Fishing in Nebraska?

States like Nebraska, Michigan, North Carolina and Virginia have recently approached corporations via Abandoned Property Experts (“APEX”), demanding audits of “lost” shareholder property kept on the companies’ transfer agent books, including what was previously turned over (“escheated”) to those states.    Is this appropriate?

Many are questioning the practice, including no less than the Securities Transfer Association (“STA”), which represents over 150 U.S.  transfer agents serving 15,000 publicly traded companies and their 100,000,000 registered shareholders.    Concerns raised about these APEX-facilitated audit requests include:

  • Why are they being initiated?  Is this just a “fishing” expedition for possible errors in past escheatment practices by issuers and their transfer agents, without any specific evidence of alleged errors?
  • Do APEX and the states realize how much work is being asked of transfer agents to comply with these audits, the cost of which might be passed back to agents’ corporate clients, directly or indirectly?
  • The duration of such audits is usually not time-limited, further exacerbating the potential cost of the audit passed back to the corporation.
  • There is evidence some of these states are not able to receive escheated property records applicable to such audits through the encryption program used by 42 reporting jurisdictions, created to ensure files can not be viewed in transit (the “HRS Pro NAUPA PGP Encryptor”).    This raises valid data security concerns about these audits.
  • Questions have also been raised as to whether APEX even has the necessary infrastructure and processing capabilities required to adequately handle the audits.

Our recommendations for issuers who receive these types of audit requests are:

  • Show the requests immediately to in-house securities counsel.    (And/or outside counsel, depending on company cost considerations.)
  • Approach industry associations that might have a policy position in effect on this matter, such as the STA and the Society of Corporate Secretaries and Governance Professionals.
  • Push back against the audit request by raising questions touched on in the list of “bullets” provided above.
  • See if the company’s current service agreement with the transfer agent already “covers” compliance with these kinds of audits under the applicable contract clause.
  • In conjunction with the previous item, talk to the company’s transfer agent and elicit its stance on the audit request.    If the audit must go forward, and “coverage” is not already provided for in the stock transfer contact, ask the transfer agent in advance what it will charge to comply with the audit, and explore how much of this cost can be mitigated by the company.

Abandoned Property is an area of shareholder services that is still an evolving frontier, attracting money-making activities of all sorts.    (See also “Deep Search” in the Term of the Month column of our home page.)  Companies should therefore feel no reluctance questioning what they see coming at them that might appear unusual, even if it looks like it is coming from an official or quasi-official source.

Stay tuned to this web site, and those of the STA and others, for more updates on this topic.    There are reasons for fishing licenses on the country’s waterways, and similar protection from aggressive state “anglers” may be required here.