
[Federal Register Volume 76, Number 58 (Friday, March 25, 2011)]
[Proposed Rules]
[Pages 16707-16712]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-6940]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-64099; File No. S7-11-11]
RIN 3235-AL11


Rule 17Ad-17; Transfer Agents', Brokers', and Dealers' Obligation 
To Search for Lost Securityholders; Paying Agents' Obligation To Search 
for Missing Securityholders

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'') amended the Securities Exchange Act of 1934 
(``Exchange Act'') by adding a subsection entitled, ``Due Diligence for 
the Delivery of Dividends, Interest, and Other Valuable Property 
Rights.'' The amendment directs the Securities and Exchange Commission 
(``Commission'') to revise Exchange Act Rule 17Ad-17, ``Transfer 
Agents' Obligation to Search for Lost Securityholders'' to: extend to 
brokers and dealers the requirement of Rule 17Ad-17 to search for lost 
securityholders; add to Rule 17Ad-17 a requirement that ``paying 
agents'' notify ``missing security holders'' in writing that the paying 
agent has sent the missing security holder a check that has not yet 
been negotiated; add to Rule 17Ad-17 an exclusion for paying agents 
from the notification requirements when the value of the not yet 
negotiated check is less than $25; and add to Rule 17Ad-17 a provision 
clarifying that the written notification requirements shall have no 
effect on State escheatment laws. The amendment also requires the 
Commission to ``adopt such rules, regulations, and orders necessary to 
implement this subsection no later than 1 year after the date of 
enactment of this subsection.'' The Commission is publishing for 
comment proposed amendments to Rule 17Ad-17 to implement the statutory 
requirements.

DATES: Comments should be received on or before May 9, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an e-mail to rule-comments@sec.gov and include File 
Number S7-11-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov) and follow the instructions for submitting 
comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-11-11. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
publicly available.

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant 
Director, or Thomas C. Etter, Jr., Special Counsel, at (202) 551-5710, 
Division of Trading and Markets, Securities and Exchange Commission, 
100 F Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On July 21, 2010, the President signed the Dodd-Frank Act into 
law.\1\ The Dodd-Frank Act was enacted to, among other things, promote 
the financial stability of the United States by improving 
accountability and transparency in the financial system.\2\ Title IX of 
the Dodd-Frank Act provides the Commission with new tools to protect 
investors and improve the regulation of securities.\3\
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, 124 Stat. 1376 (2010).
    \2\ See id. at Preamble.
    \3\ See id. Sec.  901 (``This section may be cited as the 
`Investor Protection and Securities Reform Act of 2010'.''); Title 
IX (``Investor Protections and Improvements to the Regulation of 
Securities'').
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    Section 929W of the Dodd-Frank Act added subsection (g) to Section 
17A of the Exchange Act (``Section 17A(g)''), which requires the 
Commission to revise Rule 17Ad-17 under the Exchange Act (``Rule 17Ad-
17'') \4\ to extend the rule's requirement that transfer agents search 
for ``lost securityholders'' to brokers and dealers.\5\
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    \4\ 17 CFR 240.17Ad-17.
    \5\ Rule 17Ad-17(b)(2) defines a ``lost securityholder'' to mean 
``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.''
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    Section 17A(g) further directs the Commission to revise Rule 17Ad-
17 to provide a requirement that the ``paying agent provide a single 
written notification to each missing security holder that the missing 
security holder has been sent a check that has not yet been 
negotiated.'' \6\ Under Section 17A(g), written notification must be 
sent to a missing security holder no later than seven months after the 
sending of the not yet negotiated check.\7\
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    \6\ Section 17A(g)(1)(A), 15 U.S.C. 78q-1(g)(1)(A). We note that 
Congress, in drafting Exchange Act Section 17A(g), used a two-word 
formulation of the term ``security holder.'' In Rule 17Ad-17, 
however, there is a one-word formulation of the term 
``securityholder.'' For the sake of consistency within Rule 17Ad-17, 
we are proposing to use the term ``missing securityholder'' in Rule 
17Ad-17. Throughout this release, we have used the term 
``securityholder'' when discussing Rule 17Ad-17, and we have used 
the term ``security holder'' when discussing Section 929W of the 
Dodd-Frank Act or Section 17A(g) of the Exchange Act.
    \7\ Id. Section 17A(g) provides that written notification may be 
sent along with a check or other mailing subsequently sent to the 
missing security holder.
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    Section 17A(g)(1)(D)(ii) defines ``paying agent'' to include ``any 
issuer,

