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Fall 2015: Volume 13, Issue 3

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

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ALSO in this issue:

Unclaimed Property Reporting 101 ..............1-2

Current Litigation Shedding New Light on State Conduct and Audit Consequences .....3-4

Thinking Outside the Box: Alternate Applications for Owner Communication Programs ...........................5-6

Legislative & Regulatory Updates ...............7-15

A Focus on Data Integrity for Better Compliance & Customer Communication ....16

The Changing Unclaimed Property Audit Frontier ...................................... 17 & 20

Delaware Legislative Update ....................18-19

When you were tasked with managing your organizations’ unclaimed property program, how many of you asked “What’s my job?” Unclaimed property is not exactly a household term, nor do they teach unclaimed property in college. Even our accounting and finance majors admit to never hearing the words “unclaimed property” during all of their advanced coursework.

Now that you are hired and have unclaimed property compliance on your list of “to dos”, where do you begin? Picking up where a predecessor left off may not always be the right answer. In this three-part series, we will walk through the unclaimed property reporting process. This first article discusses the data collection and analysis processes. The next two articles in the series address due diligence and, finally, state reporting.

What Are your Obligations as a Holder of Unclaimed Property?

First, it is important to know and understand your company’s obligations as a “holder” of unclaimed property. A “holder” is a business or organization in possession, custody, or control of property belonging to another person or indebted to another on an obligation. As a holder, you are obligated to do the following:

• Adhere to the unclaimed property laws and requirements for the appropriate reporting jurisdictions. This includes periodic review of records to determine if your organization holds outstanding items that could qualify as unclaimed property.

Unclaimed Property Reporting 101Data Collection & Analysis: Lesson 1 in a 3-Part SeriesBy Maureen Ferrari, Vice President Operations

(Continued on page 2)

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• Report and remit every applicable property type generated by your organization.

• Perform due diligence within the state-mandated timeframes and in compliance with state requirements.

• File the reports and remit in the appropriate state formats or methods.

• Retain copies of the reports and remittances and documentation supporting what was and was not reported. Maintain the unclaimed property until it is reported and transferred to the state.

Getting Your “House” in Order

Now that you know what is expected, how do you fulfill these obligations and achieve your company’s compliance goals? Start by getting your house in order. Identify the business areas and accounts within your organization that may generate or hold unclaimed property, a task which often begins with a review of the organizational chart and chart of accounts. Ultimately, this task may require examining multiple lines of business, subsidiaries, shared services, investor services and third party administrators, as all of the above could be generating unclaimed property liabilities. In addition, merged and/or acquired businesses may bring with them their own set of unclaimed property liabilities. The bottom line is, leave no stone unturned. Gaps in reporting or major fluctuations in amounts and property types included on reports can land your company on a state’s watch list, or worse, on the audit target list.

Data Collection

In many organizations, the collection of data can involve numerous separate databases and/or accounts. It is important to include all databases/accounts for all lines of business that could potentially generate unclaimed property; whether it is an uncashed check, dormant account, unused refund, credit balance or memo, flexible or commuter spending distribution, dividend payment, etc. While state dormancy periods range from three to five years for most property types, the dormancy period for wages, commissions and property held in the course of dissolution can have an accelerated dormancy period of as low as one year. Because of this, a suggested practice is to review all property that has remained uncashed or outstanding for one year. A list of outstanding items is then compiled and evaluated to determine which of the items is eligible for state prescribed due diligence and reporting.

Eligibility Analysis

Quite possibly, the most challenging aspect of unclaimed property reporting is determining exactly what to report, where to report it, and when it should be reported. Identifying outstanding items that are eligible for due diligence and reporting on the upcoming reporting deadlines requires up to date information about state dormancy triggers, dormancy periods, cut-off dates and reporting deadlines and how they are applied. Maintaining current state administrative guidance, statutory directives, and rules and regulations can be a formidable task. For uncashed checks, the eligibility analysis entails an

easy calculation of check issue date plus the state prescribed dormancy period. The calculation for other property types, such as banking and securities property, is more complex and involves the evaluation of multiple dates, such as date of last contact and “lost” date (date mail was returned from the post office). Due to the potential for error, particularly when multiple calculations are involved, manually making these calculations could pose a risk to your organization.

