Lost Security Holders: SEC Should Use Data to Evaluate Its 1997 Rule
Published: 2001-09-28T00:00:00

Fast Facts:

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

section_title: Letter
paragraphs: One in eight Americans are entitled to unclaimed and abandoned assets,  according to the National Association of Unclaimed Property  Administrators. These unclaimed and abandoned assets include savings  and checking accounts, securities, paychecks, insurance settlements, and  utility and rental deposits. Reportedly, most of the funds are unclaimed  because the owner moved and simply forgot about the account, changed  his or her name, or died. After a period of dormancy, the funds are turned  over to state unclaimed property offices. In an effort to protect investors in  securities, the Securities and Exchange Commission (SEC) adopted a rule  in 1997 requiring transfer agents to search for lost security holders,  maintain written procedures for searching for lost security holders, and  annually report to SEC data on the accounts of lost security holders. But  the rule excluded the broker-dealers that are involved in the buying and  selling of securities and that hold the vast majority of owners’ assets.
In 2000, a bill was introduced in the Congress that would have, among  other things, expanded the SEC rule to cover broker-dealers. The Securities  Industry Association (SIA) testified on October 4, 2000, that without some  evidence that current practices are ineffective, additional legislation would  “…appear to be a solution in search of a problem.” Concerned about lost  security holder issues, you asked us to provide information on (1) the  extent to which accounts are lost, whether this has changed over time, and  the reasons security holders were separated from their accounts; (2) the  techniques used by transfer agents, broker-dealers, and other entities to  find lost customers, and the costs of these searches; (3) SEC’s efforts to use  the data reported by transfer agents to review the operation of its 1997 rule;  and (4) SEC’s methods for ensuring that transfer agents comply with the  rule’s requirements.
To address these questions, we conducted mail questionnaire surveys with  samples of 250 transfer agents and 225 broker-dealers in April through July,  2001. Our overall survey response rate was 69 percent for transfer agents  and 54 percent for broker-dealers. The low overall response rates to the  surveys and individual questions along with the low response rate from the  largest firms, which represent most account volume, threaten the validity  of estimates made using these data, if those not providing data are  materially different from those who do. Because of these low response  rates and the inability of some respondents to provide complete lost  account data, we are (1) restricting our analysis to that subset of firms that  participated in our surveys and (2) not making estimates about the larger  population of broker-dealers and transfer agents in the United States.  Appendix I provides a more detailed description of our objectives, scope,  and methodology. Our surveys for transfer agents and broker-dealers are  included in appendixes II and III, respectively.
We conducted our review from December 2000 through July 2001 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: SEC, whose primary mission is to protect investors and maintain the  integrity of the securities markets, oversees key participants in the  securities world, including broker-dealers and transfer agents. Broker- dealers hold securities and other investments for customers. Because the  broker-dealer holds the customers’ underlying assets, customers have an  economic incentive to maintain contact with the firm. Also, the broker- dealer has an incentive to maintain contact with the customer since the  customer may purchase additional securities. Transfer agents maintain  individual security holder records for banks; corporations; and other  issuers, such as mutual funds. In this capacity, transfer agents frequently  are responsible for disseminating shareholder communications and  dividend and interest payments. However, the transfer agent does not hold  the underlying security on behalf of the investor as a broker-dealer does.
SEC became concerned that while various transfer agents attempted to  locate lost security holders, the extent and type of efforts used varied  considerably. Establishing minimum search requirements, SEC reasoned,  would facilitate finding lost security holders. Accordingly, SEC adopted a  rule on October 1, 1997, requiring transfer agents to conduct searches and  annually report to SEC aggregate data on the accounts of lost security  holders. The rule requires transfer agents to exercise “reasonable care” in  their efforts to find the correct addresses of all lost security holders. At a  minimum, transfer agents must conduct two electronic searches for  accounts whose owners are considered lost. An owner generally becomes  “lost” when correspondence is returned as undeliverable and the transfer  agent has not received the security holder’s new address. Transfer agents  are not required to search for the owners of a lost account if (1) the  aggregate value of the account is less than $25; (2) they have received  documentation of the security holders’ death; or (3) the account owner is  not a person. Transfer agents are also required to submit information  regarding the status of lost security holder accounts and the number of lost  security holder accounts that were remitted to the states during the  reporting period. In adopting the rule, SEC directed its staff to review the  operation of the adopted rules after 3 years and to report back on its  findings. On June 2, 2000, SEC modified the reporting requirements for lost  security holders as part of its revision of the TA-2, which is the annual  report filed by all registered transfer agents.