[[Page 16708]]

transfer agent, broker, dealer, investment adviser, indenture trustee, 
custodian, or any other person that accepts payments from the issuer of 
a security and distributes the payments to the holders of the 
security.'' \8\ In addition, Section 17A(g)(1)(D)(i) provides that ``a 
security holder shall be considered a `missing security holder' if a 
check is sent to the security holder and the check is not negotiated 
before the earlier of the paying agent sending the next regularly 
scheduled check or the elapsing of 6 months after the sending of the 
not yet negotiated check.'' \9\
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    \8\ Section 17A(g)(1)(D)(ii), 15 U.S.C. 78q-1(g)(1)(D)(ii).
    \9\ Section 17A(g)(1)(D)(i), 15 U.S.C. 78q-1(g)(1)(D)(i).
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    Section 17A(g)(1)(B) and (C) also require that the revisions to the 
rule: (i) Provide an exclusion for paying agents from the notification 
requirements when the value of the not yet negotiated check is less 
than $25 and (ii) add a provision to make clear that the notification 
requirements imposed on paying agents shall have no effect on state 
escheatment laws.\10\
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    \10\ See Section 17A(g)(1)(B) and (C), 15 U.S.C. 78q-1(g)(1)(B) 
and (C).
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    Section 17A(g)(2) requires the Commission to adopt rules, 
regulations, or orders necessary to implement the provisions of Section 
17A(g)(1) no later than one year after the date of enactment of the 
Dodd-Frank Act.\11\ Section 17A(g)(2) further requires the Commission, 
in proposing such rules, to seek to minimize disruptions to the current 
systems used by or on behalf of paying agents to process payments to 
account holders and avoid requiring multiple paying agents to send 
written notification to a missing security holder regarding the same 
not yet negotiated check.\12\
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    \11\ Section 17A(g)(2), 15 U.S.C. 78q-1(g)(2).
    \12\ Id.
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II. Rule 17Ad-17

A. Background

    The Commission adopted Rule 17Ad-17 in 1997 to address situations 
where recordkeeping transfer agents lose contact with securityholders 
by requiring transfer agents to conduct database searches for lost 
securityholders.\13\ As the Commission noted at that time, such loss of 
contact can be harmful to securityholders because they no longer 
receive corporate communications or the interest and dividend payments 
to which they may be entitled.\14\ Additionally, their securities and 
any related interest and dividend payments to which they may be 
entitled are often placed at risk of being deemed abandoned under 
operation of state escheatment laws.\15\ This loss of contact has 
various causes, but it most frequently results from: (1) Failure of a 
securityholder to notify the transfer agent of his/her correct address, 
especially after relocating to a new address or (2) failure of the 
estate of a deceased securityholder to notify the transfer agent of the 
death of the securityholder and the name and address of the trustee for 
the estate.\16\
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    \13\ See Exchange Act Release No. 39176 (Oct. 1, 1997), 62 FR 
52229 (Oct. 7, 1997) (adopting Rule 17Ad-17).
    \14\ See id.
    \15\ See id. Generally, after expiration of a certain period of 
time, which varies from state to state but is usually three to seven 
years, an issuer or its transfer agent must remit abandoned property 
(e.g., securities and funds of lost securityholders) to a state's 
unclaimed property administrator pursuant to the state's escheatment 
laws.
    \16\ See Exchange Act Release No. 37595 (Aug. 22, 1996), 61 FR 
44249 (Aug. 28, 1996) (proposing Rule 17Ad-17).
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B. Discussion

