Wednesday, December 11, 2013

New Missouri Program Allows Owners to Donate Unclaimed Property Directly to Charities

The State of Missouri's unclaimed property program is no stranger to these pages.  State Treasurer Clint Zweifel was the first participant in our "Meet Your Escheator" interview feature.  The state has rolled out a variety of new and different owner unification programs (i.e., ways to reunite owners with their money) such as an email notification program and unclaimed property kiosks at state agencies where citizens can search for forgotten funds.

Now the Show Me State has a new unclaimed property program, allowing residents to donate unclaimed property to charity.  Under this initiative, once an owner's claim is processed and verified by the state, the owner will have the option of donating the property directly to one of a number of Missouri-based or national charities.  More information about the program -- as well as the beneficiary charities -- can be found at the State Treasury's page here.

Wednesday, December 4, 2013

More Insurance Settlements Suggest Regulators Moving to Smaller Targets

Frequent readers of this blog are no doubt well aware of the multi-state unclaimed property investigation of life insurers' claim settlement practices.  Generally, the investigation focused on regulators’ complaints that many insurers review the Social Security Administration’s death records to determine whether an annuity policyholder had died, so they could stop paying annuities (which are paid by the insurer until the policyholder dies), but were not using that same information to notify life insurance beneficiaries that the policyholder had died (and thus, that the beneficiaries were entitled to collect on the policy).  For their part, the insurers generally denied any wrongdoing, but some agreed to revise their policies.  In the interim, a number of states have passed legislation to require life insurers to do periodic checks of their records.  More recently, the National Association of Insurance Commissioners is considering guidelines to provide more consistency in the claims handling process.

More recently, the life insurance industry website LifeHealthPro reported on two new settlements with two small or mid-size insurance companies relating to unclaimed property and claims settlement practices.  See the LifeHealthPro article for details.  As the article notes, the import of these new settlements is the states' changing focus from the largest insurers to smaller companies.  For those small and medium insurers that have been following the state investigations, but hoping it would be limited to the largest players, it may be time to reassess.  

Monday, November 4, 2013

New Michigan Law Will Apply "Generally Accepted Auditing Standards" to Unclaimed Property Audits

Last week, the Governor of Michigan signed House Bill 4289 into law.  The new law revises the "Examination of Records" provision of the Michigan Unclaimed Property Act to provide certain specific standards relating to audit techniques, memorializes the holder's right to receive a copy of the audit report, and guidelines for the use of estimates in connection with unclaimed property audits.  For example the new law requires that audits conducted by the state (or by private firms on behalf of the state) "be performed in accordance with generally accepted auditing standards to the extent applicable to unclaimed property audits."  Those Generally Accepted Auditing Standards require, among other things, that an auditor maintain "independence in mental attitude in all matters related to the audit," which may provide a holder with some protection from unreasonable, overzealous, and/or legally incorrect positions taken by private auditing firms in connection with unclaimed property audits.  The new law also requires the Administrator to propose rules for "auditing standards" within six months.

The law also contains a number of provisions concerning the use of estimates in connection with audits.  First of all, the law expressly provides statutory authority for the use of those estimates (as did prior law), but now further provides that such estimation shall only be used when the holder does not have "substantially complete records," now defined as "at least 90% of the records necessary for unclaimed property examination as defined under the principles of internal controls."  The ambiguity of that provision (e.g., how do you determine what records are "necessary"?  Who gets to decide?  What are the "principles of internal controls" referred to?) is compounded by the clarification that the calculation is not made "solely as a percentage of the total overall individual records to be examined, but also on a materiality level of value of the records."  Other provisions make clear that the determination of "substantially complete records" can be made on a property type by property type basis.  The new law thus appears to provide some helpful protections, but the scope and extent of those protections will have to be fleshed out by regulations, administrative practice, and subsequent lawsuits.

All in all, even somewhat malleable or unclear auditing standards are preferable to the complete lack of standards in most states' laws.  Congrats to Michigan for taking the first step.

Thursday, October 31, 2013

'Twas the Night Before Fall Reporting

‘Twas the night before Fall Reporting, and all through the firm,
Everyone in unclaimed property was starting to squirm.
Wire transfer instructions were given to disbursements with care,
In the hope that remittance confirmations soon would be there.

In state capitols, Treasurers smiled at the incoming proffers,
Knowing that millions would soon be in the states’ coffers.
Bob was in payables, and me with the CFO,
Was it all out?  Both of us wanted to know.

When down from the Controller there arose such a wailing,
I assumed there must be a late response to a due diligence mailing.
Away to accounting we ran down the hall,
Where Bob and I nearly tripped over the accumulated sprawl.

UP-1s, NAUPA codes, and Holder Reporting Guides,
Covered every flat surface with big stacks besides.
When, what led my stomach to churn and contort,
But hundreds of names that were left off the report.

When I asked how this many names could’ve been missed,
I was told they were still working off last quarter’s list.
Quickly, Bob and I each stifled a cry,
Certainly an exemption or two must here apply.

Airline miles? Lottery winnings? Stale B2B credits?
Perhaps just small balances with offsetting debits?
Alas, no, we would be late, and it might be gory,
With penalties and interest (both statutory).

There just wasn’t enough time to report all the names
Relationship codes, amounts less “lawful claims.”
We needed an answer, and the clock was still ticking,
Through each statute and reg, we just kept on clicking.

Then I noticed on the ledger I continued to assess,
All of the amounts listed were $50 or less.
My mood picked right up, and I started to sing:
We’ll just add it all up and report the whole thing!

Aggregate reporting -- that was the way!
We’d still get this report out by the end of the day!
We quickly revised, and added, and listed,
Everyone in tax helped, even legal assisted.

When it was ready, we unleashed the whole thing,
Breathing a sigh of relief (at least 'til next spring).
And I said to Bob, as the remittance flew out of sight,
Happy fall reporting to all, and to all a good night

Friday, October 11, 2013

Friday Lost + Found: D(minus) as in "Delaware", Money at the State Fair

COST Issues Unclaimed Property Scorecard, Delaware Still at Bottom -- The Council on State Taxation, a nonprofit trade association representing the interest of corporate state taxpayers, recently issued its second Unclaimed Property Scorecard.  The Scorecard is an effort by COST to compare and contrast the states' varying approaches to unclaimed property law compliance and looks at such topics as the use of contingent fee auditing firms, the treatment of penalties and interest and the availability of appeals processes and the like.  Once again, Delaware finds itself at the bottom of the list, registering a D-.  The highest grades were given to Virginia and Massachusetts, both of which received As.  If you are interested in unclaimed property, the Scorecard is worth a read.

