[Federal Register Volume 61, Number 168 (Wednesday, August 28, 1996)]
[Proposed Rules]
[Pages 44249-44258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21892]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232 and 240

[Release No. 34-37595; File No. S7-21-96]
RIN 3235-AG99


Lost Securityholders

AGENCY: Securities and Exchange Commission.


[[Page 44250]]


ACTION: Notice of Proposed Rulemaking and Request for Comments.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
publishing for comment proposed Rule 17Ad-17 and proposed Rule 17a-24 
which are designed to address the problem of ``lost securityholders.'' 
Rule 17Ad-17 would require transfer agents to conduct searches in an 
effort to locate lost securityholders. Rule 17a-24 would allow the 
Commission to gather data related to lost securityholders and to 
provide it to information distributors or others. The Commission also 
is seeking comments on the extent to which further regulatory or 
remedial steps are necessary, including whether the Commission should 
operate a national database for lost securityholders.

DATES: Comments should be received on or before October 28, 1996.

ADDRESSES: Interested persons should submit three copies of their 
written data, views, and opinions to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington 
D.C. 20549. Comments also may be submitted electronically at the 
following E-mail address: [email protected]. All comment letters 
should refer to File No. S7-21-96; this file number should be included 
on the subject line if E-mail is used. Comment letters will be 
available for public inspection and copying at the Commission's public 
reference room, 450 Fifth St., N.W., Washington D.C. 20549. 
Electronically submitted comment letters will be posted on the 
Commission's Internet Web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant 
Director; Christine Sibille, Senior Counsel; or Michele Bianco, 
Attorney; at 202/942-4187, Office of Risk Management and Control, Mail 
Stop 5-1, Division of Market Regulation, Securities and Exchange 
Commission, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction and Summary

    From time to time, issuers lose contact with some of their 
securityholders (``lost securityholders''). Loss of contact may result 
from a change in the securityholder's address or a transfer of 
beneficial ownership (e.g., through inheritance). As a result, these 
securityholders do not receive principal, dividend, or interest 
distributions to which they are entitled, and their property is at risk 
of being deemed abandoned under state escheat laws.1 At a point in 
time established under the applicable escheat law, the custodians of 
these assets must turn them over to the appropriate state unclaimed 
property administrator. In some states, that can occur in as few as 
three years after the custodian loses contact with the 
securityholder.2 Transfer agents, as the primary custodians of the 
records that determine the ownership of securities and the entitlement 
to corporate distributions, can reduce significantly the number of lost 
securityholders by maintaining accurate records and by promptly 
initiating corrective measures when records no longer reflect the 
current status of a securityholder.3
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    \1\ See House Committee on Small Business, 103d Cong., 2nd 
Sess., Report on Business Opportunities and Technology (1993); 
Letter from Richard Breeden, Chairman, Commission, to Ron Wyden, 
Chairman, Committee on Small Business, U.S. House of Representatives 
(February 22, 1993); Letter from Arthur Levitt, Chairman, 
Commission, to Ron Wyden, Chairman, Committee on Small Business, 
U.S. House of Representatives (October 29, 1993).
    \2\ In some states, an investor's failure to vote or to 
communicate with the issuer during a period of five successive 
years, even if no communication from the investor has been required, 
can become the basis for constructive abandonment. See, e.g., Letter 
from John K. Dalton, Associate Counsel, State of New York Office of 
the State Comptroller, to the Division of Market Regulation 
(``Division'') (December 12, 1994).
    \3\ Other financial institutions, such as registered broker-
dealers, also may maintain records of securities ownership on behalf 
of customers for which they hold assets. In such instances, the 
transfer agent has recorded the financial institution as the owner 
in its account records, and the financial institution's customer 
account records will identify the beneficial owner of the 
securities. The Commission understands that such financial 
institutions have a lower incidence of lost securityholders. Letter 
from Judith Poppalardo, Assistant General Counsel, Securities 
Industry Association (``SIA''), to Division (June 7, 1996).
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    Some transfer agents already take meaningful steps to prevent the 
loss of contact with securityholders and to reestablish contact after 
it has been lost. However, the Commission is concerned that some 
transfer agents may not be making sufficient use of currently available 
technology to locate securityholders with whom contact has been lost.
    To address this problem, the Commission is seeking comment on 
several proposals. Proposed Rule 17Ad-17 would require that transfer 
agents take certain minimum steps to locate the correct address of each 
securityholder in their master securityholder files as well as require 
them to take such additional steps as are reasonable. Transfer agents 
would be required at a minimum to make two good faith attempts to 
locate lost securityholders before turning assets over to an unclaimed 
property administrator. These searches would be made at no cost to the 
securityholder. The Commission believes that this requirement should 
help reduce the number of lost securityholders and the escheatment of 
investor assets.
    The Commission preliminarily believes that imposing an affirmative 
obligation on transfer agents to search for lost securityholders is in 
the public interest and would enhance investor protection. The 
Commission recognizes that regulatory obligations impose financial 
burdens and that the costs of complying with proposed Rule 17Ad-17 may 
fall upon transfer agents or indirectly on issuers. In proposing 
specific requirements, the Commission has attempted to minimize 
compliance costs. Also, decreasing the number of lost securityholders 
should reduce the costs to transfer agents and issuers of complying 
with state escheat laws.
    The Commission also is proposing Rule 17a-24 to gather data related 
to lost securityholders that would be available to information 
distributors and others. Under this rule, the Commission would require 
entities that hold assets for investors, such as transfer agents and 
broker-dealers, to file electronically with the Commission certain lost 
securityholder information. The Commission would make such data 
available to private entities which could establish information 
services that could be accessed by investors to determine if they have 
been reported as lost.
    As discussed more fully below, the Commission is also soliciting 
comment on the concept of a national database of lost securityholders 
to be operated by the Commission in order to facilitate the ability of 
lost securityholders to reestablish contact with issuers and transfer 
agents.
    In summary, the proposals would:
     Establish a definition of lost securityholder.
     Require transfer agents to search for lost securityholders 
at no cost to the securityholders using at least one information 
database.
     Require certain entities that hold assets for 
securityholders to file with the Commission certain information 
pertaining to lost securityholders.
     Solicit comment on the establishment of a national lost 
securityholder database to be maintained by the Commission.