    The proposed amendments would implement the statutory directive to 
extend the application of Rule 17Ad-17 to brokers and dealers. 
Specifically, the Commission proposes to revise paragraph (a) of Rule 
17Ad-17 to add the words ``broker, or dealer'' following the rule's 
existing references to transfer agents.\17\
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    \17\ The proposal also would amend paragraph (a)(1) of Rule 
17Ad-17 by: (i) Inserting the words ``and every broker or dealer 
that holds customer security accounts'' following the words 
``accounts of lost securityholders;'' (ii) inserting the words ``and 
each broker or dealer that holds customer security accounts'' 
following the words ``recordkeeping transfer agent;'' and (iii) 
inserting the words ``and broker or dealer'' following the words 
``The transfer agent.'' The proposal would amend paragraph (a)(2) by 
inserting the words ``, or broker or dealer'' following the words 
``transfer agent'' and paragraph (a)(3) by inserting the words ``, 
or broker or dealer'' following the words ``transfer agent'' and the 
words ``or customer security account records of the broker or 
dealer'' following the words ``master securityholder files.'' In 
addition, the proposal would amend paragraph (b)(2)(i) of Rule 17Ad-
17 by inserting ``or customer security account records of a broker 
or a dealer'' following the words ``master securityholder file'' and 
by inserting the words ``, or broker or dealer'' following the words 
``securityholder, the transfer agent.'' The proposal would amend 
paragraph (b)(2)(ii) by inserting the words ``or broker or dealer'' 
following the words ``transfer agent''.
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    The Exchange Act generally defines a ``broker'' as ``any person 
engaged in the business of effecting transactions in securities for the 
account of others,'' \18\ and a ``dealer'' as ``any person engaged in 
the business of buying and selling securities for such person's own 
account though a broker or otherwise.'' \19\ The proposed rule would 
apply to all brokers and dealers. As a practical matter, however, the 
Commission preliminarily believes that the only brokers and dealers 
that would have obligations under the amended rule would be those that 
carry securities for the accounts of ``customers'' within the meaning 
of Exchange Act Rule 15c3-3.\20\ Such brokers and dealers generally are 
referred to as ``clearing firms'' (as opposed to ``introducing firms'') 
and tend to be the larger brokerage firms.
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    \18\ Exchange Act Section 3(a)(4)(A), 15 U.S.C. 78c(a)(4)(A).
    \19\ Exchange Act Section 3(a)(5)(A), 15 U.S.C. 78c(a)(5)(A).
    \20\ 17 CFR 240.15c3-3.
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    The Commission proposes to redesignate current paragraph (c) of 
Rule 17Ad-17 as paragraph (d) of the rule, as discussed below. Proposed 
new paragraph (c) would include a requirement that a ``paying agent'' 
must provide written notification no later than seven months after the 
sending of any not yet negotiated check to each ``missing 
securityholder'' to inform the missing securityholder that such missing 
securityholder has been sent a check that has not yet been negotiated. 
Proposed paragraph (c)(2) of Rule 17Ad-17 would define ``paying 
agent,'' consistent with the definition in Section 17A(g),\21\ to 
include ``any issuer, transfer agent, broker, dealer, investment 
adviser, indenture trustee, custodian, or any other person'' that 
accepts payments from an issuer of securities and distributes the 
payments to securityholders. Proposed paragraph (c)(3) of Rule 17Ad-17 
would, again consistent with Section 17A(g),\22\ provide that a person 
would be considered a ``missing securityholder'' if a check is sent to 
the securityholder and the check is not negotiated before the earlier 
of the paying agent's sending the next regularly scheduled check or the 
elapsing of six months after the sending of the not yet negotiated 
check. Proposed paragraph (c)(4) of Rule 17Ad-17 would, as required by 
Section 17A(g),\23\ exclude a paying agent from the notification 
requirements if the value of the not yet negotiated check is less than 
$25. Proposed paragraph (c)(5) of Rule 17Ad-17 would, again as required 
by Section 17A(g),\24\ provide that the requirements of paragraph 
(c)(1) of Rule 17Ad-17 would have no effect on state escheatment laws.
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    \21\ Section 17A(g)(1)(D)(ii), 15 U.S.C. 78q-1(g)(1)(D)(ii).
    \22\ Section 17A(g)(1)(D)(i), 15 U.S.C. 78q-1(g)(1)(D)(i).
    \23\ Section 17A(g)(1)(B), 15 U.S.C. 78q-1(g)(1)(B).
    \24\ Section 17A(g)(1)(C), 15 U.S.C. 78q-1(g)(1)(C).
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    Currently, Rule 17Ad-17(c) requires that every recordkeeping 
transfer agent shall maintain records to demonstrate compliance with 
the requirements of the

[[Page 16709]]