If using unclaimed property software or a third-party provider to perform escheat reporting, confirm with your provider that any rules engines that perform an eligibility analysis can appropriately handle the multiple dormancy calculations that may be necessary to accurately report certain property types. To ensure the accuracy of your analyses, ensure your provider (or you, as the case may be) periodically updates their systems with the most up-to-date state dormancy and other pertinent information for each reporting and legislative cycle.

Once the eligible property has been identified, you have tackled the most challenging task in unclaimed property compliance and are a third of the way through the reporting process. n

“ In the next edition of KeaNotes,

we will examine the due diligence

process and suggest some best

practices to complete an

effective due diligence

campaign. Until next time,

class is dismissed.”

Unclaimed Property Reporting 101 (Continued from page 1)

A recent flurry of unclaimed property litigation in the past few years has brought to light several of the common issues holders under audit encounter: estimations, contingency fee auditing, and aggressive interpretations of what constitutes escheatable property. However, two important unclaimed property-related lawsuits currently pending before federal courts are placing at the forefront additional compliance issues, in both the reporting and audit contexts.

Taylor v. Yee (780 F.3d 928 (9th Cir. 2015; writ of certiorari filed 8/5/2015) and City of Sterling General Employees Retirement System v. Prudential (No. 2:2012cv05275 (D.N.J. 2015)) bring to light issues of state conduct after escheatment and confidentiality concerns after an audit. While Taylor asserts violations of the U.S. Constitution’s due process and taking clauses by raising issues related to the state of California’s alleged insufficient owner outreach efforts, the Sterling case is a shareholder class action in which audit/settlement records of the third party auditor (who is not a party to the lawsuit) have become a part of the discovery process.

Adequacy of Owner Notice and Securities Liquidation: Taylor v. Yee

The Taylor case began in late 2001 as a putative class action filed against the then-California Controller, Westly, in a California federal district court. The plaintiffs challenged the constitutionality of the California unclaimed property law and the administration of the law, alleging that the Controller’s failure to provide owners with adequate notice that their property had been escheated constituted a due process violation. At particular issue was the failure of the California Controller to publish the names of owners in newspapers throughout the state and do further outreach to return property to rightful owners. The district court dismissed the case, but the Ninth Circuit Court of Appeals reversed and remanded the case to the lower court. See Taylor v. Westly, 402 F.3d 924, 929-36 (9th Cir. 2005).

In 2005, the district court denied the plaintiffs’ request for a temporary restraining order and preliminary injunction enjoining enforcement of the UPL. Two years later, the appellate court reversed this decision and instructed the district court to grant the injunction, noting the danger of permanent deprivation of the owner’s property due to California’s policy of quick sales of escheated property. See Taylor v. Westly, 488 F.3d 1197 (9th Cir. 2007). The Ninth Circuit insisted that California take action to remedy constitutional problems stemming from a lack of adequate notice to owners. In June 2007, the district court issued an injunction which effectively put on “hold” the California Controller’s ability to collect unclaimed property until the Controller enacted measures approved by the court that provided for adequate owner notice.

In 2007, in response to the court’s mandate, the California Legislature and Governor enacted amendments to the unclaimed property law, which created the “dual reporting” program of which many holders are now familiar. Under the dual reporting scheme, holders report unclaimed property but withhold remitting the property for a specified period of time while the California Controller’s office performs its own

Current Litigation Shedding New Light On State Conduct and Audit Consequences By Karen Anderson, Vice President, Reporting Compliance, Will King, Associate General Counsel and Project Manager

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Current Litigation Shedding New Light On State Conduct and Audit Consequences (Continued from page 3)

due diligence and outreach. After a period of time has elapsed (about six months) from the filing of a holder’s “notice” report, the holder files a “remit” report to accompany the property which remains.

Within a few weeks of enactment of the dual reporting scheme, the district court granted a request from the Controller to lift the injunction. The plaintiffs appealed the decision to remove the injunction, however in May 2008, the appellate court upheld the district court’s action. While the appellate court’s decision was limited in scope to a single issue, it seemed to indicate that the Controller should be given an opportunity to implement the new scheme. Taylor v. Westly, 525 F.3d 1288 (9th Cir. 2008).

