Delaware Launches New Unclaimed Property Voluntary Disclosure Program: A more efficient and reliable alternative to comply with past due unclaimed property liabilityBy the Honorable Jeffrey W. Bullock, Delaware’s Secretary of State

In the month of January, Keane hosted a

webinar featuring Jeffery Bullock, Delaware

Secretary of State, and Geoffrey Sawyer

from the law firm of Drinker Biddle and

Reath, the administrators of the new

Delaware Voluntary Disclosure Agreement.

The webinar was well attended with

over 160 registrants listening in to get

the latest news on Delaware’s new VDA

program and participating in a question

and answer forum. Keane would like to

extend its gratitude to Jeffery Bullock,

the Secretary of State, and Geoffrey

Sawyer for volunteering their time

and assistance in a successful

and informational webinar. A

full replay and transcript of the

question and answer forum

is available on Keane’s website

at www.KeaneUP.com.

For more information about the

Delaware VDA program or to enroll in

Keane’s Voluntary Disclosure Agreement

Program, please contact Val Jundt at

vjundt@keaneup.com.

Unclaimed Property. Uncompromising Performance. 1

ALSO in this issue:Update on SEC Rule 17Ad-17 Revisions ...3-9

Legislative & Regulatory Updates .........10-11

Unclaimed Property Audits in Middle Markets ........................................ 13

Unclaimed Property Reciprocity ............14-15

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Winter/Spring 2013: Volume 11, Issue 1

The first unclaimed property compliance quarterly newsletter, published exclusively by Keane since 2003. Keane is the country’s leading provider of unclaimed property compliance solutions.

Pursuant to Delaware law, companies domiciled, or with related entities domiciled in Delaware are required to report and remit unaddressed or foreign-addressed abandoned and unclaimed property annually to the State. Historically, Delaware has enforced its right to collect this property through multi-year audits performed by the Delaware Division of Revenue. Because there is no statute of limitations on a company’s legal obligation to report and remit past due unclaimed property, these audits examined the books and records of a company beginning in 1981, and could also have included significant statutory penalties and interest.

Under the new program, companies that enroll will only be responsible for reporting abandoned or unclaimed property that appears on their books and records dating back to 1996, 15-years fewer than under a Delaware unclaimed property audit. Additionally, companies that chose to participate will not have to pay any interest or penalties on that property. More importantly, the new VDA Program has been designed to reach a final agreement on a company’s past due abandoned or unclaimed property liability in approximately nine months, providing companies the certainty they need to continue running their business.

On July 11, 2012, Governor Jack Markell signed into law Senate Bill 258, which created a new abandoned and unclaimed property voluntary disclosure program (the “VDA Program”) in Delaware. The new unclaimed property voluntary compliance program will be administered through the Delaware Department of State, and offers Delaware registered business entities a unique, but narrow-window to come into compliance with Delaware’s unclaimed property laws. The new VDA program is intended to build on Delaware’s business reputation and specifically the reputation of the Department of State in providing quality service to Delaware’s corporate clients by making abandoned and unclaimed property compliance for Delaware companies cheaper, faster and easier.

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Companies that successfully complete the new VDA program also receive a release of all past due unclaimed property liability up to the present. After entering and completing the VDA Program, companies that fulfill their future annual reporting requirements are protected against Delaware unclaimed property audits for all prior years up to the date of execution of the final VDA Program documents. All the State asks in return is that companies continue to fulfill their ongoing responsibility to report and remit annually their Delaware abandoned or unclaimed property.

Part of the State’s commitment to design a new, more business-friendly VDA Program is the creation of a new website, www.DelawareVDA.com. The website describes who is eligible for the program and how Delaware companies can participate. It also provides companies with the program’s implementing guidelines, enrollment forms and has a detailed “How it Works” section explaining the restructured voluntary compliance process.

Together, the revised structure of the VDA Program, coupled with the new website are critical to setting expectations, and more importantly, to achieve what the State believes the corporate community is striving for with this program – efficiency and reliability. The program is schedule to sunset in June 2015, and holders who enroll after June 30, 2013 have a look back period of 1993 versus 1996. As a result, it is important companies enroll soon and I am urging companies who may have past due abandoned or unclaimed property to go to www.DelawareVDA.com and enroll in Delaware’s new VDA Program. On behalf of the state of Delaware, I look forward to working with you.

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In July of 2010, Congress issued the Dodd Frank mandate which included, among many other

things, a directive to the Securities and Exchange Commission to expand the scope of SEC

Rule 17Ad-17. First, the existing requirements of SEC Rule 17Ad-17, currently impacting the

transfer agency industry, were to be extended to the broker dealer community; and second,

a paying agent must send a notice to each payee of a check remaining uncashed for six

months and valued over $25. Congress instructed the Commission to deliver a proposal on

the revised SEC Rule elements by July of 2011. The proposed 17Ad-17 revisions were finally

published in March of 2011 and offered the impacted community only a 7-week comment

period. The proposal added the words “broker or dealer” to the existing lost securityholder

search requirement that has already impacted the transfer agency community since 1997, and

clarified the application of the new requirement to clearing firms rather than introducing firms

that have the face-to-face relationships with brokerage customers. The proposal also added the

uncashed check notice requirement across all “paying agents”, defined as any issuer, transfer

agent, broker/dealer, investment adviser, indentured trustee, custodian, or any person that

accepts payments from an issuer and distributes payments to the security holders.

The proposed revisions get confusing because the uncashed payee is being called a “missing

securityholder.” That’s wreaking havoc with a lot of folks because the original 17Ad-17 search

requirements, applicable to the transfer agent community, talk about “lost securityholders.”

The minimum value of $25 triggering the new uncashed check notice requirement is also

a problem to many in the broker/dealer community because it seems very low especially in

light of the fact that unclaimed property due diligence thresholds are typically in the $50 to

$100 range. But $25 is consistent with the original 17Ad-17 search threshold. Of course, the

proposal contains a three-year record retention requirement that matches that of the existing

Rule. For the sake of good housekeeping, there will be a title change to the Rule along

with a 12-month implementation period, which was outlined in the proposal.