section_title: Transfer Agents and Broker-dealers Reported Limited Numbers of Lost Accounts, but Little Historical Data Were Available
paragraphs: In 2000, the year for which the data are most complete, the average number  of lost security holders for transfer agents and broker-dealers was  approximately 2 percent of total accounts. Seventy-five percent of transfer  agents reported that the number of their lost security holders amounted to  less than 1 percent of their total accounts. Ninety-five percent of broker- dealers reported that their lost accounts amounted to less than 1 percent of  their total accounts. Our survey observations are similar to those of SEC in  its informal surveys in 1997 and 2000. In the 1997 survey, SEC estimated  that 1.34 percent of accounts held by transfer agents were lost. On the basis  of a second survey in 2000 that represented about 75 percent of  shareholder accounts held by transfer agents, SEC estimated that lost  security holder accounts were 2.23 percent of total accounts. A May 2000  SIA poll of 17 broker-dealers showed that 0.79 percent of total accounts  belonged to lost security holders.
Over half of the transfer agents and broker-dealers that responded to our  surveys were unable to provide us with information on lost owners for  earlier years. However, data from the 75 transfer agents that did have the  information for previous years showed that the ratio of lost accounts to  total accounts was more likely to have increased or remained the same  than decreased since the 1997 rule change. On the other hand, data  supplied by the 42 broker-dealers who were able to supply it showed that  this ratio was most likely to have stayed the same or decreased.
Most of the transfer agents and broker-dealers that were unable to provide  us with data reported to us that they believed that the lost account ratio has  remained the same or decreased in the last 2 years. Among transfer agents,  about 21 percent told us that the ratio had increased, about 43 percent  indicated it had remained the same, and about 35 percent said it had  decreased. Broker-dealers’ responses included a higher percentage  reporting that the lost account ratio had remained the same over the last 2  years: about 10 percent indicated they felt it had increased; about 67  percent, that it had remained the same; and about 24 percent, that it had  decreased.
In testimony before the House Committee on Commerce, SIA said that  security holders frequently become lost through no fault of the financial  institution holding the assets. According to SIA, the most common situation  occurs when a security holder relocates and leaves no forwarding address.  Our survey also showed that the primary reason owners become lost is that  they have failed to notify the firms of address changes (see fig. 1). The  second most common reason for owners becoming lost was a transfer of  beneficial ownership, such as through an inheritance, in which the transfer  agent or broker-dealer does not receive information about the transfer. Few  transfer agents and broker-dealers believe that they received inaccurate  information in initially setting up the account. Although internal data entry  or processing errors are clearly the firms’ responsibility, they are not  considered to be a significant cause of lost security accounts.
When searches for lost security holders are unsuccessful, transfer agents  and broker-dealers are required to remit the property to the state  unclaimed property administrators under the state escheat laws. Both  groups indicated that few account holders remain lost for so long a period  that the firms would be required to remit the securities to the state. Twenty- six percent of broker-dealers remitted property to the state in 1995, and 30  percent did so during 2000. Our survey findings indicated that the  proportion of transfer agents remitting property to the states has grown  since 1995. Only 30 percent of all transfer agents able to provide data  remitted property to the states in 1995; however, over 55 percent remitted  property to the states in 2000. A number of factors could influence the  proportion of property remitted to the states. However, we could not  determine the causes of these changes from our survey results.
section_title: Transfer Agents and Broker-dealers Used Similar Techniques to Find Lost Security Holders
paragraphs: The transfer agents we surveyed indicated that they routinely used  telephone, mail, and searches of the Internet and telephone directories in  looking for lost security holders (see fig. 2). Although they are not required  to search for lost customers, broker-dealers often do, using the same  techniques. Both transfer agents and broker-dealers used telephone calls  and mail for over 75 percent of their searches. Transfer agents used credit  bureaus and professional search firms less frequently, but they still used  these firms more than broker-dealers.