In early 2012, the plaintiffs filed a second, amended complaint alleging that the Controller continues to seize and hold property without providing constitutionally adequate prior notice, and does not provide appropriate post-deprivation remedies for owners to retrieve their property. In November 2012, upon motion of the Controller, the district court dismissed each claim by the plaintiffs including the takings claim.1

While the plaintiffs appealed the dismissal, in 2015, the Ninth Circuit upheld the lower court’s decision. The plaintiffs filed a writ of certiorari with the United States Supreme Court (USSC) on August 5, 2015 in which they requested that: 1) the appellate court’s decision be GVR’d2 so that the Ninth Circuit can consider whether the unclaimed property laws violate the Takings Clause, particularly in light of many states’ practice of immediately liquidating property, such as securities, and 2) the USSC review of the constitutionality of the California unclaimed property statutory scheme in terms or procedural due process; most specifically the adequacy of owner notice.

On September 8, 2015 motions for leave to file and corresponding amici curiae briefs were filed with the USSC. These briefs were filed in support of the plaintiffs and were filed by: 1) the Unclaimed Property Professionals Organization (UPPO) and 2) the Shareholder Services Association (SSA) and the Securities Transfer Association (STA) jointly. In their attempts to push for USSC review and set standards relating to the notice and compensation issues, the petitioner’s and amici briefs explain both the Takings and Procedural Due Process problems in terms of their factual basis on a national scale. Chief among the issues are the lack of notice to owners by states, even though the states have means such as motor vehicle and tax records that could be used to locate owners. Further, the argument is eloquently made that current state practices that require the escheatment of property when owners are not “lost” and have not abandoned their property exacerbate the increasing occurrences of property deprivation without adequate notice. Finally, the immediate liquidation of securities by state unclaimed property authorities and the lack of adequate compensation to owners when they discover their property has been transferred to the state are discussed in the briefs.

The increasing trend by many states of immediate or prompt liquidation of securities upon receipt from a holder (or requiring the holder to liquidate the holdings prior to reporting) clearly presents concerns for holders and owners, alike. Keane supports further judicial review of this practice and will continue to monitor, advocate, and participate in the avenues where this topic is being further explored.

Audit Work Paper Confidentiality: City of Sterling Heights General Employees’ Retirement System v. Prudential

Another case we are watching closely now centers on what happens to work papers after an audit is complete.

In August 2012, the City of Sterling Heights General Employees Retirement System filed suit in New Jersey federal court against Prudential Financial Inc., alleging federal securities laws violations. The plaintiffs’ claims stemmed from a decrease in share price related to Prudential’s alleged failure to recognize policies eligible for payment or that were escheatable to states as evidenced by an audit-related global resolution agreement (“GRA”) with twenty states. In early 2014, the lead plaintiffs subpoenaed Verus Financial, LLC (a third party auditor hired by state administrators to conduct insurance company audits) requesting production of documents and communications, including those: 1) related to the insurance market conduct examination and unclaimed property audit conducted on behalf of the individual states; 2) Prudential’s unclaimed property and escheatment practices plus its use or non-use of the Social Security Death Master File (DMF), 3) with or related to Prudential, and 4) those with or related to any governmental or regulatory agency. The plaintiffs served Verus with a deposition subpoena as well.

Verus served its responses and objections to the document production subpoena in May 2014. Verus claimed privilege on behalf of its state government clients. After a failed “meet and confer” meeting, the plaintiffs filed a motion to compel document production and Verus filed a cross motion to quash the deposition subpoena. After a fall 2014 hearing, the court issued an order in early December in which it directed the parties to schedule a deposition of Verus representatives and for Verus to produce relevant documents. The plaintiffs were ordered to use deposition as a means of narrowing the subpoena’s document production request. Verus filed a motion to appeal the order. The California Controller filed a motion to intervene so that it can preserve its opportunity to assert privilege and object to the production of documents by Verus.

On April 30, 2015, the court issued an opinion denying the Verus privilege claim appeal and granting the California Controller’s motion. In denying Verus’ claim, the court indicated that there was no “insurance examination privilege” under federal common law. In its analysis the court indicated that the data requested by the plaintiffs was highly relevant to its claims and that the federal common law of privilege favors probative evidence over state law privilege. Further, the court indicated disagreement with Verus’ contention that, under the federal McCarran-Ferguson Act, state insurance statutes preempt the Federal Rules of Civil Procedure and Evidence and that therefore the privilege applies. In the order, the court did indicate that Verus could assert other appropriate objections to document production on a document-by-document basis.

