Lost Securityholders

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232 and 240

[Release No. 34-37595; File No. S7-21-96]

RIN 3235-AG99

Lost Securityholders

AGENCY: Securities and Exchange Commission.

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ACTION: Notice of Proposed Rulemaking and Request for Comments.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is

publishing for comment proposed Rule 17Ad-17 and proposed Rule 17a-24

which are designed to address the problem of ``lost securityholders.''

Rule 17Ad-17 would require transfer agents to conduct searches in an

effort to locate lost securityholders. Rule 17a-24 would allow the

Commission to gather data related to lost securityholders and to

provide it to information distributors or others. The Commission also

is seeking comments on the extent to which further regulatory or

remedial steps are necessary, including whether the Commission should

operate a national database for lost securityholders.

DATES: Comments should be received on or before October 28, 1996.

ADDRESSES: Interested persons should submit three copies of their

written data, views, and opinions to Jonathan G. Katz, Secretary,

Securities and Exchange Commission, 450 Fifth Street, N.W., Washington

D.C. 20549. Comments also may be submitted electronically at the

following E-mail address: [email protected]. All comment letters

should refer to File No. S7-21-96; this file number should be included

on the subject line if E-mail is used. Comment letters will be

available for public inspection and copying at the Commission's public

reference room, 450 Fifth St., N.W., Washington D.C. 20549.

Electronically submitted comment letters will be posted on the

Commission's Internet Web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant

Director; Christine Sibille, Senior Counsel; or Michele Bianco,

Attorney; at 202/942-4187, Office of Risk Management and Control, Mail

Stop 5-1, Division of Market Regulation, Securities and Exchange

Commission, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction and Summary

From time to time, issuers lose contact with some of their

securityholders (``lost securityholders''). Loss of contact may result

from a change in the securityholder's address or a transfer of

beneficial ownership (e.g., through inheritance). As a result, these

securityholders do not receive principal, dividend, or interest

distributions to which they are entitled, and their property is at risk

of being deemed abandoned under state escheat laws.1 At a point in

time established under the applicable escheat law, the custodians of

these assets must turn them over to the appropriate state unclaimed

property administrator. In some states, that can occur in as few as

three years after the custodian loses contact with the

securityholder.2 Transfer agents, as the primary custodians of the

records that determine the ownership of securities and the entitlement

to corporate distributions, can reduce significantly the number of lost

securityholders by maintaining accurate records and by promptly

initiating corrective measures when records no longer reflect the

current status of a securityholder.3

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\1\ See House Committee on Small Business, 103d Cong., 2nd

Sess., Report on Business Opportunities and Technology (1993);

Letter from Richard Breeden, Chairman, Commission, to Ron Wyden,

Chairman, Committee on Small Business, U.S. House of Representatives

(February 22, 1993); Letter from Arthur Levitt, Chairman,

Commission, to Ron Wyden, Chairman, Committee on Small Business,

U.S. House of Representatives (October 29, 1993).

\2\ In some states, an investor's failure to vote or to

communicate with the issuer during a period of five successive

years, even if no communication from the investor has been required,

can become the basis for constructive abandonment. See, e.g., Letter

from John K. Dalton, Associate Counsel, State of New York Office of

the State Comptroller, to the Division of Market Regulation

(``Division'') (December 12, 1994).

\3\ Other financial institutions, such as registered broker-

dealers, also may maintain records of securities ownership on behalf

of customers for which they hold assets. In such instances, the

transfer agent has recorded the financial institution as the owner

in its account records, and the financial institution's customer

account records will identify the beneficial owner of the

securities. The Commission understands that such financial

institutions have a lower incidence of lost securityholders. Letter

from Judith Poppalardo, Assistant General Counsel, Securities

Industry Association (``SIA''), to Division (June 7, 1996).

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Some transfer agents already take meaningful steps to prevent the

loss of contact with securityholders and to reestablish contact after

it has been lost. However, the Commission is concerned that some

transfer agents may not be making sufficient use of currently available

technology to locate securityholders with whom contact has been lost.

To address this problem, the Commission is seeking comment on

several proposals. Proposed Rule 17Ad-17 would require that transfer

agents take certain minimum steps to locate the correct address of each

securityholder in their master securityholder files as well as require

them to take such additional steps as are reasonable. Transfer agents

would be required at a minimum to make two good faith attempts to

locate lost securityholders before turning assets over to an unclaimed

property administrator. These searches would be made at no cost to the

securityholder. The Commission believes that this requirement should

help reduce the number of lost securityholders and the escheatment of

investor assets.

The Commission preliminarily believes that imposing an affirmative

obligation on transfer agents to search for lost securityholders is in

the public interest and would enhance investor protection. The

Commission recognizes that regulatory obligations impose financial

burdens and that the costs of complying with proposed Rule 17Ad-17 may

fall upon transfer agents or indirectly on issuers. In proposing

specific requirements, the Commission has attempted to minimize

compliance costs. Also, decreasing the number of lost securityholders

should reduce the costs to transfer agents and issuers of complying

with state escheat laws.

The Commission also is proposing Rule 17a-24 to gather data related

to lost securityholders that would be available to information

distributors and others. Under this rule, the Commission would require

entities that hold assets for investors, such as transfer agents and

broker-dealers, to file electronically with the Commission certain lost

securityholder information. The Commission would make such data

available to private entities which could establish information

services that could be accessed by investors to determine if they have

been reported as lost.

As discussed more fully below, the Commission is also soliciting

comment on the concept of a national database of lost securityholders

to be operated by the Commission in order to facilitate the ability of

lost securityholders to reestablish contact with issuers and transfer

agents.

In summary, the proposals would:

Establish a definition of lost securityholder.

Require transfer agents to search for lost securityholders

at no cost to the securityholders using at least one information

database.

Require certain entities that hold assets for

securityholders to file with the Commission certain information

pertaining to lost securityholders.

Solicit comment on the establishment of a national lost

securityholder database to be maintained by the Commission.

II. Transfer Agent Responsibilities to Maintain Accurate Records and to

Locate Lost Securityholders

A. Maintenance of Master Securityholder Files

Rule 17Ad-10 under the Securities Exchange Act of 1934 (``Exchange

Act'') 4 requires every recordkeeping

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transfer agent 5 to maintain and keep current an accurate master

securityholder file 6 that contains the minimum appropriate

``certificate detail'' for all securities transferred, purchased,

redeemed, or issued and to which the transfer agent must post debits

and credits. Certificate detail is defined by Rule 17Ad-9(a) to include

information such as the securityholder's registration (including name),

address of the securityholder, the size of the position, and other

information used to identify the securities and the

securityholder.7

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\4\ 17 CFR 240.17Ad-10.

\5\ 17 CFR 240.17Ad-9(h) defines recordkeeping transfer agent as

the registered transfer agent that maintains and updates the master

securityholder file.

