule 17Ac2-2 and related Form TA-2).

When it proposed these rules, the Commission also asked for comments about establishing a lost securityholder database where certain entities that hold assets for

others (e.g., transfer agents and broker-dealers) would file annually with the Commission a list of the TINs of all lost securityholders contained in their records. This

lost securityholder database could be maintained by the Commission or its delegee,

and the database could be searched or obtained by private entities that could create

commercial databases. Most commenters objected to this idea. Many commenters believed that such a database would result in a loss of privacy for securityholders.

Others suggested that the database could result in fraudulent claims.

In response to these concerns, the Commission adopted a rule requiring the annual reporting of aggregate rather than individualized data. The Commission focused on the need to gather data on lost securityholders in order to obtain better

information as to the extent of the lost securityholder problem and to assess the effectiveness of search techniques employed by transfer agents.

III. WHAT HAS HAPPENED SINCE THE RULES WERE ADOPTED?

The search requirements have been in effect since December 1997. The reporting

requirement took effect in February 1998. The numbers were to be reported on

Form TA-2, an annual filing due in August that reports data as of the preceding

June. Therefore, the first full year’s data was obtained in August 1999. Unfortunately, we have encountered some difficulties with the lost securityholder data requests in the Form. As transfer agents were preparing to report this data, it became

clear that the questions on the form were subject to differing interpretations, and

that the data is not consistent across transfer agents. In addition, recently the Division of Market Regulation has undertaken a comprehensive overhaul of Form TA2. In light of the experience with the lost securityholder reporting provision, we reviewed the lost securityholder questions as part of this process. As a result, on

March 23, 1999, the Commission proposed changes to the lost securityholder reporting requirements as a part of the proposed Form TA-2 changes.3 The new Form TA2 was adopted by the Commission on June 2, 2000.4 This report is now required

to be filed on a calendar year basis. The first set of this new lost securityholder data

will be filed in March 2001 for calendar year 2000. We expect that the revised reporting requirement will provide us with more consistent and more accurate data.

In preparing for this testimony, we obtained a ‘‘snapshot’’ of lost securityholder

activity from seven of the largest non-bank transfer agents. Approximately 990,900

out of 44,417,000 of the accounts maintained by these agents, or 2.23%, were considered to be accounts of ‘‘lost securityholders’’ as defined in our rule. Of these accounts, 384,700 accounts, or 0.87% of the accounts maintained, with an average account balance of $243, were remitted last year to state unclaimed property administrators under state escheatment laws.

All the transfer agents with whom we spoke agreed that the search requirements

have substantially reduced the number of lost securityholder accounts. From anecdotal evidence, it appears that agents find current addresses for up to 60% of the

lost accounts they submit for database searches.

Another benefit achieved by the Commission’s rulemaking is heightened awareness of the problem of lost securityholders and an effort to find innovative solutions

to resolve the problem. While our rules set minimum standards for lost

securityholder searches, one of the largest agents is now moving to a new process

where the transfer agent sends a lost securityholder file monthly to a vendor, who

then conducts a search across multiple databases (including all three credit reporting agencies, the Internal Revenue Service and the Social Security Administration).

This new process may improve the percentage of lost securityholders found.

There have been some questions raised as to why the Commission’s lost

securityholder rules apply only to transfer agents. While the Commission’s lost

securityholder rule by its terms only applies to recordkeeping transfer agents, in effect, the rule covers the lost securityholders of issuers and investment companies

because both investment companies and issuers of reporting companies must use

registered transfer agents to maintain their books and records. Now that the Commission has clarified transfer agents’ obligations regarding lost securityholders, we

are researching whether similar efforts should be extended to other entities that

hold assets for investors, such as broker-dealers. From preliminary information

about lost securityholder accounts held by broker-dealers, it appears the lost

9

securityholder situation is much smaller than at transfer agents: of 39,786,000

securityholder accounts held by 17 representative broker-dealers, only 0.79% were

considered to be accounts of ‘‘lost securityholders’’ as defined by our rule. Nonetheless, we are currently reviewing whether rulemaking in this area is appropriate.

Mr. Chairman and members of the Committee, I hope this overview has been

helpful for you. If you have any questions, I will try to answer them.

Mr. OXLEY. Thank you, Mr. Bergmann. Indeed we do have a few

questions.

I kind of got lost on the first part of your statement regarding

the percentage of lost securities. I started writing down 1.34 percent and then I went to 2.4 percent. Could you help us a little bit

with that?

Mr. BERGMANN. I wish I had a very good answer to this question,

but unfortunately, all of the information that we have seen, including the ones generated by the Commission, have been based on assumptions and estimates and extrapolations from those numbers,

and this has been part of the issue that the Commission is hoping

is addressed by its rules; that is, to get consistent, accurate information from transfer agents who hold these accounts, and to find

out how big this problem is, and whether or not any improvements

are being made by the rules we have adopted.

So that is the reason why you got different percentages.

Mr. OXLEY. Okay. But we should not be particularly concerned

about the difference between 1.34 percent and 2.3 percent. The

issue here, it is not overwhelming.

Mr. BERGMANN. Exactly.

Mr. OXLEY. And indeed the figure you used in terms of the average account size of like $243, but is that also somewhat apocryphal?

Mr. BERGMANN. These are all estimates based upon informal conversation.

Mr. OXLEY. Okay. You mentioned the use of a robust information

data base. Are we talking about Internet capabilities here?

Mr. BERGMANN. Well, the data base I was referring to was the

data base held by credit agencies and the IRS, for example. These

are geographically broad and have a lot of depth to them. So those

are the data bases which are used by a transfer agent looking for

better addresses for security holders.

Mr. OXLEY. So take us through how that works. Let’s say that

there is an allegation that there is a lost security. What obligation

does the transfer agent have currently? How does he go about his

work?

Mr. BERGMANN. Well, the sequence would be that a transfer

agent would send out a mailing of some kind to his security holder

and it gets returned as undeliverable. Then typically, what the

transfer agents do, although we don’t require this, is to immediately send it out again, because sometimes, it is the fault of the

deliverer, the Postal Service or whatever, and so they try it again

and actually a number of the problems are taken care of in that

way. However, if it is returned again, then it is considered a lost

security holder, and then the transfer agent is obligated to perform

two searches, as I mentioned, the first one after at least 3 months,

between 3 and 12 months, and then the second one between—up

to 12 months after the first one. So there is a hope that in the inVerDate 11-MAY-2000 10:28 Jan 04, 2001 Jkt 067705 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HEARINGS\67121.TXT pfrm02 PsN: 67121
10

tervening period, the address will have been corrected either by the

shareholder itself or in one of these data bases.

Mr. OXLEY. Do you have any idea how many of these folks are

deceased?

Mr. BERGMANN. I don’t know the number, but we are advised by

the transfer agents that—well, again, I have heard 10 percent, but

it would be an estimate.

Mr. OXLEY. Only 10 percent?

Mr. BERGMANN. I believe. That is a number I have heard, although I could get back to you on that if you would like.

Mr. OXLEY. Okay. Well, I was thinking about data bases and robust information data bases and the like, and it struck me that our

son is in charge of his class reunion, and they have this—there is

this company, apparently, on the Internet that can find your long

lost classmates, and apparently pretty successfully. So clearly,

there is in today’s modern Internet world, the ability, I guess, to

locate people. That is correct, right?

Mr. BERGMANN. I certainly believe it is.

Mr. OXLEY. And somebody who has to do due diligence on this,

the transfer agent or even the broker/dealer, would be considered

not doing due diligence, would you say, if they were not to use that

great capability?

Mr. BERGMANN. Well, we require that they use due diligence and

the rule requires them to use these data bases which, as we understand it, is the best means to find new addresses, which is what

is required under the rule. I mean that is how you find a lost security holder, is you get a new address.

So I think that what we require them to do as a minimum is acceptable searching. Now, whether they want to go beyond that and

use other data bases, that would be certainly something they could

do.

Mr. OXLEY. And you indicated that about 60 percent of the

searches are successful and returned to the owner.

Mr. BERGMANN. Again, that is our information from these transfer agents we contacted, yes.

Mr. OXLEY. Also, can you do all of this that we talked about,

what you talked about by rulemaking, or do you need statutory authority?

Mr. BERGMANN. Well, it depends. We certainly believe we have

the statutory authority to require transfer agents to take the actions that we—the rules we have adopted. There may be some

other areas—there have been various proposals requiring transfer

agents or even some other parties to take certain actions and those

might require legislation.

Mr. OXLEY. Well, for example, extending it to broker/dealers,

does that require legislation or can you do it by rulemaking?

Mr. BERGMANN. We believe we have the authority to do that

under our existing legislation.

Mr. OXLEY. So under what circumstances would you envision

that you would need further legislative authority?

