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.