[Federal Register Volume 62, Number 194 (Tuesday, October 7, 1997)]
[Rules and Regulations]
[Pages 52229-52237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26519]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-39176; File No. S7-21-96]
RIN 3235-AG99


Lost Securityholders

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission is adopting Rule 17Ad-
17 and Rule 17a-24 under the Securities Exchange Act of 1934. Rule 
17Ad-17, which is designed to address the problem of ``lost 
securityholders,'' requires transfer agents to conduct searches in an 
effort to locate lost securityholders. Rule 17a-24, which is designed 
to assist the Commission in monitoring the effects of Rule 17Ad-17, 
requires transfer agents to file information on lost securityholders 
with the Commission. The rules are designed to reduce the number of 
lost securityholders.

EFFECTIVE DATE: Secs. 240.17Ad-17 and 240.17Ad-7(i) will be effective 
December 8, 1997, and Secs. 240.17a-24 and 249b.102, the amendments to 
Form TA-2 will be effective February 4, 1998.

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant 
Director; Christine Sibille, Senior Counsel; Jeffrey Mooney, Attorney; 
or Theodore Lazo, Attorney at 202/942-4187, Office of Risk Management 
and Control, Mail Stop 5-1, Division of Market Regulation, Securities 
and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction and Background

    Transfer agents serve as the custodians of securityholder records, 
including records of securityholders' addresses, for issuers. In this 
capacity, transfer agents frequently are responsible for disseminating 
shareholder communications and dividend and interest payments. For 
various reasons, transfer agents occasionally have outdated or 
incorrect addresses for some securityholders (``lost 
securityholders'').\1\ As a result, these shareholders do not receive 
dividend and interest payments to which they are entitled. Generally, 
issuers retain custody of such dividend and interest payments, and if 
contact is not reestablished with a securityholder prior to the 
expiration of the appropriate state's escheat period, the issuer must 
turn the securityholder's assets over to the state unclaimed property 
administrator While various transfer agents attempt to locate lost 
securityholders, the extent and type of efforts used very considerably 
from one transfer agent to another.\2\ The Securities and Exchange 
Commission (``Commission'') believes that establishing minimum search 
requirements in this area will facilitate locating lost 
securityholders.
---------------------------------------------------------------------------

    \1\ For example, some securityholders do not provide a new 
address when they move.
    \2\ See Securities Exchange Act Release No. 37595 (August 22, 
1996), 61 FR 44249 (release proposing Rule 17Ad-17 and Rule 17a-24), 
note 13 (discussing the methods transfer agents currently use to 
locate lost securityholders).
---------------------------------------------------------------------------

    On August 22, 1996, the Commission issued for comment a release 
(``Proposing Release'') \3\ proposing Rule 17Ad-17 \4\ and Rule 17a-24 
\5\ under the Securities Exchange Act of 1934 (``Exchange Act'') and 
proposing amendments to Rule 17Ad-7,\6\ which were designed to address 
the problem of lost securityholders. Proposed Rule 17Ad-17 would 
require that transfer agents exercise reasonable care, including 
conducting data base searches, in an effort to locate lost 
securityholders.\7\ The proposed amendment to Rule 17Ad-7 set forth the 
retention time periods for the records relating to compliance with 
proposed Rule 17Ad-17. Proposed Rule 17Ad-24 would have required 
certain entities that hold assets for others (e.g., transfer agents and 
broker-dealers) to file annually with the Commission a list of the 
social security numbers of all lost securityholders contained in their 
records. The Proposing Release also requested comment on whether either 
the Commission or a private entity should create and operate a lost 
securityholder data base.
---------------------------------------------------------------------------

    \3\ Id. The Commission later extended the comment period 
contained in the Proposing Release. Securities Exchange Act Release 
No. 37949 (November 15, 1996), 61 FR 59046 (extending comment 
period).
    \4\ 17 CFR 240.17Ad-17.
    \5\ 17 CFR 240.17Ad-24.
    \6\ 17 CFR 240.17Ad-7.
    \7\ The Proposing Release also discussed transfer agents' 
obligations under Rule 17Ad-10 to maintain and keep current accurate 
master securityholder files (defined below in note 10), which 
include information such as securityholders' names and addresses. 
The Proposing Release concluded that maintaining accurate 
securityholder files is one of the most basic steps in addressing 
the lost securityholder problem. The Commission believes that 
conducting data base search for lost securityholders pursuant to 
Rule 17Ad-17 will enhance a transfer agent's fulfillment of its 
responsibilities under Rule 17Ad-10.
---------------------------------------------------------------------------

    The Commission received 57 comment letters from 52 commenters in 
response to the Proposing Release.\8\ The commenters in general 
expressed support for proposed Rule 17Ad-17 although several commenters 
expressed concerns about specific provisions of the proposed rule. The 
commenters in general expressed concern about proposed Rule 17a-24. The 
Commission is adopting Rule 17Ad-17 substantially as proposed but with 
some modifications to reflect commenters' views and is amending Rule 
17Ad-7 as proposed. The Commission is adopting proposed Rule 17a-24 
with substantial revisions and is making related changes to Form TA-
2\9\ In addition, the Commission has directed its staff to review the 
operations of the adopted rules after three years and to report back to 
the Commission on its findings.
---------------------------------------------------------------------------

    \8\ The Commission received comment letters from eighteen 
transfer agents, five trade associations representing transfer 
agents, five individuals, three corporations, one broker-dealer, two 
professional search firms, and eighteen government entities. A 
summary of comments has beem prepared by the staff of the Division 
of Market Regulation. The summary is included along with the comment 
letters in Public File No. S7-21-96, which is available for 
inspection and copying in the Commission's Public Reference Room, 
450 Fifth Street, NW., Washington, DC 20549.
    \9\ Form TA-2 is referenced in 17 CFR 249b.102.

