Reacting to increased state enforcement of so-called “inactivity” dormancy standards for escheating securities, the Securities and Exchange Commission (SEC) has proposed amendments to existing Rule 17Ad-17 (17 CFR § 240.17Ad-17) to address “inactive securityholders.” The proposal would greatly expand the rule’s scope and impose additional investor-outreach requirements on holders.
How Rule 17Ad-17 Works Today
Originally adopted in 1997, Rule 17Ad-17 requires transfer agents, brokers, and dealers to take certain actions regarding “lost securityholders” who are natural persons. Specifically, a transfer agent, broker, or dealer must “exercise reasonable care to ascertain the correct addresses for such securityholders,” including by conducting two address database searches.
The first search must occur between three and 12 months after the securityholder became a lost securityholder. The second must occur between six and 12 months after the first search.
For this purpose, a “lost securityholder” is a securityholder to whom an item of correspondence has been sent and returned as undeliverable and for whom the transfer agent, broker, or dealer has not received information about a new address. Exceptions to the search requirements include when the securityholder is deceased or the aggregate value of assets is less than $25.
Rule 17Ad-17 also requires a “paying agent”—generally, a person that accepts payments from a security issuer and distributes those payments to securityholders—to provide at least one written notice to any “unresponsive payee” who has been sent a check that has not yet been negotiated.
The notice must be sent no later than seven months after the unnegotiated check. A securityholder becomes an unresponsive payee when a check is not negotiated before the earlier of the paying agent’s sending of the next regularly scheduled check or six months after the unnegotiated check was sent. No outreach is required when the value of the check is less than $25.
The rule also provides that the unresponsive payee requirements “shall have no effect on state escheatment laws.” There is no similar statement for the lost-securityholder rules.
The Rule’s Intersection with State Unclaimed Property Laws
In comments accompanying the 2013 amendments to Rule 17Ad-17, the SEC expressly noted that the “Commission is not in this release or in Rule 17Ad-17 making any statement regarding federal preemption or regarding preemption’s relationship to state escheatment laws.”
Nonetheless, since its adoption, Rule 17Ad-17 has been intertwined with the application of state unclaimed property laws to securities because of the overlap between lost securityholders and owners of securities that may be presumed abandoned under state unclaimed property laws.
Many holders have asserted that any state law requiring escheatment based on inactivity only, without regard to returned mail (RPO), is fundamentally incompatible with Rule 17Ad-17. For example, a holder may be required to escheat an owner’s securities under an inactivity standard without first being required to search for the location of the owner under Rule 17Ad-17 because the shareholder never becomes a “lost securityholder” under the rule.
Although the SEC has declined to opine on Rule 17Ad-17’s preemptive effect on state unclaimed property laws—and the rule contains no express preemption provision—this scenario lends credence to the argument that conflict preemption may be applicable, at least before adoption of the proposed amendments.
SEC Proposes New Requirements for “Inactive Securityholders” and Expansion of “Unresponsive Payee” Scenarios
On September 1, 2026, the SEC issued proposed amending Rule 17Ad-17 to add provisions expressly applicable to “inactive securityholders.” The proposed rule defines the term as “a securityholder for whom the transfer agent, broker, or dealer has not observed any account activity for a period of 18 months.”
Under the proposal, “account activity by a securityholder” would include electronically accessing the account, including through an account login or email access; communicating electronically with the transfer agent, broker, or dealer about the account; conducting a transaction in the account where the assets are held, including deposits or withdrawals of funds; indicating receipt of communications, such as through read receipts; or taking other affirmative indication or action that reasonably demonstrates that the securityholder is reachable and engaged with the account.
This definition is similar to many state unclaimed property law articulations of owner-generated activity for dormancy purposes, including the definition adopted in the 2016 Revised Uniform Unclaimed Property Act.
The proposal would require transfer agents, brokers, and dealers to “exercise reasonable care to notify” inactive securityholders who are natural persons, which would include at least two written notifications stating that the securityholder has not been active in the account, that some jurisdictions may consider inactive accounts to be unclaimed or abandoned property subject to escheatment, and describing the steps a securityholder may take to show activity in the account.
The first notification must be provided no later than six months after the securityholder becomes inactive, and the second notification must be provided no later than six months after providing the first notice.
Although the proposed rule provides that the notifications should be “written,” they “may be sent by any method reasonably expected to reach the inactive securityholder.”
The same exceptions that apply to conducting searches for lost securityholders would apply to sending notices to inactive securityholders.
The proposal would also expand the concept of “unresponsive payee” to cover electronic payments sent to the securityholder that are rejected and returned as undeliverable to the paying agent.
The SEC says the change “would bolster investor protection” by addressing the adoption of inactivity standards by certain states, the use of methods of correspondence beyond physical mail, and the use of electronic payments.
More broadly, the SEC notes that the amended rule would reduce the risk that securityholders “lose ownership of their investment property through states’ application of their inactivity standards.” According to the SEC, the proposal would help avoid “premature remittance and liquidation of such property,” which could negatively affect investors through opportunity costs and tax consequences. The SEC acknowledges, however, that the benefits for securityholders in states with RPO-based standards “would be limited, if any.”
The SEC also says the amendments protect securityholders who do not receive physical mail because, absent returned mail, those securityholders would not be treated as lost securityholders under the existing rule.
The proposed expansion of the unresponsive-payee definition to address rejected electronic payments would, per the SEC, “strengthen investor protection” because the existing rule covers only unnegotiated checks. The amendment would “help ensure that the securityholder receives these payments, thereby advancing the protection of investors against lost payments.”
What Would the Proposal Mean for Holders?
The proposed amendments would impose significant additional notice requirements beyond those currently required under Rule 17Ad-17. These requirements would be in addition to the robust notice requirements that already exist in state unclaimed property laws.
The proposal would also require outreach to investors even when their accounts are not at risk of being reported and remitted to a state as unclaimed property, including states that have adopted RPO-based dormancy standards that do not escheat based solely on inactivity. As a result, although the amendments could reduce escheatment in some cases, they would lead to higher costs and burdens for holders.
The SEC appears to have been motivated by escheatment considerations, including the implications of state inactivity-only dormancy standards on securities. At the same time, the proposal suggests that the SEC does not appear inclined to intervene in or otherwise prevent states from implementing and enforcing such inactivity standards. Instead, the SEC has taken a more tailored approach, requiring additional holder outreach to securityholders within the scope of Rule 17Ad-17. Any direct limits on states’ ability to enforce inactivity standards would likely need to come from Congress.
Federal Legislation Could Further Change the Landscape
Federal legislation also is pending. H.R. 8338, the Safeguarding Americans’ Fairly Earned Retirement (SAFER) Act of 2026, would prohibit holders from yielding custody of securities and other investment assets until three years after an owner has been confirmed deceased, if the owner is a natural person.
If enacted, the SAFER Act would provide additional protection for investors against premature liquidation and could render the proposed amendments to Rule 17Ad-17 moot in some circumstances. Together, these developments reflect the increasing federal attention to state unclaimed property laws and their impact on investors.
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