WASHINGTON -- Legislation that would retroactively change the way unclaimed distributions of interest, principal, and dividends made by issuers of municipal bonds and other securities are returned to states was approved by the House Banking Committee's financial institutions subcommittee yesterday.
The compromise bill, which would apply to distributions made after June 21, 1991, would also lessen the liability of bond brokerage firms and other financial intermediaries that hold such assets. The measure, which now goes to the full committee, would allow such institutions to transmit unclaimed funds to central repositories after three years. The state-designated clearinghouses would then remit the funds to states.
The legislation as originally introduced by Rep. Henry Gonzalez, D-Tex., the chairman of the full committee, and Rep. Jim Leach of Iowa, the panel's ranking Republican, would have applied to distributions since 1972.
New York State, Massachusetts, and Delaware strongly oppose any retroactivity because they would be forced to reallocate to other states money they already received and spent under existing law governing "escheatment," or reversion of unclaimed assets to states. Most escheated funds now go to those three states.
Retroactivity "would throw a monkey wrench into the machinery of state government," said Rep. Joseph P. Kennedy 2d, D-Mass., who unsuccessfully tried to amend the bill to make it purely prospective. Massachusetts would have to come up with "millions" from its budget to meet the 1991 retroactivity requirement, he said.
"This is one of the most meanspirited, most obnoxious pieces of legislation to come before us," said Rep. Charles Schumer, D-N.Y. "Retroactivity is unconstitutional," he said.
Rep. Stephen Neal, D-N.C., chairman of the subcommittee on financial institutions supervision, regulation, and deposit insurance, said it was important for the panel to pass the bill because such action would pressure New York State to come to a political settlement with other states on new escheatment rules. Massachusetts and Delaware have agreed on such a settlement that would apply prospectively, he said. New York is the "lone holdout."
Congress got involved in the issue after the Supreme Court held in March 1993 in Delaware v. New York that unclaimed assets should revert to, or escheat to, the state in which the financial institution that holds the money is incorporated.
Delaware had sued New York State on grounds that New York had improperly collected unclaimed funds from Delaware-incorporated brokers that did much of their business in New York. Forty-seven other states and the District of Columbia intervened seeking their share of the pie of escheated funds.
After the ruling, Delaware and New York settled on $200 million as the amount owed by New York to Delaware. But the intervening states continued to exert pressure on New York, Delaware, and Massachusetts to chnge escheatment rules.
The legislation, which would overturn the high court's ruling, sets the June 1991 effective date because that is when the special master in Delaware v. New York proposed a new allocation regime, said Neal, who sponsored the compromise.
The original effective year of 1972 would have cost New York about $600 million, Delaware about $300 million, and Massachusetts about $50 million, a lobbyist said.
Neal obtained unanimous subcommittee approval of the compromise after the panel's ranking Republican, Rep. Bill McCollum of Florida, agreed not to offer an amendment to keep 1972 as the effective year.
The bill would require that unclaimed assets escheat first to the state in which the security's owner last resided. If the owner is unknown, funds would escheat to the statein which the principal executive offices of the issuer of the security are located. If neither the owner nor the issuer is known, the assets would escheat to the state in which the principal executive offices of intermediaries holding the security are located.
About $100 million to $150 million in unclaimed assets for which the owner is unknown are escheated each year, with a little less than half of the amount going to New York. The annual total is expected to decrease as financial intermediaries track funds better, the lobbyist said.
The bill has 331 co-sponsors, but its chances of enactment in this session are dim. House Energy and Commerce Committee chairman Rep. John Dingell, D-Mich., is seeking jurisdiction and recently requested a General Accounting Office review of the bill.
Schumer tried to amend the bill to prohibit attorneys from earning contingency fees as a result of lobbying the U.S. government, including Congress. He said one law firm was primarily responsible for driving the escheatment legislation because it has a contingency fee arrangement with 32 states for successful lobbying.
Schumer was referring to the firm Dickstein, Shapiro & Morin, which represented the intervening states in Delaware v. New York, the lobbyist said. Neal ruled that the Schumer amendment was not germane.
The political negotiations on new escheatment rules are being conducted primarily by lawyers with private firms hired by the states and some comptrollers, treasurers, and attorneys general.