II. Transfer Agent Responsibilities to Maintain Accurate Records and to 
Locate Lost Securityholders

A. Maintenance of Master Securityholder Files

    Rule 17Ad-10 under the Securities Exchange Act of 1934 (``Exchange 
Act'') 4 requires every recordkeeping

[[Page 44251]]

transfer agent 5 to maintain and keep current an accurate master 
securityholder file 6 that contains the minimum appropriate 
``certificate detail'' for all securities transferred, purchased, 
redeemed, or issued and to which the transfer agent must post debits 
and credits. Certificate detail is defined by Rule 17Ad-9(a) to include 
information such as the securityholder's registration (including name), 
address of the securityholder, the size of the position, and other 
information used to identify the securities and the 
securityholder.7
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    \4\ 17 CFR 240.17Ad-10.
    \5\ 17 CFR 240.17Ad-9(h) defines recordkeeping transfer agent as 
the registered transfer agent that maintains and updates the master 
securityholder file.
    \6\ 17 CFR 240.17Ad-10(b) requires every recordkeeping transfer 
agent to maintain and keep current an accurate master securityholder 
file and subsidiary files. If there is a record difference, the 
master securityholder file and subsidiary files must accurately 
represent all relevant debits and credits until the record 
difference is resolved. The recordkeeping transfer agent must 
exercise diligent and continuous attention to resolve all record 
differences. See also 17 CFR 240.17Ad-9(b).
    \7\ 17 CFR 240.17Ad-9(a).
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    The Commission believes that an accurate master securityholder file 
is one of the most basic steps in addressing the lost securityholder 
problem. Therefore, the Commission believes that recording of patently 
inadequate or inaccurate certificate detail to the master 
securityholder files is inconsistent with Rule 17Ad-10. For example, 
recording an address of ``New York, New York'' without a street address 
will almost certainly result in the return by the U.S. Postal Service 
as undeliverable of all correspondence sent to such address. Thus, in 
most cases a transfer agent should not post to the master 
securityholder files items it receives for transfer that contain a 
patently incorrect address or items that do not contain a complete 
address 8 and should return such transfer request to the presenter 
without effecting the transfer.9
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    \8\ Transfer agents should use their experience in their reviews 
for adequacy of addresses contained in items submitted for transfer. 
For example, the absence of a street address in some rural areas and 
small towns may not render an address incomplete or inadequate. 
Accordingly, posting such certificate detail may not violate Rule 
17Ad-10.
    \9\ The Commission understands that there are situations where 
rejecting a transfer request because of an incomplete address may 
result in financial harm to the investor (e.g., when a transfer 
request is received near or on a record date or in connection with a 
tender or an exchange offer). Letter from Michael Foley, President, 
The Securities Transfer Association (``STA''), to the Division (May 
26, 1994). In such situations, the Commission believes that a 
transfer agent should have the flexibility to follow the general 
practice of accepting the transfer request and using the address of 
the presenting financial intermediary in care of the securityholder 
before seeking an accurate address.
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B. Current Transfer Agent Practices Regarding Lost Securityholders

    Currently, most transfer agents rely on the standards contained in 
Rule 14a-3(e)(2) under the Exchange Act to determine when to code as 
``lost'' the accounts of securityholders whose correspondence has been 
returned as ``undeliverable'' because of an incorrect or insufficient 
address.10 That rule provides that unless otherwise required by 
state law, the obligation to mail an annual report or proxy statement 
to a securityholder is suspended if (1) an annual report and a proxy 
statement for two consecutive annual meetings, or (2) all payments of 
dividends or interest on securities sent by first class mail (of which 
there has been at least two payments) during a twelve month period 
which have been mailed to such securityholder's address have been 
returned as undeliverable.
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    \10\ 17 CFR 240.14a-3(e)(2).
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    Generally, the first time a distribution check is returned as 
undeliverable, a transfer agent will place the returned check in 
another specially marked (e.g., color-coded) envelope and will remail 
the distribution check to the registered owner at the same address 
(``remailing procedure'').11 If the remailing is returned, the 
issuer or the transfer agent will hold the check until the next 
distribution payment. This remailing procedure may be repeated if the 
next distribution payment or other issuer correspondence is returned as 
undeliverable. If two consecutive distribution payment mailings are 
returned as undeliverable, the transfer agent will code the 
securityholder's account as undeliverable (i.e., the securityholder is 
``lost'') and will hold any further distributions and communications to 
the securityholder. Some transfer agents also conduct a mass mailing at 
the end of each year to all securityholders whose accounts they deem to 
be undeliverable.
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    \11\ Transfer agents use this second mailing to test the 
possibility that the first mailing did not reach the intended 
recipient because of an error by the postal service. The second 
mailing also can be used to generate a better or current address by 
requesting an address correction from the postal service. Letter 
from Michael Foley, President, STA, to the Division (May 26, 1994). 
Transfer agents have estimated the success rate for this remailing 
from less than 10% to 50%. See, e.g., Letters from Charles Rossi, 
Boston EquiServe, to the Division (February 26, 1996) and from 
Anthony J. Calcagni, Harris Trust and Savings Bank, to the Division 
(February 23, 1996).
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    After two consecutive mailings are returned as undeliverable, some 
transfer agents conduct searches for the securityholder by using 
information databases.12 In addition to information databases, 
transfer agents also use various other methods in their attempts to 
obtain the current addresses of lost securityholders.13 However, 
not all transfer agents take such actions to search for lost 
securityholders.
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    \12\ Many transfer agents and corporate issuers that conduct the 
transfer functions for their own securities currently use vendor-
maintained, computer databases to assist them in searching for lost 
securityholders. Letters from Michael Foley, President, STA, to the 
Division (May 26, 1994), and Anthony F. Fireman, President, 
Corporate Transfer Agents Association, Inc. (``CTAA''), to the 
Division (April 25, 1994). These searches are usually based on name, 
address, or social security number. Many professional transfer 
agents (e.g., transfer agents that perform transfer functions for 
issuers for a fee) also have the capability to perform searches by 
taxpayer identification number for issuers that are willing to pay 
an additional fee. In addition to using vendor-maintained 
information databases (e.g., credit bureaus), some transfer agents 
and corporate issuers employ the services of the Social Security 
Administration (``SSA'') or the Internal Revenue Service (``IRS'') 
in an attempt to contact the lost securityholder.
    \13\ Among others, these methods include using CD-ROM technology 
for searching telephone directories, and inquiring at the bank where 
previously endorsed distribution checks were presented to learn if 
the bank has a current address. See also, Guttman, Modern Securities 
Transfers, para. 16.04 (3rd ed. 1987), noting that other methods 
include, but are not limited to, (i) checking all past 
correspondence with the registered owner, (ii) checking the source 
of transfer instructions for a proper address (for example, the 
broker through whom the securities had been acquired by the 
registered owner), and (iii) contacting the occupant of the premises 
of the last-known address for a forwarding address.
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C. Proposed Rule 17Ad-17

    The Commission is proposing Rule 17Ad-17 under the Exchange Act to 
require transfer agents to conduct searches for securityholders once 
the transfer agents have determined that a securityholder is lost. The 
proposed rule would require each recordkeeping transfer agent to 
exercise reasonable care to locate the correct address of lost 
securityholders, and would establish minimum search 
requirements.14 However, the rule would not impose on transfer 
agents an absolute obligation actually to locate each lost 
securityholder.
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    \14\ See supra note 5 for a definition of recordkeeping transfer 
agent.
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1. Definition of Lost Securityholder
    For purposes of Rule 17Ad-17, a securityholder will be classified 
as a lost securityholder when two items of correspondence,15 such 
as distribution payments, that were sent by first class mail at least 
three months apart, have been returned as undeliverable. Because at 
times transfer agents receive change of address notifications soon 
after the mailing and subsequent return of a distribution payment, a 
three month period will be required to have elapsed between the two 
correspondences. If and when a transfer agent receives a

