Escheating the System: States’ Increased Securities Escheatment at Investors’ Expense

Kyle Rowland

ABSTRACT

Recent changes in state unclaimed property law have created a hostile
investment landscape. States take property that is deemed “lost” or
“unclaimed” through a process called escheatment. States, eager to collect
more property through escheatment, have passed laws making it easier than
ever to escheat securities, and investors have less time to react and less
notice before escheatment happens. After escheatment, states promptly
liquidate investors’ accounts with no notice, and investors are unable to
collect their full appreciated value. This violates the Takings Clause of the
Fifth Amendment, the Due Process Clause of the Fourteenth Amendment,
and contradicts the main purpose of unclaimed property law. If this trend in
state law towards more aggressive escheatment is not curbed, it will cause
significant harm to current and future investors.
This note explains the constitutional issues with states routinely
escheating investors’ accounts after they are “inactive” for as little as three
years, liquidating investors’ accounts without notice, and not allowing
investors to collect the appreciated value of their accounts when claimed.
Further, this note explains the due process issues with states’ use of audit
firms who are paid large sums based on the amounts of investment accounts
they characterize as escheatable. The result is an aggressive state
escheatment framework prioritizing state escheatment over safeguarding
investors’ accounts. This note explains the need for the Supreme Court to
rule on the constitutionality of the states’ escheatment laws, or for the
Securities and Exchange Commission to promulgate rules to better protect
investors.

---