rule.\25\ The Commission is proposing to redesignate this provision as 
paragraph (d) of the rule and to amend the paragraph to also require 
recordkeeping transfer agents, brokers, dealers, and paying agents to 
maintain records to demonstrate their compliance with the rule. The 
rule would require that such records be maintained for a period of not 
less than three years with the first year in an easily accessible 
place.\26\
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    \25\ 17 CFR 240.17Ad-17(c).
    \26\ Currently, pursuant to Rule 17Ad-7(i), 17 CFR 240.17Ad-
7(i), transfer agents must maintain records to show their compliance 
with Rule 17Ad-17. This same requirement for transfer agents, 
brokers, dealers, and paying agents would be stated explicitly in 
proposed amended Rule 17Ad-17. In order to maintain consistency with 
proposed amended Rule 17Ad-17, we are also proposing a technical 
change to Rule 17Ad-7(i) so that it would cross-reference proposed 
amended Rule 17Ad-17(d) rather than proposed amended Rule 17Ad-
17(c).
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    Section 17A(g) further directs the Commission to avoid requiring 
multiple paying agents to send written notification to a missing 
security holder regarding the same not yet negotiated check.\27\ We do 
not believe that multiple notifications by different paying agents for 
a given check is a likely scenario under our proposed rule amendments 
because we do not believe an issuer would use two paying agents for the 
same distribution. We request comment on the likelihood of such an 
occurrence and, if such an occurrence is probable with any frequency, 
on ways to avoid it from happening.
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    \27\ See Section 17A(g)(2), 15 U.S.C. 78q-1(g)(2).
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    We are also proposing to amend the title of Rule 17Ad-17 to clarify 
that it would apply to entities other than transfer agents. 
Specifically, we propose to re-title the rule ``Transfer agents', 
brokers', and dealers' obligation to search for lost securityholders; 
paying agents' obligation to search for missing securityholders''.
    Finally, to provide brokers, dealers, and paying agents with 
sufficient time to develop systems to comply with the proposed 
amendments to Rule 17Ad-17, we propose to establish a compliance date 
for the amendments of one year following the date on which the 
Commission takes final action on this proposal. We preliminarily 
believe that one year would provide brokers, dealers, and paying agents 
with ample time to come into compliance without unduly delaying the 
benefits to securityholders that Congress intended in enacting Section 
17A(g).

III. Request for Public Comment

    The Commission requests comment on all aspects of the proposed 
amendments to Rule 17Ad-17. We request comments on how brokers and 
dealers anticipate complying with the proposed rule's requirement to 
search for lost securityholders. We also request comment on whether the 
new term ``missing securityholder,'' and its related requirements and 
timeframes will be confused with the rule's existing term ``lost 
securityholder'' and its related requirements and timeframes. We 
particularly request comment regarding whether brokers, dealers, and 
transfer agents, which are also included in the definition of ``paying 
agent,'' foresee issues that may result from the use of the two 
terms.\28\ With respect to Section 17A(g)(2)'s requirement that in 
preparing these amendments to Rule 17Ad-17 the Commission shall seek to 
``minimize disruptions to current systems,'' we request comment on any 
potential disruptions that may result from the proposed revisions and 
how to minimize any such potential disruptions.\29\ We are also 
requesting cost data for implementation of the proposed revisions by 
industry participants. We are soliciting comments on any burdens to 
commerce that might result from the proposed rule amendments. 
Commentators should provide empirical data to support their views.
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    \28\ We note that the term ``lost securityholder'' was adopted 
as part of Rule 17Ad-17 in 1997, and Congress used the term 
``missing security holder'' when it added new subsection (g) to 
Exchange Act Section 17A. For the sake of consistency within Rule 
17Ad-17, we are proposing to use the term ``missing securityholder'' 
in Rule 17Ad-17.
    \29\ Section 17A(g)(2), 15 U.S.C. 78q-1(g)(2).
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    Finally, we request comments on our proposal to establish a 
compliance date for the amendments of one year following final action 
by the Commission.

IV. Paperwork Reduction Act

    The proposed amendments to Rule 17Ad-17 would require a new and 
mandatory ``collection of information'' within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA''),\30\ consisting of 
maintaining records in order to comply with and to demonstrate 
compliance with the rule by brokers and dealers who would be newly 
added to paragraph (a) of the rule \31\ and by paying agents who would 
be newly added to paragraphs (c) and (d) of the rule.\32\ Accordingly, 
the PRA would be applicable to the proposed rule and would require 
approval of the Office of Management and Budget. The relevant record 
collection requirements would be covered by amendments to paragraph (a) 
to Rule 17Ad-17, new paragraph (c) of Rule 17Ad-17, and amended and 
renumbered paragraph (d) of Rule 17Ad-17.\33\
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    \30\ 44 U.S.C. 3501 et seq.
    \31\ 17 CFR 240.17Ad-17(a).
    \32\ 17 CFR 240.17Ad-17(c) and (d).
    \33\ Id.
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    The collection of information under the proposed paragraph (b) of 
Rule 17Ad-17 is necessary to enable transfer agents, brokers, and 
dealers and paying agents, as custodians of records that determine the 
ownership of securities and the entitlement to corporate distributions, 
to reduce the number of lost and missing securityholders.
    The term ``paying agents'' would include the following approximate 
numbers of entities: 10,379 issuers that file reports with the 
Commission; 5,063 broker-dealers registered with the Commission; 536 
transfer agents registered with the Commission and the banking 
agencies; 11,797 registered investment advisers registered with the 
Commission; 264 indenture trustees; and 896 custodians; for a total of 
approximately 28,931 entities plus an unknown number in the category of 
``any other person.''
    Based on discussions with participants in the securities industry, 
we are assuming for the purposes of proposed Rule 17Ad-17, that on an 
annual basis, there will be approximately 250,000 searches by brokers 
and dealers and 50,000 notifications by paying agents.