While this case is progressing (with the latest development being the certification of the class on August 30th), Keane will watch closely the issues related to audit work paper document production. The potential production of audit work papers would put a new light on holder confidentiality concerns during audits – which cannot be understated.

1 A Takings Claim under the U.S. Constitution alleges that private property was taken for public use without just compensation.

2 GVR is an order that can be issued by the United States Supreme Court in which they grant a petition for certiorari, vacate the lower court decision, and remand the case for further proceedings.

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Thinking Outside the Box: Alternate Applications for Owner Communication Programs By Joe Lichty, Director of Marketing

Across most of the 55 unclaimed property reporting jurisdictions and even at the federal level, there exists a requirement for holders of unclaimed property to make a concerted effort to locate the owners of property at risk of escheatment. This effort may take several forms, including state-mandated due diligence — such as letters to owners or newspaper publication, if required — and federally mandated SEC Rule 17Ad-17 mailings to owners of securities-related property. Although the methods may differ slightly by industry, property type, and jurisdiction, the requirement to attempt to notify owners of potentially escheatable property is a cornerstone of unclaimed property compliance and should be part of any organization’s compliance program.

However, going beyond these minimum, statutory notification requirements often yields benefits in the forms of significant reductions in risk and compliance costs to holders. For more than 65 years, Keane has been supporting organizations across all industries in supplementing their compliance programs through our advanced owner location programs. Historically, the majority of these programs have been implemented to assist organizations within the financial services industry that placed maintenance of customer relationships as a high priority, such as banks, broker-dealers, mutual funds, corporate securities issuers, and insurance carriers. However in recent years, due to the increased risks that escheatment causes for holders, Keane has noted an increase in the application of “alternative” owner location programs among multiple holder industries, which have been applied for the tremendous benefit of both holders and customers.

Foundation for ComplianceBefore we dive into these “alternative” applications, let’s review the essential aspects of any quality owner location and communication program:

Quality Data Yields Quality Results

In today’s age of “Big Data”, there is immense emphasis on having accurate and up to date contact information for your owners, customers, investors, and shareholders. With commercially available data sources and increased opportunities to interact with and ascertain information directly from your customers, having incomplete or outdated information is no longer an option and hinders any outreach program before it ever starts.

Use Multiple Methods

Unfortunately, there is no magic bullet in terms of an effective owner communication program. One method alone will not achieve the best results. It takes a multi-pronged approach, usually a combination of mail, electronic and telephone outreach, to effectively achieve the program’s goals, whether that is making contact, updating addresses, or motivating an owner or heir to some sort of action. Similarly, just as you should utilize multiple outreach methods to reach property owners — providing several avenues for owner responses reaffirming their ownership, updating their contact information, or resolving any open account issues is most prudent.

Start Early. Start Often.

As with any remediation program, the earlier you start – the higher the success rate. A due diligence letter, sent 60-120 days prior to escheatment, should be your last line of defense. Initiating outreach efforts well in advance; such as when a check is outstanding for more than 60 days, reaches a designated period of inactivity, or after the second instance of return mail (RPO), will greatly increase the odds of a successful remediation and communication program.

Applications in the Oil & Gas IndustryOne industry where alternative owner location and communication programs have been highly effective is the oil and gas industry. Two unique circumstances have made owner location and communication programs particularly valuable in this space at reducing unclaimed property risks and compliance costs. One of the largest factors is the substantial amount of mineral interest proceeds or royalty checks issued to leaseholders. These checks remain uncashed for various reasons such as an incorrect address, a deceased leaseholder, title disputes, and others.

A common practice within the oil and gas industry is to place these uncashed checks into a suspense account until they can be properly resolved. While this is a generally accepted practice within the industry, failure to actively monitor and address the items within the suspense accounts may result in property being considered “past due” for escheatment, resulting in costly fines, penalties, and interest. In fact, an oil and gas company’s suspense account records are often the first area of review by third-party audit firms. Communication and outreach programs can supplement the existing efforts of oil and gas division order analysts and land groups to help update “stale” suspense codes and move owners into pay status.

