SEC EXAMS Flags Lost Securityholder Failures

Transfer agents and broker-dealers failed to properly search for lost securityholders and notify unresponsive payees due to inadequate procedures and flawed electronic communication tracking, the SEC Division of Examinations ("EXAMS") warned.

In a Risk Alert, EXAMS reminded transfer agents and broker-dealers of their obligation to run database searches to locate lost securityholders. Paying agents must separately send written notice to payees who have not cashed checks. Examiners found multiple firms that failed entirely to conduct the required searches, provide notifications, or maintain written compliance procedures. Even when firms maintained written procedures, the Division observed that the methodologies were often inadequate, relying on non-compliant databases, setting incorrect search timeframes, or omitting basic steps for coding accounts as lost.

In practice, firms failed to identify all lost securityholders because of miscoding, and missed required timing windows for both searches and payee notifications. Some ran searches on taxpayer identification number ("TIN") and name combined, without first determining that a TIN-only search was unlikely to locate the holder. Some firms also kept no records of the searches they ran or the dates payee notices were mailed.

The alert also highlighted failures related to electronic communications, noting that firms communicating with securityholders via email did not update their coding methodologies to account for undeliverable electronic messages. As a result, securityholders were not marked as lost when emails bounced back.