Going to the State Fair Pays Off -- We've mentioned state fairs in this space as one of the places where states do unclaimed property outreach to potential owners of unclaimed funds.  This year, the Maryland Controller's office announced that its state and local fair outreach program resulted in excess of $300,000 being returned to rightful owners.  Whether its fried treats or found money, state fairs have something for everyone.

Tuesday, October 1, 2013

California Lowers Aggregate Reporting Threshold

The unclaimed property laws of most states provide for "aggregate reporting" of all items under a specified dollar amount.  For items under the threshold, the holder must still deliver the property to the state, but is not required to report the owners' name and address information.  The measure is generally considered to be an accommodation to holders - relieving them, for example, of the obligation to report dozens (or hundreds, or thousands) of lines of name and address information for "small balance" items from $0.01 to up to $50 or $100.

Of course, if the holder is not required to report name and address information to the state, the state will not have that owner identifying information for the purpose of reuniting owners with their property.  For that reason, the states' willingness to allow aggregate reporting has been criticized as inconsistent with the fundamental purpose of the unclaimed property laws - to have the state serve as custodian of an owner's money.

Perhaps in response to those criticisms, California is taking steps to reduce the aggregate reporting threshold, and thus, reduce the number of items that are reported to the state without name and address information. Under the current California Unclaimed Property Law, items under $50 are permitted to be reported in the aggregate (i.e., without owner name and address information).  Pursuant to Assembly Bill 212, which was signed into law last week, the aggregate reporting threshold was reduced to $25.  While this will increase the reporting burden on holders to some extent, the expanded availability of owner name and address information will also presumably aid owners in finding and reclaiming their money from the state.  The new law goes into effect on July 1, 2014.

Monday, September 23, 2013

Michigan Considers Controversial Administrative Appeals Process

Many state unclaimed property acts explicitly provide for an administrative appeals process pursuant to which a court or other "independent" entity will review the administrator's decision.  Examples can be found in Delaware and Massachusetts law.  Even where a state unclaimed property act does not have a formal review process enshrined in the law, most state constitutions enshrine the doctrine of judicial review (that is, the ability of a court to review executive or legislative actions.

The Michigan legislature is currently considering House Bill 4703, which would create an administrative appeal process to review decisions of the state's unclaimed property administrator.  Currently, under the Michigan Act, a party aggrieved by a decision has 90 days to institute proceedings in court for review.  House Bill 4703 would create a multi-tiered intermediate appeal process (which could last for the better part of 2 years) that a holder would have to avail itself of before seeking judicial review.  Under the Bill, the holder could protest audit findings first to the Administrator, net to the State Treasurer, and ultimately to an "Independent Reviewer" appointed by the State Treasurer.  Of course, all of these reviewers would be either employed by the Treasury Department directly, or appointed by the State Treasurer.  Moreover, the even the decision of the non-Treasury "Independent Reviewer" would not be final -- instead, that decision may be "adopt[ed] or reject[ed]" by the Treasurer.  The bill also purports to limit a court's ability to review the Treasurer's decision, providing that judicial review "shall be limited to whether the Treasurer's determination was supported by substantial evidence on the record."

Given these limitations, it is questionable as to whether these additional layers of administrative review are worth the time and expense that a holder would have to go through to obtain review of the Treasury's decision in the audit context.  There is the further question of whether this legislation is even constitutional.  For example, the plain language of the bill seems to be silent on a court's ability to review the Treasury Department's interpretation of the unclaimed property act in the audit context.  Judicial review of such legal determinations, however, is generally a right secured by state constitutions - and Michigan appears to be no exception.*  Thus, while the availability of an audit appeal process is desirable, the multi-tiered and non-independent review process put forth in this bill might not be the best answer.

 * The foregoing is not legal advice.  Please contact a Michigan-admitted lawyer if you have questions concerning Michigan law.

Tuesday, August 20, 2013

WSJ Article on Delaware Escheator's Jump to Contingent Fee Auditing Firm

The Wall Street Journal has an update on the story of the retirement of Delaware's State Escheator and his subsequent employment by Kelmar Associates - a privately held unclaimed property auditing firm.  Today's Wall Street Journal CFO Journal has an analysis piece about Mark Udinski's jump to Kelmar.  It is interesting reading.

Thursday, August 15, 2013

Lost + Found: California Lawsuit, Buckeye Bucks, North Carolina Changes

California Files Unclaimed Property Lawsuit -- According to an article in LifeHealthPro, the California State Controller's office has filed a lawsuit against Kemper Corporation - a company operating life insurance subsidiaries - for failing to turn over records and data requested in connection with California's unclaimed property laws.  The article notes that this is the second such lawsuit filed by California seeking access to unclaimed property compliance information.

Buckeye State Gambler Pennies Add Up -- State Hits Jackpot -- An article in The Columbus Dispatch demonstrates how the delivery of an aggregate of incredibly small dollar items to the state pursuant to unclaimed property laws results in real money.  The article recounts how slot players and others often fail to redeem credit vouchers worth only a few cents.  After time, those unclaimed credit vouchers get reported and delivered to the state pursuant to the Ohio Unclaimed Property Act -- to the tune of over $800,000 thus far.

North Carolina Makes Technical Changes to Unclaimed Property Act -- The CCHGroup blog posted a recent article concerning some technical changes to North Carolina's unclaimed property act that went into effect on July 18.  As the article recounts, among other things the Act has been amended to remove some fees and paperwork burdens placed on holders.

Tuesday, August 6, 2013

Former Delaware State Escheator Joins Private Auditing Firm

Last week, we passed along the news that Mark Udinski, the Delaware State Escheator, was retiring from that office.  The Delaware State Escheator is, as the name suggests, the public official primarily responsible for the operation of Delaware's unclaimed property program.  While Delaware has not announced who Mr. Udinski's successor will be, a press release issued by Kelmar Associates indicates that Mr. Udinski has joined that firm.  For those who don't know Kelmar is a privately-held unclaimed property auditing firm routinely engaged by states (especially Delaware) to perform unclaimed property audits of companies on the states' behalf.

No specific word on what Mr. Udinski's particular responsibilities will be, other than the general statement that he will work in the areas of "Practice Development, Marketing, Businsess Development, and Client Relations."

Tuesday, July 30, 2013

Delaware State Escheator Retires

According to a blog post in the Wall Street Journal's CFO Journal, Delaware State Escheator Mark Udinski has announced his retirement effective August 1.  Udinski has been the head of Delaware's unclaimed property program for the past several years, and was the director of the state's audit program prior to that.  Mr. Udinski's successor has not been announced by the Delaware Department of Finance.

