Uncashed Dividend Checks – New SEC Regulation
Without a lot of fanfare the SEC added a new regulation in 2013 requiring paying agents to send a notice to shareholders who do not cash dividend checks within seven months of mail date. While yet another government rule to deal with, this one makes sense to us – and also reflects a special effort by the SEC to get it right the first time.
On January 16, 2013 the SEC published the new regulation, to be effective on March 25, 2013 and require full compliance by January 23, 2014. It was meant to implement Dodd-Frank Section 929W, within the SEC’s Regulation 240.17Ad-17.
Besides extending to broker-dealers (not just transfer agents) the obligation to search for lost security holders, it added the requirement that all paying agents send a notice to an “unresponsive payee” on “regularly scheduled” checks in the amount of $25 or more no later than 7 months after mail date. The notice can piggy-back (be inserted) within another type of mailing, as long as it stays a separate document. Alternatively it can be sent as a separate electronic communication, as long as the payee previously consented to such protocol. The SEC has estimated that 800,000 notices will be sent annually as a result of the new regulation.
The SEC was also careful to label an applicable security holder an “unresponsive payee” rather than a “missing security holder,” to avoid implying inactivity (not electing to cash a check) means the security holder has a bad address or is actually “lost.” That would have poked the hornet’s nest currently buzzing within state escheatment legislation, where some states claim entitlement to a security holder’s property just because he did not communicate with the record keeper in what the state considered a reasonable period of time, while other states wait until a security holder communication literally bounces back (twice) to constitute “lost” status. For this reason the new 17Ad-17 regulation pointedly states that it “will have no effect on state escheatment laws.”
We saw no penalty for non-compliance specified in the SEC Release, or elsewhere, but it will undoubtedly surface soon – and be “typical.” As to the burden of the new rule on record keepers, the SEC’s homework indicated it would be greater for brokers (more newly obligated to participate within this discipline) than for transfer agents, who already tend to have well-honed systems and procedures in place to send notices triggered by events like this. Indeed, spreading probably less than a third of the 800,000 annual notices over the entire U.S. stock transfer industry should represent an easily manageable effort – for, again, a worthy cause.