A. Paragraph (a)

    Under paragraph (a) of the proposed rule amendments, recordkeeping 
transfer agents, brokers, and dealers would collect the names and 
addresses of their lost securityholders, and the recordkeeping transfer 
agents, brokers, and dealers would submit this information to 
information data bases pursuant to paragraph (b) of the rule. Such data 
base searches must be conducted without charge to the lost 
securityholders. Much of the new information required to be collected 
(such as the taxpayer identification numbers of lost securityholders) 
generally is already maintained by brokers and dealers and transfer 
agents so there should not be an additional cost. Therefore, the 
Commission anticipates that the increased hourly burden imposed by 
these aspects of the rule revisions would be about two minutes per 
account per search.\34\ Based

[[Page 16710]]

upon discussions with market participants, adding a corrected address 
in the event one is found would require approximately three minutes. 
The burden per account would be no more than five minutes. Assuming 
250,000 annual searches by brokers and dealers for lost security 
holders, the increased hourly burden would be 1,250,000 minutes, or 
20,833 hours (1,250,000 divided by 60).
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    \34\ Based on information provided by the industry, the 
Commission estimates that broker and dealers will annually search 
for approximately 250,000 lost securityholders. The Commission 
estimates that approximately $3.00 will be spent per account in 
order to conduct a search (comprised of approximately $2.00 for two 
searches and approximately $1.00 in administration costs). 
Therefore, the total cost for all brokers and dealers would be 
$750,000 (250,000 multiplied by $3.00).
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B. Paragraph (c)

    Under proposed paragraph (c)(1) of the rule, a paying agent must 
provide not less than one written notification to each missing 
securityholder no later than seven months after such securityholder has 
been sent a check that has not yet been negotiated. The notification 
may be sent with a check or other mailing subsequently sent to the 
missing securityholder but must be provided no later than seven months 
after the sending of the not yet negotiated check. The rule further 
provides that a paying agent shall be excluded from the notification 
requirement where the value of the not yet negotiated check is less 
than $25 and that the requirements of paragraph (c)(1) shall have no 
effect on state escheatment laws.
    The paying agents could include approximately 28,931 identifiable 
entities as noted previously in this section. However, despite the 
large number of entities eligible to be paying agents, that number 
would be limited to those firms that would be able to provide financial 
services relevant to the rule. The Commission estimates that there 
would likely be no more than 1,000 entities actually serving as paying 
agents and that these entities would consist primarily of broker-
dealers and transfer agents (including bank transfer agents), the sort 
of financial institutions that are accustomed to processing checks and 
other commercial documents, dealing with securityholder issues, 
maintaining financial records, and serving as intermediaries between 
issuers and securityholders. We note that, technically, the startup 
costs to enter the paying agent business, for a business entity already 
in the financial industry, would appear to be exceedingly modest in 
that the basic elements of being a paying agent simply involve mailing 
notification letters, sometimes including checks, and maintaining 
related financial records. While the entry costs would appear modest, 
to operate this sort of low margin business profitably would require 
economies of scale and existing business relationships that presumably 
would limit the likely number of active paying agents.
    If we assume 1,000 paying agents notifying 50,000 missing 
securityholders with each of the notifications requiring three minutes 
of labor, we estimate the burden imposed by Rule 17Ad-17(c) on ``paying 
agents'' for providing written notification to all ``missing 
securityholders'' who have been sent checks that after seven months 
have not yet been negotiated to be a total of 150,000 minutes or a 
burden of 2,500 hours (150,000 divided by 60).

C. Paragraph (d)

    Proposed paragraph (d) of Rule 17Ad-17 would require that transfer 
agents, brokers, dealers, and paying agents that are subject to the 
rule to maintain records necessary to demonstrate their compliance with 
the rule. The rule also would require transfer agents, brokers, 
dealers, and paying agents to maintain written procedures that describe 
their methodology for compliance. The records required by the proposed 
rule must be maintained for a period of not less than three years, with 
the first year in an easily accessible place, consistent with Exchange 
Act Section 17A. Based on discussions with participants in the 
securities industry, we believe that the annual recordkeeping function 
for records, which would be processed electronically, would require 
approximately one hour for every 500 missing securityholder accounts 
and every 500 lost securityholder accounts. For 250,000 searches by 
brokers and dealers, the recordkeeping time would be approximately 500 
hours. For notification of 50,000 missing securityholders, the 
recordkeeping time for the paying agents (including any issuer, 
transfer agent, broker, dealer, investment advisor, indenture trustee, 
custodian, and any other person) would be approximately 100 hours.
    In summary, assuming 250,000 searches by brokers and dealers 
(20,833 hours + 500 hours = 21,333 hours) and 50,000 notifications by 
paying agents (2,500 hours + 100 hours = 2,600 hours), the total 
estimated burden would be 23,933 hours (21,333 hours + 2,600 hours).