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An Update on SEC Rule 17Ad-17 Revisions, Contact as a Dormancy Trigger and the Rise of and Preparedness for Audits in the Broker Dealer Arena Derived from the Live Keane Webinar presented on September 27, 2012 By Debbie Zumoff, Chief Compliance Officer, Val Jundt, Managing Director, Consulting and Advisory Group, and Mike Ryan, Senior Vice President

Comments were requested by the Commission on a number of key elements contained in the proposal. The most prevailing remarks included:

• Underscoring the confusion between missing and lost securityholders, urging the Commission to use more distinctive language in the final rule revisions (rumor has it that the final revision contains new nomenclature in recognition of this confusion)

• Arguing to exclude lost securityholders from missing securityholders to avoid sending those uncashed check notices to obviously bad or inaccurate addresses

• Noting that the time frame of six months for triggering the obligation to send the uncashed check notice, should be lengthened beyond the six month period

• Indicating that the compliance burden should be allocated to the broker dealers with the face-to-face relationship with the customer

• Arguing that the Rule should only apply to those checks issued after the 17Ad-17 revisions become effective, as opposed to grandfathering it to any checks issued prior to the final publication

• Noting that re-depositing uncashed checks should be permitted and should qualify as notice

• Arguing to extend implementation from 12 to 18 months after the final Rule is released

• Arguing for recognition of and guidance on the areas where this Rule and its revisions conflict with state unclaimed property laws

• Arguing to permit electronic notices as fulfillment of the uncashed check notice requirement in the proposed Rule

So Where are We Today, More Than Two Years After the Dodd Frank Mandate?

In conversations with the SEC Division of Trading and Markets, most recently in February, April, July and September of 2012, it was indicated that all industry comments were considered and that approximately one third of those were actually included in the draft final proposal. The Commission finally released a draft of 17 CFR Part 240 entitled “Lost Securityholders and Unresponsive Payees” which was approved by the Commission and has been issued in draft form pending review at the Office of Management and Budget of the “Major Rule Analysis” under the Small Business Regulatory Enforcement Fairness Act.

The Effective Date for the 17Ad-17 amendments is March 25, 2013. The Compliance date for the 17Ad-17 amendments is January 23, 2014. A summary of key points contained in the Draft Final Rule is as follows:

1. The new requirements of 17Ad-17 will apply to ALL brokers and dealers as defined by Exchange Act Sections 3(a)(4) and 3(a)(5).

2. The search requirement as originally outlined in 17Ad-17 remains unchanged.

3. The definition of “paying agent” will be adopted as proposed.

4. The Commission has adopted the term “unresponsive payee” for a securityholder who has been sent a check and it remains uncashed for the earlier of six months or when the next regularly scheduled check has been sent.

a. Unresponsive payee is not limited to natural persons.

b. If unresponsive payee is lost, the search requirement is triggered and no notice is required until such time as paying agent obtains a good mailing address.

c. If unresponsive payee is deceased, notice requirement remains.

5. “Regularly scheduled check” is defined as not only checks for interest and dividend payments, but also any other regularly scheduled periodic payments from a securities issuer to be distributed to securityholders as a class. Therefore, it will not include checks for payment solely to an individual securityholder pursuant to specific arrangements established at the request of the securityholder or to third parties on behalf of the securityholder.

6. Only one notification is required for a given uncashed check, and that notification could be sent along with another check or other subsequent mailing.

7. A notice can cover one or multiple checks. If a notice covers multiple checks, the notice must identify each uncashed check and must be sent to the unresponsive payee no later than seven months after the sending of the oldest uncashed check covered by that notice.

8. “Redeposited checks” will be considered to have been negotiated for the purpose of 17Ad-17 only if the securityholder has established standing or other prior instructions for any check(s) to be deposited into its account in that manner. Redeposited checks may not be used otherwise to avoid the 17Ad-17 notification requirement.

9. Written notification may be provided electronically if the customer has affirmatively consented to receiving disclosures generally in such manner.

10. Rule 17Ad-17(c) will allow for six months (or 180 days) and seven months (or 210 days) to clarify and standardize the notification timeframes.

11. The $25 threshold for checks will be adopted as proposed.

12. All changes to Rule 17Ad-17 are prospective only and will not apply to uncashed checks already outstanding.

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13. A new technical Rule will be established, Rule 15b1-6, to provide ongoing notice to brokers and dealers of their new obligations under Rule 17Ad-17.

14. All record keeping requirements will be adopted as proposed.

15. The new title of the Rule will be “Lost Securityholders and Unresponsive Payees”.

With the final 17Ad-17 revisions in place, what are the issues that the broker dealer community should be thinking about now? Certainly you should be thinking about whether you have a process for those mandated lost securityholder searches — is this something you have the ability to do internally or do you need to look to external database providers to meet that search requirement? And, how about the expenses? How much is it going to cost you to meet the search mandate and to mail out those uncashed check notices? SIFMA, in its comment letter, estimated the industry compliance expense at $40 million, so each individual firm should be getting a handle on what those costs are going to be internally. How will you handle the customer responses and the system maintenance that is required after the searches are executed? How will your customers react? Certainly, 12 months remain before compliance with these revisions will be required; but what can broker dealers do now to embrace the new mandates to reduce escheat liability in the long-term as happened in the transfer agent community?

Escheatment Triggers

Turning to escheatment, let’s examine the triggers, or criteria, that are most recently giving rise to the presumption of abandonment on securities-related property types. Let’s begin with a brief overview of the actual black letter law trigger categories which can vary by holder class.

• First is “RPO”, or mail return. This is mail that is undeliverable by the post office, where the state would require only RPO for the full dormancy period in order to substantiate the presumption of abandonment.

• Second is “contact only”, where the focus is exclusively on owner generated contact, or rather the lack thereof, without any regard to mail status, giving rise to the presumption of abandonment.

• Third, owner contact is the primary driver but returned mail is generally required at the end of the dormancy period. In some cases like New York, there’s some overlap, but in most of the statutes you see language stating that the owners’ location is unknown at the end of the dormancy period.