Monday, July 29, 2013

Lost + Found: More Reclaim Records, Nebraska Outreach, Missouri Warnings

More States Announce Owner Reclaim Records -- Recently, we noted New York's and Missouri's announcements that they returned a record amount of property to rightful owners during the most recent fiscal year.  This week brings additional notices from Louisiana and Texas touting record returns.  Congrats to all.

Nebraska Announces Outreach Events -- Speaking of owner reunification, the Nebraska State Treasurer's Office has announced a series of events all across the state where an "unclaimed property specialist" will be available to help citizens look for their unclaimed property.  Treasury officials will
be attending the Nebraska State Fair, Harvest Husker Days, and other places.  A schedule of outreach events can be found here.

Missouri Warns of Unclaimed Property Scam -- According to a story by CBS affiliate KOAM7, Missouri State Treasurer is warning citizens about an unclaimed property scam being conducted by someone posing as an auditor from the National Association of Unclaimed Property Administrators.  While NAUPA is a real entity, it neither conducts unclaimed property audits on states' behalf, nor is it responsible for refunding money to owners (that task is undertaken by the individual states themselves).  We've said it before, we'll say it again:  if you get a communication about unclaimed property from someone posing as a state employee or representative, you should contact the state directly - using contact information available on the state's official website, not contact information provided in an unsolicited letter

Wednesday, July 24, 2013

California Asks: Who Is an "Owner"?

Unclaimed property laws, in a nutshell, generally require a "holder" of "property" belonging to an "owner" to report and remit (i.e., turn over) that property to a state government after a statutorily defined period of inactivity (known as the "dormancy period).  In many instances, the operation of these concepts is pretty straightforward:  If XYZ, Inc. has an outstanding check on its books owed to ABC Corp , and the check has remained uncashed for 3 years (or maybe 5 years, or some other period of time, depending on the state) than that items is statutorily deemed "abandoned" by ABC, and XYZ must report and remit that property to the appropriate state.

As with many seemingly simple things, nuances in the factual scenario sometimes complicate this analysis.  For example, in multi-party relationships, it is sometimes difficult to determine who is the "holder" of property with the obligation to report and remit to the state.  Other times, it is difficult to determine whether certain types of contingent or unliquidated claims are "property" at all.  Sometimes, even the concept of "owner" is ambiguous.  For example, many states define the "owner" of property as "a person who has a legal or equitable interest in property subject to the Act."  (See 1995 Uniform Act at Section 1(11)). That definition, by its express terms, might include a number of people.  For example, imagine that Bob Buyer buys a vintage car from Steve Seller and agrees to pay Steve 90% of what Bob can get for the car from a dealer of vintage cars that Bob knows.  In the meantime, Bob sells that car to a dealer in exchange for a check.  Clearly, Bob might be considered the "owner" of that check, and if it remains uncashed, the dealer may report it to the state.  But what about Steve?  Under the definition, doesn't he have at least an "equitable" interest in the property?  If the check goes unclaimed, assuming that he can prove the relationship set forth above, can Steve be considered an owner?

An appellate court in California faced a similar issue last year in a case called Weingarten Realty Investors v. Chiang, 212 Cal. App. 4th 813 (Cal. Ct. App. 2012).  In that case Weingarten was a judgment creditor (i.e., a party who was owed money as a result of winning a lawsuit) with a judgment against a company called Novadyne.  The Court in the underlying Weingarten v. Novadyne matter assigned certain unclaimed property held by California for Novadyne to Weingarten as a way to pay some of the judgment owed by Novadyne to Weingarten.  Armed with that assignment, Weingarten then petitioned the California State Controller's Office (SCO) to turn over the funds.  The SCO refused, indicating that Weingarten was not entitled to claim the property.

Weingarten brought suit and won in the trial court.  The SCO appealed that decision to the California Court of Appeal, who ultimately found in favor of Weingarten and published a written opinion on the subject.  In rejecting the SCO's argument that Weingarten was not a proper "owner" of the property, the Court focused on the broad definition of "owner" found in Section 1501 of the California Act, which includes "any person having a legal or equitable interest in property subject to this chapter."  Finding that Weingarten fell within that broad definition of owner, the Court concluded that Weingarten was entitled to claim the property.

But our story doesn't end there...

In February of this year, the California State Assembly introduced Assembly Bill 1275, which would change the definition of "owner" in the California Act to include only "the person who had legal right to the property prior to its escheat."  That bill passed the Assembly in May and the state Senate earlier this month.  While the legislation seems relatively straightforward, it could have an unintended impact on the holder community.  For example, the narrow definition of "owner" in the bill calls into question the traditional holder practice of making payment of the previously reported unclaimed property to the owner and then seeking reimbursement for the payment from the state.  Based upon that concern, and others, the Unclaimed Property Professionals' Organization sent a letter to the SCO seeking clarification concerning the new legislation.  

Friday, July 12, 2013

Lost + Found: Records in New York and Missouri, Oregon Holder Seminar

New York Sets Unclaimed Property Reunification Record . . .  -- According to an article in the Auburn Citizen, the New York State Office of Unclaimed Funds returned a record $347 million in unclaimed property during fiscal year 2012-13.  Lest anyone think that the job at OUF is complete, the same article notes that New York still has $12.5 billion in funds waiting to be claimed.

. . . As Does Missouri (Again) -- Missouri State Treasurer (and Escheatable guest) Clint Zweifel recently announced that his office also broke the state reunification record by returning more than $39 million in the past year.  The record wasn't very old - it was broken by the State Treasury last year.

Oregon Holding Holder Education Seminars -- All summer, the Oregon Department of State Lands will be hosting holder education seminars for reporters of unclaimed property.  According to the DSL's website, the half-day seminars will include an overview of the law, determining when and how to report unclaimed property, how to conduct due diligence, and more.  A complete schedule of events is available at the DSL's website.

Monday, July 8, 2013

Upcoming UPPO Events: Holders' Seminar and (Non-Delaware) VDA Seminar

The Unclaimed Property Professionals' Organization, the premiere trade group for holders of unclaimed property is holding its next Holders' Seminar on August 14-15 in Chicago, Illinois.  The Holders' Seminar features a wealth of information on unclaimed property topics, and features both "beginner" and "intermediate" educational tracks.  More information can be found on the UPPO website, here.