Mr. BERGMANN. Well, there have been some suggestions that we

somehow regulate these search firms, also called heir finders. I

think that would raise an area where they are clearly not regulated

by the Commission.

11

Mr. OXLEY. What are they called?

Mr. BERGMANN. Heir finders, or search firms.

Mr. OXLEY. H-E-I-R.

Mr. BERGMANN. Commercial enterprises are not within the Commission’s jurisdiction. However, as I say, with respect to broker/

dealers, we have thought about this issue and we have discussed

it with the Securities Industry Association, and I think they point

out a valid point, which is that the relationship in a broker-dealer/

customer relationship is different from the transfer agent/shareholder relationship, because there is an ongoing person usually assigned to deal with that account and the activities are generally

much more extensive than in a transfer agent’s account. So if a

customer loses touch with a broker/dealer, there is more incentive

on both sides actually to try to reestablish that contact. So that is

one reason why I believe the numbers which we have obtained

from the SIA about the number of lost security holder accounts is

very low.

Mr. OXLEY. Part of it would be driven by April 15 every year, I

assume.

Mr. BERGMANN. Exactly. There would be an annual communication, typically with respect to all of these entities, the transfer

agents, mutual funds, broker/dealers, which if the shareholder

looked at it would provide perhaps some alert that maybe they

hadn’t received something in the prior year, for example, a check.

Mr. OXLEY. Thank you.

The gentleman from New York.

Mr. TOWNS. Thank you very much, Mr. Chairman.

Let me ask, with the forms, now that they have been worked on,

do you feel that they are consistent enough to be able to give you

the kind of information you need, now that they have been worked

on? Do you feel very comfortable with them?

Mr. BERGMANN. Yes. I think we have now asked the right questions which will give us consistent information that we can use as

a baseline and a test as to whether or not it is working.

Mr. TOWNS. When you talk about using the best means necessary, what do you really mean? When you say use the best

means necessary, if the chance for an agent does not—I mean the

point is what would you consider that to be?

Mr. BERGMANN. Well, that was a question before we adopted the

rules, first of all, what is a lost security holder and what do they

really have to do to satisfy their due diligence obligation? What

was the best means necessary? Our rules defined what is the minimum standard that they have to do, which are the two searches

of a robust data base, as we were discussing earlier. So that satisfies—I don’t know if it is the best, but that is adequate to address

this problem. They can go beyond that, as some transfer agents

have done.

Mr. TOWNS. But you don’t think that three would be necessary?

Mr. BERGMANN. No, we didn’t.

Mr. TOWNS. Let me sort of—I know one thing in terms of return

mail would be one way, but what are some of the other reasons you

think people get lost in terms of——

Mr. BERGMANN. Well, I think the three most common ones that

we have seen are moving without giving a forwarding address,

12

death, which I guess is the ultimate example of not giving a forwarding address, and——

Mr. TOWNS. I think that person should be excused.

Mr. BERGMANN. And the record holder just making a mistake in

his records.

Mr. TOWNS. Thank you.

Let me just sort of go back in terms of when you say regulate

search firms, basically what are you really talking about there? I

am trying to make certain that we have an understanding.

Mr. BERGMANN. There are some commercial enterprises which

identify individuals who may have assets that they have lost contact with, and they provide a service to put the person back into

communication with their assets. It could be property, it could be

securities, it could be bank accounts or whatever. Typically, they

charge a percentage of the assets in order to make this—put them

back with their assets. Sometimes those percentages can be quite

high.

Mr. TOWNS. Last question, the privacy issue. Have you thought

about that at all in terms of now that you have had some experience with the rule?

Mr. BERGMANN. Well, we have thought about it a lot, although

largely we were going by the comments we received on our proposal, and I think it was by a margin of 2 to 1, the commenters

objected to having a data base set up for a variety of reasons. One

of the commenters was Senator Arlen Specter, for example, in raising the privacy issue. The concern was that there would be private

information about an individual’s Social Security number or their

assets up on the Web site, or at least publicly available through the

Commission, and that would raise a lot of concerns. So we felt it

was not appropriate to adopt that proposal at that time.

Once we get information about how these search requirements

that we have put in place are working, we may need to consider

further measures which might be other rulemaking and it might be

facilitating the establishment of a data base. But we haven’t made

that decision yet.

Mr. TOWNS. But you don’t see it as being something that we

would get involved with in terms of legislation? You think that you

could do it within the rules?

Mr. BERGMANN. I think that we could do it within the rules. We

haven’t fully researched that, but I think we—at the time we

thought we had the authority to do that, if the Commission was

going to run it. If another entity was going to run it on behalf of

the Commission, such as our Securities Information Center, I think

that it is called, for the lost and stolen securities program, that was

based on legislation. The Commission was authorized to hire an

outside entity to run a no-cost contract for that program.

So if we set it up that way, legislation might be required.

Mr. TOWNS. Thank you very much, Mr. Chairman. I yield back.

Mr. OXLEY. Let me just follow up if I can before we turn to our

next witness. The gentleman from New York raised the privacy

issue. The same kind of issues could be addressed on the fraud

side. That is, if you put this information on the Internet, are they

similar concerns, fraud and privacy, or do they have some new answers?

13

Mr. BERGMANN. I think they are very similar. As a matter of

fact, I think every commenter that raised the privacy issue also

raised the fraud question.

Mr. OXLEY. Very good.

Does the gentleman from Illinois have any questions?

Mr. SHIMKUS. Yes, sir. Thank you.

Mr. Bergmann, what procedures do those not covered by the

1997 regulations have in place to address lost security holder

issues?

Mr. BERGMANN. I think we are probably talking about broker/

dealers, because they are probably the largest holders of assets,

customer assets in the securities area. We spoke to the SIA, Securities Industry Association, about this, and what they do is, as I

mentioned before, the relationship is very different between a

broker/dealer and his customer and a transfer agent and a shareholder. So if the firm loses contact with the customer, typically an

individual at the firm would go out and try to find that individual

to reestablish the link.

If that were unsuccessful, then we understand that the firms actually do similar data base searches to what is required under the

transfer agent rule and they typically do a couple of searches over

a 2-year period. So we understand that the process is quite similar

to what we require for transfer agents.

Mr. SHIMKUS. Thank you. Do you believe the potential benefits

of expanding lost security holder regulations would be worth the

potential cost?

Mr. BERGMANN. Well, that is the at least $64 million question,

which was at the top of our list when we imposed the rules that

we did impose. So we thought it was—what we did was a prudent

first step, and we need to see how it works, and if it does not work

the way it should, we will have to consider other cost beneficial

measures.

Mr. SHIMKUS. That is all I have, Mr. Chairman. I yield back.

Mr. OXLEY. The gentleman yields back. Mr. Bergmann, thank

you very much for your participation in the panel.

Mr. BERGMANN. Thank you very much.

Mr. OXLEY. The Chair would like to call our second panel and

our witness, Mr. Robert Shamansky, from the law firm of Benesch,

Friedlander, Coplan & Aronoff in the capital city of Ohio. For those

members who do not know, Mr. Shamansky is a former Member

from Ohio, and I guess I am the only one who served with you,

Bob.

Mr. SHAMANSKY. A long time ago.

Mr. OXLEY. Welcome back to Washington. I know that through

the efforts of John Kasich, the entire issue was brought to our attention, and I know you have been working with Congressman Kasich on this issue for some time. So I am pleased that we were able

to schedule this hearing and give you an opportunity to indicate

your concerns about the present state of affairs regarding lost securities.

So welcome, and we look forward to your testimony.

14

STATEMENT OF ROBERT N. SHAMANSKY, BENESCH, FRIEDLANDER, COPLAN & ARONOFF; ACCOMPANIED BY DANIEL C.

DeSIMONE, OFFICE OF FEDERAL RELATIONS, NATIONAL ASSOCIATION OF STATE TREASURERS

Mr. SHAMANSKY. Thank you, Mr. Chairman, and to members of

the committee, I appreciate this opportunity. It has been mentioned

that I am of counsel to my law firm, which means that I am a lot

older than they are.

I am here as an individual shareholder. I am the guy that was

lost. That is how I became aware of it. There is a full page editorial

in Money Magazine, the managing editor, in January 1994 who

wrote the following, talking about my experience. They said, I

asked the transfer agent, why didn’t you look me up in the phone

book? And they said, well, we never do that. And I said, really?

How long would it have taken you to find me if I owed you the

$500? And that is the question they do not want to answer.

I then approached now Senator Wyden, who is my congressional

classmate, and he made some inquiries into the SEC, and reading

again from Money Magazine’s full page editorial, the Securities and

Exchange Commission estimates that ‘‘One shareholder account out

of every 20 is lost, and transfer agents are sitting on a staggering

$10 billion worth of securities accruing $500 million a year in dividends that they are failing to deliver.’’ This is what he wrote, after

having checked with the SEC.