• And fourth, we have some states that look at the earlier of the date of last owner contact or the date the mail became undeliverable, to start the dormancy clock. Additionally, there are nuances for dividend-reinvest property as well as non-dividend paying entities.

A huge question when grappling with this notion of owner contact is what constitutes owner generated contact? One thing to keep in mind is that whatever you use, documentation is the key and it must be documentation that is discoverable and auditable within the books and records of your firm. So consider the following questions when developing your systems enabling you to capture and track owner generated contact:

• Does the successful delivery of a Form 1099 constitute contact? Only in a few states is the answer officially “yes”.

• Will a verified web inquiry constitute contact? What if your systems can actually capture and verify the customers’ computer IP address indicating where the inquiry was launched? That could be a pretty good argument for contact.

• How about verified phone contact on a recorded line? Some states will accept this as contact and others won’t.

• Trades, of course, would certainly constitute contact as long as they’re initiated by the customer. But what if those trades are authorized by a customer but subsequent trades are performed by the financial advisor? Some states would question whether or not this constitutes owner generated contact.

• Same with liquidations — are they conducted by the owner or by the financial intermediary? States will vary in their response to that question.

• An easy one across the board is when actual physical checks are cashed and most states would typically consider that a strong indicator of owner contact.

Obviously contact definitions vary by state and by holder. Some state and holder representatives are just now beginning to have dialogue around and are grappling with these issues in the hopes of modernizing and standardizing the notions of owner contact in today’s hi-tech investing environment.

Even with guidance from various unclaimed property educational forums, there are still compliance hurdles that those in the broker dealer and mutual fund communities have to face. First is the challenge of understanding and applying the confusing unclaimed property provisions themselves, many of which have been law since the mid-1990s. These are not new. The enforcement of the contact feature of these laws is something that is becoming more prevalent, but the laws themselves have been around for quite some time. Secondly, in many cases we have to deal with older legacy systems that are not currently programed for owner contact. Often, contact is found in phone systems, web systems, proxy systems or mail systems, none of which are integrated into one automated database allowing for easy analysis and identification of eligible accounts for unclaimed property reporting based on owner contact. Third, these compliance efforts currently require significant manual research to capture all those owner contact indicators, which is very expensive and cumbersome.

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The contact discussion has many perspectives that are beginning to reach critical mass. Certainly from an enforcement perspective, we know that the brokerage and mutual fund industries have recently been targeted by a wave of third-party multi-state audits. Also from an implementation standpoint, we know that some online brokers have embraced the notion of contact as an unclaimed property dormancy trigger but they may have not yet embraced the notion of capturing and tracking returned mail required to comply with the coming 17Ad-17 revisions. And finally, we have the mutual fund and broker dealer industries, embracing the notion that contact is not going away and that they must now integrate it into their escheatment systems to ensure compliance enterprise wide.

Lessons Learned

One important lesson learned comes from the commercial transfer agent in the context of dealing with the Illinois statute. The historical practice by the transfer agent community was to escheat only based on mail returned or lost status, but as the states have become more aggressive over the last few years, the transfer agent community has definitely begun to reinterpret the approach and embrace the contact trigger as a necessary basis to determine eligibility for their issuer clients. When dealing with dividend paying entities, the analysis based on contact is pretty straight forward. It becomes more challenging when dealing with non-dividend, retirement accounts, brokerage accounts, and especially nominee, street name and dividend reinvestment accounts. Bottom line, the contact analysis casts a much broader net for account eligibility, resulting in staggering cost implications for subsequent due diligence mailing requirements and dramatic increases in the escheated account volume. The number of state claims also is increased, along with shareholder complaints.

There is a silver lining to all this, however, and that is customers lacking contact are generally not customers that are lost. We know where they are. Their addresses are good for the most part so if we embrace the notion of advanced owner outreach and mandated due diligence programs, we should be very successful in securing or generating contact from those owners who were previously out of touch, thus eliminating the liability or exposure for unclaimed property reporting on their accounts. Additionally, the opportunity to establish proactive communication with customers has huge benefits. It is always a good thing to verify registration information, making sure you’re getting middle names, middle initials and suffixes correct on your registration. It’s also a great way to renew owner dialogue with customers regarding the various investment options your firm provides, discussing new offerings with your customer base, reinforcing the value of each customer relationship and of course gaining the opportunity to cross sell different products and services.

Enforcement Trends

Shifting gears, let’s examine what we’re seeing from an enforcement perspective, as well as a political shift in state attitudes. The purpose of these laws was and still is to be custodial in nature. Therefore, in the absence of the owner, there is a custodial repository to which a holder can transfer those funds, where they will be held until such time as the owner can claim them. When you fast forward to present day, we see thinning state budgets and reduced state employee work forces, resulting in an increase in contract auditors employed by the states with a greater emphasis on bringing in unclaimed property revenues.

As a result, the brokerage and mutual fund industries have recently seen a spike in third-party audits more so than individual state audits. Let’s consider the players. Most readers will recognize the name “ACS” as the Unclaimed Property Clearinghouse. In 1984, they were just getting started as a third-party auditor for the states. They have recently been acquired by Xerox so their legal name is now Xerox, but they are still most commonly referred to as ACS.

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Kelmar is the predominant auditor that has been representing the state of Delaware. They also have contracts with more than 30 states, but Delaware is their primary player. Kelmar is headquartered in Boston and several principals in the company started out as Big 4 accounting tax professionals who used to work on the consulting side of unclaimed property compliance. Verus is another large player in the industry. Their principals are mainly former insurance commissioners, insurance auditors, and even some FBI agents. Verus has been extremely successful politically, as well as from a legal perspective, resulting in states litigating against life insurance companies, achieving extremely large unclaimed property settlements. Highlighted in a recent article on the front page of the Wall Street Journal noted a $500M settlement by MetLife; representing a select number of states.

