Financial Services: Unclaimed Property Compliance Beyond Securities

April 18, 2018

By now it’s fair to say the unclaimed property community is aware of third party auditors recent focus on securities, specifically the publicly traded shares of corporations of all shapes and sizes.  Client generated activity (”CGA”) and contact have a red carpet worthy spotlight on them and constantly changing legislation makes compliance a never ending battle.  Transfer agents, publicly traded companies and their advocates have their work cut out for them.  But what lies beyond securities?

There are additional unique challenges facing the financial services industry beyond securities.    As a financial services professional involved with or responsible for the unclaimed property process, are you aware of what else is out there?  The answer to that question is part of what makes understanding the impact of unclaimed property issues on the financial services industry so difficult to assess.  Let’s start with two basic questions: how well do you know your organization, and how well do you know your clients?

Knowing Your Organization

Having spent a combined 7 years managing the unclaimed property process at two different international investment banks, I was surprised to see that no matter how much I thought I knew and the awareness I brought to the process, there was always something I didn’t know.  And that’s no fault of my own.  I noticed that although people in my organizations knew there were aged credit balances out there or that our firm was performing a process different from our peers, they didn’t quite understand what unclaimed property was nor were they aware of the escheatment process.  Through my experience, I found the keys were education and asking thought provoking questions as often as possible to anyone you think might be knowledgeable of a process.  Be known as the “squeaky wheel” – someone will pay attention.    

  • Ask questions of your Finance department.  Legal entity controllers – they are the ones closest to the financials of individual corporate entities and should be a part of the unclaimed property compliance process. Find out which department (if not accounts payable) is responsible for making other payment obligations (i.e., payments relating to execution services or exchange fees) on behalf of your firm or as a service provided to your clients. 
  • Ask questions of your Middle Office.  Product controllers are the ones closest to each individual trading product and will be able to provide insight into the trade clearing process, specifically the process relating to trade differences. And this applies to more than “plain vanilla” products.  You won’t know what is out there relating to futures, commodities, origination’s, etc. until you ask.
  • Ask questions of the team that handles client mailings and your mail-room.  Find out if the process is performed in house or outsourced and where returned mail gets delivered to. Inquire if they handle mailings for all products. I was surprised when I found out all the other product areas that produced their own client statements and had their own mailing process.

Another avenue is the control structure that is currently in place at your organization.  Are you aware of what types of financial/internal controls  are in place that can help drive unclaimed property tracking prior to a property becoming dormant?  All publicly traded companies have an obligation to comply with Sarbanes-Oxley Act Section 404 (“SOX 404”) in addition to a series of FINRA regulations over supervisory controls and procedures (FINRA 3110, 3120 and 3130).   These types of controls are well documented and require annual testing and certification.  Embedded within these controls may be clues to your firm’s identification and treatment of cash balances that could eventually become unclaimed property.

Knowing Your Clients

Sounds like an easy topic.  Or is it?  I’ve found over the years that this could be a little trickier than it sounds and could change the way you manage the unclaimed property process.  As mentioned earlier, CGA and contact are very much at the forefront of securities focused audits but do the same activity and contact criteria apply to all kinds/types of client accounts?  That answer depends on who your clients are. 

In a retail environment, clients are typically people – you and me, mom and pop, who usually don’t have very exotic portfolios.  Assets are in custody at the firm where the account is held and they could be self-directed or discretionary (managed by the associated broker).  These are the accounts that would fall under the parameters of SEC 17ad-17, so the outreach process starts long before the state due diligence process begins.

Once the client base strays from the retail environment, things get to be even more confusing. Pretty much every process relating to a non-retail account, from account opening, to trade processing and settlements, to corporate action processing, to who has custody of the assets, is different from that of a retail account and the type of account can vary based on the primary type of business of the firm. The client base can include, but not be limited to, institutional clients, qualified investors, money managers, investment managers, hedge fund managers, alternative investments and prime services just to name a few.  These types of accounts also fall into the category of “non-humans”, exempt from SEC 17ad-17, therefore client outreach is typically left until necessitated by state due diligence requirements.

Adding to the challenge, there can be one account for this type of client, which is rare, or there can be thousands of accounts (“children”) associated with one main account (“parent”) which is a more likely scenario.  It is critical to understand who your firm has the relationship with as this will drive the unclaimed property process and, either increase or relieve your headaches.

Knowing Your Next Steps

Understanding an organization and the associated client base will help point a successful unclaimed property manager in the right direction when it comes to identifying and understanding any unique unclaimed property scenarios.  As a manager with oversight over the unclaimed property process, this is not something I knew or was able to ascertain just from looking at books and records.  I needed to ask and get educated. When in doubt, ask a question.  Ask questions until you know you have the right resources involved in the process and that those resources are fully invested.

Engaging with an unclaimed property professional can provide guidance and support to set you on the right track of managing escheat compliance in the complex world of Financial Services. Working with an expert can save in-house time & resources and bring peace of mind that risk and exposure can be minimized.     

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