Very frankly, I don’t have a lot of faith in the expertise, the numbers produced by the SEC. In their release in October 1997, they

said that they originally thought there were 250,000 lost shareholders, but then they concluded that there were 3 million lost

shareholders owed $450 million. I think you have to recognize that

they were off by a factor of 12, that is 1,200 percent. If you divide

250,000 into 3 million, you get 12. That is 1,200 percent. They

didn’t know that it was a problem, but there is a problem, because

I am living proof of it.

Now, this is a national problem. The gentleman sitting here with

me is Dan DeSimone of the National Association of State Treasurers, which is affiliated with the National Association of Unclaimed Property, State Property Administrators. These are the

people in every one of our 50 States who have the job of going and

making sure that the citizens of the States get their money. What

we are talking about here is people getting their money promptly,

and this is where the States are saying don’t wait for our 5 years

or 7 years or whatever to kick in when you have the data right up

to date.

Now, it is a very simple question, and mentioning John Kasich,

I think the members should know that John Kasich beat me, defeated me, a Democrat, in 1982, and I am pleased to acknowledge

his splendid cooperation. This is not a partisan issue. It is not a

partisan issue that shareholders are entitled to get their dividends.

That is what we are talking about. Nothing more than that.

With the illustration as to how things happen, I got out of law

school in 1950. That is 50 years ago. Had somebody graduated from

a medical school in 1950 and was still doing the same kind of examination, using the same kind of technology that he did 50 years

ago, he would be sued all over the place for negligence. What has

15

happened here is that the securities industries, as regulated by the

SEC, did not do a thing when it came to delivering the money they

owed, the same technologies that they were using simultaneously

to collect money that was due them, and there is simply no reason

for that.

The national data bases that every person in this room, I am

willing to say, is in that, as your son found out for his class reunion, we are all in there. And the cost, the SEC did it, when they

made the 1997 release, found that the cost, and my own inquiry,

it costs less than $1, they are all done on tape, batches, electronic.

It is like less than $1, approximately $1, and takes less than a

minute. And all of this is done by the computer bases.

With respect to the Internet and the privacy issues which were

raised legitimately, I have to point out that the 50 States for decades have published people’s names. There is not one person here

in any State and the District of Columbia that there is a list saying

somebody holds money for you. It does not say how much, it just

says, here is where you can find your money.

Now, there have been no privacy or securities matters. It is interesting to me that Mr. Bergmann asked the commenters. The commenters he got responses from were the people who do not want

to give up the money. Why would they? Because for every day that

a dollar is left with these holders, they keep the interest. They are

the ones who keep the interest. When you show up 3, 5, or whatever years later, they only give you whatever the original amount

was. Somebody else has kept that money.

All we are saying is, anybody regulated by the SEC should utilize

this very cheap, very easy to use technology. This is a list I got

from my friends in the unclaimed property world: An issuer, a

broker, a dealer, mutual fund, investment company, investment advisor, indentured trustee, custodian, anyone holding money for

someone else which is regulated by the SEC.

I want to dispel the notion here that we are not talking about

much money. A famous case, at least in this world, of Delaware v.

New York in the 1990’s involved $890 million disputed. Delaware

claimed that from the State of New York, it originated in the U.S.

Supreme Court, that represented brokered moneys held by brokered dealers for their customers. Now, when you say small percentages, but of trillions of dollars, you are talking about big

money, in Senator Dirksen’s range, billions of dollars.

Now, it is easy to play the percentage thing. But for the people

who are lost and they are disproportionately older, and oftentimes

sick, they are the victims of this. All we are asking is that the SEC,

or the Federal Government one way or the other, if there has to

be legislation, simply have them use the same tools they use when

people owe them money.

Now, this is not a blame game. There are millions of dollars represented by checks that have been sent out, but not delivered, or

sent out, and even if some old person, whatever it is, does not cash

it, it doesn’t change the fact that that money belongs to that person.

I met with these different transfer agents, the biggest in the

country. For those people who have shares of stock and get quarterly checks, question: Why can’t you in the next dividend check on

16

the stub simply say, previously we sent you a check, it is not

cashed. Please cash it, or notify us, 1-800, or e-mail or whatever,

and we will get your money to you. They said—that is a couple of

lines in their software program so people could get their money and

they will not do it, because they do not want them found. That is

the only conclusion. That idea came from prudential insurance

which sent a friend of mine a letter that said we previously sent

you a check, it isn’t cashed, please contact us. We are dealing with

these millions of checks that go out quarterly, and those computers

know which checks have not been cashed.

The main thing here is, it is the money we are talking about belongs to individuals; there is not one penny of government money,

no tax money, no corporate money. This money does not belong to

any of these people we are talking about, to treat them fairly. It

belongs to us shareholders. The people who hold it are making the

interest on that, and the shareholder does not.

So we have the technology and the way you correct that, you

simply tell the holder of the money, you have that money in an account, you just call it a trust account for any of the lawyers on the

committee, it is the same money, except with that moves on to the

claimant or goes to the State, the States are—they then get for

their own citizens, they get the interest earned by the citizen’s

money, instead of being siphoned off. You are rewarding now the

person who did not deliver the money. That is wrong, and it makes

no sense.

I would like to address the idea of the Internet. There are no privacy problems because 50 States publish lists, a majority of the

States have their lists on the Internet and there are no problems.

I had our computer man check the list from the Swiss Bankers Association of holocaust-era accounts that the American Government

and the World Jewish Community shamed the Swiss Bankers Association into putting it on the Internet. They suddenly found thousands of these accounts. And from my office in Columbus, he entered the name Klein, and came up with three hits. This is a technology which is everywhere today. It costs nothing; there are not

any costs. But it is a technology that is available to give the citizen

a chance to find himself his money.

Reference was made to the heir finders or search firms. In the

world of unclaimed property among the States, they are called

other things sometimes, like vampires or whatever you might suggest, because 25 percent to 50 percent is where—they call you up

and say well, for 25 to 50 percent, we will tell you where your

money is.

Now, the suggestion is not to regulate them, but for those who

hold the money before they engage them to say, we will do so by

open bidding and let the market, let some competition come in

here. Because the problem is, this is all done behind closed doors.

So you never know what is really happening. There is no follow up

on what they do. And I want you to know that my friends in the

transfer business have finally revealed why they do not want this

known. Because in Columbus, we would say, kickbacks. I don’t

want to shock anybody here, but they are dressed up as service

fees or something like that.

17

The SEC has the power, and I think it has the duty, to tell the

holder of the money for someone else, the conditions under which

they turn those accounts over to these search firms for 25 to 50

percent that the owner has to pay, let’s get it out in the open, let’s

get market forces in there, and let’s—and if nobody is doing this,

then there is no problem about kickbacks, however it is dressed up.

Let’s get it out in the open.

The cost is absolutely negligible. Because we are dealing—it is

all electronic, it is all on computers, and everyone who holds money

for someone else under the jurisdiction of the SEC, especially the

broker/dealers and anyone else, can all play by the same rules.

There is no special expertise. Either the SEC or with me, it is simply common sense, and this is what we are talking about.

[The prepared statement of Robert N. Shamansky follows:]

PREPARED STATEMENT OF ROBERT N. SHAMANSKY

The first thing that must be said is that promptly delivering dividends to their

rightful owners is not a partisan issue. No Republican, nor any Democrat I have

ever known, has ever been opposed to that, nor will they ever be. As proof of that

non-partisanship, I am pleased to acknowledge that Representative John R. Kasich,

Chairman of the House Budget Committee, as you know, a Republican, who defeated me, a Democrat, in November, 1982 in my effort to be re-elected to represent

the 12th District of Ohio in the United States House of Representatives, has taken

a leadership role in this effort to get our capital markets to treat the individual investor in a fair manner, which will ultimately improve our national economy by encouraging everyone to invest in the national securities market, because he or she

will be treated fairly.

Frank Lalli, Managing Editor of Money Magazine, in his Editor’s Notes entitled,

‘‘Playing Lost and Found with Your Money’’ in the January 1994 issue wrote:

‘‘The Securities and Exchange Commission estimates that one shareholder out

of every 20 is ‘lost’. In all, transfer agents are sitting on a staggering $10 billion

worth of securities accruing $500 million a year in dividends that they are failing to deliver.’’

My experience starting in 1993 has taught me to be skeptical of the data advanced by the SEC’s Division of Market Regulation (‘‘Market Reg.’’). Even after

being informed of the problem of ‘‘lost’’ securityholders, Market Reg. seriously underestimated the scope of the problem. The remedies finally adopted by the SEC excluded a majority of securities owners, e.g., customers of broker/dealers and mutual

funds among them. All securities owners ‘‘lost’’ before December 8, 1997 were excluded from the new database check for good addresses, thus remaining prey for the

predations of search firms, who may have paid so-called ‘‘service fees’’ for obtaining

lists from transfer agents.