Verus has been around for about 5 years and making huge strides, as evidenced by the recent life insurance settlements hitting the news. Seeing the huge opportunity, they are now moving on, looking at the broker-dealer industry. Not only are broker dealers looking at possible ACS or Verus audits, but Kelmar has also joined the mix. These third-party audit firms believe that broker-dealers are generally not unclaimed property compliant. The SEC Rule 17Ad-17 revisions have not yet been formalized, but with the current audit attitude and the recent trends, states are expecting that broker-dealers should go above and beyond to keep track of customer accounts as was the case with the insurance industry. In the insurance context, the intent was gray in terms of the actual legal requirement to track down owners; but the states held public hearings asserting the expectation that firms should go above and beyond—as custodians with consumer relationships. We think some of that attitude is going to spill over into the broker-dealer industry as well.

Many brokerage firms currently escheat based solely on mail return status; but many of the states are no longer willing to rely on post office delivery as confirmation that holders have a good handle on their owners and customers. We can offer examples of how New York is imposing requirements to leverage death master file research, to ensure optimal customer tracking. That is not happening by statute; instead its being imposed by New York’s expectation that firms must go above and beyond, in the absence of which New York will assert that the owner’s account is presumed abandoned. An abundance of unclaimed property also continues to arise in the wake of mergers and acquisitions, where the brokerage industry has been particularly impacted. The states have been waiting and watching for several years as brokerage firms merge systems to see how things will shake out after the 3 year dormancy period in most jurisdictions.

As a result, we are seeing the brokerage industry come into the cross hairs of most states. Kelmar has at least 15 states on board for brokerage audits even though audit notices have probably not yet been released. Kelmar is waiting to get even more states on board, as is ACS.

What are the Auditors Looking For?

Obviously, states are targeting brokerage firms who have never filed unclaimed property reports. For those of you who have experienced a merger or acquisition, be sure to ascertain the acquired firm’s reporting history in the due diligence process before purging information, as that will become significant in an audit context.

States are aware that, historically, brokerage firms have only reported based upon returned mail dates. This is especially true for smaller accounts where your agents may or may not be proactive in reaching out to contact owners due to their low or nonexistent trading patterns. These small and non-trading accounts are likely to be the ones that will fall through the cracks and become eligible for reporting in an audit situation.

The auditors will also be looking to determine: How many returned mailings before you code an account as lost? What is the length of time between account mailings? And, they are looking to see if firms are going above and beyond to establish and track owner generated contact. Some auditors are even making the following leap of logic -— if they can prove that an owner is deceased, then the presumption is in favor of “no owner contact” and the date of death can then be presumed as the date of last contact.

Retirement accounts are coming under greater scrutiny in the recent audit wave. States would prefer not to wait 3 or 5 years beyond the age of mandatory required distribution, or 70 and a half to have retirement property classified as eligible for reporting. That’s a contributing factor pushing the states to consider dates of death more carefully, especially New York, which has examined several brokerage firms with particular emphasis on deceased New York customers.

The unreconciled differences in “unknown owner” accounts, where brokers cannot reconcile balances, also fall into the bucket of property receiving auditor focus. In this scenario, there has been a variable on a trade, but the broker doesn’t know where to apply it. The auditors are examining these types of transactions and are looking for explanations on why such a variance in unknown funds exists among different firms.

Why Now?

Many have asked why the brokerage industry is now under audit scrutiny. The reasons are complex: states are hesitant to raise taxes beyond a palatable level, people are becoming ever more transient, some industries have historically been assumed to be in compliance but contractors are becoming more efficient at researching industry compliance levels and notifying the state that a particular industry is ripe for an audit. The contract auditors have nothing to lose by pursuing companies. Add to this, increased competition by third-party audit firms that view this as a great opportunity to make money fast. As result, a new crop of audit firms are emerging, and states are concerned about their credentials and their controls. Some states are considering the resurrection of audit guidelines but there is no indication that this will happen anytime soon. The fact of the matter is the states have the right to contract out of state audits and they have the right to hire outside help to do so.

Worthy of mentioning again are the insurance audits which resulted in huge settlements. As a result,more brokerage firms are looking at owner contact because of what was learned from the audit outcomes. Additionally, retirement account owners are coming of age and the states are making a push to examine those accounts for contact. But, the current economy is forcing more people to work longer and not withdraw from their retirement accounts. In fact, in recent years, the government gave a one year reprieve without the mandatory IRA distribution. Today, attaining the age of 70 does not mean you are old. When the IRA was established in 1975, the average person was living to 72. Now the average person is living to 78.

The auditors are also taking advantage of reduced dormancy periods. Couple that with new abandoned property types emerging that the states haven’t yet addressed, particularly in areas such as un-invoiced receipts and internet sales. More and more states are assessing penalties in an audit; states such as Texas and even Arkansas are assessing many audit targets for the costs of the audit. Smaller states are looking at penalties as a means to offset the expense of engaging the contract audit firm.

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VDAs & New Reporting Deadlines

The good news is there is an even greater incentive to enter into voluntary disclosure agreements with the states. The benefits to voluntary compliance are that the states generally will waive interest and penalties, they will give holders the opportunity to manage the process on their own timetable, and they will limit the reach back in a voluntary compliance effort. In an audit context, the states have the right to go back 20-25 years because there is generally no statute of limitations; this can be extremely onerous, especially in a world where there have been a lot of mergers and acquisitions.

We’re seeing more states, like Michigan and Texas, changing the reporting deadline. These changes are often being initiated by legislators; making it difficult for the state unclaimed property office to implement both administratively and procedurally. Some states continue to add new rules or policies to reduce their internal administrative burdens, for example, the specific authority to contract for audits and create estimated liabilities, thus shifting the burden to the holder community. More and more states are sending invoices for interest and penalties from late reporting as well as audit costs.

Preparing for 2013 and Beyond

Audits are on the rise, so it pays to be proactive. If you received an audit letter, several of the tips discussed here can help you navigate the process. Involving management early and notifying your legal department immediately, especially prior to the first meeting with the auditors, is highly recommended. This gives the states a sense that you’re committed to the unclaimed property compliance process and that you want to move forward. If you did not receive an audit letter, it’s just a matter of time before you do. Keep your management updated on the trends and let them know that audits are on the rise. Being active and staying involved with industry associations that deal with unclaimed property like SIFMA (Securities Industry and Financial Markets Association) can help. Plan to attend the Unclaimed Property Professionals Organization’s annual conference in March 2013 in San Diego which can help connect you with invaluable resources for managing your unclaimed property obligations.