For those of you who can't make the trip to Chicago, on July 25th, UPPO is hosting a webinar on "VDAs: Everything but Delaware."  Although the "First-Staters" out there may be loathe to admit it, there are other states out there.  (Really, they have flags and state birds, and everything).  For those of you with questions about voluntary disclosure and amnesty arrangements in places other than Delaware, UPPO has you covered.  Registration information can be found here

Thursday, June 27, 2013

Lost + Found: NC Holder Seminar, WV Lawsuits, Bona Vacantia in the UK

North Carolina to Offer Holder Education Seminar -- The North Carolina Treasurer's Department is offering a "Holder Education and Reporting" seminar on July 17th at the Quorum Center in Raleigh.  A complete copy of the agenda, and registration information, can be found here.  The seminar is free, but according to the website, limited to the first 150 registrants.

West Virginia Sues Insurers  -- In October of 2012, West Virginia sued 10 insurers over their attempts (or lack thereof) to notify beneficiaries of payable benefits.  Now, according to an article on LifeHealthPro, West Virginia has brought suit against 69 more insurers alleging violations of that state's unclaimed property act.  According to the article, insurers were identified by market share.

UK Bona Vacantia Pot Doubles in Past Year -- As we've mentioned before, modern US unclaimed property laws have their source in the old common law doctrine of bona vacantia ("ownerless goods").  Historically, the most typical example of such goods are the assets of a person who dies without a will or any known heirs.  In the UK, this common law doctrine is still alive and well.
Indeed, almost too well - according to a recent blog post on the UK edition of the Huffington Post, the mount of funds held on account of estates with no wills or known heirs in the UK has doubled in the past year to about 33.5 million Pounds (appx. $51.2 million). 

Monday, June 24, 2013

Reminder: Texas and Michigan Reports Due July 1

Up until a few years ago, unclaimed property reporting was pretty well divided into two different "seasons."  The "Fall" reports (in a majority of state), which were generally due on October 31 or November 1; and the "Spring" reports (in a minority of states, but including such notables as Delaware and New York), which were generally due in the March to May timeframe.*

In the past few years, possibly in response to a desire to increase revenue, a few states moved their unclaimed property reporting and remittance dates to July.  In particular, the reporting deadline in Michigan is now July 1 for property reaching its dormancy period as of March 31.  Likewise, in Texas, unclaimed property reports are likewise due on July 1.

Thus, make sure that you don't forget about the "Summer" states as well.

* The dates above are the "general" reporting dates for most companies.  In many states, life insurers and other holders might have holder-specific deadlines.

Wednesday, June 19, 2013

WSJ on the Delaware Dichotomy

We recently featured an editorial that ran in Investors Business Daily (and other places) in which the President of the Council on State Taxation outlined a number of ways in which Delaware's administration of unclaimed property is not in keeping with its business-friendly image. Those arguments were echoed in  yesterday's Wall Street Journal, which ran an article entitled "Delaware Shows Two Faces" (subscription required).  The article outlines the Delaware Dichotomy:  One the one hand, Delaware has a well entrenched  status as the corporate home of choice for corporate America.  On the other, Delaware is also almost uniformly recognized as the most aggressive (and some would say, overly aggressive) state in claiming "unclaimed" property (which, as the earlier COST editorial pointed out is sometimes not unclaimed property at all).  The whole article is worth a read.

Speaking of Delaware, in a guest article on the Unclaimed Property Professionals' Organization blog, Delaware attorney Brenda Mayrack posts a timely reminder that the clock is ticking for holders wishing to take advantage of the Delaware Secretary of State's Voluntary Disclosure Program.

Tuesday, June 11, 2013

More Life Insurers Settle Unclaimed Property Complaints With California

If you have been following the multi-state unclaimed property investigations into life insurers, its time to update your scorecard.  When we left the story, about 10 companies had settled claims or lawsuits relating to their death benefit payment practices.  Generally, the investigation focused on regulators' complaints that many insurers review the Social Security Administration's death records to determine whether an annuity policyholder had died, so they could stop paying annuities (which are paid by the insurer until the policyholder dies), but were not using that same information to notify life insurance beneficiaries that the policyholder had died (and thus, that the beneficiaries were entitled to collect on the policy).  For their part, the insurers generally denied any wrongdoing, but some agreed to revise their policies.  In the interim, a number of states have passed legislation to require life insurers to do periodic checks of their records.

In more recent news, LifeHealthPro reported that 11 more insurers have reached a settlement with the California State Controller's Office to resolve claims over their benefit payment practices.  Details of the settlement, and the companies involved, appear in Arthur Postal's article at LifeHealthPro, but even the general numbers are staggering -- the Controller's office estimates that the value of the recent settlements is worth more than $750 million.

Monday, May 20, 2013

Why Delaware Gets An "F" from Industry on Unclaimed Property Regulation

Despite its small size (49th out of 50 states) and relatively modest population (45th out of 50), Delaware has always played an important role in the commercial and governmental history of the United States:  Delaware was the "First State" -- that is, the first state to ratify the Constitution.  Delaware also was home to the first scheduled steam railroad service, and (according to some references) the state where  the U.S. flag was flown for the first time (at the Battle of Cooch's Bridge, near Newark, Delaware on September 3, 1777).  

However, probably nowhere more than in the corporate world has Delaware played an important role in the business of this country, especially as a corporate domicile.  For example, despite having a population of approximately 917,000 people, Delaware is home to nearly a million companies.  The reasons for Delaware's position as the corporate domicile of choice are varied, but include a well-developed business law, an established and respected court system well-versed in corporate law, and a business-friendly reputation.

Delaware can likewise be considered "The First State" with regard to unclaimed property reporting and remittance.  As we've discussed earlier, under the rules established by the Supreme Court, a holder's state of incorporation is the state with priority to take possession of owner-unknown, address unknown, and foreign owned unclaimed property.  So, for the same million companies, Delaware is an important state for unclaimed property compliance.  In this area, however, Delaware's reputation is far from sterling.  In a recent editorial published by Investors Business Daily, Douglas Lindholm, the president and Executive Director of the Council on State Taxation outlines some of the reasons why Delaware's unclaimed property administration is not "business friendly" and he explains why COST gives Delaware an "F" in unclaimed property regulation.

In a few short paragraphs, the editorial provides an overview of the most frequent holder complaints:  the state's overly aggressive (and legislatively shaky) audit procedures and techniques, its questionable liability "estimation" techniques, and most importantly, the fact that in Delaware, these "consumer protection" laws are really nothing more than a revenue generator for the state.  (As the editorial points out, of the $320 million collected last year by Delaware's unclaimed property regulators, less than $20 million was paid to owners). While COST is obviously an interest group whose first priority is to advocate for the interests of its members, none of these critiques should come as a surprise to unclaimed property professionals or corporate holders.  Indeed, it was probably these concerns (among others) that led to Delaware adopting a (comparatively) holder-friendly, but limited time, VDA Program.

