                            ATTORNEYGENERALOFTEXAS
                                         GREG      ABBOTT



                                             March 8,2005



The Honorable &role Keeton Strayhom                  Opinion No. GA-0309
Comptroller of Public Accounts
Post Office Box 13528                                Re: Whether 15 U.S.C. 5 77e, regulating the
Austin, Texas 7871 l-3528                            sale of unregistered securities, preempts section
                                                     74.401 (a) ofthe 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    Strayhom:

         You ask whether 15 U.S.C. 5 77e, regulating the sale of unregistered securities, preempts
section 74.401(a) oftheTexasPropertyCode       to theextent section74,40l(a)requires   the comptroller
to sell at public sale an unclaimed security that is not a registered, marketable security.’

          The comptroller receives abandoned or unclaimed property under section 74.301(a) of the
Property Code. S~~TEX.PROP. CODE ANN. 5 74,30l(a)(VemonSupp.              2004-05);seeaZsoTex.       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. 5 72.101(a) (Vernon Supp. 2004-05); see also id.
$j72.101(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. 5 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. Qp. 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. 5 74.304(a) (Vernon Supp.
2004-05) (requiring the state to assume custody ofproperty that has been delivered to the comptroller
and to be responsible for the property’s safekeeping).



         ‘SeeLetterfromTimothyMashbum,GeneralCounsel,Comptrollerof PublicAccounts,to HonorableGreg
Abbott,TexasAttorneyGeneral(Sept.8,2004) (on tile withOpinionCommittee,also available at http:l/www.oag
.state.tx.us)[hereinafterRequestLetter].
The Honorable   Carole Keeton Strayhom       - Page 2          (GA-0309)




        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. 4 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.
5 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. 5 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. 5 77e, part of the
Securities Act of 1933. See id.; see also 15 U.S.C. 3 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 aregistration 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. 5 77e(a) (2000). Section 77d exempts from 5 77e several kinds of transactions; you
suggest that the only exemption that may be available to the comptroller is subsection (l), which
The Honorable Carole Keeton Strayhom        - Page 3          (GA-0309)




exempts “transactions by any person other than an issuer, underwriter, or dealer.” Id. § 77d(l); see
Request Letter, supra note 1, at 2. The term “person” is defined to include a government. See 15
U.S.C. 5 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. 5 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. 5 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. 8 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 US. 957 (1972); cf:
15 U.S.C. 9 77b(a)(ll) (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. 5 77b(a)( 11) (2000). An underwriter participates in a “distribution” of a security. Id.;
see Ackerberg Y.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. 5 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
The Honorable Carole Keeton Strayhom         - Page 4          (GA-0309)




                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. 5 230.140 (2004); see R.A. Holman & Co. Y. SEC., 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. Y. 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’TCODEANN. § 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. 5 403.011 (a)(3). She has extensive duties related to collecting, keeping, and accounting for state
funds. See id. 5 403.01 l(a)(2), (4)-(10). She also is responsible for auditing claims against the state
andfor“draw[ing]     warrantsonthe treasuryforpayment      ofallmoneyrequired    bylaw to bepaidfrom
the treasury on warrants drawn by the comptroller.” Id. § 403.01 l(a)(12)-(14), (17).

         We accordingly conclude that the comptroller generally is not an underwriter for purposes
of 15 U.S.C. 5 77e(a), except perhaps in specific fact situations that we do not address here.’ See
Neuwirth Inv. Fund, Ltd. Y. Swanton, 422 F. Supp. 1187, 1195 (S.D.N.Y. 1975) (stating that the
determination ofwhether 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.




        ‘If specificfactsare present,suchas the escheatof a largenumberof unclaimedsharesin a singlecompany,
we suggestthat the comptrollercmtact the federalSecuritiesand ExchangeCommissionto determinewhetherfederal
requirementsapply.
The Honorable Carole Keeton Strayhom       - Page 5         (GA-0309)




                                       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. 3 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