V. Costs and Benefits of Proposed Amendments

    The costs of this proposal are imposed entirely by Section 929W of 
the Dodd-Frank Act and Section 17A(g). These statutory costs include, 
among other things, the application of the requirements of Rule 17Ad-
17(a) to brokers and dealers, and the requirements imposed on ``paying 
agents'' by proposed Rule 17Ad-17(c) and (d). The costs are not imposed 
on brokers and dealers or paying agents by the Commission. Accordingly, 
it is not for the Commission to determine whether these costs are 
justified by the anticipated benefits of the revised rule.
    Nevertheless, we request comment on the potential costs for any 
necessary modifications to information gathering, management, and 
record-keeping systems or procedures, as well as any potential costs or 
benefits resulting from the proposal for brokers, dealers, issuers, 
transfer agents, investment advisers, indenture trustees, custodians, 
regulators, or others. Commenters should provide analysis and data to 
support their views on the costs and benefits associated with the 
proposal.
    The proposed rule changes should provide specific benefits to 
issuers and U.S. investors, benefits which are not readily quantifiable 
in terms of dollar value. Nevertheless, the proposal would: (1) Invoke 
the services of transfer agents and brokers and dealers to reduce the 
number of lost securityholders; (2) invoke the services of all paying 
agents to reduce the number of missing securityholders; and (3) improve 
the accuracy of securityholder records. We are seeking comment on how 
we may better identify and quantify the benefits that may result from 
the adoption of the proposed amendments.

VI. Initial Regulatory Flexibility Act Analysis

A. Reasons for Proposed Action

    This action was expressly directed by legislation (i.e., Section 
929W of the Dodd-Frank Act, which added paragraph (g) to Section 17A of 
the Exchange Act).

B. Objectives and Legal Basis

    The objectives of this proposal, as discussed above in Sections I 
and II, are to help reduce the number of lost and missing 
securityholders and to further the Commission's mission of protecting 
investors. The legal basis for the proposal is set forth in Section 
17A(g).

C. Small Entities Subject to the Rule

1. Brokers and Dealers
    According to Exchange Act Rule 0-10(c),\35\ a broker or dealer is a 
small entity if it: (1) Had total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the date in the

[[Page 16711]]

prior fiscal year as of which its audited financial statements were 
prepared pursuant to Section 240.17a-5(d) or, if not required to file 
such statements, a broker or dealer that had total capital (net worth 
plus subordinated liabilities) of less than $500,000 on the last 
business day of the preceding fiscal year (or in the time that it has 
been in business, if shorter); and (2) is not affiliated with any 
person (other than a natural person) that is not a small business or 
small organization as defined in this section.\36\ Of the 5,063 brokers 
and dealers registered with the Commission, approximately 879 are small 
brokers or dealers. We note that the proposed amendments to Rule 17Ad-
17 would, as a practical matter, apply only to brokers and dealers that 
carry securities for customer accounts (i.e., clearing firms), which 
tend to be the larger broker and dealer firms. There are 503 clearing 
firms registered with the Commission, none of which qualifies as a 
small business. Accordingly, we do not expect small brokers or dealers 
to be affected by the amendments to Rule 17Ad-17.\37\
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    \35\ 17 CFR 240.0-10(c).
    \36\ Paragraph (i) of Rule 0-10, 17 CFR 240.0-10, discusses the 
meaning of ``affiliated person'' as referenced in Paragraph (c) of 
Rule 0-10.
    \37\ 17 CFR 240.17Ad-17.
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2. Paying Agents
    Section 17A(g)(D)(ii) defines the term ``paying agent'' as 
including ``any issuer, transfer agent, broker, dealer, investment 
adviser, indenture trustee, custodian, or any other person that accepts 
payment from the issuer of a security and distributes the payments to 
the holder of the security.'' With respect to data for these entities: 
(1) 10,379 issuers file reports with the Commission of which 1,207 
qualify as small businesses; \38\ (2) 536 transfer agents registered 
with the Commission or with the Federal banking agencies of which 135 
qualify as small businesses; \39\ (3) 5,063 brokers-dealers registered 
with the Commission of which 879 qualify as small businesses; \40\ (4) 
11,797 investment advisers registered with the Commission of which 718 
qualify as small businesses; \41\ (5) 264 indenture trustees of which 
four qualify as small businesses; \42\ and (6) 896 custodians of which 
11 qualify as small businesses.\43\ The Commission has no supportable 
basis to estimate the number of small entities with respect to the 
remaining category (i.e., any other person). As noted herein in Section 
IV, while approximately 28,931 entities have been identified as 
potential ``paying agents,'' the Commission preliminarily believes that 
no more than 1,000 such entities would actually serve as paying agents.
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    \38\ See Exchange Act Rule 0-10(a). 17 CFR 240.0-10(a).
    \39\ See Exchange Act Rule 0-10(h). 17 CFR 240.0-10(h).
    \40\ See Exchange Act Rule 0-10(c). 17 CFR 240.0-10(c).
    \41\ See Investment Advisers Act Rule 0-7(a). 17 CFR 275.0-7(a).
    \42\ See Trust Indenture Act Rule 0-7. 17 CFR 260.0-7.
    \43\ See 13 CFR 121.201.
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    We preliminarily believe that the bulk of paying agent services 
would be provided by brokerage firms that handle customer securities 
(which as discussed above, as clearing firms, would not be small 
entities) and transfer agents (including bank transfer agents), both of 
which are firms that typically serve as intermediaries between issuers 
and securityholders.