[[Page 44252]]

new address for a lost securityholder, either directly from the 
securityholder or through the transfer agent's efforts, the 
securityholder will no longer be classified as lost.16
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    \15\ The remailing of the same correspondence does not 
constitute a second item of correspondence.
    \16\ While not specifically required by the proposed rule, the 
Commission encourages transfer agents to take steps that may prevent 
securityholders from becoming ``lost.'' In particular, the remailing 
procedure described in the text above and the procedures described 
in footnote 13 appear to be effective methods of correcting 
misdeliveries of mail and other delivery problems. Such early 
measures may prove especially beneficial because the ``trail'' of 
the securityholder may still be fresh.
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    The Commission requests comments on whether the proposed standards 
for classifying a lost securityholder is appropriate or whether a 
different standard should be employed. For example, is the three month 
period between the mailing of two correspondences an appropriate time 
period?
2. Transfer Agents' Search Requirements
    Rule 17Ad-17 would require every recordkeeping transfer agent whose 
master securityholder file includes accounts of lost securityholders to 
search an information database for such securityholders' current 
address. The transfer agent's initial search for the securityholder 
must be based on either name, if reasonably likely to locate the lost 
securityholder, or taxpayer identification number (typically an 
individual's social security number) using at least one information 
database. The search must be conducted within three months of the 
securityholder being classified as lost. If the lost securityholder is 
not found on the initial search, the transfer agent also must conduct a 
second search for the lost securityholder between one year and eighteen 
months after the initial search. This search is intended to identify 
address changes that were added to the database after the time of the 
earlier search. The transfer agent must conduct these searches without 
charge to the lost securityholder.
    The Commission understands that database searches generally are 
considered a cost-effective way in which to locate lost 
securityholders. The Commission requests comment with respect to the 
potential costs of proposed Rule 17Ad-17 and its potential 
effectiveness in addressing the lost securityholder issue. The 
Commission requests commenters to submit specific data on costs 
involved in utilizing various vendors' information databases and costs 
involved in using other methods in an effort to locate lost 
securityholders. The Commission also requests comment on whether there 
are other entities that maintain ownership records such as broker-
dealers, that should also have search requirements.17
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    \17\ The Commission understands that many broker-dealers 
currently conduct searches for missing customers. Letter from Judith 
Poppalardo, Assistant General Counsel, SIA, to Division (June 7, 
1996).
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    In conducting an information database search, should a transfer 
agent have the option as proposed of conducting a search using either 
the names or taxpayer identification numbers of the lost 
securityholders or should the transfer agent be required to conduct a 
search using taxpayer identification numbers? The Commission 
understands that conducting searches using the taxpayer identification 
numbers may be more costly than a search using lost securityholders' 
names, but searches using taxpayer identification numbers may be more 
effective in locating lost securityholders.
    Should the requirement to search for lost securityholders apply 
only where the transfer agent is holding assets over some de minimis 
amount? A de minimis threshold would avoid a situation where a transfer 
agent would be required to expend funds in excess of the amount at risk 
of escheating.
    The Commission also is requesting comment on the time frames within 
which a search must be made. The purpose of the three month time frame 
is to require a transfer agent to search within a short period of time 
after the securityholder becomes lost, because generally chances of 
locating a lost securityholder are better the sooner a search is 
initiated. However, if the search is conducted too soon, there may not 
be an opportunity for the information databases to be updated with the 
securityholder's new address. Further, the three month period will 
permit transfer agents to conduct searches on a quarterly basis, which 
may be more cost-effective. The period between the first and the second 
search, one year to eighteen months, is intended to provide sufficient 
time for a lost securityholder's new address to appear in an 
information database subsequent to the first search.
    Comments also are requested on whether the rule should include (1) 
a requirement that transfer agents periodically assess the 
effectiveness and appropriateness of the search procedures and 
technology they employ, and/or (2) a requirement that transfer agents' 
search procedures meet a performance-based standard based on success in 
locating lost securityholders.
3. Definition of Information Database
    For purposes of Rule 17Ad-17, an information database would be 
defined as any automated database service that (1) contains addresses 
of United States residents including addresses in the geographic area 
in which the lost securityholder's last known address is located, (2) 
covers a reasonably broad geographic area, (3) is indexed by the search 
criterion used by the transfer agent (e.g., name or taxpayer 
identification number), and (4) is updated at least four times a 
year.18 The Commission requests comments on these criteria. 
Comment is also sought on whether instead of setting forth specific 
criteria for an acceptable database, the rule should require transfer 
agents to use technology reasonably designed to locate a lost 
securityholder.
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    \18\ Some examples of vendors of information databases that 
satisfy these criteria are credit bureaus, the SSA, and the IRS.
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4. Use of Professional Search Firms to Meet Search Requirements
    Currently, some transfer agents rely on professional search firms 
that charge lost securityholders a fee for locating the lost 
securityholders' assets instead of using database services.19 
Under proposed Rule 17Ad-17, the use of such firms as the method of 
locating a lost securityholder would satisfy the transfer agent's 
search obligation only if the securityholder would not be charged a fee 
as the result of a successful search. Therefore, the use of a 
professional search firm that charges the securityholder a fee for 
recovering his or her assets would be permissible only after the 
transfer agent has conducted the required two information database 
searches described above.
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    \19\ The CTAA stated that some of its members utilize 
professional search firms which generally have extensive search 
methods. The CTAA believes that the decision to use a professional 
search firm should be an independent one made by the transfer agent 
or issuer taking into consideration potential cost to either the 
issuer or the securityholder. Letter from Anthony F. Fireman, 
President, CTAA, to the Division (April 25, 1994). The National 
Association of Unclaimed Property Administrators (``NAUPA'') has 
informed the Commission that transfer agents should use caution when 
employing information vendors because many such vendors are also in 
the business of contacting lost securityholders and charging them a 
fee, which may be between 30% and 50% of the value of the 
distributions, for information about the distributions. While NAUPA 
supports the use of all available methods of facilitating transfer 
agents' searches, it is concerned about any search effort that 
causes a shareholder to lose a substantial portion of the value of 
the property and believes that such firms should be used only as a 
last resort and not as a routine method to find lost 
securityholders. Letter from Dawn E. Rockey, Second Vice President, 
NAUPA, to the Division (April 29, 1994).
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    Comment is sought on the extent to which transfer agents currently 
employ professional search firms and on any problems or concerns that 
arise from their use. Specifically, the Commission