\6\ 17 CFR 240.17Ad-10(b) requires every recordkeeping transfer

agent to maintain and keep current an accurate master securityholder

file and subsidiary files. If there is a record difference, the

master securityholder file and subsidiary files must accurately

represent all relevant debits and credits until the record

difference is resolved. The recordkeeping transfer agent must

exercise diligent and continuous attention to resolve all record

differences. See also 17 CFR 240.17Ad-9(b).

\7\ 17 CFR 240.17Ad-9(a).

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The Commission believes that an accurate master securityholder file

is one of the most basic steps in addressing the lost securityholder

problem. Therefore, the Commission believes that recording of patently

inadequate or inaccurate certificate detail to the master

securityholder files is inconsistent with Rule 17Ad-10. For example,

recording an address of ``New York, New York'' without a street address

will almost certainly result in the return by the U.S. Postal Service

as undeliverable of all correspondence sent to such address. Thus, in

most cases a transfer agent should not post to the master

securityholder files items it receives for transfer that contain a

patently incorrect address or items that do not contain a complete

address 8 and should return such transfer request to the presenter

without effecting the transfer.9

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\8\ Transfer agents should use their experience in their reviews

for adequacy of addresses contained in items submitted for transfer.

For example, the absence of a street address in some rural areas and

small towns may not render an address incomplete or inadequate.

Accordingly, posting such certificate detail may not violate Rule

17Ad-10.

\9\ The Commission understands that there are situations where

rejecting a transfer request because of an incomplete address may

result in financial harm to the investor (e.g., when a transfer

request is received near or on a record date or in connection with a

tender or an exchange offer). Letter from Michael Foley, President,

The Securities Transfer Association (``STA''), to the Division (May

26, 1994). In such situations, the Commission believes that a

transfer agent should have the flexibility to follow the general

practice of accepting the transfer request and using the address of

the presenting financial intermediary in care of the securityholder

before seeking an accurate address.

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B. Current Transfer Agent Practices Regarding Lost Securityholders

Currently, most transfer agents rely on the standards contained in

Rule 14a-3(e)(2) under the Exchange Act to determine when to code as

``lost'' the accounts of securityholders whose correspondence has been

returned as ``undeliverable'' because of an incorrect or insufficient

address.10 That rule provides that unless otherwise required by

state law, the obligation to mail an annual report or proxy statement

to a securityholder is suspended if (1) an annual report and a proxy

statement for two consecutive annual meetings, or (2) all payments of

dividends or interest on securities sent by first class mail (of which

there has been at least two payments) during a twelve month period

which have been mailed to such securityholder's address have been

returned as undeliverable.

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\10\ 17 CFR 240.14a-3(e)(2).

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Generally, the first time a distribution check is returned as

undeliverable, a transfer agent will place the returned check in

another specially marked (e.g., color-coded) envelope and will remail

the distribution check to the registered owner at the same address

(``remailing procedure'').11 If the remailing is returned, the

issuer or the transfer agent will hold the check until the next

distribution payment. This remailing procedure may be repeated if the

next distribution payment or other issuer correspondence is returned as

undeliverable. If two consecutive distribution payment mailings are

returned as undeliverable, the transfer agent will code the

securityholder's account as undeliverable (i.e., the securityholder is

``lost'') and will hold any further distributions and communications to

the securityholder. Some transfer agents also conduct a mass mailing at

the end of each year to all securityholders whose accounts they deem to

be undeliverable.

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\11\ Transfer agents use this second mailing to test the

possibility that the first mailing did not reach the intended

recipient because of an error by the postal service. The second

mailing also can be used to generate a better or current address by

requesting an address correction from the postal service. Letter

from Michael Foley, President, STA, to the Division (May 26, 1994).

Transfer agents have estimated the success rate for this remailing

from less than 10% to 50%. See, e.g., Letters from Charles Rossi,

Boston EquiServe, to the Division (February 26, 1996) and from

Anthony J. Calcagni, Harris Trust and Savings Bank, to the Division

(February 23, 1996).

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After two consecutive mailings are returned as undeliverable, some

transfer agents conduct searches for the securityholder by using

information databases.12 In addition to information databases,

transfer agents also use various other methods in their attempts to

obtain the current addresses of lost securityholders.13 However,

not all transfer agents take such actions to search for lost

securityholders.

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\12\ Many transfer agents and corporate issuers that conduct the

transfer functions for their own securities currently use vendor-

maintained, computer databases to assist them in searching for lost

securityholders. Letters from Michael Foley, President, STA, to the

Division (May 26, 1994), and Anthony F. Fireman, President,

Corporate Transfer Agents Association, Inc. (``CTAA''), to the

Division (April 25, 1994). These searches are usually based on name,

address, or social security number. Many professional transfer

agents (e.g., transfer agents that perform transfer functions for

issuers for a fee) also have the capability to perform searches by

taxpayer identification number for issuers that are willing to pay

an additional fee. In addition to using vendor-maintained

information databases (e.g., credit bureaus), some transfer agents

and corporate issuers employ the services of the Social Security

Administration (``SSA'') or the Internal Revenue Service (``IRS'')

in an attempt to contact the lost securityholder.

\13\ Among others, these methods include using CD-ROM technology

for searching telephone directories, and inquiring at the bank where

previously endorsed distribution checks were presented to learn if

the bank has a current address. See also, Guttman, Modern Securities

Transfers, para. 16.04 (3rd ed. 1987), noting that other methods

include, but are not limited to, (i) checking all past

correspondence with the registered owner, (ii) checking the source

of transfer instructions for a proper address (for example, the

broker through whom the securities had been acquired by the

registered owner), and (iii) contacting the occupant of the premises

of the last-known address for a forwarding address.

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C. Proposed Rule 17Ad-17

The Commission is proposing Rule 17Ad-17 under the Exchange Act to

require transfer agents to conduct searches for securityholders once

the transfer agents have determined that a securityholder is lost. The

proposed rule would require each recordkeeping transfer agent to

exercise reasonable care to locate the correct address of lost

securityholders, and would establish minimum search

requirements.14 However, the rule would not impose on transfer

agents an absolute obligation actually to locate each lost

securityholder.

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\14\ See supra note 5 for a definition of recordkeeping transfer

agent.

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1. Definition of Lost Securityholder

For purposes of Rule 17Ad-17, a securityholder will be classified

as a lost securityholder when two items of correspondence,15 such

as distribution payments, that were sent by first class mail at least

three months apart, have been returned as undeliverable. Because at

times transfer agents receive change of address notifications soon

after the mailing and subsequent return of a distribution payment, a

three month period will be required to have elapsed between the two

correspondences. If and when a transfer agent receives a

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new address for a lost securityholder, either directly from the

securityholder or through the transfer agent's efforts, the

securityholder will no longer be classified as lost.16

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\15\ The remailing of the same correspondence does not

constitute a second item of correspondence.