In its Tuesday, October 7, 1997 release, the SEC in Footnote 39, on page 52235

of the Federal Register, Vol. 62, No. 194, Rules and Regulations, said the following:

‘‘The Commission staff contacted several transfer agents to obtain an estimated

success rate. Only one of the transfer agents contacted currently uses data base

searches to find lost securityholders. That transfer agent, which has been conducting searches on a monthly basis for over a year, stated that its success rate

using data base searches is never less than 75% and sometimes is as high as

94%. For purposes of the cost-benefit analysis, the Commission is assuming a

60% success rate in order to be conservative.’’

My research leads me to believe that a 60% success rate is too conservative, and

that 70% to 80% is a reasonable rate, especially when the search is made as early

as possible.

With the lackluster performance from the SEC’s Division of Market Regulation,

individual investors in every Congressional District in this country must now rely

on the Congress to help them get their own dividend money back in a timely fashion. It is not only Money Magazine and the Washington Post’s Jane Bryant Quinn

who have written on this problem. Organizations like the National Association of

State Treasurers (‘‘NAST’’), whose state treasurer members in a majority of states

handle unclaimed property, and the affiliated National Association of Unclaimed

Property Administrators (‘‘NAUPA’’) have expressed their views on needed changes

to the SEC, but have failed to get from the SEC needed help in obtaining better

delivery of dividends from paying agents to the owners of securities across the entire

18

country. Mr. John Rother, Director, Legislation and Public Policy for the AARP,

wrote me on May 12, 2000 that the issue of lost shareholders will be brought to

the attention of the AARP’s policy body, the National Legislative Council, when it

meets this fall. (A disproportionate number of ‘‘lost’’ securities owners are the elderly, especially those who are sick.)

I have recently met in Washington with Senator Howard Metzenbaum in his capacity as Chairman of the Consumer Federation of America on this matter. Senator

Metzenbaum told me he has expressed his interest in this situation to Chairman

Arthur Levitt of the SEC. Senator Metzenbaum left with Chairman Levitt a copy

of Jane Bryant Quinn’s article on the abuses of ‘‘lost’’ investors that still remain to

be corrected after the SEC’s timid and inadequate rule change in 1997. (A copy of

that article is a part of this testimony.)

We are talking about ‘‘real money’’ here, that is billions of dollars. It is also vital

to understand that not one dollar of these billions is coming from taxes at any level

of government, whether it be local, state, or federal. Equally important, not one dollar of these billions is coming from any corporation or any other business. Every one

of these billions of dollars belongs without question to the ‘‘lost’’ owners of securities,

which simply means the one obligated to send the money to its rightful owner does

not have a good address for that owner; or in the case of mailed, but undelivered

or uncashed checks, won’t tell the owner, even if the sender has a good address.

Millions of investors, unknown to them, are being denied billions of their own dollars because of the practices of financial organizations regulated by the United

States Securities and Exchange Commission (‘‘SEC’’). For the first time in history,

American households now have cumulatively more money invested in securities one

way or another than their total equity in their homes, so the work of the SEC is

more important to these millions of investors than ever before.

It was not long ago that a very small percentage of Americans owned stock or

any other securities. In effect, only the few rich owned securities, and those securities were represented by pieces of paper called, for instance, stock certificates or

bonds. The records of these securities were kept in those days on other pieces of

paper, like ledgers or 3’’ x 5’’ cards or whatever. At that time, there was no way

that the outfit that held undelivered dividends for a security owner, whose address

had changed, could quickly and cheaply find a good current address for that ‘‘lost’’

security owner.

All of that is different today—totally and spectacularly different! First and most

significantly, the number of persons with investments in securities either directly

or through various retirement accounts is approaching 80 million. The values, of

course, are in the trillions of dollars.

It is a safe bet that virtually every person in this hearing room today has some

kind of a stake in securities, including even the young people here. Owners of securities are not trying to hide from their own dividends. Securities owners want to

receive their dividends. If ‘‘lost’’ for any reason, they are found quickly and cheaply

by referring at the very least to one of the three national databases which overwhelmingly list those who own securities. We—you and I—and our family members

and friends who have two nickels to rub together—are in those databases for any

number of reasons. All anyone has to do is inquire, and for batch electronic inquiries, the cost can be close to $1 per name and the time needed as short as a minute

or less.

The spectacular growth of the securities markets in the United States and elsewhere has been an outgrowth of the advances in technology like computers and the

Internet. In order to sell and make money, the financial community is using the

computer in all its various forms. The financial community has logically used technology to collect money from the public as quickly and as cheaply as possible.

The record also shows that the same financial community under the jurisdiction

of the SEC has consistently refrained from using those same technologies when it

comes to delivering monies belonging to the millions of so-called ‘‘lost’’ securities

owners, who are certainly owed hundreds of millions, and most probably billions

worth of shares held in ‘‘street name’’ by broker/dealers or in mutual funds. The

needed fair treatment practices should apply to everyone in the financial community, whom I call a ‘‘paying agent,’’ under the jurisdiction of the SEC, which directly

or indirectly undertakes to deliver dividends, interest, or other valuable property

rights to those legally entitled to them. The paying agents include any issuer, transfer agent, broker, dealer, investment company, mutual fund, investment advisor, indenture trustee, custodian, or any other person obligated to deliver dividends, interest or other valuable property rights. All of these paying agents have the obligation

to deliver monies to their owners, and the technology to do so is already in place

and cheap and easy to use.

19

Because of my own direct experiences with the financial community, as someone

who had been ‘‘lost’’, in 1992 I approached my House classmate, now Senator Ron

Wyden of Oregon, to initiate a process, which resulted in 1996 in the SEC’s proposing simple changes in its rules to treat ‘‘lost’’ shareholders better.

I regret to inform you, however, that the changes actually implemented by the

SEC on December 8, 1997, represent a classic case of the ‘‘Regulator captured by

the Regulated’’. For instance, the SEC in 1996 proposed changes to include recordkeeping broker/dealers as well as transfer agents, but then reversed itself in 1997,

saying that the changes only applied to recordkeeping transfer agents, who transfer

shares worth less than the shares held by broker/dealers in ‘‘street name’’. Besides

transfer agents, the regulations regarding lost securityholders should also apply—

as I mentioned above—to broker/dealers, corporate trustees, personal and institutional custodians and mutual funds, and issuers who do their own transfer work,

because transfer agents maintain records for less than one-half (1⁄2) of the total

value of the securities in the United States. Much greater assets are held in ‘‘street

name’’ by broker/dealers and in mutual funds. (Richard Lindsey, who was head of

the Division of Market Regulation at the SEC when it exempted broker/dealers from

the new rules, then left the SEC and went to work for Bear Stearns, one of the exempted broker/dealers in New York.)

After issuing the rule change to take effect on December 8, 1997, the SEC in a

totally arbitrary and unjustifiable interpretation of the rule change said that the requirement of looking up a ‘‘lost’’ shareholder twice in the national databases before

turning over the accounts to search firms that specialize in locating ‘‘lost’’ securities

owners applied only to those lost after December 8, 1997. This meant that 3 million

‘‘lost’’ securities owners owed $450 million—those are the SEC’s numbers—were

thrown to the dogs, i.e., to the search firms. These search firms usually charge from

25% to 50% of the money involved without the transfer agent ever having to use

a national database to locate a good address, which would potentially save these 3

million people from $125 million to $250 million of their own money. (The SEC had

originally estimated that there were only 250,000 lost securityholders, but they later

estimated that there were really 3 million lost securityholders. This meant that the

‘‘experts’’ at the SEC were off by 1,200 percent, i.e., 3,000,000 divided by 250,000

equals 12.)

The lost securityholder regulations should apply to securityholders who meet the $25.00 de minimis test adopted by the SEC in 1997, if their checks remain uncashed

for seven months. The next regularly-sent dividend and interest checks should inform the payee that a previously sent check had not been cashed, and the notice

should request a call to a toll-free number or other communication. There is a valuable precedent from Prudential Insurance for notices like this, and I have conferred

with one of the most prominent transfer agents who verified that this can be easily

done through their computers at insignificant cost.