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requests comment on whether the limitation contained in the proposed 
rule, prohibiting charging the shareholder for use of such firms until 
after a transfer agent has conducted the two prescribed searches using 
an information database, is appropriate.
5. Verification of Shareholder Identity
    Although a careful search is unlikely to result in an erroneous 
match of a lost securityholder and the information obtained from an 
information database, information databases are not 100% accurate. 
Thus, in order to guard against delivery of distributions to an 
incorrect recipient, the Commission strongly suggests that transfer 
agents verify that the person at the newly obtained address is its lost 
shareholder before disbursing securities or funds.20 Among other 
methods, verification could consist of confirming the shareholder's 
taxpayer identification number and former address.
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    \20\ The STA notes that currently most transfer agents send a 
search letter to the new address obtained from an information 
database in order to obtain additional information to assure that 
the shareholder and the new addressee are the same person. However, 
for small money values, some transfer agents automatically update 
their records and forward lost distributions to the address obtained 
from the information database. The STA believes that transfer agents 
should establish contact with the shareholder at the new address 
before releasing distributions. Letter from Michael Foley, 
President, STA, to the Division (May 26, 1994). The CTAA states that 
many transfer agents and issuers currently require the person at the 
new address to confirm the shareholder's taxpayer identification 
number and former address before issuing a check for past dividend 
or interest distributions. The CTAA also states that when an estate 
is being probated, most transfer agents or issuers will issue the 
check in the name of the deceased so that the personal 
representative or trustee of the estate is required to use legal 
documents to cash the check. Letter from Anthony F. Fireman, 
President, CTAA, to the Division (April 25, 1994).
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6. Recordkeeping Requirements
    Proposed Rule 17Ad-17 will require that all recordkeeping transfer 
agents maintain records necessary to demonstrate their compliance with 
the requirements of the rule. At a minimum, transfer agents should 
document the date a securityholder was classified as lost and the date 
a database search was conducted for such securityholder. The Commission 
also is proposing an amendment to Rule 17Ad-7 under the Exchange Act to 
require that transfer agents maintain the records required by the 
proposed rule for a period of not less than three years with the first 
year in an easily accessible place.

III. Collection of Lost Securityholder Data

A. Proposed Rule 17a-24--Background

    As discussed further in Section IV below, the Commission has been 
urged to support the establishment of a national lost securityholder 
database. In the alternative, the Commission is proposing to facilitate 
the gathering of data related to lost securityholders to provide access 
to the information by information distributors or others, including 
individuals.
    The Commission proposes to collect information on lost 
securityholders 21 from entities such as transfer agents and 
broker-dealers that hold assets for investors, and to make such 
information available to private entities which could establish 
databases accessible by the public. For example, a distributor could 
obtain this information from the Commission and charge a fee to persons 
who inquire about whether they have been reported as lost. The inquirer 
could then contact the reporting entity or otherwise take steps to 
recover the property. The Commission requests comment as to whether it 
would be economically feasible for communication vendors to develop a 
lost securityholders database and to make the information available to 
the general public at a reasonable cost.
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    \21\ The rule would include a definition of the term lost 
securityholder that is consistent with the definition under proposed 
Rule 17Ad-17.
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B. Definition of Recordkeeper

    The filing requirements under proposed Rule 17a-24 would apply to 
any entity defined by that rule as a recordkeeper. The proposed rule 
defines the term recordkeeper to mean (1) a member of a national 
securities exchange, a registered broker or dealer, or a registered 
municipal securities dealer which maintains records of securities 
received, acquired, held, or carried by or on behalf of such entity for 
the account of any securityholder, or (2) a recordkeeping transfer 
agent. Exchange members and broker-dealers carry accounts for others, 
which may include retail investors, institutional investors, or other 
broker-dealers.22 Recordkeeping transfer agents maintain records 
of ownership on behalf of issuers.
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    \22\ Exchange members and broker-dealers which carry accounts 
for others are frequently listed on the books of issuers, clearing 
agencies, or financial intermediaries as the holder of a security. 
These exchange members or broker-dealers know the identity of the 
entity for which they hold the security.
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    The Commission seeks comment concerning the scope of this 
definition. Should any other entities, such as investment advisors, be 
included within the definition of recordkeeper? Does the proposed 
definition cover entities that should not be deemed recordkeepers 
because they do not typically have lost securityholders?

C. Recordkeeper Filing Requirements

    Proposed Rule 17a-24 will require each recordkeeper to file 
electronically with the Commission on or before May 31 of each year 
information on all lost securityholders contained in such 
recordkeeper's records as of May 1 of such year.23 With the same 
filing date for all filers, the Commission could easily compile all the 
submissions into one file for downloading.
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    \23\ The annual filing would include information on a lost 
securityholder even if the securityholder was reported as lost in 
the previous year's filing.
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    The filing would include the identity of the reporting 
recordkeeper, a contact name and telephone number at the recordkeeper, 
and the period covered by the report. In an effort to protect 
confidentiality, the report contents would consist solely of a list of 
taxpayer identification numbers of lost securityholders contained in 
the recordkeeper's records.24 No names, number of shares, or 
dollar amounts would be provided.
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    \24\ The Commission understands that some professional search 
firms have databases that can identify an individual's name based on 
a social security number.
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    The Commission requests comment on the feasibility of the filing 
requirement under the proposed rule. A private entity that wants to 
establish a database would only need to download the information once a 
year from the Commission. Is an annual filing sufficient? Should more 
frequent submissions be required? Should filers submit such information 
concerning all lost securityholders, securityholders who have been lost 
for some specified time period, or lost securityholders after a 
specific occurrence, such as after the two database searches required 
under proposed Rule 17Ad-17 have been conducted? Should filers be 
required to file information with the Commission indicating that a 
securityholder has been found? If so, how soon after the securityholder 
is found? In addition to the costs they currently incur in providing 
information on lost property to state unclaimed property 
administrators, what costs would filers incur in providing the 
requested information to the Commission?
    The Commission also requests comment on whether the privacy of lost 
securityholders will be compromised by filers providing the required 
taxpayer identification numbers.25 Would information other than 
taxpayer

[[Page 44254]]

identification numbers provide greater privacy protection and still 
accomplish the stated goals? For example, would the gathering of 
specific information about a lost securityholder (e.g., the lost 
securityholder's name, last known city and state) be an effective means 
of addressing the problem while presenting fewer privacy concerns? 
26 Are there any other steps that should be taken to protect 
securityholders' privacy? Should information on the lost 
securityholder's assets (e.g., the issues and the CUSIP numbers) be 
included, and would the inclusion of such information serve any useful 
function so as to override any privacy concerns?
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    \25\ Supra note 24.
    \26\ Listing lost shareholders by name may allow for greater 
privacy because of the potential for multiple individuals to have 
the same name while a social security number will identify one 
specific individual.
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D. Method of Filing

    The Commission believes that two methods of electronic filing are 
feasible. First, recordkeepers could utilize the Commission's 
Electronic Data Gathering Analysis and Retrieval System (``EDGAR'') to 
submit their filings in accordance with current Commission 
rules.27 The Commission is proposing the use of the EDGAR system 
in an effort to employ available technology to facilitate the 
objectives of the proposed rule. EDGAR filings generally are made 
through a dial-up connection to the Commission's host equipment and 
transmitted using Commission supplied, personal computer based software 
called EDGARLink. Therefore, the cost to recordkeepers should be 
limited to a long distance telephone call.
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    \27\ 17 CFR 202.7(b). As set forth in part VIII below, the 
Commission is proposing to amend 17 CFR 232.101, which specifies 
mandated electronic submissions, to include filings under proposed 
Rule 17a-24.
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    In addition to built-in communications and data compression 
capability, EDGARLink contains features which help EDGAR filers create 
and prevalidate their submission prior to making a transmission. Use of 
the EDGAR system also would enable the Commission to validate the 
identity of the submitter, the type of submission, and whether the 
filing meets certain minimal format requirements.
    As an alternative to filing through the EDGAR system, filings could 
be submitted to the Commission through the Internet.28 Under this 
approach, the same document structure required for EDGAR could be used. 
However, the filer would not receive validation of the filing, and 
there would be no validation for header accuracy or format compliance. 
The cost may be somewhat higher because entities would be required to 
obtain access to the Internet either directly through a provider or 
through use of a service which would file on their behalf.
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    \28\ If this alternative is adopted it would be necessary to 
amend 17 CFR 202.7 and 17 CFR 232.101 to reflect the use of the 
Internet for these submissions.
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    Comments are requested on whether the EDGAR system or the Internet 
would be the better vehicle for the submission of such information. 
Commenters are requested to provide specific alternative cost estimates 
for compliance using both systems. Are there limits on the ability of 
smaller transfer agents and broker-dealers to submit this information 
due to their level of automation?