\16\ While not specifically required by the proposed rule, the

Commission encourages transfer agents to take steps that may prevent

securityholders from becoming ``lost.'' In particular, the remailing

procedure described in the text above and the procedures described

in footnote 13 appear to be effective methods of correcting

misdeliveries of mail and other delivery problems. Such early

measures may prove especially beneficial because the ``trail'' of

the securityholder may still be fresh.

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The Commission requests comments on whether the proposed standards

for classifying a lost securityholder is appropriate or whether a

different standard should be employed. For example, is the three month

period between the mailing of two correspondences an appropriate time

period?

2. Transfer Agents' Search Requirements

Rule 17Ad-17 would require every recordkeeping transfer agent whose

master securityholder file includes accounts of lost securityholders to

search an information database for such securityholders' current

address. The transfer agent's initial search for the securityholder

must be based on either name, if reasonably likely to locate the lost

securityholder, or taxpayer identification number (typically an

individual's social security number) using at least one information

database. The search must be conducted within three months of the

securityholder being classified as lost. If the lost securityholder is

not found on the initial search, the transfer agent also must conduct a

second search for the lost securityholder between one year and eighteen

months after the initial search. This search is intended to identify

address changes that were added to the database after the time of the

earlier search. The transfer agent must conduct these searches without

charge to the lost securityholder.

The Commission understands that database searches generally are

considered a cost-effective way in which to locate lost

securityholders. The Commission requests comment with respect to the

potential costs of proposed Rule 17Ad-17 and its potential

effectiveness in addressing the lost securityholder issue. The

Commission requests commenters to submit specific data on costs

involved in utilizing various vendors' information databases and costs

involved in using other methods in an effort to locate lost

securityholders. The Commission also requests comment on whether there

are other entities that maintain ownership records such as broker-

dealers, that should also have search requirements.17

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\17\ The Commission understands that many broker-dealers

currently conduct searches for missing customers. Letter from Judith

Poppalardo, Assistant General Counsel, SIA, to Division (June 7,

1996).

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In conducting an information database search, should a transfer

agent have the option as proposed of conducting a search using either

the names or taxpayer identification numbers of the lost

securityholders or should the transfer agent be required to conduct a

search using taxpayer identification numbers? The Commission

understands that conducting searches using the taxpayer identification

numbers may be more costly than a search using lost securityholders'

names, but searches using taxpayer identification numbers may be more

effective in locating lost securityholders.

Should the requirement to search for lost securityholders apply

only where the transfer agent is holding assets over some de minimis

amount? A de minimis threshold would avoid a situation where a transfer

agent would be required to expend funds in excess of the amount at risk

of escheating.

The Commission also is requesting comment on the time frames within

which a search must be made. The purpose of the three month time frame

is to require a transfer agent to search within a short period of time

after the securityholder becomes lost, because generally chances of

locating a lost securityholder are better the sooner a search is

initiated. However, if the search is conducted too soon, there may not

be an opportunity for the information databases to be updated with the

securityholder's new address. Further, the three month period will

permit transfer agents to conduct searches on a quarterly basis, which

may be more cost-effective. The period between the first and the second

search, one year to eighteen months, is intended to provide sufficient

time for a lost securityholder's new address to appear in an

information database subsequent to the first search.

Comments also are requested on whether the rule should include (1)

a requirement that transfer agents periodically assess the

effectiveness and appropriateness of the search procedures and

technology they employ, and/or (2) a requirement that transfer agents'

search procedures meet a performance-based standard based on success in

locating lost securityholders.

3. Definition of Information Database

For purposes of Rule 17Ad-17, an information database would be

defined as any automated database service that (1) contains addresses

of United States residents including addresses in the geographic area

in which the lost securityholder's last known address is located, (2)

covers a reasonably broad geographic area, (3) is indexed by the search

criterion used by the transfer agent (e.g., name or taxpayer

identification number), and (4) is updated at least four times a

year.18 The Commission requests comments on these criteria.

Comment is also sought on whether instead of setting forth specific

criteria for an acceptable database, the rule should require transfer

agents to use technology reasonably designed to locate a lost

securityholder.

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\18\ Some examples of vendors of information databases that

satisfy these criteria are credit bureaus, the SSA, and the IRS.

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4. Use of Professional Search Firms to Meet Search Requirements

Currently, some transfer agents rely on professional search firms

that charge lost securityholders a fee for locating the lost

securityholders' assets instead of using database services.19

Under proposed Rule 17Ad-17, the use of such firms as the method of

locating a lost securityholder would satisfy the transfer agent's

search obligation only if the securityholder would not be charged a fee

as the result of a successful search. Therefore, the use of a

professional search firm that charges the securityholder a fee for

recovering his or her assets would be permissible only after the

transfer agent has conducted the required two information database

searches described above.

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\19\ The CTAA stated that some of its members utilize

professional search firms which generally have extensive search

methods. The CTAA believes that the decision to use a professional

search firm should be an independent one made by the transfer agent

or issuer taking into consideration potential cost to either the

issuer or the securityholder. Letter from Anthony F. Fireman,

President, CTAA, to the Division (April 25, 1994). The National

Association of Unclaimed Property Administrators (``NAUPA'') has

informed the Commission that transfer agents should use caution when

employing information vendors because many such vendors are also in

the business of contacting lost securityholders and charging them a

fee, which may be between 30% and 50% of the value of the

distributions, for information about the distributions. While NAUPA

supports the use of all available methods of facilitating transfer

agents' searches, it is concerned about any search effort that

causes a shareholder to lose a substantial portion of the value of

the property and believes that such firms should be used only as a

last resort and not as a routine method to find lost

securityholders. Letter from Dawn E. Rockey, Second Vice President,

NAUPA, to the Division (April 29, 1994).

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Comment is sought on the extent to which transfer agents currently

employ professional search firms and on any problems or concerns that

arise from their use. Specifically, the Commission

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requests comment on whether the limitation contained in the proposed

rule, prohibiting charging the shareholder for use of such firms until

after a transfer agent has conducted the two prescribed searches using

an information database, is appropriate.

5. Verification of Shareholder Identity

Although a careful search is unlikely to result in an erroneous

match of a lost securityholder and the information obtained from an

information database, information databases are not 100% accurate.

Thus, in order to guard against delivery of distributions to an

incorrect recipient, the Commission strongly suggests that transfer

agents verify that the person at the newly obtained address is its lost

shareholder before disbursing securities or funds.20 Among other

methods, verification could consist of confirming the shareholder's

taxpayer identification number and former address.