All of the data on lost securityholders generated by transfer agents, broker/dealers, et al., should be sent to the SEC for listing on one Internet website. A majority

of states put their unclaimed property lists on the Internet, and the NAUPA has

a website where it is pooling various state lists. NAUPA created the website, because the SEC proposed such a website for itself in its 1996 release for a proposed

rule change, only to reverse itself after it had been lobbied hard by those who did

not want lost securityholders found. Common among those were search firms, ‘‘heirfinders’’, or locators (or vampires) depending on who is describing them. The SEC

already has had the Thomson Financial Network operate the SEC’s Lost and Stolen

Securities Program under the name of Securities Information Center (‘‘SIC’’), which

is designed to thwart trading in stolen stock certificates and bonds. If the SEC has

a website for its list of lost or stolen pieces of paper, why can it not have a website

for its list of the lost owners of securities? Why should a piece of paper be treated

better than the owner of the piece of paper?

It must be pointed out that the United States Government and the world Jewish

community shamed the Swiss Bankers Association into publishing on an Internet

website a list of unclaimed Holocaust era accounts, which the Swiss Bankers Association had previously maintained had been lost or destroyed. (I checked this

website from my office in Columbus, Ohio for the name ‘‘Klein’’ and I came up with

three hits.) There is no reason why the few big American banks or other financial

houses, which control the biggest transfer agents, do not do what the Swiss showed

can easily be done, i.e, put on the Internet an SEC list of lost securityholders, which

is what the states are already doing with their unclaimed property lists without any

security or privacy concerns.

Based on my experience over the last twelve years, I believe there is sufficient

interest in the private sector to distribute the information on the Internet at no cost

to the SEC once the information has been delivered electronically to the SEC. There

20

is, of course, no reason to publish on the Internet the amount owed the lost

securityholders, nor the quantities of securities owned by the lost securityholder. All

that is needed is the simple fact that John Q. Public is owed something by an identified and reachable source like a transfer agent, etc. This is exactly what all fifty

states and the District of Columbia are doing annually in newspapers and now on

the Internet without privacy or security problems.

Money due lost securityholders, which is held by any paying agents, must be held

in trust accounts so that the securityholder will get the interest earned by his or

her dividends. Right now, unbeknownst to them, millions of ‘‘lost’’ securities owners

are making interest free loans to those who are holding their money, and who won’t

tell the securities owners where their money is. In other words, the non-delivering

holders of these monies are being rewarded for not telling the rightful owners where

their money is.

A 1992 United States Supreme Court case vividly illustrates why broker/dealers

must treat their lost customers, who bought stock held in the broker/dealers’ ‘‘street

names,’’ just like all of the other paying agents. The case of Delaware v. New York,

507 U.S. 490, 113 S.Ct. 1550 (1992) is where New York and Delaware each claimed

under their respective unclaimed property laws approximately $890 million in dividends and their underlying stock generated in ‘‘street name’’ accounts owned by

securityholders, who were ‘‘lost’’ customers of the major broker/dealers

headquartered in New York City, but incorporated in Delaware. (Investors who

leave their securities in ‘‘street name’’ with a broker/dealer can be as easily lost as

any name on any transfer agent’s list.) The SEC was right when it originally proposed in 1996 to apply the rules to broker/dealers. It was wrong when it exempted

them.

Another important reason for requiring that securityholders’ money be held in

trust accounts can be gleaned from the $63.5 million in fines in addition to the return of $19.1 million illegally taken by Bankers Trust Corporation of New York in

early 1994. This $19.1 million was taken from unclaimed property due to lost customers of the bank, and it was illegally used to falsely increase the profits of the

bank, instead of sending that money to the states as required.

A long line of state cases hold that undelivered dividends are held in constructive

trust for the shareholders. Placing undelivered dividends in trust accounts ends the

abusive practice of unknown non-interest bearing loans to the party that did not deliver the dividends as in the Delaware v. New York case and with reducing the

chance for outright theft as in the Bankers Trust case.

If a search firm/heir-finder/locator is engaged by any transfer agent, et al., to locate lost securityholders at a cost to the securityholder after the obligatory two database checks, those lost securityholder accounts should be placed with search firm/

heir-finder/locators only on the basis of open bidding by these search firm/heir-finder/locators for batches of such accounts, each account in each batch to receive due

diligence with reporting to the SEC of their search results. In fact, the National Association of Unclaimed Property Administrators has urged the SEC to protect lost

securityholders from the excessive charges of from 25% to 50% by these search

firms/heir-finders/locators. There absolutely must be an explicit prohibition of kickbacks from these search firms/heir-finders/locators to those who place these lost accounts with them for locating the rightful owners. These kickbacks clothed in such

euphemistic names as ‘‘service fees’’ are outrageous examples of conflicts of interest.

The United States of America, through its many departments and agencies, holds

great sums of money due others. The Federal Government should create a commission or some other entity to locate all money owed to others. (See partial list of federal departments and/or agencies which hold money for others attached.) The U.S.

Government should put the information on one Internet website; and then the Federal Government should simplify the method whereby any claimant can obtain his

or her money from any department or agency of the United States Government.

There is simply no reason for the U.S. Government not to use currently available

technology to unite people with their money now held by the U.S. Government. The

same principle applies to the securities industry.

No state law is changed by any of the suggestions made above. These regulations

will only affect those who come within the clear jurisdiction of the Securities and

Exchange Commission. The National Association of Unclaimed Property Administrators and the National Association of State Treasurers has encouraged the SEC to

unite lost securityholders with their money years before the money becomes ‘‘unclaimed property’’ due for delivery to the states. The elected state officials know that

it is the intent of the state laws on unclaimed property to have their respective citizens get the money that is due them; it simply makes no sense to those elected state

officials to force their lost securityholder citizens into giving interest free loans withVerDate 11-MAY-2000 10:28 Jan 04, 2001 Jkt 067705 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 E:\HEARINGS\67121.TXT pfrm02 PsN: 67121
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out their knowledge to those that are holding money belonging to the lost

securityholders, who are residents of their respective states.

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23

24

Mr. OXLEY. Thank you, Mr. Shamansky.

Let me begin by asking you details of in your particular case how

the securities happened to be lost or how they lost you. You are obviously not dead, so you passed that barrier. Take us through how

this happened.

Mr. SHAMANSKY. In 1988 my CPA, I was gathering up my 1099s.

I had inherited a number of stocks from my late aunt, and some

time had passed and I gathered up in 1988 the 1099s for 1987. I

sent them out, but I knew I had inherited some stock from the

Limited headquartered in Columbus, but I didn’t have a 1099 so

I called my friends——

Mr. OXLEY. That is a good stock, by the way.

Mr. SHAMANSKY. It goes up and down. Go to the transfer agent

in New York and they told me, yes, we didn’t send you a 1099 and

I said why not, and they said, well, we didn’t send you any dividend either. I said, oh. Why not? They said we had an address of

88 E. Gay Street, but I am at 88 E. Broad Street right across from

the statehouse, so they had the wrong address. I said, why didn’t

you look me up in the phone book? They said they never do that.

Even if they were negligent, they said we don’t look you up, you

got to look us up. If I were dead or sick or whatever it is. They

have the money and it is our problem. I had to ask them logically,

well, what would you have done had I owed you the $500? In the

meantime, someone else was keeping my money. At that time it

was $500. It was an accumulation of dividends.

So I came into this with the awareness and I couldn’t understand

why the transfer agent acted that way when I was easily findable.

It is just—there is no cause. And the SEC itself says in their 1997

release the cost is negligible.

Mr. OXLEY. So basically, they have no incentive whatsoever; as

a matter of fact, they have a disincentive.

Mr. SHAMANSKY. Right, exactly.

Mr. OXLEY. And what were the, for example, the tax consequences in your aunt’s estate——

Mr. SHAMANSKY. If I may suggest, sir, the stocks, the estate had

been distributed, so I was then the owner, and I was—I really

wanted to report, I mean I wanted to report my taxes. They

didn’t—and if a check comes back, they stop sending it. It seems

strange that they stop sending it. My experience with the Massachusetts Financial Services, the original mutual fund, I got a letter,

a notice saying that if I didn’t get ahold of them, $80 some of a

dividend check was going to get escheated to the State of Ohio,

and, Mr. Chairman, they had been sending me communications all

the time. They knew that I had not cashed that check and they

were still sending me stuff, and I was still getting it, and they

never bothered to tell me that that check was still out.

Mr. OXLEY. You were getting that at the 88 East Broad address?

Mr. SHAMANSKY. Yes. And all of this information, there are three

big data bases. Shareholders are not trying to hide from their

money. This is not debt collection. This is not deadbeats who do not

want to be found. These are shareholders who want their dividends, and the technology is there, and these outfits will not use

it.

25

Mr. OXLEY. Let me ask you this. I am trying to recall. There is

a division in the State treasurer’s office, the unclaimed funds?

Mr. SHAMANSKY. It is the Department of Commerce now in Ohio.

Mr. OXLEY. And they on occasion will print in newspapers.

Mr. SHAMANSKY. Exactly.