While the VDA was a positive start, the editorial argues, a variety of other fixes are necessary before Delaware can reclaim its historical reputation as a business friendly environment.  It is well worth a read.

Wednesday, May 15, 2013

UPPO to Host Webinar on Potential Revisions to Uniform Unclaimed Property Act

As we mentioned in January, the National Conference of Commissioners on Uniform State Laws (NCCUSL) announced the formation of a "study committee" to consider revisions and/or amendments to the Uniform Unclaimed Property Act of 1995.  The NCCUSL is the entity that promulgated the 1995 Uniform Act, a variant of which is in effect in a substantial number of states.  Given the infrequency with which the Uniform Acts are revised (the revisions that became the 1995 Act came 14 years after the enactment of the previous Uniform Act) potential revisions are a big deal.  Ultimately, the committee may suggest amendments to the current (1995) Uniform Act, draft a completely new uniform act, or decide that no action is warranted.

The NCCUSL sponsored a hearing on April 24, during which time a variety of participants provided comments on whether the Uniform Act should be revised.  For those looking for more information about the Uniform Act process, some of the issues raised at the April 24 meeting, and/or how the process is expected to play out, the Unclaimed Property Professionals' Organization will be hosting a May 22 Webinar discussing these, and related, issues.  Registration information for the webinar can be found here.

Monday, May 13, 2013

Politicians - They're Just Like Us (Unclaimed Property Edition)

Yesterday's Oklahoman had an article about unclaimed property being held by the state for a variety of state elected officials, including the Lieutenant Governor.  One might think that elected officials and government entities (so closely involved with the government of the state) would be well aware of state unclaimed property laws, and would thus be quick to notice and claim any property that was surrendered to the state.  One might think that.  One would be wrong.  In just a small sample:

The California Secretary of State's Office and Franchise Tax Board both have property held by the State Controller's Office.  The Florida Department of Insurance, New Jersey Division of Motor Vehicles, and Mississippi State Treasurer all have property held in their own states.

Former Governors Mitt Romney (MA), Arnold Schwarzenegger (CA), and Jim McGreevey (NJ) all have unclaimed property being held for them by a variety of states.

Moving to even higher elective office, President Barack Obama has property waiting for him in Texas, while the last President from Texas, George W. Bush, has money being held for him in D.C. (reported by the State of Maine).

Monday, May 6, 2013

Life Insurance Updates: Mountain Time Zone Edition

The past few years have seen substantial developments relating to life insurers, and this year is no exception thus far.  While past years have seen audits, investigations, lawsuits and settlements regarding insurers' purported failures to look for deceased policyholders, legislative developments this year are focusing on requiring such searches to be done going forward.   In particular, in the first third of this year, a variety of states have passed laws requiring life insurers to check their policies against the Social Security Death Master File in order to determine whether policyholders are deceased (and thus, whether benefits are payable).

For example, on March 29, 2013 Montana enacted the “Unclaimed Life Insurance Benefits Act” (Montana Senate Bill 34) which will require insurers and related entities, starting next year, to compare their policies against the Social Security Administration’s death master file (or a similar database) on a semiannual basis.  Similar searches are also going to be required in New Mexico beginning on July 1 of this year, and in North Dakota before next November, as a result of legislation that passed in those states (New Mexico Senate Bill 312, enacted April 1; North Dakota House Bill 1171, enacted Apil 30).   

Back here on the East Coast, New York is also requiring such searches, albeit on a quarterly basis, as a result of NY AssemblyBill 1831, enacted on March 15.

Friday, April 26, 2013

Friday Lost + Found: Virginia's Billion, Wyoming's Scam Warning

Big Numbers Out of Virginia -- The Virginian-Pilot has an article about an unclaimed property auction currently being hosted by the Virginia Department of Treasury.  Feel free to check it out if you are so inclined.  However, what caught our attention here was the passing reference to how much unclaimed property is currently being held by Virginia:  according to the article, "more than $1 billion is waiting to be claimed."  (That's right, with a "B"). 

Wyoming Warns of Unclaimed Property Scam -- Along those same lines, when there is such a huge pot of money waiting to be claimed, it should come as no surprise that there are people out there who are trying to see if they can get a slice of it, honestly or not.  The Wyoming State Treasurer's Office recently warned residents of a scam whereby so called "finders" identify potential claimants, and contact them, asking for personal information and offering to "help" them reclaim their money for a fee of up to 50% of the value of the property.  Not only is that fee unscrupulous, but the disclosure of personal information subjects the claimant to an increased risk of identity theft.  We've discussed finders before in this space, and while we will forgo the discussion of the relative risks and benefits of finders for today, suffice it to say that 50% is too much.

Friday, April 19, 2013

Breaking News: Delaware Sued Over VDA/Audit Demand has an article from Randall Chase of the Associated Press with the story of a lawsuit by Select Medical against the State of Delaware arising from a VDA initiated with the Delaware Division of Revenue*.  According to the complaint, which was filed in Delaware federal court on Wednesday, Select Medical entered into a VDA with Delaware in 2006.  As a result of its own review, it attempted to close out the VDA in 2008 with a payment of approximately $20k of Delaware (in addition to some $300k filed in other states).

In response to this payment (again, according to the allegations of the Complaint) Delaware initiated an audit of the company, going back to 1981.  As a result of that audit, Delaware demanded an additional $300k from Select.  The lawsuit raises a number of challenges to the Division of Revenue's normal audit practices including:
  • the use of estimation prior to the enactment of Delaware's statute authorizing estimation;
  • the alleged use of "arbitrary and capricious" estimation methods;
  • the inclusion of non-dormant property in Delaware's estimation procedures; and
  • Delaware's claimed disregard of the Texas v. New Jersey priority rules.
 The Complaint seeks a preliminary injunction preventing Delaware from demanding the $300k audit assessment, or imposing interest and penalties on that assessment, until such time as the court can review the case.  The case is named Select Medical Corp. v. Cook, et al., Case No. 1:13-cv-00694 in the United States District Court for the District of Delaware.

* Note that the VDA program described in the complaint appears to be the Division of Revenue's VDA program, not the temporary VDA program currently being offered by the Delware Secretary of State.