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\20\ The STA notes that currently most transfer agents send a

search letter to the new address obtained from an information

database in order to obtain additional information to assure that

the shareholder and the new addressee are the same person. However,

for small money values, some transfer agents automatically update

their records and forward lost distributions to the address obtained

from the information database. The STA believes that transfer agents

should establish contact with the shareholder at the new address

before releasing distributions. Letter from Michael Foley,

President, STA, to the Division (May 26, 1994). The CTAA states that

many transfer agents and issuers currently require the person at the

new address to confirm the shareholder's taxpayer identification

number and former address before issuing a check for past dividend

or interest distributions. The CTAA also states that when an estate

is being probated, most transfer agents or issuers will issue the

check in the name of the deceased so that the personal

representative or trustee of the estate is required to use legal

documents to cash the check. Letter from Anthony F. Fireman,

President, CTAA, to the Division (April 25, 1994).

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6. Recordkeeping Requirements

Proposed Rule 17Ad-17 will require that all recordkeeping transfer

agents maintain records necessary to demonstrate their compliance with

the requirements of the rule. At a minimum, transfer agents should

document the date a securityholder was classified as lost and the date

a database search was conducted for such securityholder. The Commission

also is proposing an amendment to Rule 17Ad-7 under the Exchange Act to

require that transfer agents maintain the records required by the

proposed rule for a period of not less than three years with the first

year in an easily accessible place.

III. Collection of Lost Securityholder Data

A. Proposed Rule 17a-24--Background

As discussed further in Section IV below, the Commission has been

urged to support the establishment of a national lost securityholder

database. In the alternative, the Commission is proposing to facilitate

the gathering of data related to lost securityholders to provide access

to the information by information distributors or others, including

individuals.

The Commission proposes to collect information on lost

securityholders 21 from entities such as transfer agents and

broker-dealers that hold assets for investors, and to make such

information available to private entities which could establish

databases accessible by the public. For example, a distributor could

obtain this information from the Commission and charge a fee to persons

who inquire about whether they have been reported as lost. The inquirer

could then contact the reporting entity or otherwise take steps to

recover the property. The Commission requests comment as to whether it

would be economically feasible for communication vendors to develop a

lost securityholders database and to make the information available to

the general public at a reasonable cost.

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\21\ The rule would include a definition of the term lost

securityholder that is consistent with the definition under proposed

Rule 17Ad-17.

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B. Definition of Recordkeeper

The filing requirements under proposed Rule 17a-24 would apply to

any entity defined by that rule as a recordkeeper. The proposed rule

defines the term recordkeeper to mean (1) a member of a national

securities exchange, a registered broker or dealer, or a registered

municipal securities dealer which maintains records of securities

received, acquired, held, or carried by or on behalf of such entity for

the account of any securityholder, or (2) a recordkeeping transfer

agent. Exchange members and broker-dealers carry accounts for others,

which may include retail investors, institutional investors, or other

broker-dealers.22 Recordkeeping transfer agents maintain records

of ownership on behalf of issuers.

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\22\ Exchange members and broker-dealers which carry accounts

for others are frequently listed on the books of issuers, clearing

agencies, or financial intermediaries as the holder of a security.

These exchange members or broker-dealers know the identity of the

entity for which they hold the security.

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The Commission seeks comment concerning the scope of this

definition. Should any other entities, such as investment advisors, be

included within the definition of recordkeeper? Does the proposed

definition cover entities that should not be deemed recordkeepers

because they do not typically have lost securityholders?

C. Recordkeeper Filing Requirements

Proposed Rule 17a-24 will require each recordkeeper to file

electronically with the Commission on or before May 31 of each year

information on all lost securityholders contained in such

recordkeeper's records as of May 1 of such year.23 With the same

filing date for all filers, the Commission could easily compile all the

submissions into one file for downloading.

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\23\ The annual filing would include information on a lost

securityholder even if the securityholder was reported as lost in

the previous year's filing.

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The filing would include the identity of the reporting

recordkeeper, a contact name and telephone number at the recordkeeper,

and the period covered by the report. In an effort to protect

confidentiality, the report contents would consist solely of a list of

taxpayer identification numbers of lost securityholders contained in

the recordkeeper's records.24 No names, number of shares, or

dollar amounts would be provided.

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\24\ The Commission understands that some professional search

firms have databases that can identify an individual's name based on

a social security number.

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The Commission requests comment on the feasibility of the filing

requirement under the proposed rule. A private entity that wants to

establish a database would only need to download the information once a

year from the Commission. Is an annual filing sufficient? Should more

frequent submissions be required? Should filers submit such information

concerning all lost securityholders, securityholders who have been lost

for some specified time period, or lost securityholders after a

specific occurrence, such as after the two database searches required

under proposed Rule 17Ad-17 have been conducted? Should filers be

required to file information with the Commission indicating that a

securityholder has been found? If so, how soon after the securityholder

is found? In addition to the costs they currently incur in providing

information on lost property to state unclaimed property

administrators, what costs would filers incur in providing the

requested information to the Commission?

The Commission also requests comment on whether the privacy of lost

securityholders will be compromised by filers providing the required

taxpayer identification numbers.25 Would information other than

taxpayer

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identification numbers provide greater privacy protection and still

accomplish the stated goals? For example, would the gathering of

specific information about a lost securityholder (e.g., the lost

securityholder's name, last known city and state) be an effective means

of addressing the problem while presenting fewer privacy concerns?

26 Are there any other steps that should be taken to protect

securityholders' privacy? Should information on the lost

securityholder's assets (e.g., the issues and the CUSIP numbers) be

included, and would the inclusion of such information serve any useful

function so as to override any privacy concerns?

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\25\ Supra note 24.

\26\ Listing lost shareholders by name may allow for greater

privacy because of the potential for multiple individuals to have

the same name while a social security number will identify one

specific individual.

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D. Method of Filing

The Commission believes that two methods of electronic filing are

feasible. First, recordkeepers could utilize the Commission's

Electronic Data Gathering Analysis and Retrieval System (``EDGAR'') to

submit their filings in accordance with current Commission

rules.27 The Commission is proposing the use of the EDGAR system

in an effort to employ available technology to facilitate the

objectives of the proposed rule. EDGAR filings generally are made

through a dial-up connection to the Commission's host equipment and

transmitted using Commission supplied, personal computer based software

called EDGARLink. Therefore, the cost to recordkeepers should be

limited to a long distance telephone call.

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\27\ 17 CFR 202.7(b). As set forth in part VIII below, the

Commission is proposing to amend 17 CFR 232.101, which specifies

mandated electronic submissions, to include filings under proposed

Rule 17a-24.

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In addition to built-in communications and data compression

capability, EDGARLink contains features which help EDGAR filers create

and prevalidate their submission prior to making a transmission. Use of

the EDGAR system also would enable the Commission to validate the

identity of the submitter, the type of submission, and whether the

filing meets certain minimal format requirements.

As an alternative to filing through the EDGAR system, filings could

be submitted to the Commission through the Internet.28 Under this

approach, the same document structure required for EDGAR could be used.

