The same State Treasurers and contingency-fee unclaimed property auditors that focused on the life insurance industry are now turning their attention to broker-dealers. Sutherland has been actively assisting companies with unclaimed property audits and currently represents broker-dealers that have recently received unclaimed property audit notices.
What Is an Unclaimed Property Audit?
There are generally two categories of unclaimed property audits: the first compares a company’s accounts against an external file, such as the Social Security Death Master File (DMF), to identify purported unclaimed property; the second category of audits, referred to as a “general ledger audit,” involves extensive inspections of a company’s books and records. Broker-dealers currently are subject to both types of audits. These audits seek to discover information regarding:
- All brokerage services provided by the firm to its customers, including identifying each type of correspondence sent to account holders and the frequency of each type of correspondence.
- The firm’s policies with respect to returned and undeliverable mail.
- The firm’s process for determining when accounts become “inactive.”
- Potentially deceased individuals by comparing account owners against the DMF.
The audit may request historical records going back at least 15 years. Recent audits of broker-dealers for unclaimed property go beyond traditional unclaimed property audits in seeking information about potential deaths (hence the use of the DMF), whereas traditional unclaimed property audits focused on known liabilities and accounting information. The auditors use the DMF to identify account holders who may be deceased, switching the burden of proof to the broker-dealer to prove recent contact with the account holder, and thereby identify money and securities supposedly overdue to the states as unclaimed property and subject to late filing penalties.
Are All States Involved in Unclaimed Property Audits?
Yes. Every state has unclaimed property laws that are enforced through the audit process. State administrators hire contingency-fee audit firms to conduct these audits. The auditors most frequently identified with unclaimed property audits are: Verus Financial LLC, Kelmar Associates, LLC, and Unclaimed Property Clearinghouse (UPCH). These firms have active engagements with virtually all states. All three firms have significant unclaimed property experience but are not necessarily experienced with respect to broker-dealer business models, the federal securities laws and FINRA rules. Verus has conducted numerous multi-state DMF audits of life insurers and broker-dealers involving a majority of the states. Kelmar has conducted audits, most notably of Fortune 1000 firms, on behalf of several dozen states – including Delaware, Illinois, Michigan and New Jersey – for more than 15 years. UPCH contracts with more than 40 states and has audited companies in nearly every industry.
What Should Broker-Dealers Do When They Receive an Unclaimed Property Audit Notice?
- Take it seriously. Bring the audit notice immediately to the attention of the firm’s president and the broker-dealer’s top legal, compliance and financial officers.
- Establish a team that will be responsible for coordinating the firm’s response to the audit and seek assistance from knowledgeable professionals. Unclaimed property law is a highly specialized legal area; a firm’s strategy in responding to the notice needs to reflect affirmative legal defenses from the outset.
- Decide who will represent the firm in the initial calls with the auditor. These calls are important – the auditor has a game plan; the broker-dealer must have one too.
- Make sure the firm includes knowledgeable persons from technology on the firm’s team. An audit of this type involves aggregating massive amounts of data going back 15 or more years; the broker-dealer will need to draw from specialists who know on which systems the data has been and is being stored and how to access it.
- Map out a plan for understanding what records are in the firm’s possession and what records are not.
- Allocate sufficient resources, both internal and external, to the project.
What Should a Broker-Dealer Do to Prepare Before Receiving an Unclaimed Property Audit Notice?
- Prepare for the inevitable: the best defense is a good offense. Check the firm’s level of compliance and methodology for complying with state unclaimed property laws.
- Determine your unclaimed property compliance obligations, which may depend on your role as an introducing and/or a clearing broker-dealer.
- Identify data deficiencies. Data imperfections can generate unclaimed property issues. If there are gaps, quantify what they mean.
- Be proactive. Analyze whether entering into a voluntary disclosure agreement (VDA) with select states would be beneficial. Read available literature targeted specifically to unclaimed property issues for broker-dealers, such as the SIFMA white paper “In Brief: Unclaimed Property Compliance Obligations and Challenges for Broker Dealers” (Jan. 2015).