Inactivity vs. Returned Mail

2011 UPPO ANNUAL CONFERENCE

MARCH 6-9, 2011

Inactivity vs. Returned Mail Debbie L. Zumoff, Moderator Chief Compliance Officer Keane

Inactivity vs. Returned Mail Panel: Paul Griffith, Senior Manager - US Operations, Computershare Sal Bianco, Director of the Governance Control Division, E*Trade Paul Shlenker, Vice President, Prudential Mutual Funds Services LLC Val Golin, Head of Accounting Operations, ING Direct

Strict Statutory Construction v. Industry Practice State statutes can be broken into 4 categories: 1) RPO Only 2) Inactivity Only 3) RPO and Inactivity 4) RPO or Inactivity

© 2011 UPPO. All rights reserved.

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MARCH 6-9, 2011

Strict Statutory Construction v. Industry Practice (Continued) • Some states distinguish between dividend paying holders and Nondividend paying holders • Some states have separate provisions for DRP and Non-DRP Property

What Constitutes Activity? • Electronic Contact v. Paper • Non-return Non return of 1099s • Verified internet contact (login and password required) • Verified Phone contact

Compliance Hurdles • Information systems not tracking inactivity • Inability to comply without significant manual research • Funds grappling with methodologies to capture and audit inactivity • States supplying conflicting explanations of date of last contact


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MARCH 6-9, 2011

Inactivity y v. Returned Mail TRANSFER AGENT PERSPECTIVE

Background • Commercial TA’s maintain security holder information for more than 15,000 issuers and approximately 100 million accounts • Historically, Historically securities escheated only where the security holder was deemed “lost” per SEC Regulation 17-AD-17 • As states have become more aggressive in collection, re-interpretation of state statutes has become necessary

Defining Inactivity • Easier Analysis: – Dividend Paying y g Entities

• Difficult Analysis: – Non-Dividend Paying Entities – Dividend Reinvestment Accounts


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MARCH 6-9, 2011

Illinois Case Study ‐ 2010

Impact • Numbers for 6 major issuers (2009 versus 2010) • Eligible for due diligence based on “lost” interpretation in 2009, “contact” interpretation in 2010 – 2009 – Due diligence mailed to 5,300 holders holding 103,000 shares – 2010 – Due diligence mailed to 25,900 holders holding 7,475,000 shares • What does this cost? • Example - DRP

Inactivity y v. Returned Mail ONLINE BROKER/DEALER PERSPECTIVE


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MARCH 6-9, 2011

Customer Date of Last Contact (DOLC) 

Owner-generated activity precludes escheatment.



E*TRADE utilizes a Data Warehouse as the information hub for readily accessing and managing customer data records. 



The following modes of interaction qualify to update a customer’s contact date thereby preventing escheatment. 

Inbound Phone / IVR



Inbound Fax



Inbound Mail



User Web-Login



In-Person



Secure Message / Email



General Transactions (bookkeeping) - Bank & Brokerage Transactional Codes

Details are captured through a variety of internal applications which are then fed and stored centrally in a Data Mart

Returned Mail/Postage (RPO)  Evolving regulatory landscape in unclaimed property and the new impact to broker-dealers  Dodd-Frank Act signed into law July, 2010 ( (expansion i off currentt SEC rules l and d more active role in federal government)  Provision to begin tracking returned mail and enhancements to the due diligence process  Reporting mechanism identified for capturing data points on undeliverable client-facing material

Inactivity v. Returned Mail MUTUAL FUND PERSPECTIVE


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MARCH 6-9, 2011

Federal Law v. State Regulations SEC Rule 17Ad-17

State Regulations

• Transfer Agent: shareholder is • Certain states use “no contact” or “inactivity” as the escheatment lost if mail is returned to the trigger which may supplement or fund company as p replace RPO undeliverable undeliverable • Investors who don’t affirmatively contact the fund company are considered lost shareholders even • A second piece of mail must though shareholder mail is not be sent to shareholder within RPO 30 days of the first piece of • Accounts without financial activity mail being returned for a specified length of time could be deemed “inactive” • If returned again as • Some states require either verbal undeliverable, the return of or written communication from a client to constitute “contact” this second piece of mail is deemed to be the RPO date 16