Significant merger and acquisition activity within the industry is a second factor that often creates the need for proactive communication and outreach programs. Market forces drive the For both the acquiring and divesting entity, unclaimed property consequences arise from these transactions. When a deal requires an exchange of securities, batches of shares and/or dividend checks may be “cleaned up” in customized post-merger programs. In asset transactions, owner location and outreach can help clean up suspense or other general ledger liabilities that may come with the purchase of new wells or interests.

General Ledger RemediationMost organizations have some level of non-securities unclaimed property liability on their books and records – uncashed payroll checks, accounts receivable credits, outstanding vendor payments, being some of the most common forms. Although not specific to any particular industry, Keane has seen an increase in the practice of targeted remediation programs for general ledger property. Just as companies conduct proactive outreach and communication programs to contact investors, shareholders, and customers – general ledger liabilities can often be mitigated through an alternative location or remediation program.

General ledger property becomes unclaimed for many of the same reasons as securities related property — one of the most common being that the payment was sent to an invalid or incorrect address.

Just as a corporate issuer or brokerage firm would attempt to establish a better address for its shareholder or investor, so should a holder looking to remediate general ledger property. Better address searches and targeted outreach campaigns can significantly increase the opportunity to motivate payees, customers, and other owners to take action on their property. Once an updated address has been confirmed by the owner, checks can be reissued, credit balances refunded, and liabilities mitigated. In turn, unclaimed property reporting risks decrease.

As with any property that has satisfied its statutory dormancy period, a holder may technically be compliant with state unclaimed property laws by simply escheating the volume of uncashed checks to the appropriate state. However, with a little research, investigation, outreach and effort, holders can:

• Reduce unclaimed property liabilities;

• Clean up books and records;

• Preserve or re-establish customer and vendor relationships;

• Maintain a positive corporate reputation

• Support the application of the business to business exemptions offered in many states by proactively addressing outstanding vendor payments;

• Identify additional exemptions and possible accounting errors

Keane has demonstrated success for numerous clients by conducting analysis on and reviewing uncashed check files to identify property that may not truly be eligible for escheatment or that could potentially be prevented from escheatment through a combination of accounting analyses, advanced research, and targeted outreach.

Conclusions Although the scale and scope of an “alternative” owner location program may differ from a traditional program conducted by a Fortune 500 Corporation — the principles remain the same. All holders have an obligation to attempt to locate the rightful property owners. As noted above, compliance may technically be achieved by simply escheating and reporting the property. However, one should note the significant additional benefits possible through an “alternative” location and communication program. Aside from mitigating unclaimed property liabilities and potential audit exposure, finding and paying owners reduces the amount paid to the states, thus making the escheat reporting process more manageable. n

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Thinking Outside the Box (Continued from page 4)In corporate action transactions for holders in any industry where an exchange or tendering of shares is required, we recommend post-merger communication programs six months after the corporate action to address any uncashed checks or unexchanged shares. For publicly traded companies, this also is an opportunity to maintain positive relationships with shareholders or supplement existing communication or outreach programs.

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A Focus on Data Integrity for Better Compliance and Customer Communication Guest Article by Tom Berger, Chief Executive Officer, Cross Country Computer

There is a direct correlation between poor data quality and the likelihood that an account will lapse into dormancy. Improper storage of data elements and failure to leverage best-in-class hygiene solutions are the leading causes of this issue. These become even more of a challenge for investment and other financial records that have complicated account registrations.

Ensuring proper parsing of data and its storage is a critical first step in the hygiene process. It facilitates better matching of files to databases that are used for address standardization, change of address and compliance. The following considerations are specific to investment and financial data.

New investment accounts can include legal terms such as “CUSTODIAN”, “TTEE”, “UGMA” and “JT TEN” in conjunction with the owner’s name and address information when they are established. While these ownership-designations are mandatory, they can lead to delivery issues and lost accounts. If these legal references comingle with account owner contact information, it will reduce successful matching to the United States Postal Service (USPS) CASS Certification and National Change of Address (NCOALink) databases for address standardization and new moves. It also prevents name and address based matching for SEC 17Ad-17 compliance. These challenges are further complicated with multi-owner accounts that contain two or more individuals within a single registration. These conditions make it harder to keep track of owners/customers, which can lead to dormancy. It also makes downstream owner location research and outreach more difficult.