SEC Rule 17Ad-17 revisions are coming. Take advantage of the benefits of the mandated search process — several firms have realized over the last 15 years just how many RPO account new addresses they update by virtue of this process. Understand the costs of required system updates and RPO tracking; but also understand the ultimate savings yielded by being proactive and reducing due diligence, decreasing escheatment, developing uniform processes for lost account coding, and reducing mail to bad addresses.

Dormancy periods continue to shrink. In 2001, the average dormancy period was 4.9 years, now the average is 3.7 years. By percentage, 61% of the states have a three year dormancy period with 71% of the US population living in states with three year dormancy periods.

Where Should You Go from Here – A Few Parting Thoughts

• Establish and test strong written internal policies and procedures

• Perform early remediation of potential unclaimed transactions

• Reconcile and update vendor and customer files

• Motivate and engage your staff to stay up to date with unclaimed property developments

• Make sure all compliance documents are updated and know where to find them

• Confirm your company’s filing status and past reporting practices

• Embrace best practices and perform proactive due diligence

• Stay in contact with your customers and document same

• Try to quantify your potential exposure

• Consider partnering with an independent unclaimed property specialist to conduct period audits to confirm compliance

• Take advantage of VDAs; these can only be leveraged once in each jurisdiction so be sure to consider all property types if you proceed with VDA

• Establish a dynamic unclaimed property committee to address changes impacting your unclaimed property program

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CALiFoRNiA21419 2012Proposed 6/8/12, Finalized 9/19/12, Effective 10/19/12

This rule-making action amends existing California Code of Regulations, title 2, section 1155.350 by updating forms incorporated by reference. The regulations also amend section 1155.250 by deleting language requiring prior approval to remit funds by Fedwire and removing International Funds Transfer as a means for electronic funds transfer.

DELAWARE DE 2976 2012 Proposed 7/1/12, Finalized 11/1/12, Effective 12/1/12

On July 1, 2012, the Delaware Department of Finance/Unclaimed Property proposed regulations that limit the look back period for purposes of audit. The regulations propose that, in order to encourage compliance, the following starting periods for examinations will be observed:

1. For Holders currently under audit, or who become the subjects of an audit before the effective date of the new regulation, auditors will review records dating back to January 1, 1986, provided that the examination is completed by June 30, 2015.

2. For Holders who become the subject of an audit on or after the effective date of this new regulation, and for all other holders whose examinations are not completed by the close of business on June 30, 2015, the State Escheator will continue his existing policy of examining records created on or after January 1, 1981 to determine compliance.

The regulation also clarifies that an examination is deemed to be complete for any category of property as of the date on which the Audit Manager mails the statement of findings and request for payment for that category of property.

10 DE Reg. 699

Finalized 12/1/12, Effective 12/10/12

This new regulation amends an existing regulation addressing unclaimed property audits, specifically the periods of time that the State Escheator will examine historical records to determine compliance with Delaware unclaimed property law.

While the majority of the changes are non-substantive and mostly address verbiage changes within the regulation, there is one change that stood out. This particular change to the unclaimed property examination guidelines provides the State Escheator and authorized Auditor(s) the option to create or request physical copies of records from holders under audit.

The amended language of the regulation removes the clause that allows an unclaimed property audit to be conducted remotely only with the consent of the holder. Both changes are significant for holders that have sensitive or highly confidential records, in that these records are no longer limited to only physical on-site review.

iLLiNoiS 74 IAC 760.21 Proposed 8/31/12

The proposed regulation reduces the aggregate threshold amount from $25 to $5. Comments were invited until 10/15/12.

MiCHiGAN HB 6067 Introduced 11/29/12

On November 29th, a bill was introduced into the Michigan legislature that proposes to increase dormancy periods as follows:

• Money orders, from 3 years to 7 years

• Checks, drafts, or similar instruments, from 3 years to 5 years

• Uniform Gifts to Minors Act (UGMA) Accounts, from 3 years to 15 years

• Life Insurance Property, from 3 years to 5 years

• Prepaid funeral contracts, from 3 years to 5 years

• IRA Property, from 3 years to 5 years

• Gift Cards, from 3 years to 5 years

• Safe deposit Box contents, from 3 years to 5 years

• All other property not specifically addressed in Michigan’s Unclaimed Property Statute, from 3 years to 5 years

MoNTANA D 375 Draft Bill Filed 11/23/12

The Montana Economic Affairs Interim Committee, at the request of the State Auditor, filed a draft bill proposing an Unclaimed Life Insurance Benefits Law consistent with the NCOIL Model Act. Draft bill D 375 advocates the following:

1. An insurer shall perform a comparison of life insurance policies, annuity contracts, and retained asset accounts that are in force for its insureds against a death master file on at least a semi-annual basis to identify potential matches of its insureds.

2. For any potential matches, the insurer shall within 90 days:

a. make a reasonable effort, documented by the insurer, to confirm the death of the insured, annuity contract holder, or retained asset account holder; and

b. determine whether benefits are due in accordance with the applicable policy or contract.

Legislative & Regulatory UpdatesWinter 2012 (For the period 9/1/2012 through 12/31/2012)

introduced – used for Legislation

Passed – used for Legislation

Proposed – used for Regulations

Adopted – used for Regulations

Prefiled – drafted bills and resolutions to

be numbered, printed, made available for

public review, and scheduled for hearing

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3. If benefits are due in accordance, the insurer shall:

a. use reasonable efforts, documented by the insurer, to locate the beneficiary; and

b. provide the appropriate claim forms or instructions to the beneficiary to make a claim, including the requirement to provide an official death certificate, if applicable under the policy or contract.

