State governments are increasingly leveraging unclaimed property laws to seize and sell securities from investors, often without the owner's direct knowledge or explicit consent. Recent shifts in state legislation have shortened the time before stocks can be declared abandoned and broadened the criteria for abandonment from a "lost" standard to an "inactivity" standard.
Historically, many states waited up to seven years before considering stock as abandoned. However, more than half of states now utilize a three-year period, according to Computershare, a major stock transfer agent. The shift from requiring evidence like returned mail to simply noting a lack of recent account activity creates a lower bar for states to take custody of assets. While dividends may continue to be deposited and statements sent, these actions may not be sufficient to prevent an account from being deemed inactive under some new state laws.
Once an account is identified as nearing dormancy, brokerage firms or transfer agents may issue notices. If no sufficient response is received, the securities can be transferred to the state as unclaimed property. Subsequently, the state may sell these securities. An example cited involves a German citizen whose Amazon shares, worth approximately $1.6 million at the time of sale, were seized by California. The shares would have later been valued at over $4.2 million, with the investor receiving the sale proceeds but not the investment's appreciation. The U.S. Supreme Court declined to hear his case.
While states officially frame unclaimed property programs as a consumer protection measure, creating a central repository for forgotten assets, there is also a significant financial incentive. States can utilize the cash from seized assets while awaiting owners to claim them, which can supplement government budgets. Legislative reports from states like Texas and New Jersey have projected substantial revenue gains from shortening dormancy periods.
This evolving landscape poses challenges for transfer agents and brokers, who must navigate a complex web of state laws. The industrial-scale process of identifying and transferring lost or inactive securities is substantial, with Computershare reporting over 51,000 lost-securityholder accounts remitted to states in 2024 alone.
Regulatory bodies have also intervened when such systems have failed. In 2006, the Securities and Exchange Commission (SEC) found that Bank of New York failed to properly search for securityholders due to inadequate mailroom practices and computer coding errors, leading to approximately $11.5 million in assets being transferred to states. The SEC required the bank to compensate affected investors based on the greater of the asset's value at the time of escheatment or its later value. More recently, in 2023, the SEC identified issues with DST Asset Manager Solutions' lost-shareholder procedures, which may have put investor property at increased risk of being sent to states.
Amid these developments, some legislative scrutiny is emerging. In April, Sen. Elizabeth Warren of Massachusetts questioned state unclaimed-property administrators about the shift from returned-mail standards to inactivity standards and the shortening of dormancy periods. Conversely, Florida is enacting reforms that restore returned mail or failed electronic communication as triggers for securities and extend owner-inactivity periods to 10 years in specific circumstances, moving toward a standard more aligned with common-sense ownership principles. The core of the issue remains that inactivity alone, without evidence of abandonment, may not sufficiently justify the seizure of assets that are demonstrably still owned.