Does federal securities law stop the Texas Comptroller from selling unclaimed, unregistered stock at public sale?

TX AG Opinion GA-0309: Can the Texas Comptroller sell unregistered escheated stock at public sale?

Plain-English summary

The state Comptroller asked a narrow but practical question. Under Texas's unclaimed-property law, the Comptroller takes custody of abandoned personal property, including stock, and Property Code section 74.401(a) generally requires her to sell that unclaimed property at public sale, except for cash and "marketable securities." Sometimes the shares that escheat to the state are unregistered with the Securities and Exchange Commission, meaning they cannot be traded on a stock exchange or over-the-counter market, so they are not "marketable securities" within the meaning of the public-sale exception. The Comptroller worried that selling those unregistered shares at a public sale could itself violate federal securities law, specifically 15 U.S.C. section 77e, part of the Securities Act of 1933, which generally bars selling a security through interstate commerce or the mails unless a registration statement is in effect.

The opinion walked through the federal exemption that might apply: section 77d(1) exempts "transactions by any person other than an issuer, underwriter, or dealer." The Comptroller was clearly not an issuer or dealer, so the question came down to whether she would be acting as an "underwriter," someone who buys from an issuer with a view to reselling as part of a "distribution" of a security to the investing public. The opinion concluded she generally would not be. She did not purchase the escheated shares from the issuing company with intent to resell; she received them through the state's escheat process. And her core job, as the state's chief accounting and fiscal officer, is not "the purchase of securities of one issuer ... and the sale of its own securities to furnish the proceeds," the kind of activity the SEC's own regulations treat as a "distribution." So, in the ordinary case, the comptroller is not a federal-law underwriter and the Securities Act's registration requirement does not apply to her public sale of escheated, unregistered shares; she must instead comply with Property Code section 74.401(a) and sell them at public sale. The opinion did flag one caveat: in an unusual situation, such as escheat of a large block of shares in a single company, the comptroller should check with the SEC directly, since the underwriter analysis depends on the specific facts.

Currency note

This opinion was issued in 2005. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Who this opinion affected (as of 2005)

The Comptroller of Public Accounts: The opinion told the Comptroller's office that, for the ordinary case of escheated, unregistered, non-marketable shares, federal securities registration law does not preempt or block the Property Code's public-sale requirement, so the office should proceed with public sales as section 74.401(a) directs, while flagging unusually large single-company holdings for direct SEC consultation.

Holders of unclaimed securities and their successors: The opinion did not change how shares come to be held by the state under the escheat laws (Property Code chapters 72 through 74); it addressed only what the Comptroller may do with unregistered shares once they are in state custody.

Common questions

Can Texas sell unregistered, unclaimed stock at a public sale without violating federal securities law?
Generally yes, according to the opinion. It concluded the Comptroller is not an "underwriter" under 15 U.S.C. section 77b(a)(11) in the ordinary escheat scenario, so the registration bar in section 77e(a) does not apply, and the public-sale requirement of Property Code section 74.401(a) controls.

Why isn't the Comptroller considered a securities "underwriter" here?
The opinion reasoned that an underwriter purchases stock from an issuer with a view toward distributing it to the public, while the Comptroller receives escheated shares through the state's unclaimed-property process, not a purchase from the issuer, and her core duties as the state's chief accounting officer are not "the purchase of securities of one issuer ... and the sale of its own securities," the SEC's regulatory definition of a "distribution."

Are there situations where the Comptroller should not just proceed with a public sale?
The opinion suggested one: if a large number of unclaimed shares in a single company escheat to the state, the comptroller should contact the SEC to determine whether federal requirements would apply in that specific situation, since the underwriter determination depends on the facts.

Background and statutory framework

Property Code section 74.301(a) brings abandoned or unclaimed property into the Comptroller's custody. Personal property is generally presumed abandoned after three years without a known, locatable owner who has asserted a claim (section 72.101(a)), with related presumption periods for intangible business-association interests (section 72.101(b)) and five-year-inactive bank accounts or safe deposit boxes (section 73.101(a)). Once property is presumed abandoned, the Comptroller assumes custody and responsibility for safekeeping under section 74.304(a), and, as the opinion put it (quoting its own earlier opinion, JC-0463 (2002), as modified by GA-0061 (2003)), "steps into the absent owner's shoes."

Property Code section 74.401(a) then requires the Comptroller, with limited exceptions, to sell unclaimed personal property other than "money and marketable securities" at public sale in the city offering the most favorable market, to the highest bidder unless that bid is insufficient (section 74.401(b)), with proceeds going to the state's general revenue fund (section 74.601(b)(2)).