Mr. OXLEY. And they are required to did that?

Mr. SHAMANSKY. Yes, sir, by law. I couldn’t put a wig on and say

I am Mary Poppins, give me somebody else’s money. There are no

privacy concerns, there are no security concerns. Whether those

lists are published in the newspapers in every State or now in a

majority of the States have these lists on the Internet. Why should

not—why did the SEC say, oh, all of these things. And you notice

they talked about what the commenters, the people who commented were those who do not want us found. That is the only reasonable conclusion you can reach.

Mr. OXLEY. Well, now, in Ohio, for example, does the law now

require the Internet posting as well as the newspaper posting.

Mr. SHAMANSKY. I don’t know whether the law requires it, Mr.

Chairman. But it is just current technology. Why wouldn’t you? It

is a list.

Mr. OXLEY. And that is on there until somebody claims it, right?

Mr. SHAMANSKY. Sure, sure.

Mr. OXLEY. So your name is on there apparently forever until it

is claimed?

Mr. SHAMANSKY. We are suggesting nothing that is not already

done, it is just simply saying no longer can you pretend that this

technology isn’t there.

Mr. OXLEY. And your proposal is that in the situation of an

escheatment——

Mr. SHAMANSKY. Mr. Chairman, we are coming in before then,

because——

Mr. OXLEY. Right. But I gathered from your testimony that in

the case of escheatment that the State of the domicile of the holder,

of the stockholder ought to be the one that gets the money, is that

correct?

Mr. SHAMANSKY. That is the way it is, yes. The broker/dealers or

the transfer agents or whatever it is, whoever is holding that

money, would send it to Ohio or to the 50 States and the District

of Columbia. We are changing—the discussion that I am making

changes no State laws whatsoever.

Mr. OXLEY. The escheatment laws are different, though, in each

State, are they not?

Mr. SHAMANSKY. Yes. The periods range from 3 years to 5 years

to 7 years. But the important thing here is, we are not dealing with

State unclaimed property and the escheatment laws. What we are

saying is that the technology available to the transfer agents and

the other houses and financial institutions regulated by the SEC

has this technology and before you turn this money over to these

heir finders, you have to look people up in the phone book. Why

would you give my money to an heir finder who is going to charge

me 25 to 50 percent and you won’t look me up in the phone book

first? That is basically what we are talking about. And cumulatively, we are talking about very serious money. Forget the perVerDate 11-MAY-2000 10:28 Jan 04, 2001 Jkt 067705 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HEARINGS\67121.TXT pfrm02 PsN: 67121
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centages. In a multi-trillion dollar economy, we are talking about

really a lot of money.

Mr. OXLEY. Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman.

You used some pretty strong terms.

Mr. SHAMANSKY. Yes, sir, I did.

Mr. TOWNS. The term ‘‘kickback.’’

Mr. SHAMANSKY. Yes, sir. In Ohio we would call it that.

Mr. TOWNS. What do you mean? Could you just walk me through

it in terms of how you get a kickback?

Mr. SHAMANSKY. Sure. We are talking about these companies

that cultivate these relationships with these big transfer agents or

whoever is holding the money. Before they turn it over to these accounts, before the holder of the money turns the money over to the

States, like Ohio says, you have to send a notice to the last address, oftentimes they say, you also have to make an attempt to

find that person. So these outside companies come in, get these accounts, and then they do the searching, and for 25 to 50—it is basically cherry picking too. In other words, they only bother with the

big ones.

So if you have real money coming to you, they will say, we will tell you you are owed $10,000, you pay us $2,500 to $5,000 and I

will tell you where your money is. In the meantime, the people who

have this money, they did not look you up. They do not have to.

And what happens is, the search firm, the reality is, I have been

informed, and I hope it is not true, gives service fees, in quotation

marks, service fees to the outfit that turned the accounts over to

them. Let’s hope it isn’t true, but the consequences are startling.

Mr. TOWNS. Thank you.

Mr. SHAMANSKY. And there is no reason not to prohibit it. Mind

you, we are not regulating the search firm. Please understand that.

We are saying to the financial entity regulated by the SEC, you

don’t—you don’t give these accounts to anybody on that basis. We

are not regulating anybody. You don’t need statutory authority to

tell the holder that you already have authority over, don’t do that

practice.

Mr. TOWNS. The privacy issue, you don’t see that as an issue at

all?

Mr. SHAMANSKY. The history of it is with every State and the

District of Columbia, there is—it is simply, the old expression, a

red herring. It does not exist. The experience of all of the 50 States

show that. If you lose a stock, you have to go through all kinds of

hoops to get the stock back. The idea of the SEC—yes, I had to

point out to them, and I am glad Mr. Bergmann acknowledged, the

SEC has on the Internet a whole list of stocks that have been lost

and stolen securities. So if you lost a stock or it was stolen or a

bond or something, it is listed already, and yet there is no problem

with that.

So it is very selected precedent, shall we say, that they choose

to acknowledge. There is precedent for all of the things that are

being suggested here.

Mr. TOWNS. Thank you very much. I have no further questions,

Mr. Chairman.

Mr. OXLEY. The gentleman from Illinois, Mr. Shimkus.

27

Mr. SHIMKUS. Perfect timing. I am glad I got back.

It is an honor to meet you, sir, and to have you, and they should

have put honorable up there instead of mister. I was going to cut

into the chairman’s opening comment, but we are pleased to have

you here. As a relatively new Member, I have great appreciation

for those who have come before us and tried to make this system

work.

I want to apologize because I have been in and out on the phone

and I may ask something that has already been asked, but you sat

in during Mr. Bergmann’s statement and his question and answering, and of course he is gone, which is always telling, that they are

not going to stay around to hear the opposing view.

Do you agree with Mr. Bergmann’s prepared statement saying

that the lost security holders compared to the total accounts held

by the transfer agents is small? I know you have addressed that.

Mr. SHAMANSKY. The only honest answer is, if you are going to

play the percentage game of what, what we are having here is a

small percentage of trillions as opposed to 25 percent of $10. And

we are talking about what we have to do to strengthen our national

economy, the market economy, is to assure the individual investor

that if you put your money in the market, you are going to be

treated fairly, and that is the essence of the security and exchange

laws of our country. You want to tell your constituent he is going

to be treated fairly, even if he does not cash the check, the next

dividend checks that comes by on the stub, the same stamp, the

same envelope, the same piece of paper says a previously sent

check of yours is not cashed, and they will not do that. Prudential

Insurance does.

Mr. SHIMKUS. I found your opening testimony telling when I always have citizens who may say they have a hard time getting

ahold of me. I say, well, my phone number and my address is in

the phone book. I mean look it up. Fortunately I don’t have a lot

of constituents who call me at home, but it is there, it is not any

big secret.

I also appreciate your comments on, I always like to, when you

follow the money, you answer a lot of questions. And the issue

about holding really what I would then term the principal for

years, and then someone would appear, and then get in essence the

principal back without any other rate of return.

Mr. SHAMANSKY. Correct.

Mr. SHIMKUS. I think we need to probably fully explore that, as

to what is fair and what should be compensated to the lost person

based upon—I mean, again, follow the money. If there was a disincentive to lose people, maybe a financial disincentive, maybe they

would be a little more vigilant in ensuring that. But in siding

with—you know, in today’s society, when we are going to be able

to track people going from point A to point B on their cell phones,

I mean losing people is going to be more difficult, but we still seem

to do it.

Mr. SHAMANSKY. What we are talking about here today is the

fact that technology has changed, and whatever might have been

a decent excuse, and as a lawyer, the word ‘‘reasonable’’ is terribly

important to me. What was reasonable in the 1930’s when you are

dealing with 3 by 5 cards is unreasonable today. It was not negVerDate 11-MAY-2000 10:28 Jan 04, 2001 Jkt 067705 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 E:\HEARINGS\67121.TXT pfrm02 PsN: 67121
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ligent then, it is negligent now, because the technology has overcome.

A surgeon today has to use all of the latest techniques when he

is operating that did not exist 30 years ago, but he cannot keep operating as if it were 30 years ago. That is what we are talking

about. The cost is absolutely negligible.

Mr. SHIMKUS. I was reminded, and in fact, for some reason I

pulled up my Web page this morning, I think it was an accident,

because I never look at my own Web page, but then my staff reminded me that we have an IRS listing of lost income tax returns

on our Web page for the people of our district, which brings up, and

we not only in this subcommittee, but on the full committee, we are

always debating privacy, encryption, security of data bases, and I

know you probably went over that with the ranking member a little bit, but can you for me talk about the privacy of security holders and data base protection?

Mr. SHAMANSKY. Every State, your State, as I remember, Illinois,

every State has lists of unclaimed property.

Mr. SHIMKUS. Our State treasurer, I see.