E. Dissemination of Information

    The Commission anticipates that the information filed under 
proposed Rule 17a-24 could be disseminated as part of the existing 
EDGAR data dissemination stream. Alternatively, the Commission could 
provide access to the data on its Internet Web site. On the Internet 
Web site, any entity or individual could download the information 
submitted to the Commission for whatever reason(s) it deemed 
appropriate. The Commission requests comment on the costs and benefits 
associated with this proposal. Does the release of this information to 
any outside party create the possibility of fraud, and if so, is there 
some method to eliminate this possibility? Alternatively, should the 
Commission limit access to the information collected with respect to 
lost securityholders? For example, should dissemination of the 
information be limited to information vendors that agree to restrict 
the use and protect the confidentiality of the information?

F. Proposed Recordkeeping Requirements

    The proposed rule would require every recordkeeper to maintain such 
records necessary to demonstrate compliance with the requirements set 
forth in this rule. The proposed rule also would provide that such 
records must be maintained for a period of not less than three years, 
the first year in an easily accessible place. Comment is requested as 
to the feasibility of this requirement.

IV. Commission Supported Database

    As an alternative to the data collection proposed in Section III 
above, it has been suggested that the Commission should directly 
support the establishment of a national lost securityholder database 
which would be analogous to the database used in the Commission's lost 
and stolen securities program.29 Such a database would contain 
information such as the names and/or taxpayer identification number of 
lost securityholders. Information would be required to be submitted to 
the database by entities that are required to make other filings with 
the Commission (e.g., issuers, transfer agents, and broker-
dealers).30 All securities and funds of lost securityholders would 
continue to be held by the issuers, transfer agents, or broker-dealers. 
The database would be accessible by telephone or by computer linkage by 
shareholders or any other interested party. A user fee (i.e., a small 
charge for each inquiry) would be used to fund the operation of the 
database. The register could be searched by using a securityholder's 
name or taxpayer identification number and would reveal whether an 
entity is holding securities or funds for the securityholder. However, 
the register would not disclose the value of the assets being held.
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    \29\ Letter from Robert N. Shamansky, Benesch, Friedlander, 
Coplan & Aronoff, to the Division (May 16, 1994).
    \30\ Specifically, the proposal suggests that an issuer, 
transfer agent, or broker-dealer enroll each lost securityholder on 
an expanded version of the register which is maintained for the 
Commission by the Securities Information Center for information on 
lost and stolen securities. Letter from Robert N. Shamansky (May 16, 
1994).
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    Alternatively, it has been suggested that the Commission could 
directly maintain and operate a lost securityholder database utilizing 
the Commission's Internet Web site. Similar to the above proposal, 
transfer agents, issuers, and broker-dealers would be required to 
submit information concerning lost securityholders to the Commission. 
Individuals would have access to the database through the 
Internet.31
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    \31\ This proposal differs from the proposal discussed under 
Section III above in terms of the level of Commission involvement in 
developing and running the database. In addition, the Commission 
might need to institute a small charge for each search to cover the 
costs of development and operations. Furthermore, it might take 
longer to implement this proposal due to the complexities of such a 
database.
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    Recently, the National Association of Unclaimed Property 
Administrators (``NAUPA'') advised the Commission that it is in the 
process of developing a national database of lost 
securityholders.32 NAUPA indicated that most, if not all, of the 
states that belong to the association will provide names and last known 
addresses to its centralized database. The NAUPA database will be 
accessible by any

[[Page 44255]]

person through the Internet for a nominal fee, which will be used to 
maintain the database. NAUPA believes that a centralized database 
managed by states is an effective way to return property to rightful 
owners because states have considerable expertise in administering 
unclaimed property programs and locating missing owners. However, the 
Commission notes that NAUPA's database would not list a lost 
securityholder until such securityholder's assets had escheated to a 
state.
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    \32\ Letter from Randall A. Ross, President, NAUPA, to Steven M. 
H. Wallman, Commissioner, Commission (January 18, 1996). NAUPA 
members represent fifty jurisdictions which have unclaimed property 
laws.
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    The Commission requests comment on the establishment of a national 
lost securityholder database. Specifically, the Commission seeks 
comment on whether such a database would be of significant benefit to 
investors and the cost-effectiveness of such a database, particularly 
in light of the potential impact of proposed Rule 17Ad-17. Comments 
should also contrast the benefits of a national database with the data 
collection concept proposed in Section III.
    Commenters favoring a database should discuss, among other things, 
(i) the entity best suited to administer the database, (ii) the 
appropriate frequency of submission of information, (iii) the 
allocation of costs to maintain and to operate the database, (iv) 
methods of access to the database, and (v) the potential necessity for 
and design of safeguards to prevent unauthorized access into the 
database and to prevent fraud. In addition to the issues cited above, 
the Commission is interested in obtaining comment with respect to 
potential privacy concerns arising from the dissemination of financial 
information via the Internet. The Commission also requests comment on 
whether the NAUPA database or other available databases would be an 
adequate mechanism to address the lost securityholder problem.33
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    \33\ The Commission notes that in April of 1994, Indiana placed 
all of its unclaimed property information on the Internet. Since 
going on-line, Indiana has received approximately six additional 
calls per week; however, professional search firms (i.e., entities 
employed by corporate issuers to locate lost securityholders and 
that charge lost securityholders a percentage of their assets for 
such efforts) account for about sixty percent of the additional 
calls. Very recently, Wyoming also placed its unclaimed property 
information on the Internet.
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V. Initial Regulatory Flexibility Analysis