4. With respect to group life insurance, an insurer is required to confirm the possible death of an insured when the insurer maintains at least the following information with regard to those covered under a policy or contract:

a. social security number or name and date of birth;

b. beneficiary designation information;

c. coverage eligibility;

d. benefit amount; and

e. premium payment status.

5. An insurer may disclose minimum necessary personal information about an insured or beneficiary to a person the insurer reasonably believes may be able to assist the insurer in locating the beneficiary or a person otherwise entitled to payment of claim proceeds.

6. An insurer or its service provider may not charge insureds, account holders, or beneficiaries for any fees or costs associated with a search or verification conducted pursuant to this section.

7. The benefits from a life insurance policy, an annuity contract, or a retained asset account, plus any applicable accrued interest, must be first payable to the designated beneficiary. In the event the beneficiary cannot be found, the benefits escheat to the state as unclaimed property.

8. If claim proceeds are presumed abandoned, the insurer shall notify the department of revenue that:

a. the beneficiary of a life insurance policy, annuity contract, or retained asset account has not submitted a claim with the insurer; and

b. the insurer has been unable, after good faith efforts documented by the insurer, to contact the beneficiary.

9. In addition to giving notice to the department of revenue, the insurer shall immediately submit the unclaimed life insurance or annuity contract benefits or the unclaimed retained asset accounts, plus any applicable accrued interest, to the department of revenue.

10. A violation of these provisions constitutes an unfair method of competition or a deceptive act or practice in the business of insurance.

11. The proposed effective date is January 1, 2014.

NEW YoRK SB 6943; AB 9845 Introduced 4/13/12, Passed 12/17/12, Effective 180 Days after 12/17/12

On December 17, 2012, New York Governor Cuomo signed identical bills SB 6943 and AB 9845 into law. These bills address unclaimed life insurance and amend New York’s Insurance Law by requiring the following:

1. Every insurer shall use the Social Security Administration Death Master File (DMF) to cross-check every policy and account subject to this section on, at minimum, a quarterly basis. An insurer may perform the cross-check using the updates made to the DMF since the date of the last cross-check performed by the insurer, provided that the insurer performs the cross-check using the entire DMF at least once a year. The cross-checks shall be performed using the social security number, the name, and date of birth of the insured or account holder.

2. Every insurer shall implement reasonable procedures to account for common variations in data that would otherwise preclude an exact match with a death index, even when the insurer has incomplete records.

3. Upon receiving notification of the death of an insured or in the event of a match made by a DMF cross-check, an insurer shall search to determine whether the insurer has any other policies or accounts for the insured or account holder.

4. Insurers must also notify any of their affiliates that may maintain records relating to policies, and require them to perform a similar search.

5. Every insurer shall establish procedures to reasonably confirm the death of an insured or account holder and begin to locate beneficiaries within ninety days after the identification of a potential match. If the insurer cannot locate beneficiaries within ninety days after the identification of a potential match, the insurer shall continue to search for beneficiaries until the benefits escheat to the state.

6. Once the beneficiaries under the policy or account have been located, the insurer must provide to them the information necessary to make a claim pursuant to the terms of the life insurance policy or account. An insurer may require satisfactory proof of loss, such as a death certificate, as a condition for conclusively determining the death of the policyholder or account holder.

7. The superintendent shall develop and implement a lost policy finder to assist requestors in locating unclaimed life insurance benefits. The lost policy finder shall be available online and via other means, including but not limited to the department’s toll free telephone number. The superintendent shall assist a requestor in using the lost policy finder, including informing the requestor of what information an insurer may need to facilitate responding to the request. The new law includes specific rules and timeframes surrounding requests and responses to the lost policy finder.

8. Every insurer shall establish procedures to electronically receive the lost policy finder application request form and make reports to the superintendent.

9. An insurer must then report any information on unclaimed benefits due, the number of policies and accounts that the insurer has identified for the prior calendar year under which any outstanding monies have not been paid or distributed by December 31 of such year.

10. At no later than policy delivery or the establishment of an account and upon any change of insured, owner, or beneficiary, every insurer shall request information sufficient to ensure that all benefits or other monies are distributed to the appropriate persons upon the death of the insured or account holder, including, at a minimum, the name, address, social security number, date of birth, and telephone number of every owner, insured and beneficiary of such policy or account, as applicable.

11. Where an insurer issues a policy or provides for an account based on data received directly from an insured’s employer, the insurer may obtain the beneficiary information described in paragraph one of this subsection after receiving the data from the insured’s employer.

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Keane’s Unclaimed Property Reporting Group Goes Above & Beyond During Fall Reporting SeasonBy Maureen Ferrari, Vice President Operations

The month of October is always a busy one for Keane’s unclaimed property reporting group, as the lion’s share of states have a fall reporting deadline. This year was no exception, as the members of Keane’s unclaimed property reporting group put in countless hours and worked around the clock to ensure that each and every report was filed accurately and on time.

The presence of Superstorm Sandy made this reporting season even more challenging, as the Northeast was battered by the storm over several days. With the exception of one day, our corporate office and operations center were closed, however, the reporting group worked throughout the storm, and in some cases, hand-delivered reports to our clients when offices were shutdown. Keane also reached out to the state unclaimed property offices to request extensions for our clients and filed requests on their behalf.

After the storm headed out to sea – the end results were astounding. With over 200 reporting clients to account for, Keane filed over 9,000 reports to 47 different reporting jurisdictions. These reports were filed on behalf of over 3,000 individual tax IDs and included 416,109 escheatable accounts.

We would like to publicly thank our unclaimed property reporting team on a job well done and their dedication to our clients.

As we look to 2013, Keane is offering two new unclaimed property services. After listening to our clients and understanding their challenges, we are now offering enhanced communication services for due diligence mailings and automated shareholder database cleanup to help our customers save time and money.

Enhanced Due Diligence Mailings

As you know, the mandated due diligence letter, for most states, contains specific language and details what must be communicated to every customer. However, the reverse side of the letter leaves an opportunity to convey any customized message. Beginning with Spring 2013 reporting season, Keane is offering you the opportunity to submit a customized message with your mailings. Some examples of messages might include:

• Detailed instructions on how to reactivate your account

• A customized call to action

• Frequently asked questions

• Suggestions on how to prevent your property from becoming unclaimed

This is a great opportunity to use this new service to maximize the effectiveness of your mailings and reduce your unclaimed property liability.