---------------------------------------------------------------------------

[[Page 52230]]

II. Discussion

A. Rule 17Ad-17: Obligation to Search

    As adopted, Rule 17Ad-17 requires that transfer agents exercise 
reasonable care to ascertain the correct addresses of all lost 
securityholders in their records. At a minimum, transfer agents must 
conduct two searches using an information data base. In addition, 
transfer agents may not use any service designed to locate their lost 
securityholders that results in a charge to a securityholder until 
after the two data base searches have been conducted.
1. Definition of Lost Securityholders
    Rule 17Ad-17 generally defines a ``lost securityholder'' as a 
securityholder to whom an item of correspondence that was sent to the 
securityholder at the address in the transfer agent's master 
securityholder file has been returned as undeliverable.\10\ However, if 
a transfer agent re-sends the returned item to the securityholder 
within one month, the transfer agent has the option to delay 
classifying the securityholder as lost for purposes of Rule 17Ad-17 
until the item is again returned to the transfer agent as 
undeliverable. If and when a transfer agent receives a new address for 
a lost securityholder, either directly from the securityholder or 
through the transfer agent's own efforts, the securityholder will no 
longer be classified as lost.
---------------------------------------------------------------------------

    \10\ ``Master securityholder file'' is defined in Rule 17Ad-9(b) 
as the official list of individual securityholder accounts.
---------------------------------------------------------------------------

    Under the definition as proposed, a securityholder would have been 
classified as lost only after two separate items of correspondence 
mailed at least three months apart had each been returned as 
undeliverable. Commenters in general were opposed to a requirement that 
three months elapse between the mailing of two undeliverable items of 
correspondence, stating that this approach would increase costs by 
requiring transfer agents to initiate new coding mechanisms.\11\ In 
addition, some commenters stated that continuing to mail distributions 
to an incorrect address increases risk of loss. Commenters also noted 
that the proposed definition of lost securityholder could result in 
long delays before some shareholders are defined as lost.\12\
---------------------------------------------------------------------------

    \11\ The Proposing Release noted that the three month period was 
intended to give transfer agents time to receive any delayed change 
of address notifications prior to having to conduct searches.
    \12\ For example, if an issue does not pay dividends or 
interest, the only securityholder correspondence may be the annual 
report. In such an instance, a securityholder would not have been 
classified as lost until a year after the first correspondence had 
been returned as undeliverable.
---------------------------------------------------------------------------

    The Commission believes that the revised definition produces a more 
consistent result as to when shareholders are classified as lost.\13\ 
In addition, the Commission understands that some transfer agents have 
internal procedures whereby they promptly remail returned 
correspondence because they have found such remailing procedures to be 
beneficial in reducing the number of lost securityholders.\14\ 
Therefore, the revised definition gives transfer agents flexibility to 
delay coding a securityholder as lost until after the remailed item is 
returned as undeliverable.
---------------------------------------------------------------------------

    \13\ The revised definition avoids situations where 
securityholders of issues with quarterly mailings would have been 
defined as lost three months after a correspondence was first 
returned as undeliverable while securityholders of issues with only 
annual mailings would not have been defined as lost until a year 
after a correspondence was first returned as undeliverable.
    \14\ Transfer agents have found that some items are returned as 
a result of the deliverer's error rather than an incorrect address 
and that remailing will result in the securityholder receiving the 
item.
---------------------------------------------------------------------------

    In addition, the Commission is making minor technical amendments to 
the proposed definition of lost securityholder. For example, to take 
into account future developments in the methods used to disseminate 
shareholder communications, the rule no longer refers to returned 
correspondence that were ``sent by first class mail.''
2. Transfer Agents' Search Requirements

a. Type of Search

    Rule 17Ad-17 requires every recordkeeping transfer agent whose 
master securityholder file includes accounts of lost securityholders to 
search for such securityholders' current address using at least one 
information data base. The transfer agent's search for a lost 
securityholder must be based on the taxpayer identification number 
(``TIN'') or on the name of the lost securityholder if a search based 
on TIN is not reasonably likely to locate the lost securityholder.
    As originally proposed, the search could be based on a 
securityholder's name if such a search was reasonably likely to locate 
the lost securityholder. Commenters were divided as to the advisability 
of such provision. While most commenters agreed that TIN searches are 
more effective, some commenters argued that transfer agents should have 
the flexibility to search by name when advisable (e.g., when the TIN is 
missing or incomplete). By revising the requirement to permit name 
searches only when a TIN search is not reasonably likely to locate the 
lost securityholder (e.g., when the TIN is missing or incomplete), the 
Commission believes transfer agents are afforded sufficient flexibility 
to conduct the most effective search.

b. Time Frames for Search

    The rule as adopted also differs from the proposal with respect to 
the time frames in which the searches must be conducted. As proposed, a 
transfer agent would have had to conduct a search within three months 
of a securityholder being classified as lost. If after the first search 
the securityholder had continued to be classified as lost, the proposal 
would have required another search between 12 and 18 months after the 
initial search. Many commenters suggested that conducting an initial 
search three months after a securityholder was classified as lost was 
too soon for the data bases to be updated, and that conducting a second 
search between 12 and 18 months after the first search was too long a 
period from loss of contact.
    As adopted, a transfer agent must conduct the initial search 
between three and 12 months of a securityholder being classified as 
lost.\15\-\16\ If the lost securityholder is not found, the 
transfer agent must conduct a second search between six and 12 months 
after the initial search.
    Demonstrated below are time frames in which the second search would 
need to be conducted depending upon when the first search occurred.
---------------------------------------------------------------------------

    \15\-\16\ As discussed in the Proposing Release, the 
Commission encourages transfer agents to take immediate steps upon 
learning a shareholder's address may not be correct. Proposing 
Release, note 16. The Proposing Release discusses several techniques 
that, while not required by the rule, may be beneficial in reducing 
the number of lost securityholders for which the transfer agent must 
search. Proposing Release, note 13.

[[Page 52231]]



                                                                                                                
                Lost                   3 mos.     9 mos.    12 mos.    15 mos.    18 mos.    21 mos.    24 mos. 
                                                                                                                
                                                                                                       
(2) 1st Search                                                                                                
                1st search at:                                                                                  
                    3 mos.                                                                                      
(2)  2d Search                                                                                                
                    6 mos.                                                                                      
(2)  2d Search                                                                                                
                    9 mos.                                                                                      
(2)  2d Search                                                                                                
                    12 mos.                                                                                     
(2)  2d Search                                                                                                
                                                                                                                
                                                                                                                

The second search is intended to take advantage of address changes that 
may have been added to the data base after the initial search. The 
transfer agent must conduct these searches without charge to a lost 
securityholder.
    Under the proposed rule, the time in which transfer agents would 
have been required to conduct the first search would have depended on 
the frequency of mailings associated with an issue. (The first search 
would have had to be conducted between three and 15 months after the 
return of the first correspondence based on whether the issue had 
quarterly or annual mailings.) \17\
---------------------------------------------------------------------------

    \17\ Between three to 12 months would have elapsed between the 
first and second returned items of correspondence, and the first 
search would have had to be conducted within three months after the 
return of the second item of correspondence.
---------------------------------------------------------------------------