    Section 603(a) 34 of the Administrative Procedure Act,35 
as amended by the Regulatory Flexibility Act (the ``Flexibility Act'') 
36 generally requires the Commission to undertake a Regulatory 
Flexibility Act Analysis of all proposed rules or proposed rule 
amendments to determine the impact of such rulemaking on ``small 
entities.'' 37 Approximately 470 registered transfer agents 
qualify as ``small entities'' for purposes of the Flexibility Act and 
would be subject to the requirements of proposed Rules 17a-24 and 17Ad-
17. Of the approximately 650 registered broker-dealers that would be 
classified as recordkeepers under proposed Rule 17a-24, approximately 
85 are small entities.
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    \34\ 5 U.S.C. 603(a).
    \35\ 5 U.S.C. 551, et seq.
    \36\ 17 Pub. L. No. 96-354 (September 19, 1980), 94 Stat. 1164, 
reprinted in (1980) U.S. Code Cong. & Ad. News 1169.
    \37\ Although section 601(b) of the Flexibility Act defines the 
term ``small entity'' the statute permits agencies to formulate 
their own definitions. The Commission published final definitions of 
the term ``small business'' and ``small organization'' in Securities 
Exchange Act Release No. 6380 (February 4, 1982), 47 FR 5215. 
Section 240.0-10(h) defines a small transfer agent for purposes of 
the Flexibility Act as follows:
    For purposes of the Commission rulemaking in accordance with the 
provisions of Chapter Six of the Administrative Procedure Act (5 
U.S.C. 601 et seq.) and unless otherwise defined for purposes of a 
particular rulemaking proceeding, the term ``small business'' or 
``small organization'' shall . . .
    (c) When used with reference to a broker or dealer, mean a 
broker or dealer that:
    (1) Had total capital (net worth plus subordinated liabilities) 
of less than $500,000 on the date in the prior fiscal year as of 
which its audited financial statements were prepared pursuant to 
Sec. 240.17a-5(d) or, if not required to file such statements, a 
broker or dealer that had total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the last business day of the 
preceding fiscal year (or in the time that it has been in business, 
if shorter); and
    (2) Is not affiliated with any person (other than a natural 
person) that is not a small business or small organization as 
defined in this section; . . .
    (h) When used with reference to a transfer agent, mean a 
transfer agent that:
    (1) Received less than 500 items for transfer and less than 500 
items for processing during the preceding six months (or in the time 
that it has been in business, if shorter);
    (2) Maintained master shareholder files that in the aggregate 
contained less than 1,000 shareholder accounts or was the named 
transfer agent for less than 1,000 shareholder accounts at all times 
during the preceding fiscal year (or in the time that it has been in 
business, if shorter); and
    (3) Is not affiliated with any person (other than a natural 
person) that is not a small business or small organization under 
this section.
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    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'') pursuant to the requirements of the Flexibility 
Act, regarding the proposed rules. The IRFA notes that the proposed 
rules are intended to reduce the number of securityholders with whom 
contact is lost and to address the associated problems of undeliverable 
dividend and interest distributions by establishing standards for 
transfer agents with respect to their obligation to conduct searches in 
an effort to locate such securityholders and by facilitating the 
collection of data related to lost securityholders to permit 
information distributors or others the opportunity to establish 
databases in whatever form is most cost efficient. Proposed Rule 17Ad-
17 establishes a single standard for all transfer agents regardless of 
size and is not anticipated to have any significant economic impact on 
small entities. Similarly, proposed Rule 17a-24 sets forth a uniform 
filing requirement for all recordkeepers and is not anticipated to have 
any significant economic impact on the small entities subject to the 
rule.

A. Rule 17Ad-17

    Some registered transfer agents will not incur significant 
additional compliance costs because they currently use an information 
database to search for lost securityholders. Thus, the proposed 
requirements will have a practical effect only on transfer agents that 
do not presently conduct searches using an information database. The 
Commission estimates that even for such transfer agents, the cost of 
compliance with proposed Rule 17Ad-17 will be small.38 In 
addition, because a transfer agent's cost of compliance generally will 
be based upon the quantity of lost securityholders it must attempt to 
locate, small transfers agents should not, on average, bear 
disproportionately high compliance costs. On average, compliance costs 
should be roughly proportional to the number of securityholder records 
maintained by the transfer agent. Some database vendors may charge 
discounted rates for bulk searches, which could inure to the benefit of 
larger transfer agents. However, such discounts are small, and thus 
they should not disadvantage small transfer agents significantly.
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    \38\ Based upon information supplied to the Commission by 
transfer agents, vendors other than the SSA and the IRS typically 
charge $.95 to $1.75 per account for lost securityholder searches. 
The charge for searches conducted through the SSA and IRS using 
securityholder social security or tax identification numbers is 
$3.00 per account.
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    The proposed rule will impose on transfer agents an additional 
recordkeeping requirement. The requirement has been broadly drafted to 
provide transfer agents with sufficient flexibility to minimize 
recordkeeping costs. Specifically, proposed Rule 17Ad-17 will require 
that all recordkeeping transfer agents maintain records necessary to 
demonstrate their compliance with the rule's requirements. The 
Commission also is proposing an amendment to Rule 17Ad-7 to require 
that transfer agents maintain the records required by the proposed rule 
for a period of not less than three

[[Page 44256]]

years, the first year in an easily accessible place.
    The Commission considered various alternatives to the proposed rule 
and found no alternatives consistent with the proposed rule's objective 
and the Commission's statutory mandate.39 However, as set forth in 
Section II.B. above, the Commission is seeking comment on alternative 
search and reasonable care standards including (i) a requirement that 
transfer agents use technology reasonably designed to locate a lost 
securityholder instead of following specific guidelines as to what 
constitutes an acceptable database, (ii) a requirement that transfer 
agents periodically assess the effectiveness and appropriateness of the 
search procedures and technology they employ, and/or (iii) a 
requirement that transfer agents' satisfaction of their reasonable care 
obligations be based upon their search procedures meeting a 
performance-based standard based on success in locating lost 
securityholders.
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    \39\ Among other things, the Commission considered (i) the 
establishment of a national database to which transfer agents would 
be required to submit the names of all lost securityholders and (ii) 
the effects of a database to be established by the National 
Association of Unclaimed Property Administrators and populated with 
information provided by the states that will include the names of 
all persons whose property has escheated to the states. In both 
instances, securityholders would need to take affirmative action to 
discover the existence of their lost assets. Because many if not 
most lost securityholders are unaware that they have property which 
is considered undeliverable and escheatable, many would not realize 
the importance of accessing the database. With respect to the first 
alternative, many of the same costs would be incurred by transfer 
agents because they would need to submit the names of the lost 
securityholders to the national database rather than to a database 
service. With respect to the second alternative, lost 
securityholders would be deprived of their assets for a longer 
period of time because their names would not be included in the 
database until their assets had escheated to the state. However, the 
Commission believes that it may be beneficial to pursue one of the 
alternatives as an additional mechanism for locating lost 
securityholders in conjunction with the proposed rule.
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B. Rule 17a-24

