On August 1, the Delaware Department of Finance (DOF) published a revised version of its proposed reporting and examination manual regulation addressing audit procedures and method of estimation. See 21 DE Reg 123 (Aug. 1, 2017). The revised proposed regulation is substantially similar to the first draft proposed earlier this year, but contains a dozen or so notable differences (described in more detail below). Because the former draft of the regulation was never finalized, the 60-day time period for eligible holders to convert to the Voluntary Disclosure Agreement (VDA) Program (administered by the Secretary of State) or an expedited audit has not started to run, and will not commence until the final DOF regulation is published in the monthly Register of Regulations. Based on the fact that the DOF is accepted comments through August 31, 2017 (and likely needs at least a month to take them into consideration), the final regulation is not expected to be published before October 1, 2017, giving eligible holders at least three more months before the looming conversion deadline.
Our summary of the initial regulations proposed by the DOF and Secretary of State (SOS) on April 1, 2017 is available here. The final SOS VDA estimation regulation was published on July 1, 2017, without substantive amendments. See 21 DE Reg 50 (July 1, 2017). Below is a brief summary of the key differences between the old and new proposed DOF reporting and examination manual that holder’s should be aware of.
12 Key Differences
- Language was added to clarify that other reasonable alternative calculations of “gift card maximum cost” may be proposed by a holder and will be considered by the DOF on a case-by-case basis.
- Indication of owner interest in property provisions expanded to provide that “[p]roof to the satisfaction of the State Escheator that an Owner has had contact with a designated representative of the Holder in the period of dormancy may be considered an indication of owner interest in the property.” This acknowledges that the contact need only be with the holder, not necessarily in reference to a specific piece of property.
- A list of records to be retained by holders showing “the date, place, and nature of the circumstances that gave rise of the property right” was added. See Sec. 2.10. While the list of records is helpful, it is still incomplete and should be expanded to include documentation of resolution of property issues such as voiding a check because services not performed. The proposed regulation also clarifies that holder’s unclaimed property filing history is only required for all states if the holder is incorporated/formed in Delaware.
- Language was added to the Confidentiality & Nondisclosure Agreement (NDA) provisions, clarifying that a NDA is contingent upon the parties agreeing on the terms “within sixty (60) days of the date of the Notice of Examination letter.” This means that the parties do not have to abide by the pre-approved State form, but must act quickly if they are going to deviate from it. The terms of the pre-approved sample NDA were also expanded to prevent the auditor from disclosing that Delaware has authorized an exam to solicit other states to join. This is an important provision that should be included in any NDA, and the DOF should be applauded for including it in their pre-approved sample.
- A new provision was added stating that “[u]pon request by the Holder, the State shall provide to the Holder all records of prior unclaimed property reports filed previously in the State.” This is something that we have asked states to do for years, which is often met with significant resistance. It makes the most sense for states to automatically do this, and avoid the unnecessary nuisance that digging up this information puts on holders. More states should follow Delaware in explicitly acknowledging that they will provide holder reporting history upon request.
- Consistent with the new statutory requirement that abatement of penalties and interest must be for “good cause shown” the regulation specifies several factors that the State Escheator may consider (if applicable and without limitation) in making this determination, including: (1) whether the Holder has a significant history of filing unclaimed property reports; (2) the responsiveness of a Holder during the exam; and (3) whether the Holder used ordinary business care in its compliance efforts.
- In the estimation provisions, the exclusion of funds returned in the normal course of business from the population of potential unclaimed items is no longer contingent upon the funds being returned prior to the issuance of the exam notice. However, funds returned outside the normal course of business remain included in the population.
- The following language was stricken from the projection provisions: “The sole purpose of determining an estimated liability in a time period where records exist is for calculating an unclaimed property liability in years where records do not exist. The use of statistical sampling for estimation shall be used, therefore, where (a) prior approval is received by the State; and (b) records are not available and the names and address of rightful owners cannot be identified.”
- A sample “due diligence” letter was added to the regulation to supplement the sample “remediation” letter (for sampling/estimation purposes) that was formerly included.
- A new provision was added that requires Delaware to “conduct periodic review of the Auditors’ conduct, processes, and procedures to ensure that the Auditors are complying with security protocols, record retention and destruction requirements, and all applicable statutes and regulations.”
- A new provision was added to provide that “[a]t the Holder’s request, the State may provide a release and indemnification agreement for any categories of property where the examination is deemed to be complete.” Across the country, many of the more aggressive and unreasonable states take the position that they are unable to release specific categories of property audited pursuant to a release. The DOF should be applauded for expressly acknowledging this release authority, which is necessary to prevent duplicate audits of the same property type and period. Other states are encouraged to take note and follow the DOF’s lead here.
- A new provision on expedited examinations was added, but it lacks any meaningful guidance and appears to simply be a placeholder. Specifically, the provision states that “certain Holders may have the option of expediting the completion of a pending examination. The State shall publish a form ‘Intent to Expedite Completion of Examination’ which shall outline the expectations of the Holder in that circumstance.” As such, the details of expedited examination process continue to remain a mystery until the form is published.
Any written submission in response to the revised reporting and examination manual must be received by the DOF no later than 4:00 pm EST, Thursday, August 31, 2017. Unsurprisingly, the revised DOF proposed regulation does not change basic estimation and extrapolation technique that a federal district court recently determined results in “significantly misleading results” before concluding that the method and audit techniques collectively “shock the conscience.” This remains the elephant in the room. A number of other troubling provisions were retained in the most recent proposed DOF regulation, such as the express inclusion of non-domicile affiliates with no Delaware addressed property within the scope of an examination and requirement that they provide any and all records, an issue that is currently being litigated in the Marathon Petroleum case.
Given the fact that the conversion deadline is likely to be later this year, holders currently under audit are encouraged to reach out to the unclaimed property advisors now to discuss whether they are eligible and what their options are in light of the statutory and (proposed) administrative changes to the Delaware unclaimed property law.