Proper storage begins with the identification and placement of each data element into its correct place on the file layout. This will optimize name and address matching and allow for proactive address verification solutions. These automated processes can be more cost-effective than manually researching lost accounts. Improved data parsing and storage also increases compliance rates by highlighting the relationship between multiple individuals on an account to more effectively determine who should be targeted for legal and marketing communications.

There are a variety of measures that can be taken in order to isolate each data element and improve data quality:

• Make sure separate fields are created within your internal database to store each piece of information.

• Create business rules for how to set up new accounts so that the string “MRS MARY & DR DAVID SMITH JTWROS” is not stored in one field, but instead parsed into its components. This level of parsing can be achieved programmatically such that a string is scanned for specific terms which are then placed into their respective places on the layout.

• Weigh the position of each element within the full registration. For example, ‘IRA’ could be either a first name or a designation for an ‘Individual Retirement Account’.

• Supplement missing data with external append services that match on a particular available element, such as a Social Security Number, email address or phone number, and return back a current land address, etc. Conversely, a postal address can be used to find an individual’s email address or phone number. This additional contact information can then expand your communication strategy by offering new and often lower cost channels.

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The Changing Unclaimed Property Audit Frontier By Pam Wentz and Ann Fulmer, Directors, Keane Consulting & Advisory Services

In recent years the unclaimed property audit landscape has been described as the “wild west” due to aggressive and unpredictable audit methodologies employed by some contract auditors. This article describes the ever-evolving audit landscape and sheds light on recent changes.

It is important to note that not all audits are created equally. Audits conducted by state-employee auditors can vary by state and can differ dramatically from audits conducted by third-party contract auditors. While it is not always the case, an audit conducted by state-employee auditors is more likely to be conducted on behalf of a single state. In addition, state-employee auditors are more likely to perform audits of companies located within the state by which the auditors are employed. In our experience, state-employee auditors tend to be more reasonable than contract auditors, and single state audits tend to be completed in a shorter timeframe. The prevalence of such state-conducted audits also appears to be a declining trend.

So why do states hire third-party contract audit firms instead of more state employee-auditors? The short answer is a lack of resources. It can be difficult to get appropriations for employee auditors when state budgets are tight and the funds collected could turn into claims paid. Contract auditors are often paid based upon the amount of unclaimed property they uncover. Furthermore, it would be impossible for each state to employ the resources necessary to not only audit every company that does business within its borders, but also those out-of-state companies that have liability to the state. Hence, the use of contract auditors by most states.

While all unclaimed property audits can be challenging, those conducted by contract auditors give rise to a unique set of challenges not posed in audits conducted by state-employee auditors. For example, holders often complain about the lack of experience of the contract auditors, particularly with industry-specific issues, such as those in banking and securities. Also, there has been a significant amount of turnover at some contract audit firms, resulting in “auditor training” taking place “on the job” during the course of the audit.

Additional complaints have focused on the audit processes themselves. Many of the contract auditors’ methods seem to be more appropriately designed for fraud audits than for unclaimed property audits. The result is audits that involve more than the identification of a potential unclaimed property liability, significantly protracting the resources needed to address requests, and, often times taking several years to complete.

Auditor independence has come into question because most contract auditors are paid a fee contingent upon the amount of unclaimed property they uncover. The question of independence has been fueled by what holders view as aggressive positions on what constitutes unclaimed property and over-reaching estimation methodologies.

These characteristics of some individual auditors and the firms that employ them have resulted in negative publicity, high-profile litigation, and in the case of Delaware, new laws. SB11, enacted into law in January, 2015 provides that no more than 50% of Delaware unclaimed property audits can be conducted by a single contract audit firm. This provision has increased the number of contract audit firms vying for Delaware’s, as well as the other states’, audit business.

(Continued on page 20)

Delaware Legislative Update: Senate Bill 141 is enactedBy Ann Fulmer, Director, Keane Consulting and Advisory and Freda Pepper, Director, Compliance

After careful consideration of Delaware’s unclaimed property compliance procedures, the Delaware Unclaimed Property Task Force legislatively created in 2014, recommended improvements to the state unclaimed property compliance practices. The purpose of the Task Force was to help ensure fairness and increase voluntary compliance with the Delaware Unclaimed Property program. After many hearings and research on the subject, the Task Force issued recommendations. Some of the recommendations have now been implemented in the form of Senate Bill 141.