    Proposed Rule 17a-24 will impose some additional compliance costs 
upon all registered transfer agents and such registered broker-dealers 
that fall within the definition of recordkeeper under the rule. 
However, the Commission estimates that the cost of compliance with 
proposed Rule 17a-24 will be small 40 and that the impact of the 
rule upon recordkeepers' operations will be insignificant, regardless 
of the recordkeepers' size.
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    \40\ Establishing filing capability through EDGAR should not 
require any expenditure by recordkeepers because the Commission 
supplies the necessary software. Even if the small entity does not 
currently have computer capability, the entity should be able to 
find a service provider to file on its behalf for a small charge. 
The Commission estimates an additional administrative cost of 
approximately $50.00 per year for gathering and transmission of the 
required information and approximately $10.00 per year for the cost 
of a long distance telephone call.
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    The proposed rule will impose on registered transfer agents and 
broker-dealers an additional recordkeeping requirement. The requirement 
has been broadly drafted to provide transfer agents and broker-dealers 
with sufficient flexibility to minimize recordkeeping costs. 
Specifically, proposed Rule 17a-24 will require that all recordkeepers 
under the proposed rule maintain records necessary to demonstrate their 
compliance with the rule's requirements. The Commission also is 
requiring that transfer agents maintain the records required by the 
proposed rule for a period of not less than three years, the first year 
in an easily accessible place.
    The Commission considered various alternatives to the proposed rule 
and preliminarily concluded that Rule 17a-24 best fulfilled the 
proposed rule's objective and the Commission's statutory 
mandate.41 However, as set forth in Section IV above, the 
Commission is seeking comment on alternative information databases.
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    \41\ As noted in footnote 37 above, the Commission considered 
(i) the establishment of a national database to which transfer 
agents would be required to submit the names of all lost 
securityholders and (ii) the effects of a database to be established 
by the National Association of Unclaimed Property Administrators and 
populated with information provided by the states that will include 
the names of all persons whose property has escheated to the states. 
With respect to the first alternative, the Commission believes that 
private vendors will be able to establish an effective database more 
quickly than the Commission. As previously noted with respect to the 
second alternative, lost securityholders would be deprived of their 
assets for a longer period of time because their names would not be 
included in the database until their assets had escheated to the 
state.
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    Commenters are encouraged to comment on any aspect of the analysis. 
Such comments will be considered in the preparation of the Final 
Regulatory Flexibility Analysis if the proposed rule is adopted. A copy 
of the Analysis may be obtained by contacting Michele Bianco, Attorney, 
Division of Market Regulation, U.S. Securities and Exchange Commission, 
450 Fifth Street, NW., Washington, DC. 20549 at 202/942-4187.

VI. Paperwork Reduction Act

    Certain provisions of proposed Rule 17Ad-17 and proposed Rule 17a-
24 may contain ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995,42 and the 
Commission has submitted them to the Office of Management and Budget 
for review in accordance with 44 U.S.C. 3507(d). The titles for the 
collection of information are: ``Proposed Rule 17Ad-17 (Transfer 
Agents' Obligation to Search for Lost Securityholders)'' and ``Proposed 
Rule 17a-24 (Data Collection for Private Databases).''
---------------------------------------------------------------------------

    \42\ 44 U.S.C. 3501 et seq.
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    The collection of information under proposed Rule 17Ad-17 and under 
proposed Rule 17a-24 is intended to facilitate greater accuracy of 
transfer agents' and broker-dealers' records. The collection of 
information is necessary to enable recordkeeping transfer agents, as 
the usual custodians of the records that determine the ownership of 
securities and the entitlement to corporate distributions, and broker-
dealers, as holders of customer assets, to reduce significantly the 
number of lost securityholders.
    Under the proposed rules, transfer agents and broker-dealers may 
use any appropriate method (e.g., through computerized or manual means) 
to collect the names of the lost securityholders. Under proposed Rule 
17Ad-17, information must be submitted by transfer agents to a database 
service that is automated. Broker-dealers and transfer agents must 
submit information to the Commission pursuant to proposed Rule 17a-24 
through computerized means. The information required to be collected by 
Rule 17Ad-17 and Rule 17a-24 (i.e., the taxpayer identification numbers 
of lost securityholders) generally is already maintained by registered 
transfer agents and broker-dealers. Therefore, the Commission 
anticipates that the increased costs imposed by the rules will be 
relatively minimal.\43\
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    \43\ The cost of compliance with proposed Rule 17Ad-17 will 
depend on the number of undeliverable accounts at each transfer 
agent. Based upon the information received from transfer agents and 
broker-dealers, the Commission believes there will be approximately 
250,000 securityholders lost annually by all transfer agents. The 
Commission estimates that approximately $3.00 will be spent per 
account (comprised of approximately $1.00 for each of two searches 
and approximately $1.00 in increased administrative costs for 
downloading and forwarding the information). Therefore, the 
estimated total annual cost for all transfer agents is $750,000.
    The cost of compliance with proposed Rule 17a-24 should be a 
minimal amount comprised of the cost of a long distance telephone 
call and administrative costs. Transfer agents and broker-dealers 
will be required to make an annual electronic filing. Filing 
capability through EDGAR should not require any significant start-up 
expense. The Commission estimates a long distance telephone charge 
of approximately $10.00 per year and an additional administrative 
cost of approximately $50.00 per year for downloading and forwarding 
the information. Thus, at a total cost of approximately $60.00 per 
year for each recordkeeper, the total annual cost for all 
recordkeepers is estimated to be $129,000.
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    The proposed rules also require that all recordkeeping transfer 
agents (and all recordkeepers with respect to

[[Page 44257]]

proposed Rule 17a-24) maintain records necessary to demonstrate their 
compliance with the rules' requirements. This recordkeeping requirement 
is intended to provide transfer agents and broker-dealers with 
sufficient flexibility to record and to maintain necessary information 
in a manner that minimizes recordkeeping costs. The Commission will 
require that transfer agents (and all recordkeepers with respect to 
proposed Rule 17a-24) maintain the records required by the proposed 
rules for a period of not less than three years, the first year in an 
easily accessible place.
    The Commission does not anticipate that the collection of 
information will result in any significant burden to transfer agents or 
broker-dealers. The likely respondents to the proposed collection of 
information under proposed Rule 17Ad-17 will be the approximately 1500 
registered transfer agents. The likely respondents to the proposed 
collection of information under proposed Rule 17a-24 will be the 
approximately 1500 transfer agents and approximately 650 of the 
registered broker-dealers. The Commission estimates registered transfer 
agents will devote approximately five hours per year \44\ to providing 
information on lost securityholders to third party database vendors, 
totalling 7,500 hours industry-wide. The Commission estimates 
registered transfer agents and broker-dealers will devote approximately 
two hours per year to make the required annual filing under proposed 
Rule 17a-24, totalling 4300 hours industry-wide.\45\
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    \44\ Transfer agents will need to submit this information to a 
database a maximum of four times a year to insure that a search is 
made within three months of a securityholder becoming lost. Each 
download and forwarding of information should take approximately 1.2 
hours.
    \45\ Recordkeepers will submit information once a year. Each 
download and transmission of information should take approximately 
two hours.
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    The collection of information under proposed Rule 17Ad-17 and 
proposed Rule 17a-24 would be mandatory. Any information collected 
pursuant to proposed Rule 17Ad-17 or proposed Rule 17a-24 would not be 
confidential. Unless a valid Office of Management and Budget (``OMB``) 
control number is displayed, for Commission may not sponsor or conduct 
or require response to an information collection.
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to--
    (i) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information shall have practical utility;
    (ii) Evaluate the accuracy of the agency's estimate of the burden 
of the proposed collection of information;
    (iii) Enhance the quality, utility, and clarity of the information 
to be collected; and
    (iv) Minimize the burden of the collection of information on those 
who are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the Desk Officer for the 
Securities and Exchange Commission, Office of Information and 
Regulatory Affairs, Office of Management and Budget, Washington, D.C. 
20503, and should also send a copy of their comments directly to the 
Commission. OMB is required to make a decision concerning the 
collections of information between thirty and sixty days after 
publication, so a comment to OMB is best assured of having its full 
effect if OMB receives it within thirty days of publication.