    Because the timing of the search requirements would have been 
dependent upon the frequency of issuers' mailings, commenters noted 
that transfer agents would not have had much flexibility in determining 
when to search for lost securityholders.
    Under the adopted rule, the first search must be conducted between 
three to 12 months after the first correspondence is returned. However, 
unlike the proposed rule, transfer agents may search at any time during 
this period. As a result, transfer agents' search requirements are 
triggered within basically the same timeframes whether there are 
quarterly or annual mailings, but transfer agents will be better able 
to use their discretion as to the most appropriate time to conduct the 
searches. Additionally, this revision may permit transfer agents to 
conduct more cost-effective searches by allowing transfer agents to 
bundle together many lost securityholders for submission to a data base 
service which should lower internal costs and increase the likelihood 
that transfer agents will qualify for volume discounts from data base 
services.

c. Exceptions to the Search Requirement

    In the Proposing Release, the Commission requested comment on 
whether the requirement to search for lost securityholders should apply 
only when a lost securityholder's account contained assets over some de 
minimis amount.\18\ Many commenters agreed that transfer agents should 
not be required to expend funds to search for a lost securityholder 
when the cost of a search could exceed the amount in the 
securityholder's account. Although varying de minimis amounts were 
suggested, most commenters favored a de minimis threshold of $100 per 
account.
---------------------------------------------------------------------------

    \18\ In calculating this amount, all assets in that account for 
which the transfer agent maintains records are included regardless 
of whether the transfer agent is actually in possession of the 
property. Therefore, the value of the assets in the securityholder's 
account includes dividends, interest, and other payments due to the 
securityholder and the value of any underlying assets (e.g., the 
value of securities owned by the shareholder as shown on the 
transfer agent's records).
---------------------------------------------------------------------------

    The Commission believes that there should be a de minimis exception 
from the search requirements that will allow transfer agents to forgo 
searches that would not be cost-effective. Based on what the Commission 
understands to be the low cost of data base searches,\19\ the 
Commission is amending the proposed rule to permit transfer agents to 
exclude from the search requirements any lost securityholder when the 
value of all dividend, interest, and other payments due to the 
securityholder plus the value of all assets listed in the lost 
securityholder's account is less than $25. The Commission believes that 
this exemption will reduce the economic impact of the rule on transfer 
agents while still affording sufficient protection to 
securityholders.\20\
---------------------------------------------------------------------------

    \19\ Refer to Section IV below for a discussion of the cost of 
data base searches.
    \20\ Some commenters stated that for efficiency reasons some 
transfer agents will search for all lost securityholders.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission noted that data base 
searches generally are considered a cost-effective way to locate lost 
securityholders. The Commission requested comment on the potential 
effectiveness of the rule in addressing the lost securityholder issue. 
The request was intended to elicit comment on situations where data 
base searches would not be an appropriate method of locating lost 
securityholders. One commenter requested that exemptions from the 
search requirement be created for certain categories of securityholders 
that will not be reached through an electronic data base search, 
specifically any lost securityholder (1) whose last known address is 
outside of the United States; (2) whose account has a missing or 
incomplete TIN; (3) which is not a natural person (e.g., a 
corporation); or (4) who is known to be deceased.
    Based on this request and on additional research into the 
capabilities of existing commercial data bases, the Commission has 
decided to create an exemption from the search requirements for 
securityholders for whom the transfer agent has received documentation 
of their death \21\ and an exemption for securityholders which are not 
natural persons. The Commission understands that the data bases relied 
upon by most transfer agents do not contain information on estates or 
heirs and that there is no automated method by which such information 
can be obtained. \22\ Securityholders which are not natural persons 
likewise cannot be located easily through the use of information data 
bases and comprise a minuscule percentage of the total amount of lost 
securityholders.
---------------------------------------------------------------------------

    \21\ Such documentation may consist of a report received from an 
information data base.
    \22\ The Commission has been informed that in the future some 
information data bases may be updated to include beneficiary data. 
If a low cost method of determining a deceased's beneficiary becomes 
available, the Commission may reexamine the application of search 
requirements to this category of securityholder.
---------------------------------------------------------------------------

    The Commission is not adopting the other suggested exemptions 
because data base searches for those categories of lost securityholders 
could in many cases be effective. For example, although the Commission 
understands that most data bases currently do not contain the names of 
individuals living outside of the United States, it is possible that a 
securityholder with a foreign last known address was only temporarily 
living out of the country and that a data base search will provide an 
updated domestic address.
    With respect to the commenter's request for an exemption for 
securityholders with missing or incomplete TINs, the adopted rule 
permits transfer agents to conduct a search based on a lost 
securityholder's name when a search based on a TIN is not reasonably 
likely to locate a lost

[[Page 52232]]

securityholder. Therefore, the Commission also believes that no 
exemption should be created for accounts with missing TINs.

d. Assessment of Procedures

    In the Proposing Release, the Commission requested comment 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 standard based on 
success in locating lost securityholders. Most commenters that 
addressed the issue generally did not support adopting a strict 
application of this requirement. For example, some commenters believe 
that transfer agents should not have an absolute requirement to locate 
a certain percentage of their shareholders because the results of the 
searches frequently were outside of their control. While the adopted 
rule does not specifically contain such requirements, the Commission 
believes that transfer agents should bear these concepts in mind in 
determining whether they have met their obligation to exercise 
reasonable care under Rule 17Ad-17(a). For example, if a transfer agent 
is using a data base service that routinely fails to locate any or that 
locates only a very small percentage of lost securityholders, the 
transfer agent should evaluate whether the use of such service 
constitutes the exercise of reasonable care.
3. Definition of Information Data Base
    As proposed, Rule 17Ad-17 would have defined an information data 
base as any automated data base service that (1) contains addresses of 
U.S. 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 TIN or by name, and 
(4) is updated at least four times a year. The Commission has revised 
the definition based on commenters' suggestions. The first requirement 
has been revised to require that the data base contain addresses from 
the entire United States. The second requirement has been revised to 
require that the data base contain names of at least 50% of the U.S. 
adult population. The third requirement also has been revised to 
clarify that an information data base must be indexed by TINs if a TIN 
search is used or by name if a name search is used. The fourth 
requirement is adopted as proposed. The revisions are intended to 
preclude the use of a data base that contains a small number of names 
but covers a broad geographic area or one that contains a large number 
of names but covers only a small geographic area.
    The Commission also is adopting an alternative standard that will 
provide flexibility to transfer agents in fulfilling their obligations 
to search for lost securityholders. The alternative will permit 
transfer agents to use any service to locate lost securityholders if 
that service produces comparable results to the information data base 
described above. As part of their obligation to maintain records 
discussed below, a transfer agent relying on this alternative would be 
required to develop written procedures documenting and describing the 
alternative service used.
4. Use of Professional Search Firms
    The Proposing Release discussed the current practice of some 
transfer agents to use professional search firms that charge a lost 
securityholder a fee for locating the lost securityholder's assets. As 
proposed and as adopted, Rule 17Ad-17 will prohibit a transfer agent 
from using any service to locate a securityholder that results in a 
charge to the securityholder until after the two data base searches 
required by the rule have been conducted. While a few commenters argued 
against the proposed prohibition, many commenters supported the 
provision with some arguing for additional restrictions.
    Although the more extensive search techniques employed by 
professional search firms may locate some securityholders that the data 
base searches will not locate, the charges of such firms can cost a 
securityholder a significant portion of his or her assets. The 
Commission believes that transfer agents should make efforts (i.e., the 
search provisions of Rule 17Ad-17(a)(1)) to locate lost securityholders 
before permitting services to charge them for reuniting them with their 
assets. Therefore, the Commission is adopting Rule 17Ad-17(a)(2) as 
proposed to delay transfer agents' use of professional search firms 
where the charge is assessed to the securityholder until after a 
transfer agent has completed two searches under Rule 17Ad-17.\23\
---------------------------------------------------------------------------