SB 141 was enacted and became effective on July 22, 2015. The new provisions impact companies with a reporting obligation to Delaware, companies considering entrance into and currently participating in Delaware’s VDA Program, and companies selected for audit by the state of DE either in the past or the future. The key provisions of SB 141 include the indefinite extension of the Voluntary Disclosure Agreement (VDA) Program administered through the Delaware Secretary of State (SOS), changes to the audit notification and selection process, a reduction to the audit and VDA look-back periods, the reinstatement of fines, penalties, and interest, and the creation of a new notice and reporting requirement for both the Delaware State Escheator and companies seeking to remain compliant.

The Indefinite Extension of the VDA Program

The Secretary of State’s VDA Program, which was to sunset in June, 2015, has been extended indefinitely. By way of background, the VDA Program is administered by the SOS, and not the State Escheator in the Department of Finance. The original SOS VDA program was created in reaction to holder complaints and lawsuits related to audits by third party auditors hired by the Department of Finance (DOF). The SOS program opened for enrollment in January 2012 and provided holders a limited opportunity to participate in the program in order to come into compliance with the Delaware unclaimed property provisions. Opportunity to enroll in the original SOS VDA Program expired on September 30, 2014. The advantages of enrolling in the SOS program include the following: shorter VDA look-back periods (1991 vs. 1996), potential waiver of interest and penalties, and audit protection upon successful completion of the VDA Program and ongoing annual compliance. For the most part,

the SOS VDA program tends to be more company-friendly than the DOF VDA program and can be completed more efficiently and effectively than an audit. Due to SB 141, holders now can take advantage of the VDA program on an ongoing basis.

Audit Notification Process

In an effort to increase voluntary compliance versus the need for audits, an audit notification process has now been established. The new law established via SB 141 provides that no organization can receive an audit notice without first being advised by the Delaware SOS of the voluntary compliance program. However, due to communication with the DE VDA Administrator, Keane has learned that notifications/invitations sent to holders beginning in the fall of 2014, are considered by the SOS to satisfy the notice requirement created by SB 141. While additional notices may be sent by the SOS to holders who have already received notice, they are not required for the holder to be considered audit eligible. Indeed, all holders that received an invitation last year, and chose not to respond/participate, are currently considered eligible for audit. All other companies, however, must receive the notice of the SOS VDA program in order to become audit eligible. If those companies fail to respond to the SOS within 60 days of receipt of the VDA participation invitation, they will be referred to the State Escheator/DOF for audit. Also, it is important to note that companies can be audited if they elect to participate in the SOS VDA program and fail to complete the required self-examination within the defined completion period.

Also, if the form indicating the company’s intent to enter into a voluntary disclosure agreement is not received by the SOS within 60 days after the request to enter the VDA was mailed, the company will be referred to the State Escheator for audit. Therefore, if a holder fails to receive the notification with the upcoming spring reporting cycle, Keane recommends that an in-depth search be conducted in-house to determine whether notification was actually delivered. This is especially important in light of the 60 day time period associated with audit notification letters. If an audit notification letter is delivered to the wrong party within a company, it could severely impact the company’s ability to participate in the SOS VDA program.

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Reduction of the Look-back Periods Audits

Another major provision of SB 141 is the reduced audit look-back periods. Audits initiated before the signing of SB 141 on July 22, 2015 have a look-back period reduced by five years to 1986. Audits initiated between July 22, 2015 and December 31, 2016 have a lookback period to 1991. Look-back periods for audits initiated after January 1, 2017 will be calculated according to a rolling 22 year period. This reduction in lookback periods essentially ends the fixed “1981 rule” formerly used in Delaware audits.

VDA Program

The look-back periods in the SOS VDA program have been altered as well. Those currently in the VDA program will be subject to a lookback period of January 1, 1996. After January 1, 2017, a look-back period of 19 years will apply to those entering the VDA Program. This constitutes a 3-year advantage for the audit look-back periods to be applied starting in 2017.

