From States “Reaching Out” To Shareowner “Out Reach”

“To reverse the detrimental effects of these state ‘reach out’ initiatives, issuers and transfer agents must be proactive in maintaining shareowner contact to curtail securities escheatment.”

By Karen Anderson
Unclaimed Property Recovery & Reporting, LLC

Augmentation of state revenues plus the desire to avoid liability from unclaimed property owners/shareholders are the motives for three major, relatively recent “reaching out” initiatives by state governments. The repercussions of these initiatives have been costly and time-consuming for issuers and transfer agents, but may be the catalyst to enhance procedures to “reach out” to shareowners to prevent property from becoming escheatable. This article outlines the three major state initiatives, and discusses some potential reactions and adaptations that issuers and/or transfer agents may consider.

THE STATES “REACH OUT”

1. Changing Unclaimed Property Requirements

Arizona, Michigan, and Indiana are examples of states that enacted laws in 2009 or 2010 that shortened unclaimed property dormancy periods and/or reporting dates in order to increase state revenues due to a poor state and national economy. When dormancy periods are reduced, the state receives a one year windfall of additional cash for the years that are caught in the dormancy period reduction.

For example, when a state reduces the dormancy period for uncashed dividend checks from 5 years to 3 years, the property that is 4 or 3 years old, which would not be reportable yet if the reduction hadn’t occurred, is now reportable along with the property that is 5 years old. This gives the state 2 years worth of extra property that year. This trend of “reaching out” to businesses for increased unclaimed property remittances is the “IN” solution for many states to supplement sagging state revenues.

In addition, note that many states are stepping up imposition of penalties for inaccurate or untimely reporting of unclaimed property. Florida and Montana now routinely charge penalties for late filing. Both states have begun to send notices if reports have not been received, and if property appears to have been reported late, they assess penalties and interest for late filing.

2. More Audits – and Unclaimed Property Law Enforcement

Another measure designed to increase state revenues is the expansion in the number, scope, and complexity of unclaimed property audits. During the past few years, states have “reached out” to more businesses (including financial institutions, brokerages, insurance companies, mutual fund companies, etc.) by initiating unclaimed property audits, asserting novel theories of escheatment, and assessing interest and penalties when compliance does not comport with the new theories. As many states are subject to hiring freezes, the states utilize third party contract auditors. In most instances, these auditors are paid a percentage of the unclaimed property they discover, thereby incenting thorough, and frequently burdensome reviews

In addition, some states have changed how they handle businesses that reach out to them in an attempt to become compliant voluntarily. For example, Florida previously limited the “lookback” period to 5 years for those businesses that initiated voluntary compliance, as opposed to state mandated audits, which require 10 year “lookbacks”. Recently, Florida eliminated the limited “lookback” incentive for holders who voluntarily become compliant, and now requires 10 years of reports.

Similarly, consider that in 2010 Indiana and Pennsylvania reached out to businesses by providing amnesty windows to permit businesses that had failed to comply to come forward voluntarily with make-up filings, without the imposition interest, penalties, or costs. The amnesty period for both of these states expired on November 1, 2010. An Indiana state government official who spoke at the July, 2010 regional conference of the Unclaimed Property Professionals Organization (UPPO) indicated that the amnesty period was a chance for businesses to come into compliance before the state began taking more aggressive enforcement measures.

As noted, the states are continuing to “reach out” by strengthening enforcement, and it is anticipated that these efforts will accelerate and become more contentious.

3. Due Diligence Requirements Amplified

Another trend in unclaimed property laws has been to tighten state requirements for performance of due diligence. A recent federal court case in California has spawned concern that the states may be held liable for violations of the United States Constitution if insufficient attempts are made to contact owners prior to escheatment to the state. In reaction, the state changed the California Unclaimed Property Law to require that a business must take reasonable due diligence measures. Holders who do not comply will not be afforded the statutory release of liability provision for property remitted to the state.

Further evidence of the states’ renewed emphasis on due diligence is the new language on some states’ report cover sheets. At least 12 states now require the holder’s representative to attest that the business has complied with the due diligence requirements of the pertinent state statute. One of the most stringent requirements is that of the Virgin Islands, wherein the holder must provide an affidavit attesting that the holder has complied with the due diligence requirements of the law.

ANALYSIS

The state initiatives described above are pressuring businesses to re-evaluate their policies and processes with the objective of reducing their risk by minimizing the existence of unclaimed property. Minimizing unclaimed property permits the business to curtail time consuming and costly compliance requirements. In addition, minimization permits the business to avoid penalties and interest for incomplete or inaccurate compliance, and limits the time involved and possible findings in a possible future unclaimed property audit.

For transfer agents and securities issuers this means turning the tables on the state “reaching out” initiatives by creating proactive shareowner “outreach” designed to establish contact with shareowners or, in some cases, their beneficiaries. Maintaining contact is a best practice resulting in business retention, and it prevents the running of the unclaimed property dormancy period and the triggering of state unclaimed property provisions. Suggested practices include:

1. Expedient telephone, email or subsequent mailing follow-up with shareholders after one mailed or emailed item (i.e., dividend check, proxy statement, etc.) is unresolved or returned as undeliverable. Such follow-up may include database searches for a better address, or possibly linking of active accounts to the inactive account of the shareowner. Reaching out to shareowners soon after one returned item will result in a greater number of “reconnections” with shareholders as the tracking trail will be warmer.
2. Collaboration between the issuer and its transfer agent to confirm the address information of shareowners such as those who are current and former employees of the issuer.
3. Consistent procedures for the capture of changes in shareowner address including the cross referencing of address information in multiple accounts, recording forwarding address information listed on mail returned from the post office, and address confirmation when a shareowner contacts the issuer or transfer agent via telephone or the internet, etc.
4. Address update reminders should be included in all shareowner mailings and emails.
5. Periodic requests to shareowners for review and update of beneficiary contact information.

CONCLUSION

To reverse the detrimental effects of these state “reach out” initiatives, issuers and transfer agents must be proactive in maintaining shareowner contact to curtail securities escheatment.

The unclaimed property regulatory climate and the desire to minimize risk should be motivation for issuers and transfer agents to create or enhance their shareowner outreach procedures.