Mr. SHAMANSKY. Okay. And all we are saying is, the States have

been doing this for decades. They don’t have privacy problems, they

don’t have security problems. The list on the Internet is nothing

but a list, like in the Chicago Tribune. You don’t put the money

down there, you don’t tell—you don’t say that Bob Shamansky had

so many shares of the Limited; you just say that Manufacturers

Hanover or whomever it is that holds the money is holding money,

period. That is all.

The reason you are not going to have a problem is because a lot of them may be a dollar or $2, I mean you simply don’t—what happens in the present system is this cherry picking goes on. The heir

finders or search firms, they only take the big ones, they are not

going to bother with the little ones. So the people who get hit are

really hit hard, and there is no reason for any of it, because we are

dealing in batches. It is all on tape, it is all through the Internet.

My testimony came from my Columbus office to the printer here

and it came into the committee all on e-mail, and technology has

made this difference.

You mentioned about the IRS. On the last page of my testimony

is a partial list of the Federal agencies and departments which hold

money for thousands of citizens. The suggestion is, as a precedent,

the Federal Government should have one site for all of these and

you would only have to go to the one site. The technology is there.

The cost is negligible. I urge the members here of the fact that

maybe 20 more million homes have access, have computers at

home, and if the Federal Government would simply coordinate its

information, what a boon it would be to anybody, regardless of all

the different organizations, arms, departments, or whatever, agencies that have money for someone else.

Mr. SHIMKUS. Thank you.

Mr. Chairman, if I could just finish up, I used to be a tax collector in my previous life. We called it county treasurer in the

State of Illinois. We collected property taxes, and we had a requirement by State law to publicly notice those people who failed to pay

their taxes and then when we were going to settle the tax bill we

29

had to publicly notice that. It did not bring any comfort to the person whose taxes we ended up selling, but it did provide me with

a lot more leverage when these very angry taxpayers came in to

say it was in this paper on this date, publicly noticed. So when people lose their assets, lose their assets over the statute of limitations, I do not think it is beyond our scope to make sure that the

public has every opportunity to—and defend ourselves before the

statute of limitations runs out—that they have every opportunity

to easily access unclaimed property.

Mr. SHAMANSKY. It is simply a list which is on there any time

I choose to look myself up on the list. It truly is that simple. The

idea that there is a lot of high technology, a lot of all these legal

or whatever problems, it is not true. I am here because it is not

true.

Mr. SHIMKUS. Thank you, Mr. Chairman. I yield back.

Mr. OXLEY. Thank you. Spoken like a true tax collector, I might

add.

Bob, it is good to have you back.

The gentleman from New York.

Mr. TOWNS. Thank you very much. I just want to make certain

that I am clear on one issue.

When it comes to the interest, I thought it was—I am not sure

in terms of how it works, and maybe you can help me with this.

I thought that the interest, the State received all of the interest

along the line.

Mr. SHAMANSKY. That is fine, and let me clarify that, if I may.

If you have a bank account, a savings account, say, in a bank in

your district and that bank account, I think in New York it may

be 3 years now instead of 5, and it has been earning interest during that 3 years, when the bank sends along to, I think it is the

State treasurer in New York, or whoever it is that takes it, that

is one account. But we are talking about something different here.

The broker/dealer incorporated in Delaware but has an office in

New York City, but the shares are in street names, it means it is

in the broker/dealer’s name, and the broker/dealer gets the money,

the dividends that year. However, it is holding it in its account,

when it, if it loses me or I am lost to it, when it sends the money

on to Ohio, it only sends the dividend. In the meantime, it has been

holding that money. And money, Congressman Towns, is never

idle. Every single second that money is working, and the broker—

that is why you have the case of Delaware v. New York involving

$890 million. This is big money. So that interest—and it is a very

simple solution. The money is simply held in a trust account. The

same holder, the same outfit that gets the money just puts it—instead of its account, it puts it in the trust account for its customers.

That seems to me eminently fair, and no problem to do. Do they

want to give up that windfall? No. Should they have had the windfall in the first place? No.

Mr. TOWNS. Thank you very much. I am happy to know there is

life after you leave this place.

Mr. OXLEY. Bob, thank you. It is good to have you with us.

The subcommittee stands adjourned.

[Whereupon, at 11:15 a.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

30

1The Securities Industry Association (‘‘SIA’’) brings together the shared interests of nearly 800

securities firms, employing more than 380,000 individuals, to accomplish common goals. SIA

members—including investment banks, broker-dealers, and mutual fund companies—are active

in all phases of corporate and public finance. The U.S. securities industry manages the accounts

of more than 50 million investors directly and tens of millions of investors indirectly through

corporate, thrift, and pension plans, and accounts for $270 billion of revenues in the U.S. economy. 2 17 CFR 240.17Ad-17.

3See, e.g., Quinn, Calling All—Some?—‘Lost’ Securities Owners, The Washington Post, June

28, 1998.

PREPARED STATEMENT OF THE SECURITIES INDUSTRY ASSOCIATION

Chairman Oxley, Ranking Member Towns, and members of the Subcommittee, the

Securities Industry Association (‘‘SIA’’) 1 appreciates the opportunity to share our

views on the Money Return Act of 2000, H.R. 3997, a bill designed to improve systems for the delivery of dividends, interest, and other valuable property rights to

lost securityholders. The securities industry strongly supports the goals of the proposed legislation but we question whether legislation is necessary to accomplish

these objectives. Moreover, we respectfully disagree with the notion of subjecting the

industry to potentially devastating civil liability in the absence of a record of clear

abuse.

Customers are the lifeblood of the securities industry. They are our single most

important asset and we have strong incentives to maintain frequent contact with

them. Consequently, the incidence of lost securityholders in the brokerage industry

is low, primarily because firms have stringent procedures in place and act quickly

to locate a securityholder who becomes ‘‘lost.’’

H.R. 3997 would, among other things, extend to all paying agents, including

broker-dealers, obligations to exercise due diligence in the delivery of dividends, interest, and other valuable property rights to their owners by requiring them to conduct data base searches, similar to those required of transfer agents.2 Paying agents

that fail to exercise due diligence shall be liable to any lost securityholder or class

of lost securityholders for damages, which may be trebled if the court determines

that such failure constitutes gross negligence.

We respectfully submit that legislation is unnecessary as sufficient economic incentives exist to ensure the industry’s due diligence in serving its customers. The

SIA agrees that data base searches are an effective method of locating lost

securityholders. In fact, most broker-dealers have been employing this technology

for many years.

Unfortunately, we are not aware of any industry-wide statistics on lost

securityholders; however, we believe the problem has been grossly overstated. Based

on an informal survey of SIA member firms, we estimate that less than 1% of all

customer accounts held at broker-dealers, which number in the tens of millions, are

‘‘lost.’’ Therefore, we are confident that broker-dealer practices have been effective

in locating lost securityholders and minimizing the amount of securities industry assets that escheat to the states. Moreover, we believe that regulations adopted in

1997, which impose due diligence obligations on transfer agents, have further reduced the number of lost securityholders. Without some evidence that current industry practices are ineffective, additional legislation at this time would appear to be

a solution in search of a problem.

HOW SECURITYHOLDERS BECOME ‘‘LOST’’

Abandoned property is tangible or intangible property that is unclaimed by its

rightful owner. Although it seems inconceivable that a securityholder would ‘‘abandon’’ their property, for a variety of reasons, a considerable number of

securityholders are ‘‘lost’’ each year when dividend or interest payments, or other

correspondence sent to the securityholder, are returned as undeliverable. Although

abandoned property is not unique to the securities industry, lost securities have

been the subject of several news reports over the last several years.3 Other forms

of abandoned property include, for example, savings and checking accounts, uncashed payroll checks, utility and rental deposits, retirement benefits, safe deposit

box contents, tax and fee refunds, old life insurance policies, and accident benefits.

Indeed, virtually every industry contributes to the hundreds of millions of dollars

turned over to states each year under abandoned property laws.

In the securities industry, securityholders may become lost through no fault of the

financial institution holding the assets. The most common situation occurs when a

securityholder relocates and leaves no forwarding address. Additionally, a transfer

of beneficial ownership, e.g., through inheritance, can also result in a securityholder

becoming lost. As a result, the securityholders do not receive principal, interest, or

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4For example, a security held by a customer in street name is sold shortly before a dividend

is declared and paid. If the security has not been transferred into the name of the financial institution that purchased the security on behalf of a customer, the selling financial institution

will receive the dividend. In such a case, the customer that purchased the security before dividend date will be credited with the dividend on payable date but the selling financial institution

will have a dividend overage. The financial institution holding the security on behalf of the purchasing customer will have to make a claim against the selling financial institution for that

amount. Because some financial institutions are not diligent about researching and collecting

these amounts from each other, this discussion does not focus on this form of abandoned property. In these cases, however, all beneficial owners have been credited with the appropriate dividends and interest. 5See, e.g., New York Stock Exchange Rule 409 and National Association of Securities Dealers

Rule 2340.

dividend payments to which they are entitled, and the property ultimately can escheat to the state after the time period established under the applicable state abandoned property laws.

