Audits & Opportunities
Unclaimed Property Compliance Update. A review of the current unclaimed property enforcement environment and recent legislative developments.
Benjamin Franklin once said, “Nothing can be said to be certain, except death and taxes.” As we begin 2016, we might consider adding unclaimed property audits to that list.
We sat down with Ann Fulmer, of Keane’s National Consulting & Advisory Services Team to discuss the current enforcement environment, concerns within the transfer agent community and opportunities for compliance once again available to corporations and transfer agents.
Optimizer: Unclaimed property audits have always been a concern within the industry, but lately it appears as though the auditors are turning their focus towards the corporate transfer agents. What is their intent?
Ann: The auditors are taking lessons learned from their audits of the life insurance and broker-dealer industries and applying them to transfer agents. As a result, the transfer agents are being asked to “encourage” their clients to make their records available to the auditors.
Optimizer: This approach raises several concerns for both the transfer agent and the issuer.
Ann: Exactly. A lot of questions have been asked throughout the industry. Does the company have to make their records available to the auditor, especially if they’re not the ones being audited? What defenses are being jeopardized by this approach? What opportunities do the clients have to defend themselves if the audit is being conducted beyond their control? What if they were previously audited by the same third-party firm?
Optimizer: How are these audits being conducted?
Ann: The auditors are primarily using two methods in their audits, both of which put the onus on the transfer agent and the client to rebut the presumption of abandonment.
In the first scenario, the auditor will conduct an in-depth review of the documents utilized to determine date of last owner initiated contact. They will typically ask to see screen shots, PDFs, or other forms of documentation to support the dates used to constitute activity.
The second approach is very similar to what was implemented in the life insurance and brokerage industries and is being referred to as an Audit Resolution Agreement (ARA). In an ARA, the transfer agent would be required to conduct a comparison of its shareholder lists to the DMF and National Change of Address (NCOA) database to identify those accounts that they consider to be potentially inactive or lost. The company then has to prove activity on the accounts or that the accounts are NOT lost.
Optimizer: With the burden of proof squarely on the company or transfer agent, what qualifies as owner initiated activity and resets the dormancy clock?
Ann: Some examples of owner initiated activity include an opening an account, voting a proxy mailing, presentment of a check, written correspondence or response to a letter of transmittal or due diligence notice, or validated contact by phone, internet, or IVR.
Other examples include any change in share balance position such as transfers, broker share movements, issuances of shares or sales of shares (excluding stock splits, stock dividends and DRP shares reinvested to an account position). Some states allow for the bank receipt of ACH payment, or an ACH payment received by the transfer agent.
Optimizer: What can transfer agents do to protect both themselves and their clients?
Ann: Many transfer agents are taking advantage of voluntary compliance initiatives, such as the one made available once again in Delaware.
Optimizer: Delaware is always a hotbed of unclaimed property activity. What’s the latest news ?
Ann: This past July, Delaware Senate Bill 141 was signed into law and became effective immediately. This bill was a result of the efforts of the Delaware Unclaimed Property Task Force, which aimed to implement a more holderfriendly environment and ensure fairness with Delaware’s notoriously stringent unclaimed property laws.
The most significant aspect of SB 141 is the reinstatement of the Voluntary Disclosure Agreement (VDA) program conducted by the DE Secretary of State (SOS). Originally set to sunset in 2015, the VDA program allows holders not currently under audit to come into compliance without the fear of an audit and receive a complete waiver of interest and penalties.
The VDA program also offers a shortened look- back period for record review (1996), and often tends to be more company-friendly than a traditional audit.
Optimizer: Are there any specific nuances to the program for corporate issuers?
Ann: Keane has learned directly from Delaware that securities administered by transfer agents will be reviewed to determine if there is past-due equity related property, which currently includes accounts with a date of last contact of 2011 or earlier.
Optimizer: Were there any other significant changes as a result of this legislation?
Ann: Another important aspect of the bill is the amended audit notification process. No company may receive an audit notice without first being advised by the DE SOS of the VDA Program. However, once a company receives the notice to enroll in the VDA program, they have 60 days to enroll or be considered eligible for audit. Holders that decline the invitation to enroll are also considered eligible for audit.
The DE VDA administrators sent out floods of invitations throughout 2012 and 2013, and another wave to more than 700 companies throughout August and September 2015. After discussions with the DE VDA administrators, Keane has learned that the DE SOS is not required to send additional notices beyond what has already been sent out.
Optimizer: So, to put it plainly - if a company previously received an invitation, and chose not to respond or participate, they are currently considered eligible for audit.
Ann: Exactly. If you’ve previously received an invitation to enroll in the program – you’re officially on notice. If you’re unsure if your organization has already received an invitation, I would check with your compliance and regulatory departments, or I would check with your upper management. Sometimes if they don’t know who to send it to, they’ll address it to the CFO or CEO.
Optimizer: What should companies do if they’ve received a notice?
Ann: Most importantly – act quickly. As I mentioned, the clock is already ticking once you’ve received the notice. Enroll as soon as you can, that way if you have any questions or concerns, they can be addressed right up front. There are some companies that are so big and so diverse that they might have scoping issues – which can be a major undertaking.
I would also recommend engaging legal counsel, as well as a holder advocate or consultant to facilitate the process, manage timelines, and ensure the accuracy of deliverables.
Optimizer: What is the key takeaway for corporate issuers in the current enforcement environment?
Ann: The audits are going to continue – so be prepared and take action in some form or another. The Delaware VDA program is a great opportunity for holders to ensure compliance and receive complete protection from an audit.