Since the beginning of 2017, Delaware’s abandoned and unclaimed property law has undergone continuous statutory and regulatory changes, e.g., the enactment of SB 13 (Delaware’s new unclaimed property statute) and SB 79 (an amendment to SB 13), as well as the promulgation of final regulations from the Secretary of State (the “SOS”) regarding estimation practices in its voluntary disclosure agreement (“VDA”) program. To read our prior coverage relating to these unclaimed property developments in Delaware, see Delaware Issues New Abandoned and Unclaimed Property Regulations, Technical Correction to Delaware’s Unclaimed Property Overhaul Legislation Includes Extension of Time to Convert an Audit to a Voluntary Disclosure Agreement, and UPDATE: The Delaware Secretary of State Releases the Final Version of its Estimation Regulations With No Substantive Changes.
Final Regulations Published By The Delaware Department of Finance
The latest development occurred on October 1, 2017, when the Delaware Department of Finance (the “DOF”), the state governmental body ultimately responsible for audits, published its final regulations. The DOF regulations establish the guidelines and standards for administering an unclaimed property audit or examination. Overall, consistent with the prior drafts of the regulations, the final DOF regulations retain the severely criticized estimation methodology and ignore many of the constitutional issues raised by the federal court in Temple-Inland Inc. v. Cook, 1:14-cv-00654 (D. Del. June 28, 2016) (“Temple-Inland”). In particular, the final DOF regulations continue to assert that the DOF can estimate a holder’s Delaware unclaimed property liability for years for which a holder no longer has books and records based on all unclaimed property identified in a sample period, even property escheatable to other states. The federal court in Temple-Inland determined that this estimation technique “created significantly misleading results” and was “contrary to the fundamental principle of estimation.” Id. at 31. Ultimately, because of this and other issues, we expect that Delaware will face more unclaimed property disputes and litigation going forward.
However, with the release of the final DOF regulations, holders can take solace in the fact that they now have some certainty when it comes to the new unclaimed property landscape in Delaware; and thus, holders can begin to evaluate their audit and compliance positions with respect to Delaware unclaimed property law, as well as determine an appropriate path forward.
Implications for Current Delaware Unclaimed Property Audits
The DOF regulations became effective on October 11, 2017. This is of particular importance as the effective date of the DOF regulations started a 60 day clock for holders already under audit with the DOF to convert their existing audit to the SOS VDA program or the expedited audit process within the DOF. More specifically, holders that received an audit examination notice from the DOF on or before July 22, 2015 will have until December 11, 2017 (i.e., 60 days from the effective date of the DOF regulations) to convert their audit to the SOS VDA program or DOF expedited audit process – both of which would result in waiver of interest and penalties.
While waiver of interest and penalties is an obvious, significant benefit which tends to favor converting to a VDA or expedited audit, other factors, including a holder’s specific facts and circumstances, need to be considered when determining whether a holder should stay under regular audit or convert to a VDA or expedited audit. Given the December 11, 2017 deadline, holders currently under audit need to make some immediate decisions with respect to their audit position in Delaware and, for this reason, should consult their advisors about the strategic benefits and risks associated with remaining in their existing audit versus converting to the VDA program or expedited audit process.
We note that the final DOF regulations, like the prior draft versions of the regulations, fail to provide any substantive guidance with respect to the expedited audit election. All that is clear is that the expedited audit requires strict adherence to certain audit deadlines in order to get the benefit of waiver of interest and penalties. Without any regulatory guidance, the expedited audit election continues to be of questionable value to most companies that are not on the verge of completing an existing audit given the history of Delaware’s contract auditors unreasonable scheduling deadlines and voluminous document requests.
Implications for Delaware Companies Not Under Current Audit
For holders with potential significant unclaimed property liability in Delaware that are not currently under audit, Delaware law requires that the SOS notify holders of their opportunity to enter the VDA program before the DOF can initiate audit. However, holders should be aware that there are some exceptions to this rule, e.g., if Delaware is joining a multistate audit initiated by other states, then the DOF can initiate audit immediately, without affording the holder prior notice from the SOS regarding the VDA program. Holders that receive a notice from the SOS regarding their opportunity to enter the VDA program will have 60 days from the time the SOS notice is mailed to opt into the VDA program. If a holder does not opt into the VDA program, Delaware law requires the SOS to refer the holder to the DOF for audit. Under Delaware’s unclaimed property statute, once the DOF mails an examination notice to a holder, the holder can no longer enter the SOS VDA program.
Lastly, holders with potential unclaimed property liability in Delaware should closely monitor their mailboxes. The SOS recently announced that it will soon be mailing notices to holders it has identified as potentially non-compliant with the state’s unclaimed property law, and that the SOS will be referring such holders to the DOF for audit if they do not timely enroll in the SOS VDA program.