Customers of a broker-dealer who hold their securities in street-name on the

books of the broker-dealer are less susceptible to becoming lost. Their securities are

transferred by the broker-dealer, along with shares held by other customers in the

same security, into nominee name and held at a securities depository, where purchases and sales are reflected as book entry movements in the account of the

broker-dealer participant.

When securities are held in street-name, dividends and interest are credited to

the account of the broker-dealer on the depository’s books, and in turn to the customer account on the broker-dealer’s books. Brokerage customers, because their

underlying assets are held on the broker-dealer’s books, are diligent about

maintaining contact with the firm. Likewise, the firm has an economic incentive in

maintaining contact with the securityholder who may purchase additional securities

through the broker-dealer. Consequently, very few broker-dealer customers actually

become ‘‘lost.’’ If an account statement of such a securityholder is returned as undeliverable, diligent efforts, often at considerable expense to the firm, are undertaken to relocate the customer.

The more common situation where a securityholder is likely to become ‘‘lost’’ is

when the original shares are held directly by the securityholder and, because the

securityholder has moved without leaving a forwarding address, dividends and interest checks mailed to the securityholder by the transfer agent are returned as undeliverable. Unlike a brokerage account where the underlying securities are in the

account, the amounts due to a lost securityholder on the books of a transfer agent

can be minimal and may not justify the expense of extensive search procedures.

However, as discussed in more detail below, the SEC has adopted rules requiring

transfer agents to conduct data base searches when such a securityholder becomes

lost.

BROKER-DEALERS EMPLOY EFFECTIVE PROCEDURES TO LOCATE LOST SECURITYHOLDERS

Securityholders represent a continuing stream of income for a broker-dealer and

so the incentive to maintain close contact is great. Contact between the registered

representative and the customer is frequent and the instances where an account

holder is truly lost are few. Nevertheless, because the industry is holding huge sums

of money on behalf of millions of investors, inevitably broker-dealers will have abandoned property that will escheat to the state each year. Broker-dealers generally

have stringent procedures in place to locate lost securityholders before this happens.

Typically, broker-dealers handle three kinds of abandoned property. Generic abandoned property is the underlying assets, usually securities, in an account in which

the broker-dealer has lost contact with the beneficial owner. Dividends and interest

paid on the underlying securities can also cause cash to accrue in the beneficial

owner’s account. Finally, there is abandoned property that results from the failure

of financial institutions to collect dividends and interest from each other.4

Accounts generally are considered abandoned if correspondence is returned as undeliverable anywhere from two to five times. Because self-regulatory organization

(‘‘SRO’’) rules require that quarterly account statements be sent to customers, 5

within four months from the date of the first failed delivery, efforts may be underway to locate the lost securityholder. In most cases, the branch office where the account is maintained is notified and the registered representative is directed to try

to obtain a current address. If the branch office is unable to make contact with the

securityholder, the account is coded as undeliverable and is moved to an unclaimed

property account range for the purpose of calculating the time of dormancy under

state abandoned property laws. It remains here until it is required to be turned over

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6Seventeen reporting firms had 315,841 lost securityholder accounts out of 39,786,203 total

accounts. 7Securities Exchange Act Release No. 34-39176 (October 1, 1997), 62 FR 52229.

8 Id. At 52229. At the same time it adopted Rule 17Ad-17, the Commission adopted Rule 17a24, which required transfer agents to disclose the aggregate number of lost securityholder accounts as of June 30 of each year and the percentage of total accounts represented by such lost

securityholder accounts. This was designed to assess the effectiveness of the search requirements of Rule 17Ad-17. 9Securities Exchange Act Release No. 34-42892 (June 2, 2000), 65 FR 36602.

to the state pursuant to state abandoned property laws, generally between three

and seven years.

Although the account has been moved to an unclaimed property range, efforts to

locate the lost securityholder continue. Broker-dealers routinely search automated

data bases such as leading credit bureaus by name and social security number in

an effort to locate a current address. Other methods include using CD-ROM technology for searching telephone directories, and inquiring at the bank where previous

disbursement checks were presented to learn if the bank has a current address.

Broker-dealers also may use professional search firms such as EquiSearch and

Keane Tracers that charge a fee but employ more thorough search techniques. In

no case is the fee passed on to the securityholder. The timing of such a search varies

among broker-dealers but generally is conducted approximately two years after the

recoding of the account. The waiting period is used because many accounts are reactivated during this period through internal efforts at the firm.

SIA believes these methods have proven to be effective in locating lost

securityholders. Although we are not aware of any industry-wide statistics on the

number of lost securityholders, over the last several years, in connection with SEC

initiatives in this area, SIA polled member firms in an effort to quantify the amount

of money escheating to the states each year from the brokerage industry as a result

of lost securityholders. In May of 2000, we collected information from 17 firms representing a cross section of the industry. We extrapolated using numbers provided

by this representative sampling and estimate that the number of lost securityholder

accounts in relation to the total number of accounts is approximately 8/10 of one

percent, 6 an impressive statistic given the tens of millions of customer accounts that

broker-dealers service.

SEC ACTIONS THAT ADDRESS LOST SECURITYHOLDERS

As we have noted, the SIA believes there is a higher incidence of lost

securityholders when a securityholder who holds shares directly relocates without

leaving a forwarding address and simply forgets about dividend and interest payments that may be forwarded by the paying agent. In 1997, the Commission acted

to address this situation by adopting Rule 17Ad-17, which imposes an affirmative

obligation on transfer agents to search for lost securityholders.7 At a minimum,

transfer agents must conduct two searches using an information data base. In addition, transfer agents may not use any service designed to locate their lost

securityholders that results in a charge to a securityholder until after two data base

searches have been conducted. In adopting Rule 17Ad-17, the Commission directed

its staff to review the operation of the adopted rules after three years and to report

back to the Commission on its findings.8

In June 2000, the Commission revised the reporting obligations, requiring information to be submitted on Form TA-2, the annual report filed by all registered

transfer agents, and rescinded Rule 17a-24.9 In adopting the amendments, the Commission stated that the new reporting requirements should enable the Commission

to assess the scope of the lost securityholder problem and to assess the effectiveness

of the search requirements of Rule 17Ad-17 more effectively. We believe when the

Commission reviews this data, it will see that the magnitude of the problem is much

less than news reports and other alarmists have projected. We urge the Subcommittee to evaluate this information before determining that additional measures

are necessary to locate lost securityholders.

COMMISSION-RUN DATA BASE IS UNNECESSARY AND WOULD BE INCOMPLETE

The bill also would require the Securities and Exchange Commission (‘‘Commission’’) to establish, or provide for the establishment of, a web-based data base that

would contain the names of lost securityholders, paying agents, and issuers. Paying

agents would be required to report information on lost securityholders to the Commission or its designee on a periodic basis.

As a practical matter, the web-based data base provided for in the bill would be

inferior to public and private data bases that already exist. Because it would contain

33

information only on securityholders, it would be an added level of bureaucracy that

duplicates more complete information on unclaimed property from all sources that

currently is available in other data bases. It is our understanding that most states

now post information on unclaimed property on the Internet. The National Association of Unclaimed Property Administrators (‘‘NAUPA’’) provides a link to these

websites and also sponsors Missingmoney.com, a database containing unclaimed

property records from participating states, that is searchable on the web. It is a free

source for unclaimed property searches sponsored by participating states and the

NAUPA.

Finally, the bill would establish a new federal agency to collect and publish information on unclaimed property held by the U.S., and to establish procedures for restoring such monies to rightful owners. The SIA believes there is simply no justification for creating another bureaucracy with such a narrow purpose, particularly in

light of the proliferation of web-based databases that will enable owners to quickly

and easily search for property they have inadvertently abandoned.

CONCLUSION

Despite inflammatory projections of millions of lost securityholders owed billions

of dollars in dividends and interest, SIA believes the securities industry does an exemplary job of locating lost securityholders and reuniting them with their assets.

Broker-dealers maintain close relationships with customers and have stringent procedures in place to locate securityholders who become lost. Informal survey results

indicate that lost securityholders represent less than 8⁄10 of 1 percent of all accounts

held by broker-dealers. We respectfully submit that economic incentives, not legislation, ensure the industry’s due diligence in serving its customers. Furthermore, advances in technology and public and private sector initiatives are making quicker

and more thorough searches possible at little or no cost. The proposed bill is a solution for a problem that is deminimis.