    \23\ Because a professional search firm that charges a fee to 
the transfer agent rather than to lost securityholders could qualify 
as an information data base search under the rule, professional 
search firms could be used to satisfy the transfer agent's search 
obligation under Rule 17Ad-17.
---------------------------------------------------------------------------

5. Verification of Securityholder
    In order to guard against delivery of distributions to an incorrect 
recipient, the Commission recommended in the Proposing Release that 
transfer agents should verify that the person at the newly obtained 
address is in fact its account holder before disbursing securities or 
funds. One commenter expressed concern that requiring a transfer agent 
to confirm a securityholder's identity may restrict the transfer 
agent's ability to correct its master securityholder file because some 
shareholders may fail to return verification forms. The language in the 
Proposing Release was not intended to mandate a particular procedure. 
Instead, it was intended to highlight the need for transfer agents to 
use care prior to disbursement of securityholder funds. Prior to 
disbursing funds or to updating their master securityholder files, 
transfer agents should determine whether such action is appropriate 
based on all relevant factors.

B. Rules 17Ad-7 and 17Ad-17: Recordkeeping Requirements

    Rule 17Ad-17 requires that all recordkeeping transfer agents 
maintain records to demonstrate their compliance with the requirements 
under the rule. Paragraph (i) is being added to Exchange Act Rule 17Ad-
7 to require that transfer agents maintain the records required by Rule 
17Ad-17 for a period of not less than three years and that transfer 
agents maintain these records in an easily accessible place during the 
first year.\24\
---------------------------------------------------------------------------

    \24\ Rule 17Ad-7 sets forth the lengths of time and the methods 
by which transfer agents must maintain the records which they are 
required to keep pursuant to Exchange Act Rules 17Ad-6, 17f-2, and 
17Ad-17.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission suggested that transfer 
agents document the date each securityholder is classified as lost and 
the date the data base searches are conducted. One commenter 
interpreted this discussion to be a requirement that such dates be 
recorded on each lost securityholder's individual account record. This 
commenter stated that this requirement could require costly systems 
upgrades and that transfer agents instead should be allowed to 
demonstrate that data base searches have been conducted by referencing 
procedures that are in place and that reasonably assure that the 
searches are conducted on a timely basis. The language in the Proposing 
Release was not intended to specify the recordkeeping method to be used 
by transfer agents. Rather it was intended to provide flexibility to 
transfer agents to create systems that adequately demonstrate 
compliance with Rule 17Ad-17. However, the Commission does not believe 
that referencing

[[Page 52233]]

procedures without any specific documentation demonstrating that 
searches have been appropriately conducted is adequate.
    The Commission also is adding language to Rule 17Ad-17 to clarify 
that transfer agents must maintain written procedures on how they will 
comply with the rule. The amendment to the rule is intended to give 
transfer agents more guidance on what the minimum recordkeeping 
requirements are while still providing flexibility to determine the 
most efficient method of demonstrating compliance with the requirements 
of the rule.

C. Rule 17a-24: Lost Securityholder Data

    In the Proposing Release, the Commission also discussed the 
creation of a data base that would contain information (e.g., TINs) on 
all lost securityholders. Proposed Rule 17a-24 would have required 
certain entities that hold assets for others (e.g., transfer agents and 
broker-dealers) to file annually with the Commission a list of the TINs 
of all lost securityholders contained in their records. The Commission 
also requested comment on whether the Commission or its delegee should 
create and operate a lost securityholder data base or whether the 
Commission should release the information it received under Rule 17a-24 
to the public to permit private entities to create data bases.
    Most commenters were opposed to the creation of a lost 
securityholder data base. Many commenters believed that the data base 
would result in a loss of privacy for securityholders. Other commenters 
suggested that the data base could result in fraudulent claims. 
Finally, some commenters opined that the data base would be of limited 
utility because it would require that securityholders take the 
initiative to discover whether they had any unclaimed assets.
    In response to concerns expressed by commenters, the Commission has 
determined to adopt proposed Rule 17a-24 with revisions that will only 
require the reporting of certain aggregate data. As noted in the 
Proposing Release, the Commission believes that there is a need to 
gather data on lost securityholders in order to obtain better 
information as to the extent to which lost securityholders are not 
receiving assets to which they are entitled and to assess the 
effectiveness of search techniques employed by transfer agents.\25\ 
Similar to the proposed rule, the final rule will require each 
recordkeeping transfer agent to file annually with the Commission 
information on lost securityholders contained in the transfer agent's 
records.\26\ However, the Commission has determined to require transfer 
agents to submit only aggregate data regarding the accounts of lost 
securityholders instead of the individual data that would have been 
required by proposed Rule 17a-24. This aggregate information would have 
been available by totaling the information that would have been 
required by proposed Rule 17a-24 or currently is readily accessible by 
transfer agents.
---------------------------------------------------------------------------

    \25\ 61 FR at 44252-44253.
    \26\ 61 FR at 44253.
---------------------------------------------------------------------------

    Specially, the Commission is revising proposed Rule 17a-24 to 
require registered transfer agents to disclose the aggregate number of 
lost securityholder accounts as of June 30 of each year and the 
percentage of total accounts represented by such lost securityholder 
accounts. These figures would be reported for specified periods of 
time: one year or less, three years or less, five years or less, or 
greater than five years.\27\ The Commission also is requiring 
information on lost securityholder accounts that escheat to state 
unclaimed property administrators on an annual basis. To facilitate the 
reporting of this information, the Commission is amending Exchange Act 
Form TA-2,\28\ the annual report of registered transfer agents. The 
Commission believes that this will be the least burdensome and most 
efficient way for transfer agents to comply with the revised rule.
---------------------------------------------------------------------------