The transfer agents and broker-dealers we surveyed also estimated that  they spend a similar amount of resources to find lost security holders.  About forty percent of all transfer agents and broker-dealers estimated  spending less than $10 in the search for each lost security holder (see fig.  3). For transfer agents, the smallest firms were the most likely to spend less  than $10 per lost customer (55 percent), while almost 67 percent of  medium firms and 58 percent of larger firms spent more. Small and medium  broker-dealer firms spent more than $10 per lost customer over 60 percent  of the time, while 77 percent of larger firms spent more. Thirty-seven  percent of transfer agents told us that, in 2000, they had full-time staff at  headquarters assigned to find lost security holders. These employees were  in addition to any that may have been located at branch offices. The  average number of personnel assigned was 2.5 at firms with full-time  staffing. About 34 percent of broker-dealers had full-time staff assigned to  find lost security holders; on average, these firms devoted 2.5 employees to  this task.
Transfer agents and broker-dealers usually have policies or procedures in  place specifying steps to be taken to find security holders when mail is  returned as undeliverable. According to our survey results, 78 percent of  transfer agents and 69 percent of broker-dealers responding told us that  they have written policies on searching for lost security holders. For the  transfer agents with policies or procedures, 48 percent had these measures  before they were required by the 1997 SEC rule. Larger transfer agents  were more likely to have written policies or procedures before the 1997  ruling. Some 75 percent of large firms and 65 percent of medium firms  reported having written policies or procedures on locating lost customers  before 1997, compared with only 24 percent of small firms. Among broker- dealers, who are not required to have search policies, 55 percent had  similar measures before 1997.
Other financial institutions that have customer accounts, such as banks  and insurance companies, are not required to search for lost account  holders or maintain data on lost accounts. Thus, the Federal Reserve  Board, the Federal Deposit Insurance Corporation, and the Office of the  Comptroller of the Currency do not maintain information on the extent of  lost accounts or search techniques used in the industry. Similarly, state and  industry officials told us that insurance companies are not required to  search for lost beneficiaries.
section_title: SEC Has Not Used the Data Submitted Under the 1997 Rule
paragraphs: SEC’s 1997 data reporting requirement has yet to provide information that  staff can use to assess the rule as the Commission directed them to when  the rule was adopted because data initially received from transfer agents  were inconsistent. Transfer agents were to report the aggregate number of  lost security holder accounts as of June 30 each year and the percentage of  total accounts represented by the lost security holder accounts. The  number of lost security holder accounts was to be reported as lost for  specified periods of time: 1 year or less, 3 years or less, 5 years or less, or  greater than 5 years. Transfer agents were also to report information on  security holder accounts that were remitted to the state unclaimed  property administrators. According to SEC officials, the reporting  requirement took effect in February 1998, and the numbers were to be  reported in an annual filing due in August that reports data as of the  preceding June. Therefore, the first full year’s data were due in August  1999.
However, when transfer agents began reporting the data, SEC staff found  differences in the way that firms interpreted the questions. As a result, the  data that the transfer agents reported to SEC were inconsistent. Because of  these inconsistencies, SEC staff have not been able to review the operation  of the rule after 3 years as instructed by the Commission in 1997. SEC  proposed changes to the reporting form in March 1999 and adopted a  revised form on June 2, 2000. SEC officials expect that the revised  reporting requirement will provide more consistent and accurate data that  will allow them to assess the scope of the lost security holder problem and  the effectiveness of the search requirements of the rule. The first set of  data, now required on a calendar year basis, was filed in March 2001 for  calendar year 2000. At the time of our review, SEC had not started to  analyze these data.
section_title: SEC Relies on Inspections to Ensure Compliance
paragraphs: SEC relies primarily on its general inspections of transfer agents to ensure  that these firms comply with the securities laws and regulations, including  the lost security holder rule. SEC policy is to inspect transfer agents with  large operations every 2 years, agents associated with investment  companies every 5 years, and agents with small banks every 10 years.  However, SEC staff noted that the 10-year cycle reflects the fact that  banking regulators already conduct examinations of these firms every 18 to  36 months, and that banking regulators review these firms’ compliance  with the lost security holder rule.
SEC records showed that transfer agents inspected between 1998 and 2000  were inspected within the cycle time. SEC found violations relating to  compliance with the 1997 rule in about a quarter of the inspections it made  between 1998 and 2000. This is consistent with our survey results, which  indicated that about 22 percent of the transfer agents who responded to our  survey were in violation of the lost security holder rule because they did  not have written policies or procedures for searching for lost security  holders. Our survey results also showed that smaller firms may be more at  risk of noncompliance because only about 60 percent of small transfer  agents reported having written search policies.