Reinstatement of the Penalty and Interest Provisions

As an additional incentive for companies to come into compliance voluntarily, SB 141 reinstates past due property penalties and interest at a rate of 0.5% per month on any past due property reported on or after March 1, 2016. The total interest that may be calculated is capped at 25% of the amount required to be paid. In comparison, the 2014 interest cap was 50%. Please note, NO interest or penalties will be assessed under the SOS VDA program.duction of

Annual Notice to Holders

To help ensure that companies remain aware of their reporting responsibilities and lines of communication remain open, SB 141 added requirements for annual DOF notices and the provision by holders of contact information. The State Escheator/DOF must notify all holders who have filed reports in the past five report years of their apparent obligation to file a report. Notices will be sent no later than 120 days prior to the March 1 reporting deadline.

In an effort to identify the key contact person at each company, SB 141 changed the statute by adding a requirement that each unclaimed property report filed specify a “holder contact person” that is employed by the holder company. This individual will serve as the contact with the State for all correspondence related to unclaimed property compliance. The holder is instructed to notify the State of any change of contact person or their contact information.

Best Practices

Keane offers the following best practices as they relate to DE SB 141:

• If your company has not previously enrolled in the DE VDA program, consider enrolling at this time. Some things to consider when weighing this opportunity include parent or subsidiary incorporation in DE, mergers or acquisition of entities previously incorporated in DE, or a significant presence in DE.

• If your company previously received an outreach letter from the DE SOS regarding DE’s VDA opportunity, or receives one in the future, ACCEPT the invitation by completing and submitting the VDA -1 application ASAP or within 60 days of the date of the notification.

• Hire a consultant to help perform the self-assessment needed to complete the SOS VDA process.

• In particular industries, consider hiring outside legal counsel to help address industry specific hurdles.

• Respond timely, don’t delay.

• If your business participates in the VDA program, work expediently with the SOS VDA administrator to resolve issues and questions.

In summary, the enacted SB 141 is Delaware’s answer to a “Company Friendly” approach. Provisions contained with the legislation encourage voluntary compliance and seek to ensure that companies are given the opportunity to participate in the SOS VDA program prior to being audited. Incentives for participating in the SOS VDA now include a shortened look-back period, the mitigation of interest and penalties, and future audit protection. Communication channels also are being enhanced in the form of annual reporting notices and the request for a holder contact person. SB 141 has opened the door for companies to come into compliance with Delaware’s unclaimed property provisions voluntarily. Now it is up to holders to consider the opportunity and if appropriate, take the next step.

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The content presented in this newsletter represents Keane’s understanding of evolving legislation and case law governing unclaimed property compliance 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 2015

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There are now more contract auditors on the scene, which is significantly changing the unclaimed property audit landscape. The new contract auditor firms tend to be smaller in size and have fewer state contracts, so each firm is auditing on behalf of fewer states. While historically, it has been very unusual to have a contract auditor representing only one state, it is no longer uncommon. In turn, it is becoming more and more the norm for holders to be under audit by multiple contract auditors at the same time. Since there are no standard unclaimed property auditing guidelines, or even any standard education or training requirements for unclaimed property auditors, there is little consistency from firm to firm. Having multiple contract auditors with multiple audit methodologies requesting records for different periods at different times can obviously be very disruptive to a business’ normal operation.

The good news is that more states appear to be more closely monitoring their contract auditors. While historically states have provided very little oversight of their contract auditors, states now seem to be paying more attention to what the contract auditors are doing on their behalf. States also seem to be more willing to meet with holders and listen to their concerns about contract auditors and their methods.

While the audit landscape is ever-evolving, some of the best practices remain the same. If selected for audit, a holder should require the auditor to sign a nondisclosure agreement prior to providing confidential data. Further, the holder should confirm that any third-party audit firm has the necessary security in place to protect the holder’s data. In addition, the holder should consider redacting certain personal, private information in order to protect the owner’s identity, prior to turning information over to the auditor. Also, while a holder should be responsive to auditor requests, it is important that the holder first understand why the information requested is necessary and how it will be utilized. Lastly, a holder should challenge requests for information when appropriate.

Unclaimed property audits will continue to take place, whether by state personnel or by third-party contract auditors. The purpose of an audit, not specific to unclaimed property, is to form a fair and objective opinion on the accuracy and validity of the financial statements and/or processes of an organization. While states clearly have the right to audit, it is the holder’s responsibility to ensure that all pertinent protections are in place and to proceed with caution through the changing audit frontier. n

The Changing Unclaimed Property Audit Frontier (Continued from page 17)