    \27\ The Commission requested comment in the Proposing Release 
on whether the filing requirement should include information 
concerning the length of time securityholders have been lost. 61 FR 
at 44253.
    \28\ Pursuant to Exchange Act Rule 17Ac2-2, registered transfer 
agents are required to file an annual report on Form TA-2 by August 
31 of each calendar year. 17 CFR 240.17Ac2-2.
---------------------------------------------------------------------------

    The Commission believes that revised Rule 17a-24 is preferable to 
the rule as proposed at this time. The aggregate information required 
by the adopted rule should, as a result of Rule 17Ad-17, be readily 
available to transfer agents. Moreover, the collection of aggregate 
data, rather than taxpayer identification numbers or other personal 
data, ameliorates privacy concerns raised by some commenters. In 
addition to not requiring individual data, the revised rule will enable 
the Commission to better monitor the effectiveness of Rule 17Ad-17 over 
time and determine whether additional measures are necessary to find 
lost securityholders. Finally, the Commission has narrowed the scope of 
the rule. Unlike the proposed rule which would have applied to any 
recordkeeping broker-dealer or transfer agent, as adopted Rule 17a-24 
applies only to recordkeeping transfer agents. The Commission believes 
that a narrower focus is preferable at this time.

III. Regulatory Flexibility Analysis

    The following discussion summarizes the Commission's Final 
Regulatory Flexibility Analysis (``FRFA'') in accordance with the 
Regulatory Flexibility Act (``RFA'') \29\ in connection with Rule 17Ad-
17, Rule 17a-24, and the related amendments to Rule 17Ad-7 adopted 
today. A complete copy of the FRFA may be obtained by contacting 
Theodore Lazo, Attorney, Division of Market Regulation, U.S. Securities 
and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549 at 
202/942-4187.
---------------------------------------------------------------------------

    \29\ 5 U.S.C. 601-612.
---------------------------------------------------------------------------

    The FRFA explains both the need for and the objectives of the rules 
adopted by the Commission. As set forth in greater detail in the FRFA, 
the adopted rules with establish minimum standards for all transfer 
agents with respect to lost securityholders and may help the Commission 
to monitor the effectiveness of these standards. The FRFA further 
explains that the Commission believes that imposing an affirmative 
obligation on transfer agents to search for lost securityholders is in 
the public interest and will enhance investor protection.
    The FRFA also (i) summarizes the significant issues raised by 
public comments in response to the Commission's Initial Regulatory 
Flexibility Analysis (``IRFA''), (ii) summarizes the Commission's 
assessment of such issues, and (iii) states any changes made in the 
proposed rules as a result of such comments. As noted in the FRFA, none 
of the comment letters received related directly to the IRFA, but seven 
commenters supplied data on the costs of proposed Rule 17Ad-17.\30\ As 
discussed in the FRFA, the Commission believes that most of this cost 
data is overstated because it includes costs not created by the rule. 
The Commission also believes that the revisions to proposed Rule 17Ad-
17 (e.g., the extended time frames for conducting searches and the 
exceptions to the search requirements) will eliminate any excess costs 
of compliance with the rule that commenters contended would arise. The 
FRFA also notes that Rule

[[Page 52234]]

17a-24 has been revised to minimize the costs to all transfer agents.
---------------------------------------------------------------------------

    \30\ The cost data that the Commission received is discussed 
more fully in Section IV below.
---------------------------------------------------------------------------

    The FRFA also provides a description of and an estimate of the 
number of small entities to which the rule will apply. The FRFA states 
that the Commission estimates that 413 registered transfer agents 
qualify as ``small entities'' and will be subject to the requirements 
of the rule.
    As required by the RFA, the FRFA describes the projected reporting, 
recordkeeping, and other compliance requirements of the rule and 
includes as estimate of the classes of small entities that will be 
subject to the requirements and the type of professional skills 
necessary for preparation of the reports or records. As discussed 
above, Rule 17Ad-17 does not require any specific type of recordkeeping 
other than that which is necessary to demonstrate compliance with the 
rule, including establishing written procedures with respect to 
compliance with the rule. The FRFA states that the Commission believes 
that Rule 17Ad-17 as adopted provides sufficient flexibility for all 
transfer agents, including transfer agents which are small entities, to 
maintain records in the most cost-effective manner. The FRFA also 
states that the Rule 17a-24 as adopted will require transfer agents to 
report aggregate data regarding their lost securityholder accounts and 
that the Commission believes that such records will be readily 
available to transfer agents.
    The FRFA also describes the steps the Commission has taken to 
minimize the significant economic impact on small entities consistent 
with the stated objectives of applicable statutes (e.g., alternative 
standards for small entities). As discussed further in the FRFA, the 
Commission has amended proposed Rule 17Ad-17 to provide additional 
flexibility to all transfer agents, including smaller transfer agents. 
In addition, the Commission has attempted to devise the most reasonable 
and simplest approach that would afford transfer agents as affective 
means to reduce the number of lost securityholders. The FRFA further 
explains that the Commission requested comment on the adoption of a 
requirement that transfer agents use search techniques based on their 
periodic assessment or a requirement that transfer agents' search 
procedures meet a performance based standard. In light of the comments 
received on the issue, the Commission is not adopting a periodic 
assessment requirement or a performance based standard. However, the 
Commission has revised the proposed rule to permit transfer agents to 
use any combination of services to local lost securityholders that 
provides a comparable result to an information data base.
    As detailed in the FRFA, the Commission has decided not to create 
an exception to Rule 17Ad-17 for small entities. The FRFA explains that 
the Commission believes that any increased costs incurred by small 
entities because of the rule will be reasonable and are justified by 
the necessity to ensure that all securityholders receive the same level 
of investor protection. While the Commission has decided not to create 
an exception to the rule for small entities, the adopted rule does 
provide a de minimis exception for lost securityholders whose accounts 
hold assets of less than $25. The Commission believes that small 
transfer agents will likely rely on the de minimis exception more than 
large transfer agents.\31\
---------------------------------------------------------------------------

    \31\ The Commission understands that small transfer agents tend 
to provide services to issuers with smaller prices per share. On 
occasion, when shareholders sell their positions, they fail to 
completely close out their account. As a result, they may leave an 
account holding only a few shares or the most recent dividend 
payment. Because a few shares of a smaller issuer is more likely to 
be under the de minimis amount than a few shares of a larger issuer, 
the Commission believes that the de minimis exception may be more 
beneficial to small transfer agents. Some large transfer agents also 
have stated that because it is more cost efficient to search for all 
of their lost securityholders than to segregate out the small 
accounts, they probably will not use the exemption.
---------------------------------------------------------------------------

    With respect to Rule 17a-24, the FRFA notes that the Commission has 
amended the proposed rule to reduce the reporting burden on all 
transfer agents and to minimize the compexity and operational burden of 
the requirements. Finally, the Commission states that any increased 
costs are justified by the need to monitor the effectiveness of Rule 
17Ad-17.
    Based on the analysis contained in the FRFA, the Commission 
believes that the adopted rules will not adversely affect small 
entities and include sufficient regulatory flexibility for compliance 
to minimize the impact on small entities. The FRFA is available for 
public inspection in File No. S7-21-96, and a copy may be obtained by 
contacting Theodore Lazo, U.S. Securities and Exchange Commission, 450 
Fifth Street, NW, Mail Stop 5-1, Washington, DC 20549.

