Financial advisors (FAs) are a critical link—and often the last line of defense—in a process that brokerage firms, mutual fund companies and other asset custodians are establishing to protect client assets from state claims.
If the statutory dormancy period passes without reestablishing contact with the owner, then a presumption of abandonment arises; this presumption is, however, rebutted if the holder successfully contacts the owner prior to being required to report the property to the state.
Broker/dealer firms are generally aware of their compliance obligations under state unclaimed property laws. However, those firms have recently become the target of multistate audits conducted by contingent fee auditors for which firms may not be prepared. In connection with those audits, states are considering whether investment accounts (both retirement accounts and retail brokerage accounts) are “dormant” and subject to escheat. Thus, your clients’ assets—be they retirement accounts or non-retirement brokerage, mutual fund or other types of accounts—are likely currently under scrutiny by states that will determine whether your clients have an active account or have otherwise demonstrated their interest in such assets.
If the state of your client’s last known address determines that her assets are “dormant,” it may claim such assets under its escheat laws, which authorize the state to liquidate the assets and use the cash value for its own purposes while the owner remains “lost.”
FAs’ Role in Preventing Dormancy of Investment Assets and Accounts
The contingent-fee audit firms are actively asserting liability against both brokerage firms and mutual fund companies and are basing state claims to assets on owner inactivity, even in cases where: (1) owners have delegated authority to their FAs to trade in the account, (2) owners established dividend reinvestment elections and automatic electronic distribution orders that result in regular movement of cash into/out of accounts, and/or (3) no mail sent to the owner (including tax returns and account statements) has been returned as undeliverable.
When a brokerage firm is under audit, the best information regarding the active status of an account may lie in the FA’s hands—records of meetings, phone calls, confirms and the like. (This means that the more contact an FA has with his/her clients, the easier it is to demonstrate the active status of accounts.) Even if a client has not been in touch with his/her FA in some time, the FA likely is in the best position to reach out and make affirmative contact with the owner; documentation of an FA’s successful outreach is currently being used to prove the owner’s awareness of and interest in investment property for purposes of these audits.
Industry Coordination Is Essential
An FA’s response to outreach from the firm that is holding such assets may be necessary to prevent a presumption of abandonment from arising and the assets being remitted to the state. The risk to your clients is clear and present: Most states liquidate investment assets within a short period of time (indeed, some states do so within a few weeks of receipt of the assets!), and states will only return the cash value as of the date of liquidation. This means that clients who followed “buy and hold” investment philosophies may later discover that their retirement savings and the upside of such a strategy have been adversely impacted by the states’ exercise of “custodial” escheat laws.
Trade associations such as SIFMA (Securities Industry and Financial Markets Association), ICI (Investment Company Institute), SSA and UPPO (Unclaimed Property Professionals Organization) are all monitoring these state and contract audit firm practices and can provide further education and resources if you or your firm is impacted.
Kendall L. Houghton, Alston & Bird partner and co-head of the Unclaimed Property Group, and Matthew P. Hedstrom, partner in the group, co-authored the recently released third edition of Bloomberg BNA’s Unclaimed Property (Portfolio 1600), a comprehensive overview of the National Conference of Commissioners on Uniform Laws' (NCCUSL) Uniform Unclaimed Property Acts.