On the federal side, the Securities Act of 1933's section 77e(a) bars selling a security through interstate commerce or the mails unless registration is in effect. Section 77d(1) exempts transactions by anyone who is not an "issuer," "underwriter," or "dealer," terms defined in 15 U.S.C. section 77b(a)(4), (11), and (12). The opinion relied on case law describing an underwriter as someone who purchases stock from an issuer with intent to resell to the public as part of a "distribution" (Quinn & Co. v. S.E.C., 452 F.2d 943 (10th Cir. 1971); Ackerberg v. Johnson, 892 F.2d 1328 (8th Cir. 1989); S.E.C. v. Van Horn, 371 F.2d 181 (7th Cir. 1966)), and on the SEC's own regulatory definition of "distribution" in 17 C.F.R. section 230.140, which focuses on a person whose chief business is buying one issuer's securities and selling its own securities to fund that purchase (citing R.A. Holman & Co. v. S.E.C., 366 F.2d 446 (2d Cir. 1966); Budget Rent-A-Car Sys., Inc. v. Hirsch, 810 F. Supp. 1253 (S.D. Fla. 1992)). Measured against the Comptroller's actual statutory role as the state's "sole accounting officer" responsible for supervising the state's fiscal concerns, collecting and accounting for state funds, auditing claims, and drawing treasury warrants (Gov't Code § 403.011(a)(2)-(4)-(10), (12)-(14), (17)), the opinion concluded her core function does not match the underwriter/distribution definition, citing Neuwirth Inv. Fund, Ltd. v. Swanton, 422 F. Supp. 1187 (S.D.N.Y. 1975), for the broader point that the underwriter determination is fact-specific.

Citations

Statutes and regulations:

• Tex. Prop. Code Ann. § 74.301(a) (Vernon Supp. 2004-05)
• Tex. Prop. Code Ann. § 72.101(a) (Vernon Supp. 2004-05)
• Tex. Prop. Code Ann. § 72.101(b) (Vernon Supp. 2004-05)
• Tex. Prop. Code Ann. § 73.101(a) (Vernon Supp. 2004-05)
• Tex. Prop. Code Ann. § 74.304(a) (Vernon Supp. 2004-05)
• Tex. Prop. Code Ann. § 74.401(a) (Vernon Supp. 2004-05)
• Tex. Prop. Code Ann. § 74.401(b)
• Tex. Prop. Code Ann. § 74.601(b)(2)
• 15 U.S.C. § 77e(a) (2000)
• 15 U.S.C. § 77a (2000)
• 15 U.S.C. § 77d(1)
• 15 U.S.C. § 77b(a)(2) (2000)
• 15 U.S.C. § 77b(a)(4)
• 15 U.S.C. § 77b(a)(11)
• 15 U.S.C. § 77b(a)(3)
• 15 U.S.C. § 77b(a)(12)
• 17 C.F.R. § 230.140 (2004)
• Tex. Gov't Code Ann. § 403.011(a) (Vernon 2005)
• Tex. Gov't Code Ann. § 403.011(a)(3)
• Tex. Gov't Code Ann. § 403.011(a)(2), (4)-(10)
• Tex. Gov't Code Ann. § 403.011(a)(12)-(14), (17)

Cases:

• Quinn & Co. v. S.E.C., 452 F.2d 943, 946 (10th Cir. 1971), cert. denied, 406 U.S. 957 (1972)
• Ackerberg v. Johnson, 892 F.2d 1328, 1336 (8th Cir. 1989)
• S.E.C. v. Van Horn, 371 F.2d 181, 188 (7th Cir. 1966)
• R.A. Holman & Co. v. S.E.C., 366 F.2d 446, 449 (2d Cir. 1966), cert. denied, 389 U.S. 991 (1967)
• Budget Rent-A-Car Sys., Inc. v. Hirsch, 810 F. Supp. 1253, 1255-57 (S.D. Fla. 1992)
• Neuwirth Inv. Fund, Ltd. v. Swanton, 422 F. Supp. 1187, 1195 (S.D.N.Y. 1975)

Other authorities:

• Tex. Att'y Gen. Op. No. JC-0463 (2002)
• Tex. Att'y Gen. Op. No. GA-0061 (2003)
• Lewisohn Copper Corp., 38 S.E.C. 226, 234 (1958)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0309
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2005/ga0309.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS

GREG ABBOTT

March 8, 2005

The Honorable Carole Keeton Strayhorn
Comptroller of Public Accounts
Post Office Box 13528
Austin, Texas 78711-3528

Opinion No. GA-0309

Re: Whether 15 U.S.C. § 77e, regulating the sale of unregistered securities, preempts section 74.401(a) of the Texas Property Code to the extent section 74.401(a) requires the comptroller to sell at public sale an unclaimed security that is not a registered, marketable security (RQ-0273-GA)

Dear Comptroller Strayhorn:

You ask whether 15 U.S.C. § 77e, regulating the sale of unregistered securities, preempts section 74.401(a) of the Texas Property Code to the extent section 74.401(a) requires the comptroller to sell at public sale an unclaimed security that is not a registered, marketable security.[1]

The comptroller receives abandoned or unclaimed property under section 74.301(a) of the Property Code. See TEX. PROP. CODE ANN. § 74.301(a) (Vernon Supp. 2004-05); see also Tex. Att'y Gen. Op. No. JC-0463 (2002) at 4, modified on other grounds, Tex. Att'y Gen. Op. No. GA-0061 (2003) at 8. Personal property generally is presumed abandoned if, for longer than three years: (1) the holder does not know the property owner's existence and location; and (2) according to the holder's knowledge and records, no person has asserted a claim to the property or has exercised an act of ownership. See TEX. PROP. CODE ANN. § 72.101(a) (Vernon Supp. 2004-05); see also id. § 72.101(b) (setting out the three-year period leading to a presumption of abandonment of stock or other intangible ownership interest in a business association); id. § 73.101(a) (stating that a financial institution may presume an account or a safe deposit box abandoned if the account or box has been inactive for five years or more and the owner's location is unknown). "Once property is presumed abandoned, the Comptroller assumes responsibility for it and, in effect, steps into the absent owner's shoes." Tex. Att'y Gen. Op. No. JC-0463 (2002) at 4, modified on other grounds, Tex. Att'y Gen. Op. No. GA-0061 (2003) at 8; see TEX. PROP. CODE ANN. § 74.304(a) (Vernon Supp. 2004-05) (requiring the state to assume custody of property that has been delivered to the comptroller and to be responsible for the property's safekeeping).

Section 74.401 of the Property Code requires the comptroller generally to sell unclaimed personal property, excluding "money and marketable securities," at a public sale:

Except [for property belonging to an out-of-state owner, property with minimal value, and military awards and decorations], the comptroller shall sell at public sale all personal property, other than money and marketable securities, delivered to the comptroller . . . . The comptroller shall conduct the sale in the city in this state that the comptroller determines affords the most favorable market for the particular property.

TEX. PROP. CODE ANN. § 74.401(a) (Vernon Supp. 2004-05). The comptroller must sell the property "to the highest bidder" unless the comptroller considers the highest bid "insufficient." Id. § 74.401(b). In that case, the comptroller may decline the bid and offer the property for public or private sale. See id. Proceeds from the sale are deposited into the state's general revenue fund. See id. § 74.601(b)(2).

You indicate that, on occasion, the comptroller receives "unclaimed, privately held shares of stock that would not be properly classified as 'marketable securities.'" Request Letter, supra note 1, at 1. These shares "are not registered with the Securities and Exchange Commission and, therefore, cannot be sold on stock exchanges or over-the-counter markets." Id. at 2. You assume that these unregistered shares are not marketable securities, and therefore, you continue, section 74.401 appears to require the comptroller to sell them at public sale; yet you believe that an offer to sell these shares at public sale would, in most instances, violate 15 U.S.C. § 77e, part of the Securities Act of 1933. See id.; see also 15 U.S.C. § 77a (2000) (titling act). For purposes of this opinion, we adopt your representation that the shares about which you ask are not marketable securities under section 74.401.

Section 77e(a), 15 U.S.C., effectively prohibits the sale of unregistered securities:

Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly-

(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or

(2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.

15 U.S.C. § 77e(a) (2000). Section 77d exempts from § 77e several kinds of transactions; you suggest that the only exemption that may be available to the comptroller is subsection (1), which exempts "transactions by any person other than an issuer, underwriter, or dealer." Id. § 77d(1); see Request Letter, supra note 1, at 2. The term "person" is defined to include a government. See 15 U.S.C. § 77b(a)(2) (2000). The terms "issuer," "underwriter," and "dealer" are defined:

• An issuer is a "person who issues or proposes to issue [a] security." Id. § 77b(a)(4).
• An underwriter is a "person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking." Id. § 77b(a)(11); see also id. § 77b(a)(3) (defining "sale," "sell," "offer to sell," "offer for sale," and "offer").
• A dealer is a "person who engages . . . as agent, broker, or principal, in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person." Id. § 77b(a)(12).

You assume that the comptroller is not an issuer or a dealer, but may be an underwriter. See Request Letter, supra note 1, at 2 ("the only relevant question is whether the Comptroller would be acting as an underwriter in reselling the securities at issue here").