Automated Database Cleanup

Maintaining electronic customer files can be an unwieldy task with databases containing hundreds of thousands, and in some cases, millions of entries. Improved data quality can help reduce your unclaimed property liability or avoid you the embarrassment of accidentally escheating your own employees’ assets. Keane has developed a service for clients to scrub outdated databases by using advanced matching techniques to retrieve missing information or identify incorrect records by comparing them against other databases. Comparing two databases side-by-side and updating records through manual data entry can be time consuming and lead to more errors. Using Keane’s system, you can cross reference multiple databases against a unique identifier, such as a social security or account number, and pull information with only a series of mouse clicks to automatically update your client’s information. Using our automated database cleanup service can help improve your data quality and benefit you by:

• Reducing unclaimed property reporting errors

• Decreasing the time spent with states to answer reporting mistakes

• Reducing your overall reporting liability

• Increasing the chance of reuniting beneficiaries with unclaimed property

• Aging property easily by cross referencing timely and accurate records

• Making your data more useful by pulling accurate statistical samples with clean data

• Helping you pinpoint audit red flags by examining gaps or duplicates in check number patterns

• Freeing up your resources to focus on your core business

13

Unclaimed Property Audits on the Rise in Middle MarketsBy Cornel Lupu, Manager in Keane’s Consulting and Advisory Group and Barbara Blick, Vice President

Over the past 4 years, a flurry of multi-state unclaimed property audits have been initiated within the insurance industry. The impact of these audits came to light on May 17, 2011, when John Hancock Life Insurance Company (John Hancock) entered into a settlement agreement with the state of Florida’s Office of the Attorney General, Office of Insurance Regulation and the Florida Department of Financial Services. Just weeks later, on June 1, 2011, approximately 29 other states entered into a similar agreement with John Hancock known as the Global Resolution Agreement. More settlements with state regulators soon followed:

• January, 2012 – Prudential Insurance Company reached a settlement with 19 states over its unclaimed property practices.

• April, 2012 – MetLife agreed to a $500 million multi-state settlement.

• October, 2012 – Nationwide Insurance Company, American General and Forethought Group entered into multi-state settlements.

With the exception of the settlement with Forethought Group, all of these settlements have been a direct result of the unclaimed property audits conducted by Verus Financial LLC, a third-party audit firm contracted by numerous state regulators. More settlements are sure to be on the horizon as states like West Virginia escalate their unclaimed property compliance enforcement efforts by having filed law suits against 30 life insurance companies.

Up until now, the audit focus was clearly on the top tier life insurance companies in the United States. As settlements were announced, so were changes in the regulatory landscape, creating opportunities for other third-party unclaimed property audit firms. We are now seeing a migration from unclaimed property audits of large life insurance companies to the “middle market” life insurance and fraternal insurance carriers. Unclaimed property audit firms such as Kelmar Associates and Xerox Unclaimed Property Clearinghouse, to name a few, are also contracting with state regulators to conduct multi-state unclaimed property audits in these same areas.

So What Does This Mean?

These recent changes point towards state regulators wanting to ensure that all insurance companies (big and small) are in compliance with the unclaimed property laws. In 2013 we can expect to see an increase in the number of unclaimed property audits and legislative changes in the insurance industry. These audits will impact all insurance carriers, regardless of their size. State regulators will continue to investigate current industry trends and business practices to ensure that policy owners and/or beneficiaries are made aware of their assets and are administered in a timely fashion. The expectation

is that the insurers proactively communicate with the policy owner or beneficiary once the insurer becomes aware that the insured is deceased.

With audits mounting, it would be prudent for insurance companies to assume the stance that an audit notice may be coming. And in taking this position, companies should be making all possible preparations for an audit. The best way and most common approach would be to prepare a self-assessment based on an audit checklist. Here some examples of what companies should be doing and asking themselves in advance of an unclaimed property audit:

• Have I been filing unclaimed property reports consistently and including all relevant property types?

• Am I holding any past due unclaimed property? If so, consider filing a voluntary disclosure agreement with the appropriate states.

• How far back are records kept for filed unclaimed property reports, bank statements, voided checks, cashed checks, journal entries to support credits written off, etc.?

• Has the Social Security Death Master File (DMF) ever been used to check for potential deceased policy owners? If so, what were the results?

• Am I performing the proper due diligence as mandated by state regulations?

• Are all of my business lines following the same unclaimed life benefits and escheatment procedures?

• Do I have an acquired block of business that may have incorrect or missing data?

• Have I reviewed my staffing model to ensure that state SLAs continue to be met with the increased in claim processing work?

on a Routine Basis, You Should Be:

• Performing a risk assessment to quantify any potential past due unclaimed property.

• Reviewing policies and procedures to determine if there is any risk of exposure to any unclaimed property liability.

• Testing and scheduling regular internal reviews; and consider the benefits of a risk analysis.

There are several benefits for scheduling cyclical compliance reviews. Using an independent specialist to conduct the review often brings a fresh perspective and aids in identifying gaps, areas of risk and suggested best practices. On the flip side, the independent review can also prove beneficial to reaffirm the strengths and consistencies of your compliance process.

14

Filing unclaimed property reports can be a daunting task. There

are multiple jurisdictions, different holding periods and various

reporting deadlines to consider. Filing reciprocal reports can

appear to be a great option for reducing the reporting burden,

however, we recommend that companies be extremely cautious

when considering this option.

What is Reciprocal Reporting?

In an attempt to reduce the reporting burden, many states

entered into reciprocal agreements years ago that permitted

holders to report property for other states to a “primary” or

“agent” state (i.e. state of the company’s headquarters or primary

operations). The states would then exchange property, most

commonly on an annual basis. Each state provided a list of any

states for which they accepted reciprocal property along with

their holder reporting instructions.

