There is much to consider in 2015 with respect to unclaimed property. Here are some of the highlights and action items to focus on as you move into the new year:
Audits and VDAs
Delaware Interest and Penalty Changes In 2014, the Delaware legislature removed portions of the unclaimed property law that levied up to 125% penalties on unclaimed property liability.1 In doing so, the legislature changed the landscape dramatically. Coupled with the state’s estimation methodology, the interest and penalty provisions generated high risk for companies—risk that may have led to companies agreeing to otherwise unfavorable settlements.
Now the interest and penalties are capped at $5,000,2 and the state’s estimation methodology is under review in litigation. For that reason, holders should reconsider their audit and VDA strategy in light of the reduced risk of interest, penalties, and audit liability.
- Action item: Reevaluate potential legal positions in audits or VDAs prior to resolution, in light of the reduction in risk resulting from new changes in Delaware law.
Private Auditors Focus on Transfer Agents One of the most infamous unclaimed property audit firms—Kelmar Associates LLC—has begun auditing books and records of transfer agents in order to identify the liability of such agents’ customers—issuers of stock. Kelmar has commenced these audits along with the state of Arkansas, which has a statute permitting the audit of a third-party vendor’s records.3 Given changing rules and legal ambiguities associated with the escheatment of “inactive” shares of stock, issuers should reevaluate their policies and vendor agreements to ensure they are protected and compliant in this area.
- Action item: Review contracts with transfer agents for confidentiality, indemnity, and reporting responsibility, and analyze potential unclaimed property risk associated with inactive shares. If you have been notified that you are under audit via your transfer agent, consider requesting an individual non-disclosure agreement to provide protection against information sharing.
Court Limits Scope of Audit Requests Holders subject to audit have begun to contest audit information requests that appear overbroad and burdensome, and at least one court has agreed to limit such requests. In Thrivent Financial for Lutherans v. Chiang,4 the court refused to require the holder to comply with Kelmar’s request for information about almost 6 million life insurance policies. The court held that the state controller’s argument was unlikely to succeed: California unclaimed property law did not warrant the auditor’s broad request. With its holding, the court placed limitations on the state’s scope of audit.
- Action item: Consider contesting individual audit requests that seem irrelevant or unduly burdensome to the company. Though states have broad latitude to audit, requests may be limited where they are deemed irrelevant to confirming compliance.
Mississippi Lists Audit Priorities Mississippi’s Office of the State Treasurer has adopted an “order of priority” for initiated unclaimed property audits, effective January 1, 2015.4 The state lists as first priority holders who have never reported unclaimed property to Mississippi. Holders who have not reported recently are second priority. Holders whose current reports appear deficient are the third and last priority.5
- Action item: Non-Mississippi filers should review their exposure and consider voluntarily coming forward in Mississippi and requesting interest and penalty abatement.
New York Business-to-Business Change New York’s Office of Unclaimed Funds (NYOUF) reversed its administrative practice with respect to how it applies its informal business-to-business exemption. New York previously considered business-to-business credits as active and not unclaimed so long as the holder and owner continued their ongoing business relationship.6 Now, the dormancy period begins when the holder issues the credit, unless the holder obtains written consent that it is to hold the credit on account.7 Legal issues arising from this position include whether New York may impose interest or penalties on credits more than three years old that are reported on the March return, but that were not previously reported in reliance on NYOUF’s prior practice with respect to business-to-business transactions.
- Action item: Review all dormant accounts receivable credits for customers with New York addresses to determine how to include these on your New York report in March (and how due diligence should be completed prior to reporting). Once reported, carefully monitor any interest or penalty assessments related to this property, and consider protesting to the extent such assessments are received.
Pennsylvania Unclaimed Property Overhaul Pennsylvania passed new legislation overhauling its unclaimed property law. One major change is the reduction of many dormancy periods from five years to three.8 It also redefined the standards for activity that would render an account dormant in the first instance. Thus, more property will “age out,” but companies may have fewer “inactive” accounts. These and other changes9 will materially affect the composition of the Pennsylvania report.
- Action item: Review and refresh unclaimed property policies and procedures in light of recent state law changes, especially with respect to tracking activity through electronic log-ins. Obtain verification from third-party administrators that their policies incorporate these changes.
Contractual Terms Involving Large Funds In Highland Homes v. Texas,10 the Texas Supreme Court permitted parties to agree on the disposition of unclaimed class action funds. This decision reversed the lower court’s determination that such funds must be remitted to the state, and in doing so, diverged from several cases that prohibit so called “private escheat.”11 Although the case involves class action settlement funds, nothing in the decision limits its applicability to such funds. Any large fund created by parties, such as shareholder buy-out funds for example, could implicate state prohibitions on “private escheat.”
- Action Item: Unclaimed property managers and directors should confirm that general counsel’s office is made aware of the unclaimed property implications of contracting to form large settlement or buy-out funds so that the contracts can be structured so as to minimize unclaimed property risk.
Unclaimed property law is ever-changing, and states have turned their attention to this area as a source of additional revenue. New administrative policies, legislative guidance, and litigation will make this area one for companies to watch closely in 2015.