IV. Costs and Benefits of the Rules and Their Effects on 
Competition, Efficiency, and Capital Formation

    Section 23(a)(2) of the Exchange Act \32\ requires the Commission, 
in adopting rules under the Exchange Act, to consider the competitive 
effects of such rules and to make a determination whether any burden on 
competition is necessary or appropriate in furthering the purposes of 
the Exchange Act. Furthermore, section 3 of the Exchange Act \33\ as 
amended by the recently enacted National Securities Markets Improvement 
Act of 1996 (``Markets Improvement Act'') \34\ provides that whenever 
the Commission is engaged in rulemaking and is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, the Commission also shall consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78w(a)(2).
    \33\ 15 U.S.C. 78c.
    \34\ Pub. L. 104-290, section 106, 110 Stat. 3416 (1996).
---------------------------------------------------------------------------

    The Commission has considered Rule 17Ad-17 and Rule 17a-24 in light 
of the standards cited in sections 3 and 23(a)(2) of the Exchange Act 
and believes that for the reasons stated herein, the adoption of the 
rules will (i) promote efficiency for securityholder recordkeeping by 
subjecting all transfer agents to the same flexible rules governing 
searches for lost securityholders and reporting information to the 
Commission related to such searches, (ii) not adversely affect capital 
formation because it relates solely to post-issuance activity, and 
(iii) not impose any burden on competition not necessary or appropriate 
in furtherance of the Exchange Act.
    In the Proposing Release, the Commission stated its view that the 
proposed Rule 17Ad-17 would not have a significant impact on transfer 
agent competition. 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. As discussed below, 
the cost of compliance with the proposed rule is minimal, and for many 
transfer agents that currently conduct securityholder searches using an 
information data base, the proposed rule will impose no additional 
cost. Because a transfer agent's cost of compliance generally is based 
upon the number of securityholders it must attempt to locate, transfer 
agents, regardless of their size, should incur comparable relative 
costs in exercising comparable care. On average, compliance costs 
should be roughly proportional to the number of securityholder records 
maintained by the transfer agent.
    One commenter stated that the rule as proposed could have an 
anticompetitive effect because the costs could cause additional 
transfer agents to abandon an

[[Page 52235]]

already contracting market. However, this commenter did not provide any 
detail as to the burden created by the rule or why such burden should 
disproportionately affect certain transfer agents. The Commission 
believes that the rule as adopted has been drafted so as to provide the 
maximum flexibility to transfer agents to meet their obligations in the 
most cost-effective manner possible. After careful consideration of the 
commenter's views, the Commission has determined that Rule 17Ad-17 will 
not impose any burden on competition not necessary or appropriate in 
furtherance of the Exchange Act.
    In the Proposing Release, the Commission estimated compliance costs 
to the industry of approximately $750,000, based on an estimated cost 
of $3.00 per account and a total estimated 250,000 lost securityholder 
accounts. Based on more recent data obtained from several large 
transfer agents, the Commission has revised its cost estimate per 
account to $3.38 the first year and $1.79 per account in the following 
years. Significantly, based on its most recent information, the 
Commission now believes that there may be as many as 3 million lost 
securityholder accounts. Due primarily to this change in estimated lost 
securityholder accounts, the Commission's revised estimate of the 
aggregate costs to the industry are one time compliance costs of $4.6 
million and annual compliance costs of $5.2 million.
    The Commission received seven comment letters that provided 
specific cost estimates. One commenter estimates (assuming one search 
and match) that the cost of locating an account will be approximately 
$6.00, which includes out-of-pocket postage, staff, and computer time. 
A second commenter states that vendor prices for data base searches may 
vary widely and that the actual cost per account will range from $5.00 
to $12.00.\35\ A third commenter estimates an aggregate cost of as much 
as $4.75 for each lost securityholder and total initial programming 
costs of $150,000.\36\ Two commenters estimate that charges from firms 
for data base searches range from $2.00 per account to approximately 
$1.00 per account for tape files. Another commenter anticipates that 
the costs of complying with the rule will exceed $100,000 in additional 
labor costs together with software and hardware costs each year. 
Another commenter estimates that the cost per account for using an 
information data base ranges from less than $.10 when using a CD ROM to 
as much as $1.70 to use a third party vendor data base.
---------------------------------------------------------------------------

    \35\ The commenter's estimates include the cost of the data base 
search itself plus such items as system processing expenses to 
generate the search and to receive the matched file from the data 
base vendor; printing and mailing expenses; handling and other 
related charges for returned items; and expenses for replacement of 
uncashed checks and lost securities.
    \36\ The estimate of $4.75 is based on postage, data base 
charges, and an increase in processing staff by two full time 
positions. Currently, this commenter conducts periodic searches for 
its lost securityholders.
---------------------------------------------------------------------------

