Securities Audit – What Holders Need to Know

Sovos
November 17, 2021

What is an unclaimed property securities audit? It is an audit of the holder’s equity positions (i.e., common stock) held by the shareholders of a publicly held company. These positions are recorded in an account specific to each shareholder. The accounts are generally administered by the holder’s transfer agent. These accounts include the number of shares owned by the shareholder and any distributions or dividend checks that have not been cashed. The auditors will review the transfer agent’s database of the holder’s shareholder accounts to determine if there is any property that may need to escheat to the states. This sounds straightforward, but there are some considerations that every holder needs to understand.

Responsibility versus accountability

The holder’s transfer agent is responsible for maintaining the shareholder’s records, which include the escheatment of shareholder accounts to the states. However, the holder is ultimately responsible for ensuring that unclaimed property is reported to the states. It is in the holder’s best interest to ensure that the transfer agent is maintaining accurate shareholder records and all transactions are reflected in the shareholder database in a timely manner. Any errors or omissions that are inadvertently made by the transfer agent can have an impact on a holder’s unclaimed property compliance.

How does the process happen?

The auditors will always review the transfer agent’s database to identify the date of last last owner-generated contact or activity by the shareholder for each account. The contact date is one of the main data elements used to determine if an account has reached or passed the dormancy period. Auditors will request that the transfer agent provide documentation to validate the owner-generated activity that occurred on the contact date or prove that there has been more recent shareholder contact. If sufficient documentation is not available, then the auditor will add the account to the report of property for potential escheatment.

The transfer agent is responsible for ensuring that the shareholder database is updated with the current contact date. Unfortunately, there have been many instances where either:

  • The contact date is not updated or does not reflect shareholder contact. 
  • The documentation is incomplete or not available to validate the contact date.  

This could potentially result in having accounts escheat prematurely or late. States could assess interest on accounts that escheat late, something that all holders want to avoid.

Is there a solution that can help mitigate this risk?

Yes, it’s simple and may require a little investment in time and resources, but it’s worth it.

When navigating through a securities audit, a holder should be actively engaged in the process. Do not let the transfer agent review and respond to all the auditor’s requests without oversight. All documentation provided by the transfer agent should be reviewed by the holder prior to submission to the auditor. If holders adhere to this process, then any inaccuracies may be identified prior to submission to the auditors, resulting in potentially  preserving many accounts from escheatment. 

If you are not able to dedicate resources to manage the audit, then you should consider contracting with unclaimed property consultants. An experienced consultant can help ensure preservation of shareholder accounts and identify potential control weaknesses in the maintenance of shareholder account records.

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Author

Sovos

Sovos is a global provider of tax, compliance and trust solutions and services that enable businesses to navigate an increasingly regulated world with true confidence. Purpose-built for always-on compliance capabilities, our scalable IT-driven solutions meet the demands of an evolving and complex global regulatory landscape. Sovos’ cloud-based software platform provides an unparalleled level of integration with business applications and government compliance processes. More than 100,000 customers in 100+ countries – including half the Fortune 500 – trust Sovos for their compliance needs. Sovos annually processes more than three billion transactions across 19,000 global tax jurisdictions. Bolstered by a robust partner program more than 400 strong, Sovos brings to bear an unrivaled global network for companies across industries and geographies. Founded in 1979, Sovos has operations across the Americas and Europe, and is owned by Hg and TA Associates.
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