Friday, April 12, 2013

Friday Lost + Found: Kenya Delays, Steel City Funds, Colorado Small Business Exemption

Kenyan Unclaimed Assets Authority Ordered to Get to Work and Consider How to Use Funds -- The full scale implementation of a Uniform Act style unclaimed property act is apparently still slow going in Kenya.  According to Kenya's Standard Digital News website, the Unclaimed Financial Assets Authority -- the government entity created by the new law -- has been ordered by the High Court to hold its initial meeting and commence work.  This is after earlier delays caused by problems in finding members for the Authority.  Separately, Business Daily Africa is reporting that Kenya's Higher Education Loans Board is negotiating with the UFAA to see if the funds taken in under the unclaimed property act can be used to fund certain higher education expenses, similar to what is done in some U.S. states.

Pittsburgh Unclaimed Funds -- As we've mentioned a few times, cities are also often in possession of unclaimed funds for their residents.  Recently, WPXI in Pittsburgh posted an article that includes a listing of unclaimed property held by the Steel City for its residents.

Colorado Gift Card Exemption For Small Issuers -- On March 15, Colorado's Governor signed House Bill 13-1102 into law.  The law exempts from the Colorado Unclaimed Property Act unclaimed gift cards held by an issuer that sells less than $200,000 of gift cards per year.


Wednesday, April 10, 2013

"Spring State" Reporting Deadlines Approaching

With one exception (we're looking at you, Mississippi) states require holders to report and deliver unclaimed property on an annual basis.   While the deadline in a majority of the states is in the fall (typically October 31 or November 1), there is a substantial minority of states where the reports are due in the Spring,* including FloridaIllinois, Pennsylvania, Tennessee and Vermont.  Of course, there is no rest for the weary unclaimed property professional.  After getting out the spring reports in May, it will soon be time to get due diligence letters out for the fall reporting cycle. 

* Note that the reporting deadlines discussed above are for general corporations.  In many states, life insurers have their own reporting deadlines which tend to fall in May.

Monday, April 8, 2013

North Dakota Gets "Reasonable" About Third-Party Unclaimed Property Audits

North Dakota's Governor signed Senate Bill 2058 into law on March 15th.  In addition to giving the state tax commissioner authority to share personally-identifying information with the state's unclaimed property division it also sets forth that a new provision concerning audits. 

While the North Dakota Unclaimed Property Act (like most state laws based on one of the uniform acts) provides that the state may commence an unclaimed property audit regardless of whether the holder believes it has unclaimed property, the new law clarifies that the state many not "contract for an examination" (i.e., with a private auditing firm) unless the state has "reasonable cause to believe" that a person has failed to comply with the act.

This distinction, while minor, is a welcome addition to the precepts of unclaimed property law enforcement.  In the context of a privately-run examination -- even where the holder has little or nothing to report -- the time, effort, and resources necessary to respond to an audit is tremendous.  Indeed, in some instances, the private auditors may be working on a contingent fee (meaning, they get paid a portion of what they find) and thus have a financial interest in making sure that the audit result is a large amount, regardless of whether that is the right amount.  While the contingent fee nature of the audit should, in theory, protect a compliant holder because the auditor will not want to waste (unpaid) time trying to squeeze blood from a stone, that theory does not hold up to practice.  In reality, some contract auditing firms perform "their" audit by making burdensome information demands upon the holder, selecting items at random to be "tested" from that information, then demanding the holder "prove" that the randomly selected items are not unclaimed property.  Adding insult to injury, should the holder push back on a particularly burdensome, ill-conceived, or irrelevant demand, the auditing firm responds by threatening to inform the contracting states that the holder is being "uncooperative." 

For a variety of reasons (not the least of which is that state employed auditors do not get a cut of what they find) state-run unclaimed property audits tend to be less disruptive and less adversarial.  Accordingly, North Dakota's decision to limit the contract auditors to places where there is "reasonable cause" to believe that noncompliance exists is a welcome step for those holders who are in compliance. 

Friday, March 15, 2013

Unclaimed Federal Tax Refunds & What Happens When Sovereigns Collide

 According to The Asbury Park Press, the federal government is holding more than $917 million in unclaimed tax refunds from 2009 and the deadline for requesting a refund -- April 15 -- is fast approaching.  According to the article the number of taxpayers affected is significant:  more than 30,000 in New Jersey, over 86,000 people in Texas, and more than 100,000 in California. 

This begs the question:  what happens to these tax refunds if they remain unclaimed, do they get turned over to the states as unclaimed property?  Consider the following:

Unclaimed property practitioners are familiar with the seemingly continued and unrelenting expansion of state unclaimed property laws.  Where, historically, those laws were used to provided rules for the disposition of the estates of those who died without heirs, they now touch upon nearly every party of modern economic life:  bank accounts, brokerage accounts, checks, gift cards, benefits, rebates, insurance proceeds . . . . the list is nearly endless.  However, as state governments become increasingly reliant upon using unclaimed funds to balance state budgets and provide a source for state revenue, pressure increases on state legislatures and/or unclaimed property administrators to expand the laws even further, or to audit even more aggressively, to continue to be able to feed the beast.  As states recognize that they can only squeeze so much revenue from corporations and financial institutions, they will start to look elsewhere.  One such place that they may look is to federal government programs.  

After all (the argument would go), one of the rationales for state unclaimed property laws is that the state "steps into the shoes" of the rightful owner and takes custody of the property in that owner's name.  See Great Iowa Treasure Hunt FAQs (explaining that "The courts have long maintained the states' rights are derivative of the missing owner. In other words, the state stands in the shoes of the missing owner.")  Under this theory, there would seem to be no reason why property held by the federal government is any different.

The "steps into the shoes" theory, however, is not the only policy supporting unclaimed property laws.  Another is the "common benefit" theory, which generally provides that when property is abandoned or unclaimed, the property is better used for the benefit of all citizens (i.e., by escheating the money to the state) rather than having the holder (who, in most cases, has no entitlement to the funds) receive a windfall because of the owner's failure to take the property.  Under this theory, the property arguably should remain with the federal government, where it can be used for the common benefit of all citizens.  Similarly (the argument would go) there is no reason why the state should be deemed a better custodian of unclaimed funds than the federal government.  Indeed, the federal government has its own site providing links to searchable databases of unclaimed funds relating to government programs.

So, what happens when sovereigns collide?  A relatively recent case out of New Jersey suggests one possible answer.  Last year, the states of New Jersey, Montana, Oklahoma, Missouri, Pennsylvania, Kentucky and North Carolina filed an action in federal court seeking to require the federal treasury to turn over unclaimed savings bonds that the states alleged had become abandoned pursuant to their state unclaimed property laws.  The amounts at issue were significant.  The states sought turnover of some $1.6 billion in matured bonds and some estimate that the amount of matured but unredeemed bonds held by the Treasury Department is about $16 billion. 