However, the filer would not receive validation of the filing, and

there would be no validation for header accuracy or format compliance.

The cost may be somewhat higher because entities would be required to

obtain access to the Internet either directly through a provider or

through use of a service which would file on their behalf.

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\28\ If this alternative is adopted it would be necessary to

amend 17 CFR 202.7 and 17 CFR 232.101 to reflect the use of the

Internet for these submissions.

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Comments are requested on whether the EDGAR system or the Internet

would be the better vehicle for the submission of such information.

Commenters are requested to provide specific alternative cost estimates

for compliance using both systems. Are there limits on the ability of

smaller transfer agents and broker-dealers to submit this information

due to their level of automation?

E. Dissemination of Information

The Commission anticipates that the information filed under

proposed Rule 17a-24 could be disseminated as part of the existing

EDGAR data dissemination stream. Alternatively, the Commission could

provide access to the data on its Internet Web site. On the Internet

Web site, any entity or individual could download the information

submitted to the Commission for whatever reason(s) it deemed

appropriate. The Commission requests comment on the costs and benefits

associated with this proposal. Does the release of this information to

any outside party create the possibility of fraud, and if so, is there

some method to eliminate this possibility? Alternatively, should the

Commission limit access to the information collected with respect to

lost securityholders? For example, should dissemination of the

information be limited to information vendors that agree to restrict

the use and protect the confidentiality of the information?

F. Proposed Recordkeeping Requirements

The proposed rule would require every recordkeeper to maintain such

records necessary to demonstrate compliance with the requirements set

forth in this rule. The proposed rule also would provide that such

records must be maintained for a period of not less than three years,

the first year in an easily accessible place. Comment is requested as

to the feasibility of this requirement.

IV. Commission Supported Database

As an alternative to the data collection proposed in Section III

above, it has been suggested that the Commission should directly

support the establishment of a national lost securityholder database

which would be analogous to the database used in the Commission's lost

and stolen securities program.29 Such a database would contain

information such as the names and/or taxpayer identification number of

lost securityholders. Information would be required to be submitted to

the database by entities that are required to make other filings with

the Commission (e.g., issuers, transfer agents, and broker-

dealers).30 All securities and funds of lost securityholders would

continue to be held by the issuers, transfer agents, or broker-dealers.

The database would be accessible by telephone or by computer linkage by

shareholders or any other interested party. A user fee (i.e., a small

charge for each inquiry) would be used to fund the operation of the

database. The register could be searched by using a securityholder's

name or taxpayer identification number and would reveal whether an

entity is holding securities or funds for the securityholder. However,

the register would not disclose the value of the assets being held.

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\29\ Letter from Robert N. Shamansky, Benesch, Friedlander,

Coplan & Aronoff, to the Division (May 16, 1994).

\30\ Specifically, the proposal suggests that an issuer,

transfer agent, or broker-dealer enroll each lost securityholder on

an expanded version of the register which is maintained for the

Commission by the Securities Information Center for information on

lost and stolen securities. Letter from Robert N. Shamansky (May 16,

1994).

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Alternatively, it has been suggested that the Commission could

directly maintain and operate a lost securityholder database utilizing

the Commission's Internet Web site. Similar to the above proposal,

transfer agents, issuers, and broker-dealers would be required to

submit information concerning lost securityholders to the Commission.

Individuals would have access to the database through the

Internet.31

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\31\ This proposal differs from the proposal discussed under

Section III above in terms of the level of Commission involvement in

developing and running the database. In addition, the Commission

might need to institute a small charge for each search to cover the

costs of development and operations. Furthermore, it might take

longer to implement this proposal due to the complexities of such a

database.

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Recently, the National Association of Unclaimed Property

Administrators (``NAUPA'') advised the Commission that it is in the

process of developing a national database of lost

securityholders.32 NAUPA indicated that most, if not all, of the

states that belong to the association will provide names and last known

addresses to its centralized database. The NAUPA database will be

accessible by any

[[Page 44255]]

person through the Internet for a nominal fee, which will be used to

maintain the database. NAUPA believes that a centralized database

managed by states is an effective way to return property to rightful

owners because states have considerable expertise in administering

unclaimed property programs and locating missing owners. However, the

Commission notes that NAUPA's database would not list a lost

securityholder until such securityholder's assets had escheated to a

state.

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\32\ Letter from Randall A. Ross, President, NAUPA, to Steven M.

H. Wallman, Commissioner, Commission (January 18, 1996). NAUPA

members represent fifty jurisdictions which have unclaimed property

laws.

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The Commission requests comment on the establishment of a national

lost securityholder database. Specifically, the Commission seeks

comment on whether such a database would be of significant benefit to

investors and the cost-effectiveness of such a database, particularly

in light of the potential impact of proposed Rule 17Ad-17. Comments

should also contrast the benefits of a national database with the data

collection concept proposed in Section III.

Commenters favoring a database should discuss, among other things,

(i) the entity best suited to administer the database, (ii) the

appropriate frequency of submission of information, (iii) the

allocation of costs to maintain and to operate the database, (iv)

methods of access to the database, and (v) the potential necessity for

and design of safeguards to prevent unauthorized access into the

database and to prevent fraud. In addition to the issues cited above,

the Commission is interested in obtaining comment with respect to

potential privacy concerns arising from the dissemination of financial

information via the Internet. The Commission also requests comment on

whether the NAUPA database or other available databases would be an

adequate mechanism to address the lost securityholder problem.33

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\33\ The Commission notes that in April of 1994, Indiana placed

all of its unclaimed property information on the Internet. Since

going on-line, Indiana has received approximately six additional

calls per week; however, professional search firms (i.e., entities

employed by corporate issuers to locate lost securityholders and

that charge lost securityholders a percentage of their assets for

such efforts) account for about sixty percent of the additional

calls. Very recently, Wyoming also placed its unclaimed property

information on the Internet.

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V. Initial Regulatory Flexibility Analysis

Section 603(a) 34 of the Administrative Procedure Act,35

as amended by the Regulatory Flexibility Act (the ``Flexibility Act'')

36 generally requires the Commission to undertake a Regulatory

Flexibility Act Analysis of all proposed rules or proposed rule

amendments to determine the impact of such rulemaking on ``small

entities.'' 37 Approximately 470 registered transfer agents

qualify as ``small entities'' for purposes of the Flexibility Act and

would be subject to the requirements of proposed Rules 17a-24 and 17Ad-

17. Of the approximately 650 registered broker-dealers that would be

classified as recordkeepers under proposed Rule 17a-24, approximately

85 are small entities.

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\34\ 5 U.S.C. 603(a).

\35\ 5 U.S.C. 551, et seq.

\36\ 17 Pub. L. No. 96-354 (September 19, 1980), 94 Stat. 1164,

reprinted in (1980) U.S. Code Cong. & Ad. News 1169.

