2022 Unclaimed Property Year-End Round Up

The OPTIMIZER’s Riskiest Internal Control Issue of All!

BY JENNIFER BORDEN, ESQ. BORDEN CONSULTING GROUP

Multi-year audits and litigation are now the norm, whereas prompt payment to owners is not.

The unclaimed property (“UP”) landscape over the last year has been excruciating for issuers, their vendors and their shareholders alike. Due to ever changing requirements, routine compliance is now exceedingly expensive. Multi-year audits and litigation are now the norm, whereas prompt payment to owners is not. Consider these actual occurrences from 2022:

• A corporation tried to claim its property from a state and was told it was “established that the claimant is the reported owner”. Despite being the owner, the state continued that the corporation had not “established ownership” of the property the state recognized the corporation owned. The denial of the claim led to costly multi-year litigation, including an eventual appellate win in Ohio.
• Another owner attempted to claim shares that had been properly escheated in November of 2019, only to learn that the state liquidated in early 2020, just as the market crashed due to COVID fears. Having lost a quarter of a million dollars in value, the shareholder then sued the issuer and the transfer agent for restitution. The issuer sought indemnification from the state. The state declined to provide indemnification for the harm caused by its ill-advised sale, even though indemnification is specifically required by statute, thereby necessitating additional multi-party litigation to make the shareholder whole.
• In the face of the stringent requirements of the GDPR and CCPA, as well as numerous high profile data breaches at government agencies, an issuer under UP audit raised concerns about the security of the nonpublic personally identifiable financial information it was being told to transmit electronically to the states’ contracted auditor. The state’s reaction to these legitimate concerns was to accuse the issuer of raising data privacy and security merely to delay the audit, telling the court that since the state and its auditor had not previously had a significant security incident, there should be no worry about one in the future. The state then issued voluminous subpoenas to the issuer, its transfer agent, its escheat compliance vendors, its 17Ad-17 search vendor and even the TA’s mail house, apparently in search of security lapses that might be used to discredit the issuer’s well-founded concerns.
• In an attempt to escheat additional securities, several states have communicated that shares that are held in brokerage accounts are not securities and will not be afforded the protections of securities, such as SEC 17Ad-17 updates.
• Several states proposed legislation to trigger escheatment of securities based on “inactivity” instead of whether the owner is lost. This will result in the transfer of millions of shares owned by shareholders who continue to reside at the address where they are currently receiving their mail and tax statements.
• Several states continue to push for the immediate escheatment of shares of deceased owners, without regard for attempts to transfer shares to beneficiaries.
• Several states passed or proposed legislation that would not allow owners to be made whole when investments have been liquidated, restrict the owners’ ability to have professionals assist with their claims and have reduced the time a state holds securities before liquidating.
• In a class action where the owners sued the state for not paying the owners interest earned on their property, the state’s response to this potentially unconstitutional taking is to dismiss the owners’ claims, saying that the owners’ “negligence” in allowing the property to be escheated should not be “rewarded” with the interest their property actually earned while being held by the state.

Unclaimed property statutes were designed to prevent owners from losing forgotten property or facilitating transfer to the heirs who were not aware of their property interests. The theory is that holders should routinely review their records for accounts that appear to be abandoned; conduct outreach to owners and heirs; and in the absence of contact from the owner after due diligence, escheat the property to the state, to be held for the benefit of the rightful owners. As envisioned, well-implemented UP statutes absolutely benefit owners. Strict compliance is crucial and additional owner outreach is admirable. In my experience, issuers recognize the benefits of shareholder engagement and embrace outreach. Stellar compliance with UP statutes is a bonus.

Unfortunately, there has been a shift away from the true goals of UP statutes. Want to escheat more abandoned property? Simply change the definition of “abandoned” accounts (from “lost” accounts to “inactive” accounts, even though there is no requirement for the accounts to be “active”). What if this new definition does not jibe with state or federal securities laws? Simply say the property is not securities property. Too many “active” accounts? Eliminate the actions, such as direct deposit of dividends, that constitute “activity” sufficient to toll the dormancy period. Interested in escheating all of the shares that are newly-classified as “inactive”, but don’t like the associated custody expenses? Simply liquidate, even though the state is supposed hold the shares for the benefit of the owners. Want to have cash even more quickly? Shorten the statutory holding period required prior to liquidation.

Want more cash? Charge the issuers interest using questionable methods and usurious rates, while enacting statutes that prohibit paying the owner interest, making them whole, or engaging with experienced professionals who can assist in their claims. After all, according to state filings, it is the owners’ fault that the state had to escheat the property in the first instance.

Statutes designed to protect owners should actually protect owners, and any negative outcomes from the implementation of escheat statutes, inadvertent or otherwise, must be strictly scrutinized and promptly rectified.

When I was assigned to serve as counsel to the Massachusetts Unclaimed Property Fund in 1994, I cherished my part in assisting people in recovering property they had forgotten. The states are currently holding billions of dollars in property, most of which has been remitted via routine compliance. In my opinion, the emphasis must again be on facilitating compliance and returning property to rightful owners. Hopefully, the corporate community can engage with the states to implement UP statutes in a manner that prioritizes logical compliance and owner reunification, as opposed to the creative methods employed by some recently which have had the effect of complicating compliance, needlessly increasing expenses, creating financial, legal and reputational risk for issuers and destroying investments: all without any associated benefits to the owners. Statutes designed to protect owners should actually protect owners, and any negative outcomes from the implementation of escheat statutes, inadvertent or otherwise, must be strictly scrutinized and promptly rectified.