Britons Blindsided by U.S. Escheat Laws
Jessica Gorst-Williams, the "Agony Aunt" of U.K. newspaper The Telegraph recently ran an help column relating to a U.K. resident's complaint that her shares were escheated to the State of Delaware without her knowledge. Accordingly to the unlucky shareholder, her shares were turned over to the state "because I had not made any contact with the company since receiving the shares, the necessity of which I had no prior knowledge."
Ultimately, the shareholder had to submit her driver's license, passport, bus pass (seriously), as well as a copy of the actual stock certificate. After jumping through these hoops, did our heroine across the pond get her stock back? Not exactly. Instead, she got a check for $1, as the state had already liquidated the stock without her consent at the then-market value.
This story is far from unique. Every year, certain states require broker/dealer firms to turn over stock positions, which are in many cases summarily liquidated, based upon nothing more than the fact that the account owner did not engage in activity during the previous 3-5 years.
By way of background, all states require the reporting and delivery of dormant securities positions. However, the manner in which this "dormancy" is measured differs among the states. There are generally two styles. In "Returned Mail" (sometimes called "RPO" (Returned by Post Office)) states, the three to five year time period after which the broker must turn over "abandoned" securities to the state does not begin to run until one or more mailed account statements are returned to the broker as undeliverable by the postal service. In "activity" states, on the other hand, the dormancy period begins to run immediately after the last owner-generated activity in the account. In other words, when you open up a brokerage account subject to the unclaimed property jurisdiction of an "activity" state, the dormancy period begins to run immediately. If you don't trade in that account or engage in some other activity, your securities will be deemed abandoned at the end of three to five years.
While the passage of time alone might make sense to require the escheat of certain items (i.e., payroll checks - which generally aren't held for a long time), it doesn't make sense when it comes to securities accounts, many of which are being held for the long term. While investment advice is not something this blog is qualified to provide, it is nonetheless true that "Buy and Hold" (or passive investing) has been a popular investment strategy for decades. Thus, escheating securities to the state (where they may be quickly liquidated) simply because of a lack of activity seems inconsistent with how many owners utilize their investment accounts.
Adding financial insult to injury, the overwhelming majority of states do not hold those securities escheated to them in the name of the rightful owner. Instead, most states' laws, including those that have adopted the recent 2016 Uniform Unclaimed Property Act, provide that the state may sell securities after three years, and that generally the rightful owner is entitled only to the proceeds of the sale. In other words, the owner loses any increase in value of those securities after they are sold by the state.
Unfortunately, it does not look like these practices are waning. For example, a bill currently making its way through the Arkansas legislature would permit the Administrator of unclaimed property in that state to sell escheated securities immediately upon receipt, instead of holding them for three years. Thus, the states' every increasing appetite for unclaimed property has shifted the burdens of maintaining ownership squarely onto the shoulders of the owner. Now, more than ever, it is important for owners to keep tabs on their securities accounts, even if they are holding for the long term.
Ultimately, the shareholder had to submit her driver's license, passport, bus pass (seriously), as well as a copy of the actual stock certificate. After jumping through these hoops, did our heroine across the pond get her stock back? Not exactly. Instead, she got a check for $1, as the state had already liquidated the stock without her consent at the then-market value.
This story is far from unique. Every year, certain states require broker/dealer firms to turn over stock positions, which are in many cases summarily liquidated, based upon nothing more than the fact that the account owner did not engage in activity during the previous 3-5 years.
By way of background, all states require the reporting and delivery of dormant securities positions. However, the manner in which this "dormancy" is measured differs among the states. There are generally two styles. In "Returned Mail" (sometimes called "RPO" (Returned by Post Office)) states, the three to five year time period after which the broker must turn over "abandoned" securities to the state does not begin to run until one or more mailed account statements are returned to the broker as undeliverable by the postal service. In "activity" states, on the other hand, the dormancy period begins to run immediately after the last owner-generated activity in the account. In other words, when you open up a brokerage account subject to the unclaimed property jurisdiction of an "activity" state, the dormancy period begins to run immediately. If you don't trade in that account or engage in some other activity, your securities will be deemed abandoned at the end of three to five years.
While the passage of time alone might make sense to require the escheat of certain items (i.e., payroll checks - which generally aren't held for a long time), it doesn't make sense when it comes to securities accounts, many of which are being held for the long term. While investment advice is not something this blog is qualified to provide, it is nonetheless true that "Buy and Hold" (or passive investing) has been a popular investment strategy for decades. Thus, escheating securities to the state (where they may be quickly liquidated) simply because of a lack of activity seems inconsistent with how many owners utilize their investment accounts.
Adding financial insult to injury, the overwhelming majority of states do not hold those securities escheated to them in the name of the rightful owner. Instead, most states' laws, including those that have adopted the recent 2016 Uniform Unclaimed Property Act, provide that the state may sell securities after three years, and that generally the rightful owner is entitled only to the proceeds of the sale. In other words, the owner loses any increase in value of those securities after they are sold by the state.
Unfortunately, it does not look like these practices are waning. For example, a bill currently making its way through the Arkansas legislature would permit the Administrator of unclaimed property in that state to sell escheated securities immediately upon receipt, instead of holding them for three years. Thus, the states' every increasing appetite for unclaimed property has shifted the burdens of maintaining ownership squarely onto the shoulders of the owner. Now, more than ever, it is important for owners to keep tabs on their securities accounts, even if they are holding for the long term.