VII. Burden on Competition

    The Commission believes that the proposed rules will not have a 
significant impact on transfer agent or broker-dealer competition. 
Under proposed Rule 17Ad-17, all transfer agents will be subject to the 
same specified minimum standard for reasonable care in attempting to 
locate securityholders with whom contact has been lost. Similarly, 
proposed Rule 17a-24 will require all transfer agents and broker-
dealers to submit the same information to the Commission.
    The cost of compliance with proposed Rule 17Ad-17 is minimal.\46\ 
For many transfer agents that currently conduct securityholder searches 
using an information database, proposed Rule 17Ad-17 will pose no 
additional cost. Because a transfer agent's cost of compliance 
generally is based upon the number of securityholders it must attempt 
to locate, transfers agents regardless of their size and exercising 
comparable care should incur comparable relative costs. On average, 
compliance costs should be roughly proportional to the number of 
securityholder records maintained by the transfer agent. In addition, 
the extent of the effort required by a transfer agent to meet its 
reasonable care obligations will require a balancing of cost against 
the value of assets at issue. Accordingly, larger transfer agents which 
are likely to have a greater proportion of accounts of considerable 
value, often will be required to take more extensive measures and incur 
greater costs in meeting their reasonable care obligations under 
proposed Rule 17Ad-17.
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    \46\ Supra note 43.
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    With respect to proposed Rule 17a-24, the cost of compliance also 
should be minimal.\47\ While the cost to each entity will be 
approximately the same regardless of the entities' size (i.e., the 
number of lost securityholders should not affect significantly the 
amount of time it takes to collect the information and to transmit it 
to the Commission), the total cost to each entity should be so limited 
as to not raise competition concerns.
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    \47\ Supra note 43.
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VIII. Text of the Amendments

List of Subjects

17 CFR Part 232

    Reporting and recordkeeping requirements; Securities.

17 CFR Part 240

    Transfer agents; Broker-dealers; Reporting and recordkeeping 
requirements; Securities.

    For the reasons set out in the preamble, the Commission proposes to 
amend Chapter II of Title 17 of the Code of Federal Regulations as 
follows:

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

    1. The authority citation for part 232 continues to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 77sss(a), 
78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79t(a), 80a-8, 80a-
29, 80a-30 and 80a-37.

    2. By amending Sec. 232.101 paragraph (a)(1)(iv) by revising the 
phrase ``format; and'' to read ``format;''.
    3. By amending Sec. 232.101 paragraph (a)(1)(v) by revising the 
phrase ``et seq.).'' to read ``et seq.); and''.
    4. By adding paragraph (a)(1)(vi) to Sec. 232.101 to read as 
follows:


Sec. 232.101  Mandated electronic submissions and exceptions.

    (a) * * *
    (1) * * *
    (vi) Documents filed with the Commission pursuant to Sec. 240.17a-
24 of this chapter.
* * * * *
    5. By amending Sec. 232.101(c)(11) by revising the phrase 
``Regulation;'' to read ``Regulation, other than those filed with the 
Commission pursuant to Sec. 240.17a-24 of this chapter;''

[[Page 44258]]

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    6. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
    7. By adding Sec. 240.17a-24 to read as follows:


Sec. 240.17a-24  Reports of Lost Securityholders.

    (a) Each recordkeeper shall file electronically with the Commission 
on or before May 31 of each year a list of the taxpayer identification 
numbers (e.g., social security number or employer identification 
number) of all lost securityholders for which such recordkeeper 
maintains records of ownership interests as of May 1 of such year. The 
list of lost securityholders shall include the name and telephone 
number of the appropriate person to contact at the recordkeeper.
    (b) For purposes of this section:
    (1) Lost securityholder means the holder of record of a security or 
any person from whom or on whose behalf a recordkeeper has received, 
has acquired, holds, or carries securities;
    (i) To whom two separate items of correspondence that were sent by 
first class mail by the recordkeeper at least three months apart have 
been returned as undeliverable; and
    (ii) For whom the recordkeeper has not received information 
regarding the securityholder's new address.
    (2) Recordkeeper means:
    (i) A member of a national securities exchange, a registered broker 
or dealer, or a registered municipal securities dealer which maintains 
records of securities received, acquired, held, or carried by or on 
behalf of such entity for the account of any securityholder; or
    (ii) A recordkeeping transfer agent as defined in Sec. 240.17Ad-
9(h).
    (c) Every recordkeeper shall maintain such records necessary to 
demonstrate compliance with the requirements set forth in this section. 
Such records shall be maintained for a period of not less than three 
years, the first year in an easily accessible place.
    8. By amending Sec. 240.17Ad-7 by adding paragraph (i) to read as 
follows:


Sec. 240.17Ad-7  Record retention.

* * * * *
    (i) The records required by Sec. 240.17Ad-17(c) shall be maintained 
for a period of not less than three years, the first year in an easily 
accessible place.
    9. By adding Sec. 240.17Ad-17 to read as follows:


Sec. 240.17Ad-17  Transfer agents' obligation to search for lost 
securityholders.

    (a)(1) Every recordkeeping transfer agent whose master 
securityholder file includes accounts of lost securityholders shall 
exercise reasonable care to ascertain the correct address of such 
securityholders. In exercising reasonable care to ascertain for its 
master securityholder file such lost securityholders' current address, 
each recordkeeping transfer agent shall conduct two database searches 
using at least one information database service. The transfer agent 
shall search by name (if reasonably likely to locate the 
securityholder) or taxpayer identification number (e.g., social 
security number or employer identification number). Such database 
searches must be conducted without charge to a lost securityholder and 
with the following frequency:
    (i) Within three months of such securityholder becoming a lost 
securityholder; and
    (ii) Between one year and eighteen months after the transfer 
agent's first search for such lost securityholder.
    (2) A transfer agent may not use a search method or service to 
establish contact with lost securityholders that results in a charge to 
a lost securityholder prior to completing the searches set forth in 
paragraphs (a)(1)(i) and (a)(1)(ii) of this section.

    (b) For purposes of this section:
    (1) Information database service means any automated database 
service that:
    (i) Contains addresses of United States residents including 
addresses in the geographic area in which the lost securityholder's 
last known address is located;
    (ii) Covers a reasonably broad geographic area;
    (iii) Is indexed by name or taxpayer identification number; and
    (iv) Is updated at least four times a year.
    (2) Lost securityholder means a securityholder:
    (i) To whom two separate items of correspondence that were sent by 
first class mail at least three months apart have been returned as 
undeliverable; and
    (ii) For whom the transfer agent has not received information 
regarding the securityholder's new address.
    (c) Every recordkeeping transfer agent shall maintain such records 
necessary to demonstrate compliance with the requirements set forth in 
this section.
    Dated: August 22, 1996.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21892 Filed 8-27-96; 8:45 am]
BILLING CODE 8010-10-P