In 2000, SEC conducted 183 exams of transfer agents and found violations  of lost security holder rules in 51, or 28 percent of examinations. In 1998  and 1999, SEC found such violations in 21 and 32 percent of the total  exams, respectively. Of the 51 exams with lost security holder rule  violations in 2000:  29 firms failed to maintain substantive evidence that they had conducted  at least 2 database searches for lost security holders and did not have  written procedures governing searches for lost security holders;  13 other firms failed to maintain substantive evidence that they had  conducted 2 database searches; and  9 firms did not have relevant written procedures.
Typically, the transfer agent with a violation is sent a deficiency letter and  has 30 days to respond. SEC staff said that most firms respond to the  deficiency letter by indicating corrective actions they will take or have  taken. If the firm’s response letter indicates that the firm will take adequate  steps to address the issues, no follow-up is conducted until the next  examination. However, if the deficiency is serious or if the transfer agent’s  response to the deficiency letter does not indicate that adequate corrective  actions will be taken, SEC staff may decide that a follow-up exam is  needed. However, SEC officials said that it was unclear whether a lost  security holder rule violation, alone, would likely be considered serious  enough to trigger a follow-up exam.
As of July 11, 2001, SEC had sent deficiency letters to all 51 agents with  violations in 2000. SEC also referred 19 transfer agents’ exam results to  banking regulators and 4 results to SEC’s Division of Enforcement. At that  time, 2 of the 51 firms in violation had been reexamined and 6 had  withdrawn their registration with SEC or SEC had cancelled their  registration. Also as of July 11, SEC had reexamined 11 of the 60 registered  transfer agents found to have lost security holder deficiencies in 1999  exams and 9 of the 26 agents found to have violations in the 1998 exams.
section_title: Conclusions
paragraphs: Our survey data suggest that few differences may exist between transfer  agents and broker-dealers in the ratio of lost security holders to total  accounts or search techniques and procedures used to find lost account  holders. Yet, only transfer agents are subject to SEC’s 1997 rule. In addition,  most security holders appear to be lost due to address changes that they  have not reported to the transfer agent or broker-dealer, rather than  through errors made by the firm that would clearly be the firm’s  responsibility. In addition, SEC directed its staff to assess the operation of  the rule after 3 years. Now that SEC has adopted a revised form for these  data, the Commission expects that its revised reporting requirements will  provide it with more consistent and accurate data. In that event, SEC can  analyze the data it receives in conjunction with its inspection results and  our survey data to assess the continued need for and scope of the 1997 rule.
SEC’s use of a standard exam cycle coupled with exams by banking  regulators and follow-up exams for serious deficiencies or inadequate  corrective actions could be supplemented by using additional data to target  inspections.  Our survey results showed that small transfer agents may be  more likely to be in violation of SEC’s 1997 rule than larger transfer agents.  These data, along with the data received from transfer agents under the  rule’s data reporting requirement and the data collected during inspections  could be useful as SEC works to target future inspections.
section_title: Recommendations
paragraphs: To better determine the usefulness of the 1997 rule and to help ensure  compliance with the rule, we recommend that the Chairman of SEC take  the following steps:  Analyze the data submitted by transfer agents in conjunction with  inspection results and our survey data to assess the need for and scope  of the 1997 rule.
Use the data submitted by transfer agents along with inspection results  to target future transfer agent inspections.
section_title: Agency Comments
paragraphs: We provided a draft of this report to SEC for its review and comment.  SEC  concurred with the report’s recommendations.  SEC’s comment letter is  reproduced in appendix IV.
We will send copies of this report to the Ranking Minority Members of the  House Committee on Financial Services and Committee on Energy and  Commerce, other interested congressional committees, the Chairman of  SEC, and other interested parties. We will also make copies available to  others on request.
Key contributors to this report are listed in appendix V. If you have any  questions, please call me at (202) 512-8678 or Susan H. Campbell at (202) 512-6790.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to provide information on (1) the extent to which  accounts are lost, whether this has changed over time, and the reasons  security holders were separated from their accounts; (2) the techniques  used by transfer agents, broker-dealers, and other entities to find lost  customers and the costs of these searches; (3) the Securities and Exchange  Commission’s (SEC) effort to use the data reported by transfer agents to  review the operation of its 1997 rule; and (4) SEC’s methods for ensuring  that transfer agents comply with the rule’s requirements.