D. Reporting, Recordkeeping, and Other Compliance Requirements

    Proposed new paragraph (d) of Rule 17Ad-17 would require 
recordkeeping transfer agents, or brokers, or dealers, and paying 
agents to demonstrate compliance with these provisions and to maintain 
written procedures that describe the methodology for complying with the 
provisions. Such records would be required to be maintained for not 
less than three years, the first year in an easily accessible place. 
Their maintenance would be subject to examination by the appropriate 
regulatory agency as defined by Section 3(a)(34)(B) of the Exchange 
Act.\44\
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    \44\ 15 U.S.C. 78c(a)(34)(B).
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E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission preliminarily believes there are no rules that 
duplicate, overlap, or conflict with the proposed rule.

F. Significant Alternatives

    With respect to small entities, the Commission considered whether 
viable alternatives to the proposed rulemaking exist that could 
accomplish the stated objectives of Section 17A(g) of the Exchange Act 
and whether they would minimize any significant economic impact of 
proposed rules on small entities. Specifically, the Commission 
considered the following alternatives: (1) The establishment of 
different procedures that take into account the resources available to 
small entities; (2) the clarification, consolidation, or simplification 
of compliance and reporting requirements under the proposed rules 
insofar as they affect small entities; (3) the use of performance 
rather than design standards; and (4) an exemption from coverage of the 
rule, or any part thereof, for small entities. However, inasmuch as 
Section 929W of the Dodd-Frank Act, which added Section 17A(g) to the 
Exchange Act, expressly requires the proposed revisions, no alternative 
to the proposed rule amendment appears available at this time.
    The Commission encourages the submission of written comments with 
respect to any aspect of the Initial Regulatory Flexibility Analysis 
(``IFRA'').\45\ Those comments should specify costs of compliance with 
the proposed rule, and suggest alternatives that would accomplish the 
objective of the proposed amendments to Rule 17Ad-17. A copy of the 
IRFA may be obtained by contacting Thomas C. Etter, Jr., Division of 
Trading and Markets, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-7010, telephone no. (202) 551-5713.
---------------------------------------------------------------------------

    \45\ 5 U.S.C. 603.
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VII. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation

    The proposed amendments to the rule should have a neutral effect on 
efficiency and capital formation and should have no material 
anticompetitive effects. While we believe the proposed amendments to 
the rule would apply to all transfer agents, brokers, dealers, and 
paying agents, they could in theory create a barrier to entry for 
potential new entrants if the compliance costs associated with 
searching for and contacting lost or missing securityholders are high 
enough. The Commission encourages the submission of written comments on 
Section VII.

VIII. SBREFA Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\46\ a rule is major if it has resulted in or is likely to 
result in:
---------------------------------------------------------------------------

    \46\ 5 U.S.C. 801, et seq. The Regulatory Flexibility Act 
requires regulatory agencies to consider the impact of their 
proposed and final regulations on small entities.
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.

We request comment regarding the potential impact of the proposed rule 
amendments on the economy on an annual basis. We also request that 
commenters provide empirical data and other factual support for their 
views.