\37\ Although section 601(b) of the Flexibility Act defines the

term ``small entity'' the statute permits agencies to formulate

their own definitions. The Commission published final definitions of

the term ``small business'' and ``small organization'' in Securities

Exchange Act Release No. 6380 (February 4, 1982), 47 FR 5215.

Section 240.0-10(h) defines a small transfer agent for purposes of

the Flexibility Act as follows:

For purposes of the Commission rulemaking in accordance with the

provisions of Chapter Six of the Administrative Procedure Act (5

U.S.C. 601 et seq.) and unless otherwise defined for purposes of a

particular rulemaking proceeding, the term ``small business'' or

``small organization'' shall . . .

(c) When used with reference to a broker or dealer, mean a

broker or dealer that:

(1) Had total capital (net worth plus subordinated liabilities)

of less than $500,000 on the date in the prior fiscal year as of

which its audited financial statements were prepared pursuant to

Sec. 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; . . .

(h) When used with reference to a transfer agent, mean a

transfer agent that:

(1) Received less than 500 items for transfer and less than 500

items for processing during the preceding six months (or in the time

that it has been in business, if shorter);

(2) Maintained master shareholder files that in the aggregate

contained less than 1,000 shareholder accounts or was the named

transfer agent for less than 1,000 shareholder accounts at all times

during the preceding fiscal year (or in the time that it has been in

business, if shorter); and

(3) Is not affiliated with any person (other than a natural

person) that is not a small business or small organization under

this section.

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The Commission has prepared an Initial Regulatory Flexibility

Analysis (``IRFA'') pursuant to the requirements of the Flexibility

Act, regarding the proposed rules. The IRFA notes that the proposed

rules are intended to reduce the number of securityholders with whom

contact is lost and to address the associated problems of undeliverable

dividend and interest distributions by establishing standards for

transfer agents with respect to their obligation to conduct searches in

an effort to locate such securityholders and by facilitating the

collection of data related to lost securityholders to permit

information distributors or others the opportunity to establish

databases in whatever form is most cost efficient. Proposed Rule 17Ad-

17 establishes a single standard for all transfer agents regardless of

size and is not anticipated to have any significant economic impact on

small entities. Similarly, proposed Rule 17a-24 sets forth a uniform

filing requirement for all recordkeepers and is not anticipated to have

any significant economic impact on the small entities subject to the

rule.

A. Rule 17Ad-17

Some registered transfer agents will not incur significant

additional compliance costs because they currently use an information

database to search for lost securityholders. Thus, the proposed

requirements will have a practical effect only on transfer agents that

do not presently conduct searches using an information database. The

Commission estimates that even for such transfer agents, the cost of

compliance with proposed Rule 17Ad-17 will be small.38 In

addition, because a transfer agent's cost of compliance generally will

be based upon the quantity of lost securityholders it must attempt to

locate, small transfers agents should not, on average, bear

disproportionately high compliance costs. On average, compliance costs

should be roughly proportional to the number of securityholder records

maintained by the transfer agent. Some database vendors may charge

discounted rates for bulk searches, which could inure to the benefit of

larger transfer agents. However, such discounts are small, and thus

they should not disadvantage small transfer agents significantly.

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\38\ Based upon information supplied to the Commission by

transfer agents, vendors other than the SSA and the IRS typically

charge $.95 to $1.75 per account for lost securityholder searches.

The charge for searches conducted through the SSA and IRS using

securityholder social security or tax identification numbers is

$3.00 per account.

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The proposed rule will impose on transfer agents an additional

recordkeeping requirement. The requirement has been broadly drafted to

provide transfer agents with sufficient flexibility to minimize

recordkeeping costs. Specifically, proposed Rule 17Ad-17 will require

that all recordkeeping transfer agents maintain records necessary to

demonstrate their compliance with the rule's requirements. The

Commission also is proposing an amendment to Rule 17Ad-7 to require

that transfer agents maintain the records required by the proposed rule

for a period of not less than three

[[Page 44256]]

years, the first year in an easily accessible place.

The Commission considered various alternatives to the proposed rule

and found no alternatives consistent with the proposed rule's objective

and the Commission's statutory mandate.39 However, as set forth in

Section II.B. above, the Commission is seeking comment on alternative

search and reasonable care standards including (i) a requirement that

transfer agents use technology reasonably designed to locate a lost

securityholder instead of following specific guidelines as to what

constitutes an acceptable database, (ii) a requirement that transfer

agents periodically assess the effectiveness and appropriateness of the

search procedures and technology they employ, and/or (iii) a

requirement that transfer agents' satisfaction of their reasonable care

obligations be based upon their search procedures meeting a

performance-based standard based on success in locating lost

securityholders.

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\39\ Among other things, the Commission considered (i) the

establishment of a national database to which transfer agents would

be required to submit the names of all lost securityholders and (ii)

the effects of a database to be established by the National

Association of Unclaimed Property Administrators and populated with

information provided by the states that will include the names of

all persons whose property has escheated to the states. In both

instances, securityholders would need to take affirmative action to

discover the existence of their lost assets. Because many if not

most lost securityholders are unaware that they have property which

is considered undeliverable and escheatable, many would not realize

the importance of accessing the database. With respect to the first

alternative, many of the same costs would be incurred by transfer

agents because they would need to submit the names of the lost

securityholders to the national database rather than to a database

service. With respect to the second alternative, lost

securityholders would be deprived of their assets for a longer

period of time because their names would not be included in the

database until their assets had escheated to the state. However, the

Commission believes that it may be beneficial to pursue one of the

alternatives as an additional mechanism for locating lost

securityholders in conjunction with the proposed rule.

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B. Rule 17a-24

Proposed Rule 17a-24 will impose some additional compliance costs

upon all registered transfer agents and such registered broker-dealers

that fall within the definition of recordkeeper under the rule.

However, the Commission estimates that the cost of compliance with

proposed Rule 17a-24 will be small 40 and that the impact of the

rule upon recordkeepers' operations will be insignificant, regardless

of the recordkeepers' size.

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\40\ Establishing filing capability through EDGAR should not

require any expenditure by recordkeepers because the Commission

supplies the necessary software. Even if the small entity does not

currently have computer capability, the entity should be able to

find a service provider to file on its behalf for a small charge.

The Commission estimates an additional administrative cost of

approximately $50.00 per year for gathering and transmission of the

required information and approximately $10.00 per year for the cost

of a long distance telephone call.

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The proposed rule will impose on registered transfer agents and

broker-dealers an additional recordkeeping requirement. The requirement

has been broadly drafted to provide transfer agents and broker-dealers

with sufficient flexibility to minimize recordkeeping costs.

