Investors should be aware of a potential risk with their stock investments: the risk of their stock being declared abandoned by the state. This does not require them to pass away or to move to another location. They may still receive statements and automatic dividends, but their accounts could still be considered abandoned.
State Laws on Unclaimed Property
States have updated their unclaimed-property laws over the last few years. These changes make it easier for securities to be declared abandoned. Previously, most states considered stocks abandoned after seven years of inactivity. Now, more than half the states have reduced that period to three years. A shift from requiring returned mail to simply deeming accounts inactive has made it easier for governments to seize accounts not actively engaged.
Computershare, a leading stock transfer agent, notes this trend, which they describe as unfortunate. Once considered lost, states labeled stocks ‘abandoned’ even if dividends are regularly deposited and statements are issued.
Risks to Long-term Investors
Many long-term investors abide by the principle of ‘buy and hold.’ This practice can put them at risk of having their investments deemed abandoned. Computershare advises that receiving statements or dividends alone may not meet state activity criteria.
The financial system may know where your dividends go but still consider you missing.
When an account is identified as dormant, the owner is notified. If the response isn’t adequate, the securities may be transferred to the state and sold. For Jan Peters, a German citizen affected by this, California sold 1,029 of his Amazon shares worth $1.6 million. He was paid the sale proceeds, but lost potential appreciation of over $2.6 million. His legal challenge for recovery reached the Supreme Court but was declined.
Consumer Protection and State Benefits
States claim these laws protect consumers, acting as a secure lost-and-found for forgotten assets. The state maintains custody, making it easier for the owner to reclaim them. However, states benefit financially, using portions of the funds while waiting for owners.
For instance, Texas expected a $72 million gain to their General Revenue Fund by reducing dormancy periods in 2011. New Jersey projected a revenue increase from $90 million to $309 million annually with similar changes.
Challenges and Concerns
The system incentivizes various parties. Transfer agents, brokers, and other stakeholders gain financially from processing accounts as unclaimed property, while investors seek protection and stability.
The Securities and Exchange Commission (SEC) has addressed failures in administering unclaimed-property laws, such as issues with Bank of New York and DST Asset Manager Solutions, highlighting potential system pitfalls.
Calls for Reform
Sen. Elizabeth Warren inquired into state practices on unclaimed-property standards. Florida has introduced reforms that reinstate returned mail or failed electronic communication as verification measures, leading to logical management of ownership.
If you know who I am, you know where I am, and there is evidence that the account belongs to me, my stock isn’t abandoned.
Unclaimed-property laws originally protected genuinely lost assets, not inactive ones. Proper ownership should be acknowledged as valid and respected.
This article reflects opinions and analysis of current legislative trends affecting stock ownership.