Ultimately, the federal district court dismissed the case, raising the doctrines of federal preemption (i.e., that federal law is superior to, and cannot be trumped by, a conflicting state law) and intergovernmental immunity (i.e., that one government cannot threaten civil or criminal penalties to another government for acts carried out in an official capacity).  This decision was affirmed by the United States Court of Appeals  in Philadelphia, which held that "federal statutes and regulations pertaining to United States savings bonds preempt the States' unclaimed property acts insofar as the State seek to apply their acts to take custody of the proceeds of the matured but unredeemed savings bonds."  The Court also agreed with the district court that the states' claim was barred by the doctrine of intergovermental immunity, reasoning that allowing application of state unclaimed property laws to the federal government "would result in a direct regulation of the Federal Government [by a state] in contravention of the Supremacy Clause."

Apparently reluctant to give up on this pot of funds, the objecting states filed a Petition for Certiorari with the Supreme Court of the United States, asking the high court to review and reverse the appellate court's decision.  That petition is currently under review.

Unless and until the Supreme Court reverses the decision of the Court of Appeals in the savings bond case, it is unlikely that the states will see be able to take custody of property held by the federal government under state unclaimed property laws.  However, with both the state and federal governments scrambling to raise revenue, cut expenses, and balance budgets, these inter-government fights over other people's money are sure to continue.

Friday, March 1, 2013

Lost + Found: Unclaimed Celeb & Politico Cash; Badger Boxes

Unclaimed Money in Hollywood . . . -- NBC Dateline posted a short video discussing unclaimed funds being held for Hollywood notables and other celebrities.  NBC's Tamron Hall caught up with Joan Rivers to let her know in person.  Julia Roberts, Jodie Foster, John Travolta, Katie Holmes and others are on the list.

. . . And in Washington -- According to PC Magazine President Obama also has money waiting for him as unclaimed property.

A look inside Wisconsin's Unclaimed Safe Deposit Boxes -- Fox 11 (Green Bay, Wisconsin) has an entertaining article about what residents of the Badger State are keeping in their unclaimed safe deposit boxes.  Just the normal stuff -- spoons, pearl undergarments, bricks of cocaine . . . .

Wednesday, February 27, 2013

Aggregate Reporting Under the Microscope in California

Under most state unclaimed property laws, there exists a mechanism called "aggregate reporting" whereby the holder of the funds is permitted (or in some states, required) to report and remit items under a specific dollar amount (usually $50) in one lump sum, without providing owner name and address information.  As we've discussed previously in this space, while aggregate reporting reduces administrative burden on the holder and on the state, that process is arguably inconsistent with the primary purpose of the unclaimed property laws -- to try and reunite owners with their missing funds.  Obviously, to the extent that the state does not have identification information for the owner of the funds, the state cannot search for that owner or take any action to return the funds.

A recent situation in California demonstrates this problem.  According to a report by CBS 13 Sacramento, a fifteen year old California resident learned that his $30 savings account was turned over to the state by his bank because of a lack of activity.  When he and his family went to search for the funds, however, they state was unable to locate the account.  They eventually contacted CBS 13 consumer investigation reporter Kurtis Ming, who learned that since 2007 California brought in more than $68 million in funds without owner name and address.  Ultimately, the bank - not the state - gave the money back to its customer, but the story isn't over yet.

California Assemblymember Bonnie Lowenthal has authored a bill to close this unclaimed property "loophole" and would require holders to report owner-identification information for all amounts, regardless of size.  Assembly Bill 212 would remove the provisions of California unclaimed property law that permit balances of less than $50 to be reported in the aggregate, and would also require holders to send notice to all owners of unclaimed property -- regardless of the balance.  The bill is currently before the Assembly Judiciary Committee.

Thursday, February 7, 2013

Unclaimed Life Insurance Updates

A few items of note concerning the long running regulatory investigation into the unclaimed property practices of life insurers, and their use of the Death Master File to determine whether policies are eligible to be paid.  Earlier this week, NBC's The Today Show posted an article estimating the value of unclaimed insurance policies at over $1 billion.  The story provides a good summary of the issues, and the history of the investigations to date.

Of course, wherever there is a giant pot of money reported, people seeking a share of it will not be far behind.  According to a report by Arthur Postal on LifeHealthPro, at least one plaintiffs' lawyer has commenced a class action against insurer John Hancock seeking damages for delayed notification of life insurance benefits.  For its part, John Hancock has already been investigated -- and reached a settlement -- with a variety of states concerning this particular issue.  Thus, it appears that the insurers' fears of having the state investigations being used to fuel private class action lawsuits is coming to pass.  It is doubtful that this will be the last such case.

Monday, February 4, 2013

Delaware Extends Temporary VDA Program

As we've mentioned a few times, Delaware has a temporary Voluntary Disclosure Program that is being run out of the Secretary of State's office - complete with a detailed website.  The Secretary of State's program operates separately from the VDA program run by the Division of Finance -- the latter a program oft-criticized for being more stick than carrot. 

Early reviews of the Secretary of State program have been favorable (though it should be noted that such work is still in the very preliminary stages) and the program has just been extended by the Delaware legislature.  Pursuant to House Bill No. 2, holders can still obtain a VDA "look back" period starting in 1996 if the enter into the VDA program by 6/30/13 and make payment (or arrangements for payment) by 6/30/15.

Friday, January 25, 2013

Lost & Found: Mark Your Calendars

Recently, we mentioned that the Unclaimed Property Professionals' Organization's Annual Conference was coming up this March.  In case you can't make it out to San Diego this Spring (and even if you can) the following are some other unclaimed property events that might be worthwhile for you and/or your unclaimed property team:

Delaware VDA Webinar -- As we've covered previously, Delaware is currently sponsoring a limited time enhanced Voluntary Disclosure Agreement program sponsored by the Secretary of State's office, complete with a snazzy website that provides a great deal of information about the program.  In keeping with the new program's outreach efforts, the Delaware Secretary of State will be holding a webinar on January 28th at 3pm to provide detailed information about the VDA program.  Registration information can be found at the aforementioned snazzy website.

NAUPA Holder's Workshop (May 14-17 in Pittsburgh, PA) -- If UPPO is considered the primary holder-centric unclaimed property interest group, then its state counterpart is the National Association of Unclaimed Property Administrators (NAUPA).  NAUPA is affiliated with the National Association of State Treasurers and acts to "support excellence and professionalism among those individuals charged with the responsibilities of unclaimed property administration and compliance."  Among other things, NAUPA also hosts an annual "Holder's Workshop" as a learning and networking event for unclaimed property professionals.  This year's event will be held in Pittsburgh from May 14th to the 17th.  Prospective attendees should visit NAUPA's website for more information.