    The Commission believes that the estimates higher than the 
Commission's estimate of $3.38 per lost account overstate the costs 
involved because the figures include expenses not related to the rule 
or which are required already as a part of the transfer agent's duties 
(e.g., the cost of shareholder mailings). Furthermore, the Commission 
believes that compliance with the rule as it is being adopted will not 
require transfer agents to incur any substantial costs with respect to 
additional labor, hardware, or software because the rule's requirements 
regarding coding securityholders as lost are consistent with current 
state escheatment laws. Such state laws also require transfer agents to 
be able to produce information on lost securityholders for annual 
filings with the state, and therefore transfer agents' computer systems 
currently should be capable of producing lists of lost securityholders 
to provide to the data bases. Thus, the Commission believes that 
transfer agents' current computer systems should not require 
significant changes in order to comply with the rule.
    Further, the Commission has amended the proposal so as to lower the 
cost of compliance with the rule. For example, the Commission has 
created a de minimis exception to the rule because searches for 
accounts with lesser values would not produce as great a benefit (i.e., 
the cost of locating such securityholders would be a much larger 
percentage of the assets to be returned). In addition, the Commission 
has amended the rule to be more consistent with current state law 
requirements by eliminating the requirement that three months elapse 
between two mailings prior to coding a securityholder as lost. 
Accordingly, the Commission is retaining its estimate of $3.38 per 
account in the first year and $1.79 per account in the following years.
    The Commission believes that the cost of the rule will be 
outweighed by its benefits. The rule will create a uniform standard 
applicable to all transfer agents thus ensuring that all investors have 
the opportunity to the reunited with their assets.\37\ In addition, the 
rule will guarantee that transfer agents make at least two attempts to 
locate lost securityholders before forwarding names to a search firm 
that may result in substantial charges to the securityholder. Thus, the 
rule should help investors recover a greater percentage of their 
assets.
---------------------------------------------------------------------------

    \37\ Some transfer agents currently attempt to locate lost 
securityholders, but the extent and type of efforts used vary 
greatly among transfer agents. In some cases, transfer agents 
forward the names of lost securityholders directly to professional 
search firms, in which case the securityholder must pay a fee to 
regain its assets. In other cases, the transfer agent searches for 
lost securityholders only if the search are authorized and paid for 
by the issuer.
---------------------------------------------------------------------------

    Based on comments received, the Commission believes that the number 
of lost securityholders compared to total accounts held by transfer 
agents is small, approximately 1.34%. However, the actual dollar amount 
of those assets can be significant. The Commission believes that the 
total value of assets held in accounts coded as ``lost'' may in fact 
exceed $450 million.\38\
---------------------------------------------------------------------------

    \38\ The data cited in this paragraph is based on a limited 
informal survey of several large transfer agents.
---------------------------------------------------------------------------

    The Commission believes that Rule 17Ad-17 mandates a cost-effective 
means for locating lost securityholders. Because of the de minimis 
exception, transfer agents are not required to search for lost 
securityholders unless their accounts are worth $25 or more. The 
Commission believes that the rate of success for data base searches is 
at least 60%.\39\ Thus, even if every account of lost securityholders 
was worth only $25, the rule would provide an average benefit of $15 
per lost securityholder account (i.e., 60% of $25). This estimated 
benefit is larger than any commenter's estimate of the per account cost 
of data base searches.\40\ Futhermore, because the value of many 
accounts will exceed $25, the Commission expects that the actual 
benefit will be higher.
---------------------------------------------------------------------------

    \39\ The Commission staff contacted several transfer agents to 
obtain an estimated success rate. Only one of the transfer agents 
contacted currently uses data base searches to find lost 
securityholders. That transfer agent, which has been conducting 
searches on a monthly basis for over a year, stated that its success 
rate using data base searches is never less than 75% and sometimes 
is as high as 94%. For purposes of the cost-benefit analysis, the 
Commission is assuming a 60% success rate in order to be 
conservative.
    \40\ One commenter stated that the per account cost could be as 
high as $12.00. However, as discussed above, the Commission believes 
that this estimate includes many costs not created by the rule. 
Also, as noted above, the Division of Market Regulation estimates 
the average cost of data base searches required by the rule will 
total only $3.38 per account in the first year and $1.79 per account 
in the following years.
---------------------------------------------------------------------------

    The Commission has considered the substantial likely benefits that 
investors

[[Page 52236]]

will receive from adoption of the rule and the additional cost the rule 
will impose on transfer agents. The Commission has decided to adopt the 
rule given the lack of consistent standards currently in effect with 
respect to lost securityholders and the relatively minor cost per 
account imposed by the rule. In consideration of cost, the Commission 
has designed the final rule to give transfer agents maximum flexibility 
to comply with the rule's requirements and to minimize their search and 
recordkeeping expenses.
    Rule 17a-24 as adopted differs from the proposed rule. Because the 
adopted rule requires that information be reported on a form that all 
transfer agents subject to the rule are required to file, the rule 
should not create an additional filing burden. In addition, the 
information that the reporting transfer agents must file should be 
currently available to such transfer agents.\41\ Thus, because the rule 
should not create any significant costs to transfer agents, the 
Commission has determined that Rule 17a-24 will not impose any burden 
on competition not necessary or appropriate in furtherance of the 
Exchange Act.
---------------------------------------------------------------------------

    \41\ Transfer agents must record which of their securityholders 
are lost and the date that such securityholders become lost in order 
to comply with state escheatment laws.
---------------------------------------------------------------------------

    In addition, the Commission believes that the benefits of the rule 
justify the costs. The benefits of the rule are to provide the 
Commission with information to determine whether transfer agents are 
more successful in locating lost securityholders and, therefore, 
whether Rule 17Ad-17 is effective. The costs of compliance with Rule 
17a-24 should be limited to the costs involved in compiling the 
information required to be reported once a year.

V. Paperwork Reduction Act

    As set forth in the Proposing Release, Rule 17Ad-17 and Rule 17a-24 
contain collections of information within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\42\ Accordingly, the collection of 
information requirements contained in the rules and related amendments 
were submitted to the Office of Management and Budget (``OMB'') for 
review and were approved by OMB which assigned the following control 
numbers: Rule 17Ad-17, control number 3235-0469; and Rule 17a-24, 
control number 3235-0470.\43\ The collection of information 
requirements are in accordance with Section 3507 of the PRA.\44\ An 
agency may not conduct or sponsor and a person is not required to 
respond to a collection of information unless the agency displays a 
valid OMB control number.
---------------------------------------------------------------------------

    \42\ 44 U.S.C. 3501 et seq.
    \43\ Rule 17Ad-7 was previously submitted to OMB, which approved 
the rule and assigned the following control number 3235-0136.
    \44\ 44 U.S.C. 3507.
---------------------------------------------------------------------------

    The collections of information under Rule 17Ad-17, Rule 17a-24, and 
Rule 17Ad-7 are mandatory. As described in more detail above and in the 
Proposing Release, the collections of information are 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, to reduce significantly the number of lost 
securityholders and for the Commission to monitor compliance with the 
rule. The Commission may review this information during periodic 
examinations or with respect to investigations. The records required to 
be filed with the Commission and any records required to be kept 
pursuant to these rules that are requested by and submitted to the 
Commission will be kept confidential to the extent permitted by the 
Freedom of Information Act \45\ and the Privacy Act of 1974.\46\
---------------------------------------------------------------------------