Specifically, proposed Rule 17a-24 will require that all recordkeepers

under the proposed rule maintain records necessary to demonstrate their

compliance with the rule's requirements. The Commission also is

requiring that transfer agents maintain the records required by the

proposed rule for a period of not less than three years, the first year

in an easily accessible place.

The Commission considered various alternatives to the proposed rule

and preliminarily concluded that Rule 17a-24 best fulfilled the

proposed rule's objective and the Commission's statutory

mandate.41 However, as set forth in Section IV above, the

Commission is seeking comment on alternative information databases.

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\41\ As noted in footnote 37 above, the Commission considered

(i) the establishment of a national database to which transfer

agents would be required to submit the names of all lost

securityholders and (ii) the effects of a database to be established

by the National Association of Unclaimed Property Administrators and

populated with information provided by the states that will include

the names of all persons whose property has escheated to the states.

With respect to the first alternative, the Commission believes that

private vendors will be able to establish an effective database more

quickly than the Commission. As previously noted with respect to the

second alternative, lost securityholders would be deprived of their

assets for a longer period of time because their names would not be

included in the database until their assets had escheated to the

state.

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Commenters are encouraged to comment on any aspect of the analysis.

Such comments will be considered in the preparation of the Final

Regulatory Flexibility Analysis if the proposed rule is adopted. A copy

of the Analysis may be obtained by contacting Michele Bianco, Attorney,

Division of Market Regulation, U.S. Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC. 20549 at 202/942-4187.

VI. Paperwork Reduction Act

Certain provisions of proposed Rule 17Ad-17 and proposed Rule 17a-

24 may contain ``collection of information'' requirements within the

meaning of the Paperwork Reduction Act of 1995,42 and the

Commission has submitted them to the Office of Management and Budget

for review in accordance with 44 U.S.C. 3507(d). The titles for the

collection of information are: ``Proposed Rule 17Ad-17 (Transfer

Agents' Obligation to Search for Lost Securityholders)'' and ``Proposed

Rule 17a-24 (Data Collection for Private Databases).''

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\42\ 44 U.S.C. 3501 et seq.

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The collection of information under proposed Rule 17Ad-17 and under

proposed Rule 17a-24 is intended to facilitate greater accuracy of

transfer agents' and broker-dealers' records. The collection of

information is necessary to enable recordkeeping transfer agents, as

the usual custodians of the records that determine the ownership of

securities and the entitlement to corporate distributions, and broker-

dealers, as holders of customer assets, to reduce significantly the

number of lost securityholders.

Under the proposed rules, transfer agents and broker-dealers may

use any appropriate method (e.g., through computerized or manual means)

to collect the names of the lost securityholders. Under proposed Rule

17Ad-17, information must be submitted by transfer agents to a database

service that is automated. Broker-dealers and transfer agents must

submit information to the Commission pursuant to proposed Rule 17a-24

through computerized means. The information required to be collected by

Rule 17Ad-17 and Rule 17a-24 (i.e., the taxpayer identification numbers

of lost securityholders) generally is already maintained by registered

transfer agents and broker-dealers. Therefore, the Commission

anticipates that the increased costs imposed by the rules will be

relatively minimal.\43\

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\43\ The cost of compliance with proposed Rule 17Ad-17 will

depend on the number of undeliverable accounts at each transfer

agent. Based upon the information received from transfer agents and

broker-dealers, the Commission believes there will be approximately

250,000 securityholders lost annually by all transfer agents. The

Commission estimates that approximately $3.00 will be spent per

account (comprised of approximately $1.00 for each of two searches

and approximately $1.00 in increased administrative costs for

downloading and forwarding the information). Therefore, the

estimated total annual cost for all transfer agents is $750,000.

The cost of compliance with proposed Rule 17a-24 should be a

minimal amount comprised of the cost of a long distance telephone

call and administrative costs. Transfer agents and broker-dealers

will be required to make an annual electronic filing. Filing

capability through EDGAR should not require any significant start-up

expense. The Commission estimates a long distance telephone charge

of approximately $10.00 per year and an additional administrative

cost of approximately $50.00 per year for downloading and forwarding

the information. Thus, at a total cost of approximately $60.00 per

year for each recordkeeper, the total annual cost for all

recordkeepers is estimated to be $129,000.

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The proposed rules also require that all recordkeeping transfer

agents (and all recordkeepers with respect to

[[Page 44257]]

proposed Rule 17a-24) maintain records necessary to demonstrate their

compliance with the rules' requirements. This recordkeeping requirement

is intended to provide transfer agents and broker-dealers with

sufficient flexibility to record and to maintain necessary information

in a manner that minimizes recordkeeping costs. The Commission will

require that transfer agents (and all recordkeepers with respect to

proposed Rule 17a-24) maintain the records required by the proposed

rules for a period of not less than three years, the first year in an

easily accessible place.

The Commission does not anticipate that the collection of

information will result in any significant burden to transfer agents or

broker-dealers. The likely respondents to the proposed collection of

information under proposed Rule 17Ad-17 will be the approximately 1500

registered transfer agents. The likely respondents to the proposed

collection of information under proposed Rule 17a-24 will be the

approximately 1500 transfer agents and approximately 650 of the

registered broker-dealers. The Commission estimates registered transfer

agents will devote approximately five hours per year \44\ to providing

information on lost securityholders to third party database vendors,

totalling 7,500 hours industry-wide. The Commission estimates

registered transfer agents and broker-dealers will devote approximately

two hours per year to make the required annual filing under proposed

Rule 17a-24, totalling 4300 hours industry-wide.\45\

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\44\ Transfer agents will need to submit this information to a

database a maximum of four times a year to insure that a search is

made within three months of a securityholder becoming lost. Each

download and forwarding of information should take approximately 1.2

hours.

\45\ Recordkeepers will submit information once a year. Each

download and transmission of information should take approximately

two hours.

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The collection of information under proposed Rule 17Ad-17 and

proposed Rule 17a-24 would be mandatory. Any information collected

pursuant to proposed Rule 17Ad-17 or proposed Rule 17a-24 would not be

confidential. Unless a valid Office of Management and Budget (``OMB``)

control number is displayed, for Commission may not sponsor or conduct

or require response to an information collection.

Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits

comments to--

(i) Evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the agency,

including whether the information shall have practical utility;

(ii) Evaluate the accuracy of the agency's estimate of the burden

of the proposed collection of information;

(iii) Enhance the quality, utility, and clarity of the information

to be collected; and

(iv) Minimize the burden of the collection of information on those

who are to respond, including through the use of automated collection

techniques or other forms of information technology.

Persons desiring to submit comments on the collection of

information requirements should direct them to the Desk Officer for the

Securities and Exchange Commission, Office of Information and

Regulatory Affairs, Office of Management and Budget, Washington, D.C.