Tuesday, January 22, 2013

Uniform Law Commission to Consider New Uniform Unclaimed Property Act

Many states' unclaimed property laws are based upon one of the Uniform Unclaimed Property Acts promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL) -- either the 1995 Act or one of its predecessors, the 1981 or 1952 Uniform Acts.  The NCCUSL is not a group of state legislatures (or even state legislators), but rather is a group of appointed commissioners who are responsible for devising, debating and drafting uniform laws that are intended to be widely adopted by the individual states in order to promote legal uniformity.  The NCCUSL is probably best known for the promulgation of the Uniform Commercial Code, which governs a variety of commercial transactions.

In any event, given the relative infrequency with which the Uniform Unclaimed Property Acts have been amended (i.e., every 20 to 30 years or so), any action by the NCCUSL with respect to unclaimed property tends to be significant.  For example, when the commission last took action in promulgating the 1995 Act, the Colorado Avalanche were still known as the Quebec Nordiques, the invention of the DVD had just taken place, and blogs did not exist. 

Thus, it is notable that last week the NCCUSL announced the formation of a "study committee" to consider revisions and/or amendments to the Uniform Act.  According to the release, the committee will be appointed shortly.  Once formed, the committee may suggest amendments to the current (1995) Uniform Act, draft a completely new uniform act, or decide that no action is warranted.

Wednesday, January 16, 2013

UPPO Annual Conference - March 24-27 in San Diego

The Unclaimed Property Professionals' Organization is a association of unclaimed property professionals and service providers "dedicated to advancing industry best practices for unclaimed property practitioners."  Unlike other trade groups that focus on a particular profession or industry (e.g., manufacturers, banks, healthcare) the UPPO is group of unclaimed property professionals (as the name suggests) across the whole spectrum of industries. 

The UPPO holds many events throughout the year, but the most popular is the organization's annual conference.  This year's conference will be March 24-27 in San Diego, California.  The Conference brings together professionals and experts in a wide variety of areas, and offers dozens of presentations, educational program and industry-specific roundtables.*  The Conference also offers separate learning tracks for beginner, intermediate and advanced unclaimed property professionals.  There is something for everyone.  Additional information can be found at the UPPO's conference page here.

* Disclaimer:  The author is a UPPO member and will be a speaker at the conference. 

Friday, January 11, 2013

Lost & Found: California Photo Gallery, Tips for Seniors

California Unclaimed Property Photos:  Ever wonder what kind of stuff people put in safe deposit boxes?  Wonder no longer!  The Sacramento Bee has posted a photo gallery of California's "security room" that holds property recovered from unclaimed and/or abandoned safe deposit boxes.  The photos are part of a bid by Controller John Chiang to raise awareness of California's unclaimed property program.

Missouri Posts Unclaimed Property Tips for Seniors:  Speaking of unclaimed property outreach programs, Missouri State Treasurer Clint Zweifel is working on an outreach program to collect Missouri seniors with their unclaimed property.  As part of the program, the Treasurer's office has put together a set of tips for searching and claiming property.  While the tips were drafted as part of the senior outreach program, most of it is sound advice for anyone.

Monday, January 7, 2013

New York Amends Insurance Law to Require Quarterly Searches of Death Master File

Another in the long running sage of unclaimed insurance benefits and the Social Security Administration's "Death Master File" ("DMF").  For those of you who haven't followed this story earlier, here's a brief recap:

Generally, when a person with life insurance dies, the estate or a beneficiary of the policy notifies the insurance company to begin the benefit payment process.  For a variety of reasons, however, this notification may never take place.  Either the policyholder died without a beneficiary, or the beneficiaries did not even know that a policy existed. 

Th current controversy revolves around the insurers' use (or, more to the point, alleged non-use) of the macabre sounding "Social Security Death Master File" to determine whether or not life insurance benefits have become payable.  Though state laws generally do not explicitly require the use of the SSN index, some regulators have complained that insurers search the SSN Index to identified individuals who have dies so they can stop paying annuities (i.e., products that pay out until death), but then don't use that same information with regard to the payment of life insurance benefits (i.e., those products that pay out upon death).

In November of 2011, the New York State Insurance Department issued a directive requiring all 172 life insurers authorized to do business in New York to use the Social Security Administration's Master File to identify death benefit payments that were due as of that date.  The New York state legislature has now joined the fray, and has promulgated a law requiring quarterly searches of the DMF.

Pursuant to Assembly Bill 9845, signed into law by Governor Cuomo on December 17, 2012, each insurer subject to the act is required to cross-check all policies and accounts against the DMF "no less frequently than quarterly" in an effort to determine whether death benefits are payable.  The new law also has an infrastructure or IT component as well, requiring insurers to "implement reasonable procedures to account for common variations in data" that might preclude an exact match (presumably misspellings, transcribed numbers, etc). 

The Act will take effect on June 15, 2013.


Wednesday, January 2, 2013

Securities & Exchange Commission Approves New Lost Shareholder Rules

On December 21, the U.S. Securities and Exchange Commission approved new rules requiring broker dealers to perform searches for "lost shareholders."  Under preexisting law -- specifically Rule 17Ad-17 -- "transfer agents" (that is, those entities serving as the custodian of shareholder records for stock issuing companies) were required to perform searches for "lost shareholders" including, but not limited to, searching commercially available databases for new address information.

The new rules apply Rule 17Ad-17's requirements to the broker-dealer firms that hold hundreds of thousands of customer accounts.  Generally, the new rule requires broker-dealers to search for "lost securityholders" by conducting two database searches.  One between three and twelve months of such securityholder becoming a lost securityholder, and the second between six and twelve months after the first search.  The rule defines "lost securityholder" as a customer to whom correspondence and/or account statements are returned as undeliverable.  Note also that the cost of the required searches may not be assessed against the lost securityholder or his or her account.

Of course, many brokerage firms already perform statutory due diligence when they receive account statements or other correspondence as undeliverable.  For two reasons, however, it could be argued that the new SEC rules are more likely to be effective than the due diligence requirements of most states' unclaimed property laws.  First, the database searches required by the SEC rule are a higher standard of due diligence that most states' unclaimed property laws.  Second, the SEC rule requires the holder to act much more quickly (i.e., 6 months as opposed to 3 years) than most state requirements.

A copy of the draft rule can be found here.  The new rule will become effective 60 days after it is published in the Federal Register, and broker-dealers will have one year from that date to come into compliance.