Reciprocal reporting was originally intended for de minimis

amounts or incidental property only. Although not specifically

defined by most states, it was assumed to be limited to a small

number of items and small dollar amounts (e.g. ten or fewer

properties valued at $1,000 or less).

Does Reciprocal Reporting Really Reduce the

Reporting Burden?

Keep in mind that even though you may be reporting multiple

states’ property through a single state, the property still needs

to be reported based on the applicable state law. This means

that you will still need to consider multiple holding periods, due

diligence requirements and aggregate amounts. Combining

property for Spring and Fall states means that you will have to

be cautious of different cut-off dates (i.e. June 30, December 31,

March 31) as well.

Does Reciprocal Reporting Really Exist?

Unless there is a formal, written agreement between the two

states, the holder is required “by law” to file the property to the

state of the owner’s last known address. It is not clear how many

states actually have formal written agreements that allow them

to accept property on behalf of another state. Often, property

is exchanged through informal courtesy agreements between

the states. This means that it can depend upon the individual

administration’s willingness to reciprocate, which can change on

an annual basis. Additionally, some states will only reciprocate to

those that send them money. Therefore, there is no guarantee

that the money you report will be forwarded to the

appropriate jurisidiction.

By Maureen Ferrari, Vice President, Unclaimed Property and Pam Wentz, Director, Consulting and Advisory Group

Reciprocity

15

What are the Risks Associated with

Reciprocal Reporting?

While it is clear that holders are indemnified when unclaimed

property is reported according to the applicable state law, it is

not clear if holders are indemnified by the state for out of state

property. Consider the following scenario:

Company A is selected for audit by multiple states which have

engaged a third-party auditor to conduct the audit. During the

audit, it is noted that Company A has filed reciprocal reports

to its primary state of operations for many years. Assuming the

property was never forwarded to the appropriate states, can the

states of the owners’ last known addresses make demand for

that property? Is the primary state required by law to indemnify

you for the out of state property reported? Can the audit states

legally demand property that has been reported to another state?

In our experience, holders have been caught in a tug of war

between the states. In many cases the states do demand

the property from the holders and advise them to seek

reimbursement from the state to which they incorrectly reported.

There is also an increased risk that the owner may not be reunited

with the reciprocally reported property. States may not send

notifications, advertise, or make any efforts to locate owners of

the out of state property. Additionally, if an owner comes forward

to collect his or her funds, it might be difficult for them to file

a claim. They may have to contact both states in an effort to

find the property and the claim can be delayed for a significant

amount of time if the property is in the process of being

forwarded from the primary state to the state of the owner’s

last known address.

Reciprocal reporting can also increase your risk of an audit. It

might appear that you are not filing reports or may increase the

concern that the reports filed reciprocally are not complete.

More and more states are assessing interest on property that is

past due when reported. States could choose to assess interest

from the date it was due to the date it was received from the

reciprocal state. If the state is not transferring the property timely,

this could result in a significant liability.

Closing Thoughts

• Although reciprocal reporting of smaller amounts or few

owners is allowed by many states, most states do prefer that

holders file directly with their state.

• Since property must still be filed in accordance with the

applicable state law, filing reciprocally doesn’t necessarily relieve

the holder of the additional time and burden to understand

each state’s reporting requirements.

• There is no guarantee that the states will exchange the property

in a timely manner, which can cause a multitude of problems.

• Holders who choose to file reciprocally to another state should

proceed with caution; and

• Due to the fluctuation in value and to ensure that your

company receives the necessary release and indemnification,

under no circumstances should securities-related property

ever be filed reciprocally to any state other than the

appropriate jurisdiction.

Unclaimed Property. Uncompromising Performance.

Barbara Rice, State Compliance LiaisonCommitted to ensuring compliance and supporting our clients with all of the state unclaimed property laws, Barbara will serve as an additional resource for state-related matters. Barbara brings over 20 years of unclaimed property experience. She is a former State Unclaimed Property Administrator (OH & SC) and was actively involved as a board member and served in leadership roles on various committees with the National Association of Unclaimed Property Administrators (NAUPA). Barbara is a recipient of NAUPA’s Lifetime Achievement Award and has been presented with various awards and recognition from other groups (including UPPO) for her active involvement and support of unclaimed property compliance matters.

Myrna Milstein, CPA - Consulting ManagerMyrna is a former Unclaimed Property Audit Supervisor and Manager with the Commonwealth of Pennsylvania. Myrna joins our team with over ten years of unclaimed property compliance experience. Myrna supervised a team of auditors and served as the lead auditor in joint audits with other states during her tenure with the state. Myrna was also instrumental in the development and enhancement of Pennsylvania’s audit programs, policies and procedures, staff development and training.

Trudy Smith, Executive AssistantTrudy joins our team, bringing over seven years of unclaimed property knowledge and experience after serving as the Executive Assistant to the Director of the Pennsylvania Unclaimed Property Division. Trudy will be responsible for a coordinating and assisting our consulting and reporting team with on-boarding new clients, coordination and setup up to access our state of the art Keane Client Portal and other related tasks to help ensure smooth and timely support to our team and clients.

Brett Sheppard, Staff ConsultantBrett is a graduate of Loyola University and recently served as an Internal Auditor with the State of Maryland. Brett brings a strong accounting and internal audit background to our team. He is also in the process of working to complete the requirements for his CPA and MBA designations. Brett will be based out of our New York Office.

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P: 610.232.0700 • F: 610.232.0799

E: questions@KeaneUP.com

www.KeaneUP.com

The content presented in this newsletter represents Keane’s understanding of evolving legislation and case law governing unclaimed property law up to its publishing date. The content is provided for informational purposes only and should not be considered legal advice or legal opinion. For more information, please contact Debbie L. Zumoff, Chief Compliance Officer, at 610.232.0700 or via e-mail at dzumoff@KeaneUp.com.

©Keane 2013

New Hires Further Bolster Keane’s All-Star Consulting & Advisory Services TeamKeane is pleased to announce four new additions to its Consulting & Advisory Services Team. The newest members

add over 37 years of unclaimed property experience to an all-star group of unclaimed property specialists.