20503, and should also send a copy of their comments directly to the

Commission. OMB is required to make a decision concerning the

collections of information between thirty and sixty days after

publication, so a comment to OMB is best assured of having its full

effect if OMB receives it within thirty days of publication.

VII. Burden on Competition

The Commission believes that the proposed rules will not have a

significant impact on transfer agent or broker-dealer competition.

Under proposed Rule 17Ad-17, all transfer agents will be subject to the

same specified minimum standard for reasonable care in attempting to

locate securityholders with whom contact has been lost. Similarly,

proposed Rule 17a-24 will require all transfer agents and broker-

dealers to submit the same information to the Commission.

The cost of compliance with proposed Rule 17Ad-17 is minimal.\46\

For many transfer agents that currently conduct securityholder searches

using an information database, proposed Rule 17Ad-17 will pose no

additional cost. Because a transfer agent's cost of compliance

generally is based upon the number of securityholders it must attempt

to locate, transfers agents regardless of their size and exercising

comparable care should incur comparable relative costs. On average,

compliance costs should be roughly proportional to the number of

securityholder records maintained by the transfer agent. In addition,

the extent of the effort required by a transfer agent to meet its

reasonable care obligations will require a balancing of cost against

the value of assets at issue. Accordingly, larger transfer agents which

are likely to have a greater proportion of accounts of considerable

value, often will be required to take more extensive measures and incur

greater costs in meeting their reasonable care obligations under

proposed Rule 17Ad-17.

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\46\ Supra note 43.

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With respect to proposed Rule 17a-24, the cost of compliance also

should be minimal.\47\ While the cost to each entity will be

approximately the same regardless of the entities' size (i.e., the

number of lost securityholders should not affect significantly the

amount of time it takes to collect the information and to transmit it

to the Commission), the total cost to each entity should be so limited

as to not raise competition concerns.

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\47\ Supra note 43.

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VIII. Text of the Amendments

List of Subjects

17 CFR Part 232

Reporting and recordkeeping requirements; Securities.

17 CFR Part 240

Transfer agents; Broker-dealers; Reporting and recordkeeping

requirements; Securities.

For the reasons set out in the preamble, the Commission proposes to

amend Chapter II of Title 17 of the Code of Federal Regulations as

follows:

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR

ELECTRONIC FILINGS

1. The authority citation for part 232 continues to read as

follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 77sss(a),

78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79t(a), 80a-8, 80a-

29, 80a-30 and 80a-37.

2. By amending Sec. 232.101 paragraph (a)(1)(iv) by revising the

phrase ``format; and'' to read ``format;''.

3. By amending Sec. 232.101 paragraph (a)(1)(v) by revising the

phrase ``et seq.).'' to read ``et seq.); and''.

4. By adding paragraph (a)(1)(vi) to Sec. 232.101 to read as

follows:

Sec. 232.101 Mandated electronic submissions and exceptions.

(a) * * *

(1) * * *

(vi) Documents filed with the Commission pursuant to Sec. 240.17a-

24 of this chapter.

* * * * *

5. By amending Sec. 232.101(c)(11) by revising the phrase

``Regulation;'' to read ``Regulation, other than those filed with the

Commission pursuant to Sec. 240.17a-24 of this chapter;''

[[Page 44258]]

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

1934

6. The authority citation for part 240 continues to read in part as

follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,

77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,

78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-

37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.

* * * * *

7. By adding Sec. 240.17a-24 to read as follows:

Sec. 240.17a-24 Reports of Lost Securityholders.

(a) Each recordkeeper shall file electronically with the Commission

on or before May 31 of each year a list of the taxpayer identification

numbers (e.g., social security number or employer identification

number) of all lost securityholders for which such recordkeeper

maintains records of ownership interests as of May 1 of such year. The

list of lost securityholders shall include the name and telephone

number of the appropriate person to contact at the recordkeeper.

(b) For purposes of this section:

(1) Lost securityholder means the holder of record of a security or

any person from whom or on whose behalf a recordkeeper has received,

has acquired, holds, or carries securities;

(i) To whom two separate items of correspondence that were sent by

first class mail by the recordkeeper at least three months apart have

been returned as undeliverable; and

(ii) For whom the recordkeeper has not received information

regarding the securityholder's new address.

(2) Recordkeeper means:

(i) A member of a national securities exchange, a registered broker

or dealer, or a registered municipal securities dealer which maintains

records of securities received, acquired, held, or carried by or on

behalf of such entity for the account of any securityholder; or

(ii) A recordkeeping transfer agent as defined in Sec. 240.17Ad-

9(h).

(c) Every recordkeeper shall maintain such records necessary to

demonstrate compliance with the requirements set forth in this section.

Such records shall be maintained for a period of not less than three

years, the first year in an easily accessible place.

8. By amending Sec. 240.17Ad-7 by adding paragraph (i) to read as

follows:

Sec. 240.17Ad-7 Record retention.

* * * * *

(i) The records required by Sec. 240.17Ad-17(c) shall be maintained

for a period of not less than three years, the first year in an easily

accessible place.

9. By adding Sec. 240.17Ad-17 to read as follows:

Sec. 240.17Ad-17 Transfer agents' obligation to search for lost

securityholders.

(a)(1) Every recordkeeping transfer agent whose master

securityholder file includes accounts of lost securityholders shall

exercise reasonable care to ascertain the correct address of such

securityholders. In exercising reasonable care to ascertain for its

master securityholder file such lost securityholders' current address,

each recordkeeping transfer agent shall conduct two database searches

using at least one information database service. The transfer agent

shall search by name (if reasonably likely to locate the

securityholder) or taxpayer identification number (e.g., social

security number or employer identification number). Such database

searches must be conducted without charge to a lost securityholder and

with the following frequency:

(i) Within three months of such securityholder becoming a lost

securityholder; and

(ii) Between one year and eighteen months after the transfer

agent's first search for such lost securityholder.

(2) A transfer agent may not use a search method or service to

establish contact with lost securityholders that results in a charge to

a lost securityholder prior to completing the searches set forth in

paragraphs (a)(1)(i) and (a)(1)(ii) of this section.

(b) For purposes of this section:

(1) Information database service means any automated database

service that:

(i) Contains addresses of United States residents including

addresses in the geographic area in which the lost securityholder's

last known address is located;

(ii) Covers a reasonably broad geographic area;

(iii) Is indexed by name or taxpayer identification number; and

(iv) Is updated at least four times a year.

(2) Lost securityholder means a securityholder:

(i) To whom two separate items of correspondence that were sent by

first class mail at least three months apart have been returned as

undeliverable; and

(ii) For whom the transfer agent has not received information

regarding the securityholder's new address.

(c) Every recordkeeping transfer agent shall maintain such records

necessary to demonstrate compliance with the requirements set forth in

this section.

Dated: August 22, 1996.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-21892 Filed 8-27-96; 8:45 am]

BILLING CODE 8010-10-P