    \45\ U.S.C. 552.
    \46\ 5 U.S.C. 552a.
---------------------------------------------------------------------------

    Based upon further review of the disclosure and recordkeeping 
changes required by Rule 17Ad-7, the Commission is retaining its burden 
estimates for the collection of information under that rule. Thus, the 
description and estimated burden of the collection of information 
requirement under Rule 17Ad-7 have not changed and are set forth in the 
Proposing Release.
    Originally, the Commission estimated compliance costs of Rule 17Ad-
17 to the industry of approximately $750,000, based on an estimated 
cost of $3.00 per account and a total estimated 250,000 lost 
securityholder accounts. Based on comments received questioning the 
Commission's original burden estimate, the Commission obtained more 
recent data from several large transfer agents. As a result, the 
Commission has revised its cost estimate per account to $3.38 the first 
year and $1.79 per account in the following years. Significantly, based 
on its most recent information, the Commission now believes that there 
may be as many as 3 million lost securityholder accounts. Due primarily 
to this change in estimated lost securityholder accounts, the 
Commission's revised estimate of the aggregate costs to the industry 
are one time compliance costs of $4.6 million and annual compliance 
costs of $5.2 million.
    Due to the changes in Rule 17a-24 as adopted and the corresponding 
changes on Form TA-2, the Commission will be resubmitting its 
collection of information requirement to OMB for review and approval.

VI. Statutory Basis

    Pursuant to section 17A(d)(1) of the Exchange Act, 15 U.S.C. 78a-
1(d)(1), the Commission amends Rule 17Ad-7 and Form TA-2 and adopts 
Rule 17Ad-17 and Rule 17a-24 in Chapter II of Title 17 of the Code of 
Federal Regulations.

List of Subjects in 17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements; Securities; Transfer 
agents.

Text of the Amendments

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

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

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

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78k, 78k-l, 
781, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 79q, 
79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless 
otherwise noted.
* * * * *
    2. By adding Sec. 240.17a-24 to read as follows:


Sec. 240.17a-24  Reports of lost securityholders.

    (a) Each recordkeeping transfer agent shall file with the 
Commission on Form TA-2 (17 CFR 249b.102) the following aggregate 
information with respect to lost securityholder accounts contained on 
such transfer agent's master securityholder files:
    (1) The total number of lost securityholder accounts and the 
percentage of lost securityholder accounts compared to total number of 
accounts contained on the transfer agent's master securityholder files.
    (2) The information required by paragraph (a)(1) of this section 
shall be provided separately for securityholders lost one year or less, 
three years or less, five years or less, and more than five years and 
for securityholders whose assets which have escheated to unclaimed 
property administrators within the last calendar year.

[[Page 52237]]

    (b) For purpose of this section, lost securityholder means a 
securityholder:
    (1) To whom an item of correspondence that was sent to the 
securityholder at the address contained in the transfer agent's master 
securityholder file has been returned as undeliverable; provided, 
however, that if such item is re-sent within one month to the lost 
securityholder, the transfer agent may deem the securityholder to be a 
lost securityholder as of the day the re-sent item is returned as 
undeliverable and
    (2) For whom the transfer agent has not received information 
regarding the securityholder's new address.
    3. Section 240.17Ad-7 is amended 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.
    4. Section 240.17Ad-17 is added 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 addresses of such 
securityholders. In exercising reasonable care to ascertain for its 
master securityholder file such lost securityholders' current 
addresses, each recordkeeping transfer agent shall conduct two data 
base searches using at least one information data base service. The 
transfer agent shall search by taxpayer identification number or by 
name if a search based on taxpayer identification number is not 
reasonably likely to locate the securityholder. Such data base searches 
must be conducted without charge to a lost securityholder and with the 
following frequency:
    (i) Between three and twelve months of such securityholder becoming 
a lost securityholder and
    (ii) Between six and twelve 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 
paragraph (a)(1) of this section.
    (3) A transfer agent need not conduct the searches set forth in 
paragraph (a)(1) of this section for a lost securityholder if:
    (i) It has received documentation that such securityholder is 
decreased or
    (ii) The aggregate value of assets listed in the lost 
securityholder and all securities owned by the lost securityholder as 
recorded in the transfer agent's master securityholder files, is less 
than $25; or
    (iii) The securityholder is not a natural person.
    (b) For purposes of this section:
    (1) Information data base service means either:
    (i) Any automated data base service that contains addresses from 
the entire United States geographic area, contains the names of at 
least 50% of the United States geographic area, contains the names of 
at least 50% of the United States adult population, is indexed by 
taxpayer identification number or name, and is updated at least four 
times a year; or
    (ii) Any service or combination of services which produces results 
comparable to those of the service described in paragraph (b)(1)(i) of 
this section in locating lost securityholders.
    (2) Lost securityholder means a securityholder:
    (i) To whom an item of correspondence that was sent to the 
securityholder at the address contained in the transfer agent's master 
securityholder file has been returned as undeliverable; provided, 
however, that if such item is re-sent within one month to the lost 
securityholder, the transfer agent may deem the securityholder to be a 
lost securityholder as of the day the resent item is 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 records to 
demonstrate compliance with the requirements set forth in this section 
which shall include written procedures which describe the transfer 
agent's methodology for complying with this section.

PART 249b--FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934

    5. The authority citation for part 249b continues to read in part 
as follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
    Note: Form TA-2 does not and the amendments will not appear in 
the Code of Federal Regulations.


Sec. 249b.102  [Form TA-2 Amended]

    6. Form TA-2 (referenced in Sec. 249b.102) is amended by adding 
paragraph 8 to Instruction I.A. to read as follows:

Form TA-2

* * * * *
    I. General Instruction for Filing and Amending Form TA-2.
    A. * * *
    8. ``Lost securityholder'' is defined in Rule 17a-24(b)(1) (17 CFR 
240.17a-24(b)(1)).
 * * * * *


Sec. 249b.102  [Form TA-2 Amended]

    7. Form TA-2 (referenced in Sec. 249b.102) is amended by adding 
paragraph c to Question 4 to read as follows:

Form TA-2

* * * * *
    4. * * *
    c. (i) Number of lost securityholder accounts and (ii) percentage 
of total accounts represented by lost securityholder accounts as of 
June 30 for:

Accounts of securityholders lost one year or less:---------------------
Accounts of securityholders lost three years or less:------------------
Accounts of securityholders lost five years or less:-------------------
Accounts of securityholders lost more than five years:-----------------
Accounts of securityholders which have escheated to states within the 
year ended June 30:----------------------------------------------------
* * * * *
    Dated: October 1, 1997.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-26519 Filed 10-6-97; 8:45 am]
BILLING CODE 8010-01-M