We question whether the comptroller could be considered an underwriter in the circumstances you describe. As the term's definition suggests, an underwriter is "one who purchases stock from [an] issuer with an intent to resell to the public" in connection with a security distribution. Quinn & Co. v. S.E.C., 452 F.2d 943, 946 (10th Cir. 1971), cert. denied, 406 U.S. 957 (1972); cf. 15 U.S.C. § 77b(a)(11) (2000). Here, the comptroller, in receiving the property under state escheat laws, does not appear to have purchased stock from an issuer. In addition, we assume that the number of escheated shares in a particular company is typically small. See Quinn & Co., 452 F.2d at 946 (indicating that whether a sale is a distribution depends in part on the number of shares sold).

Nor could the comptroller be said to have obtained the stock "with a view to" distributing it. 15 U.S.C. § 77b(a)(11) (2000). An underwriter participates in a "distribution" of a security. Id.; see Ackerberg v. Johnson, 892 F.2d 1328, 1336 (8th Cir. 1989) (stating that the term "underwriter" is "generally defined in close connection with the definition and meaning of 'distribution'"); S.E.C. v. Van Horn, 371 F.2d 181, 188 (7th Cir. 1966) (stating that the statutory definition of "underwriter" "specifically covers every person who participates in a distribution of securities"). While relevant federal law does not define the term "distribution," see 15 U.S.C. § 77b (2000), section 230.140 of the Securities and Exchange Commission's corresponding regulations in 17 C.F.R. defines the term "for certain transactions":

A person, the chief part of whose business consists of the purchase of the securities of one issuer, or of two or more affiliated issuers, and the sale of its own securities to furnish the proceeds with which to acquire the securities of such issuer or affiliated issuers, is to be regarded as engaged in the distribution of the securities of such issuer or affiliated issuers within the meaning of section 2(11) of the Act.

17 C.F.R. § 230.140 (2004); see R.A. Holman & Co. v. S.E.C., 366 F.2d 446, 449 (2d Cir. 1966) (indicating that the term "distribution" denotes "'the process by which in the course of a public offering [a] block of securities is dispersed and ultimately comes to rest in the hands of the investing public'") (quoting Lewisohn Copper Corp., 38 S.E.C. 226, 234 (1958)), cert. denied, 389 U.S. 991 (1967); see also Budget Rent-A-Car Sys., Inc. v. Hirsch, 810 F. Supp. 1253, 1255-57 (S.D. Fla. 1992) (suggesting that "distribution" is synonymous with "initial offerings" or other sales of large blocks of a particular corporation's stock); Ackerberg, 892 F.2d at 1335 n.6 (stating that the word "distribution" has been construed to mean "the equivalent of a 'public offering'").

The "chief part" of the comptroller's job is not the purchase and sale of securities, as the definition of "distribution" requires. See TEX. GOV'T CODE ANN. § 403.011(a) (Vernon 2005) (listing the comptroller's general powers). In particular, the comptroller is the state's "sole accounting officer" and must "supervise . . . the state's fiscal concerns and manage those concerns." Id. § 403.011(a)(3). She has extensive duties related to collecting, keeping, and accounting for state funds. See id. § 403.011(a)(2), (4)-(10). She also is responsible for auditing claims against the state and for "draw[ing] warrants on the treasury for payment of all money required by law to be paid from the treasury on warrants drawn by the comptroller." Id. § 403.011(a)(12)-(14), (17).

We accordingly conclude that the comptroller generally is not an underwriter for purposes of 15 U.S.C. § 77e(a), except perhaps in specific fact situations that we do not address here.[2] See Neuwirth Inv. Fund, Ltd. v. Swanton, 422 F. Supp. 1187, 1195 (S.D.N.Y. 1975) (stating that the determination of whether one is an underwriter requires an analysis of various facts). Assuming that the comptroller is not an underwriter, she need not comply with federal securities laws in disposing of the securities. Consequently, the comptroller must comply with section 74.401(a), requiring her to sell the unmarketable securities at public sale.

SUMMARY

With respect to disposing of unclaimed, unmarketable securities that have escheated to the state, which the comptroller must sell under Texas Property Code section 74.401(a), the comptroller generally is not an underwriter for purposes of 15 U.S.C. § 77e(a). Accordingly, she must sell the securities at public sale in compliance with Property Code section 74.401(a).

Very truly yours,

BARRY R. McBEE
First Assistant Attorney General

DON R. WILLETT
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Kymberly K. Oltrogge
Assistant Attorney General, Opinion Committee

Footnotes

[1] Letter from Timothy Mashburn, General Counsel, Comptroller of Public Accounts, to Honorable Greg Abbott, Texas Attorney General (Sept. 8, 2004) (on file with Opinion Committee, also available at http://www.oag.state.tx.us) [hereinafter Request Letter].

[2] If specific facts are present, such as the escheat of a large number of unclaimed shares in a single company, we suggest that the comptroller contact the federal Securities and Exchange Commission to determine whether federal requirements apply.