To address our first and second objectives, we visited and interviewed  officials from SEC’s Division of Market Regulation; the New York Stock  Exchange; the National Association of Securities Dealers; and the  Securities Industry Association. We also reviewed applicable SEC rules,  reports, and transcripts from previous congressional hearings on the  issues. To gain a perspective on how lost account holders are handled in  other related industries, we interviewed officials from the Federal Reserve  Board, the Federal Deposit Insurance Corporation, the Office of the  Comptroller of the Currency, the American Counsel of Life Insurers, and  selected state insurance commissioners.
We also conducted mail questionnaire surveys with samples of 250 transfer  agents and 225 broker-dealers in April through July, 2001. We drew our  stratified random samples from records in SEC’s databases. For broker- dealers, our target population was all broker-dealers doing a public  business and carrying their own accounts, who made required filings to  SEC in the third quarter of 2000, and who were active at the time of our  survey. There were approximately 320 such firms. After drawing our  sample of broker-dealers, we further restricted this survey to only those  who were engaged in retail activity. For transfer agents, our target  population was all transfer agents that made required filings with SEC for  fiscal year 1999, maintained at least one customer account, and were active  at the time of this survey—approximately 700 firms.
As shown in tables 1 and 2, our overall survey response rate was 54 percent  for broker-dealers and 69 percent for transfer agents.  Response rates also  varied by size of firm in both samples, with lower response rates in the  stratum of larger firms than in the two strata of smaller firms. Because of  these low response rates, and the inability of some respondents to provide  complete lost account data, we are restricting our analysis to that subset of  firms that participated in our survey and are not making estimates about  the larger population of broker-dealers and transfer agents in the United  States. The low response rates to the surveys and individual questions  threaten the validity of estimates made using these data, if those not  providing data were materially different from those who do. Because the  largest firms, which are important to our estimates for the population  because they account for much of the activity of the two industries, are  providing data at such low rate, the representativeness of weighted  estimates for the population might be subject to significant bias. Therefore,  we present survey results in this report in unweighted form, representing  only those firms that participated in our study and provided answers to the  individual questions being analyzed.
To address our third objective, we interviewed officials from SEC’s Division  of Market Regulation.  We also reviewed SEC’s revised rules relating to  reporting requirements for transfer agents.
To answer our fourth objective on SEC’s efforts to ensure that transfer  agents comply with its 1997 rule on lost security holders, we interviewed  and reviewed data provided by officials in SEC’s Office of Compliance  Inspections and Examinations. The officials provided us with several  electronic files containing transfer agent examination data that we  analyzed to determine how many inspections were conducted in each year,  how many violations were found, and whether the firm had been  reinspected or withdrawn or cancelled its registration with SEC.
We conducted our review from December 2000 through July 2001 in  accordance with generally accepted government auditing standards.
section_title: Transfer Agent Survey Questionnaire
section_title: Broker-dealer Survey Questionnaire
section_title: Comments From the Securities and Exchange Commission
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those named above, Brian D. Berg, Emily R. Chalmers, Tom  Conahan, Heather T. Dignan, Monty Kincaid, Carl M. Ramirez, and Sindy R.  Udell made key contributions to this report.
section_title: GAO’s Mission
paragraphs: The General Accounting Office, the investigative arm of Congress, exists to  support Congress in meeting its constitutional responsibilities and to help improve  the performance and accountability of the federal government for the American  people. GAO examines the use of public funds; evaluates federal programs and  policies; and provides analyses, recommendations, and other assistance to help  Congress make informed oversight, policy, and funding decisions. GAO’s  commitment to good government is reflected in its core values of accountability,  integrity, and reliability.
section_title: Obtaining Copies of GAO Reports and Testimony
paragraphs: The fastest and easiest way to obtain copies of GAO documents is through the  Internet. GAO’s Web site (www.gao.gov) contains abstracts and full-text files of  current reports and testimony and an expanding archive of older products. The  Web site features a search engine to help you locate documents using key words  and phrases. You can print these documents in their entirety, including charts and  other graphics.
Each day, GAO issues a list of newly released reports, testimony, and  correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site  daily. The list contains links to the full-text document files. To have GAO E-mail  this list to you every afternoon, go to our home page and complete the easy-to-use  electronic order form found under “To Order GAO Products.”
subsections: section_title: Order by Mail or Phone
section_title: Visit GAO’s Document Distribution Center
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
paragraphs: Web site: www.gao.gov/fraudnet/fraudnet.htm, E-mail: fraudnet@gao.gov, or 1-800-424-5454 (automated answering system).
section_title: Public Affairs