[[Page 16712]]

IX. Statutory Basis and Text of Proposed Amendments

Statutory Basis

    Pursuant to Section 17A(g) of the Exchange Act, 15 U.S.C. 78q-1(g), 
the Commission proposes to amend Sec.  240.17Ad-7 and Sec.  240.17Ad-17 
under the Exchange Act in the manner set forth below.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of the Amendments

    In accordance with the foregoing, the Commission proposes to amend 
part 240 of Chapter II of Title 17 of the Code of Federal Regulations 
as follows:

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

    1. The general authority citation for part 240 is revised and the 
following citation is added in numerical order to read as follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78mm, 78n, 78n-1, 78o, 78o-4, 78p, 
78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-
29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq.; 18 U.S.C. 1350; 
and 12 U.S.C. 5221(e)(3) unless otherwise noted.
* * * * *
    Section 240.17Ad-17 is also issued under Pub. L. 111-203, Sec.  
929W, 124 Stat. 1869 (2010).
* * * * *


Sec.  240.17Ad-7  [Amended]

    2. Section 240.17Ad-7(i) is amended by removing ``240.17Ad-17(c)'' 
and adding in its place ``240.17Ad-17(d)''.

    3. Section 240.17Ad-17 is amended by:
    a. Revising the heading.
    b. Revising paragraph (a)(1).
    c. In paragraph (a)(2) adding the phrase ``, or broker or dealer'' 
following the word ``agent''.
    d. In paragraph (a)(3) introductory text adding the phrase ``, or 
broker or dealer'' following the word ``agent''.
    e. In paragraph (a)(3)(ii) adding the phrase ``or customer security 
account records of the broker or dealer'' following the word ``files''.
    f. In paragraph (b)(2)(i) adding the phrase ``or customer security 
account records of a broker or dealer'' following the word ``file'' and 
adding the phrase ``, or broker or dealer'' following the phrase 
``securityholder, the transfer agent''.
    g. In paragraph (b)(2)(ii) adding the phrase ``or broker or 
dealer'' following the word ``agent''.
    h. Redesignating paragraph (c) as paragraph (d), and adding new 
paragraph (c).
    i. Revising newly redesignated paragraph (d).
    The revisions and addition read as follows:


Sec.  240.17Ad-17  Transfer agents', brokers', and dealers' obligation 
to search for lost securityholders; paying agents' obligation to search 
for missing securityholders.

    (a)(1) Every recordkeeping transfer agent whose master 
securityholder file includes accounts of lost securityholders and each 
broker or dealer that holds customer security accounts shall exercise 
reasonable care to ascertain the correct addresses of such 
securityholders. In exercising reasonable care to ascertain such lost 
securityholders' correct addresses, each recordkeeping transfer agent 
and each broker or dealer shall conduct two data base searches using at 
least one information data base service. The transfer agent and broker 
or dealer 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 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 or 
broker's or dealer's first search for such lost securityholder.
* * * * *
    (c)(1) The paying agent, as defined in paragraph (c)(2) of this 
section, shall provide not less than one written notification to each 
missing securityholder stating that such securityholder has been sent a 
check that has not yet been negotiated. Such notification may be sent 
with a check or other mailing subsequently sent to the missing 
securityholder, but must be provided no later than seven (7) months 
after the sending of the not yet negotiated check.
    (2) The term paying agent shall include any issuer, transfer agent, 
broker, dealer, investment adviser, indenture trustee, custodian, or 
any other person that accepts payments from the issuer of a security 
and distributes the payments to the holder of the security.
    (3) The securityholder shall be considered a missing securityholder 
if a check is sent to the securityholder and the check is not 
negotiated before the earlier of the paying agent's sending the next 
regularly scheduled check or the elapsing of six (6) months after the 
sending of the not yet negotiated check.
    (4) A paying agent shall be excluded from any notification 
requirement where the value of the not yet negotiated check is less 
than $25.
    (5) The requirements of paragraph (c)(1) of this section shall have 
no effect on state escheatment laws.
    (d) Every recordkeeping transfer agent, broker, or dealer carrying 
securities for the accounts of customers, and every paying agent shall 
maintain records to demonstrate compliance with the requirements set 
forth in this section which shall include written procedures that 
describe the transfer agent's, or broker's or dealer's, or paying 
agent's methodology for complying with this section. Such records shall 
be maintained for a period of not less than three (3) years with the 
first year in an easily accessible place.

    By the Commission.

    Dated: March 18, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-6940 Filed 3-24-11; 8:45 am]
BILLING CODE 8011-01-P


