Escheatment

A firm issues a redemption check to a customer, and months later the check still has not been cashed. What should the firm's cashiering function do regarding this outstanding item?

1. A.Track and follow up on the outstanding, uncashed check, since an item that remains unclaimed for an extended period can eventually become subject to the state's unclaimed property (escheatment) process if the customer is never reached and the check is never cashed.Correct. The firm must track and follow up on outstanding checks, which can eventually lead to escheatment.
2. B.Nothing -- once a check has been issued and mailed, the firm's responsibility for that item ends regardless of whether it is ever actually cashed.Wrong. The firm's responsibility does not end once the check is mailed; it must track and follow up on the outstanding item.
3. C.Automatically reissue an identical check every thirty days indefinitely, without ever escalating the item for further review.Wrong. Automatic indefinite reissuance without escalation is not the appropriate handling; the item must be actively tracked and can lead to escheatment.
4. D.Immediately reverse the underlying redemption and restore the position to the customer's account, since an uncashed check means the redemption never actually completed.Wrong. An uncashed check does not mean the underlying redemption should be automatically reversed.

Why: An issued check that never gets cashed does not simply disappear from the firm's responsibility once it is mailed. The firm needs to track and follow up on outstanding, uncashed items, because a check that stays unclaimed for an extended period, with the customer never reached and the item never cashed, can eventually become subject to the state's unclaimed property process, the same escheatment mechanism that applies to a dormant account.

A firm identifies an account that appears to meet the criteria for dormancy under applicable state law. Before actually remitting the account's assets to the state, what is the firm generally expected to do first?

1. A.Remit the assets to the state immediately upon identifying an account that meets the dormancy criteria, since no further action by the firm is expected beforehand.Wrong. The firm is generally expected to make reasonable contact efforts before remitting the assets.
2. B.Wait indefinitely for the customer to make contact on her own initiative, without the firm making any attempt to reach her first.Wrong. The firm is expected to make its own reasonable contact attempts, not simply wait indefinitely.
3. C.Transfer the account to a different broker-dealer selected by the firm, rather than remitting it to the state at all.Wrong. Transferring the account to another broker-dealer is not the expected due diligence step before escheatment.
4. D.Make reasonable due diligence efforts to contact the customer at her last known address (and through other available means) before remitting the assets, giving her an opportunity to reactivate the account before it is actually escheated.Correct. Reasonable due diligence contact attempts are expected before the firm actually remits assets under escheatment.

Why: Before actually remitting a dormant account's assets to the state, a firm is generally expected to make reasonable efforts to reach the customer first -- attempting contact through her last known address and other available means -- giving her a real opportunity to reactivate the account and avoid escheatment altogether. Jumping straight to remittance without this due diligence step skips exactly the safeguard meant to prevent an account from being escheated when the customer could still have been reached.

Ravenswood Fund has paid Cuthbert quarterly distributions for six years. The last four checks came back undeliverable, mail sent to his address of record is returned, and he has not responded to any contact attempt. The transfer agent now classifies the account as abandoned property. The fund obligation is to:

1. A.Return the uncashed distributions to the portfolio to offset fund operating expensesThe money belongs to Cuthbert, not to the fund. Using it to reduce expenses would transfer his property to the other shareholders.
2. B.Hold the funds in a non-interest-bearing suspense account indefinitely until Cuthbert or an heir appearsIndefinite suspense is not an option. State dormancy periods require the property to be reported and remitted once they run.
3. C.Distribute the amounts pro rata to the remaining shareholders after seven yearsThere is no such seven-year forfeiture. Unclaimed property goes to the state, not to the other shareholders.
4. D.Perform the search and notification steps state law requires and, if he remains unlocated, escheat the property to the appropriate stateCorrect. Unclaimed distributions and dormant accounts pass to the state under its unclaimed property statute, which holds the assets for the owner or his heirs.

Why: Uncashed distribution checks and dormant accounts are governed by state unclaimed property law. The transfer agent must make the search and notification efforts the applicable state requires and, if the shareholder still cannot be located within the state dormancy period, escheat the property - remit it to the state, which then holds it for the owner or his heirs to claim.

Coldstream Markets holds a customer account that has seen no contact and no activity for years, and mail sent to the address of record comes back undeliverable. Which body of law determines when the assets must be surrendered and to whom?

1. A.The unclaimed property law of the applicable state, ordinarily that of the customer's last known address.Correct. Abandoned property is governed by state statute, which is why neither the trigger nor the recipient is uniform across the country.
2. B.FINRA's books and records rules, which fix one national dormancy trigger for brokerage accounts.Wrong. FINRA has no rule surrendering customer property to anybody, and no nationwide trigger exists to apply.
3. C.The Securities Investor Protection Act, which directs abandoned customer property to SIPC.Wrong. That statute addresses the failure of a broker-dealer, not customers who cannot be found at a solvent one.
4. D.The firm's written supervisory procedures, which may set whatever period the firm considers reasonable.Wrong. Procedures govern how a firm carries out the law and cannot decide when somebody else's property becomes surrenderable.

Why: Escheatment is a creature of state law. Each state's unclaimed property statute defines when an account is presumed abandoned, what the holder must do to find the owner before that point, and to which state the property is reported and remitted, ordinarily the state of the owner's last known address on the holder's records. Because the statutes differ state by state, the dormancy trigger and the reporting mechanics are not uniform, and an operations unit has to run the process against the correct state's rules for each account. The firm's own procedures sit on top of that, describing how it searches, tracks and reports; they do not set the underlying trigger.