Triggers For State Escheatment Inactivity / No Contact Rule – Accounts without financial activity for a specified length of time and/or no verbal or written communication from a client RPO – Undeliverable mail Returned by the Post Office State Escheatment S d d Standard

Number of States

States

RPO Only

2

AK, VA

Inactivity and RPO

10

CA, MI, MO, NE, GA, MA, IA, UT, WY, NY

Inactivity or RPO

22

AL, AZ, AR, HI, IN, KS, LA, ME, MT, NV, NM, NC, WV, NH, NJ, VT, FL, OK, SC, TX, OH, WI

Inactivity Only

16

CO, MN, MS, ND, RI, SD, ID, MD, WA, IL, KY, PA, TN, OR, CT, DE

The above information was provided by The Keane Organization effective 7/8/2010.

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Challenges and Issues Associated with Inactivity/No Contact • Defining “Contact” among states with no contact standard, there is no uniform definition of what constitutes contact • There are various systems infrastructure challenges to gather contact information from various sources • Defining “Customer” Prudential Mutual Funds are intermediary sold and we define our customer as the broker dealer/financial professional • Many shareholder only communicate with their Financial Professional who in turn submit their orders and maintain their account • It is generally believed that the federal standard is consistent with a fund’s fiduciary responsibility to it’s shareholders


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MARCH 6-9, 2011

Definition of “Inactivity/Contact” Varies by State Contact Standard

States

Example

Cashed Dividend or Distribution Check

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NY, NJ, AC, AZ, NC

Owner must communicate in writing with 16 issuer/holder within dormancy period within dormancy period

NY, NH, PA, VA, KY

Owner must establish documented “general” contact with issuer/holder

NJ, FL, HI, AZ, MS

37

Exercise Act of Ownership

2

DE, TN

Unreturned Mail or 1099

39

CT, NY, WY, CA, MI

The above information was provided by The Keane Organization effective 7/8/2010.

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Moving Forward - Address technical requirement of state regulations - Define customer base that is directly held and not intermediated by a broker dealer/advisor - Define “Contact” and “Activity” elements that need to be captured to substantiate last contact - Establish Date of Last Contact field on shareowner recordkeeping platform - Develop “state specific” logic and process to capture contact elements and to appropriately update date of last contact field - Develop “and/or” logic by state to trigger dormancy period via traditional RPO date or date of last contact

Inactivity vv. Returned Mail

ONLINE BANKING PERSPECTIVE


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MARCH 6-9, 2011

ING DIRECT - BACKGROUND • Online federal savings bank: 10 years old, $90B in assets/$78B in deposits, 2,300 employees, 7M customers • Operates in all 50 States and DC • Primary products subject to escheatment: – Banking products: CDs, savings, checking, IRAs – General ledger items: uncashed checks (vendor, payroll, overpayments) • Inactivity is primary driver for escheatment • ONLY $9M (0.2%) in balances escheated lifetime to date

“Customer Initiated” Contact • Online PIN validated log-ins – Electronic tax reports – 85% of customers considered “electronic” • Financial transactions • Phone contact (identify verified)

Top “Pain Points” • Management buy-in to achieve compliance; ongoing support • Philosophy shift from “save for rainy day” to “and by the way; check in annually” • Bad B d addresses/contact dd / t t info i f • IT resources/development (thousands of transaction codes, what to include or exclude?) • Variation by State for laws • State Audit education process and resource drain – New York State “tango”


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MARCH 6-9, 2011

Compliance – Bankwide “Committee” Effort • Accounting – Process owner; State filings & payments • IT – “Last contact date” calculation, warehouse reporting extractions, website “speed bump” page • Marketing/Public relations – Education campaigns • Operations – Account maintenance, mail coordination • Legal/Compliance – Assists with audits, legislation compliance • Sales – Outbound calling campaigns, call volume monitoring • EVERYONE – EDUCATION and AWARENESS!

QUESTIONS? Debbie L. Zumoff, Keane 610.232.0704, [email protected] Paul Griffith, Computershare 781.575.2825, [email protected] 781 575 2825 paul griffith@computershare com Sal Bianco, E*Trade 201.499.0771, [email protected] Paul Shlenker, Prudential Mutual Funds Services LLC 973.367.3742, [email protected] Val Golin, ING Direct 302.255.3075, [email protected]


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