Valerie M. Jundt, Senior Manager Deloitte & Touche LLP UNCLAIMED PROPERTY What’s New and Why You Should Care! Shareholder Services Association Chicago,

Valerie M. Jundt, Senior Manager Deloitte & Touche LLP

UNCLAIMED PROPERTY What’s New and Why You Should Care!

Shareholder Services AssociationChicago, Illinois

September 17, 2008

Copyright © 2008 Deloitte Development LLC. All rights reserved. 2

Introduction

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Brief overview of the basics

• History of the Law• Unclaimed Property Defined• 54 Jurisdictions/2 Canadian Provinces

• All states have a law though no two laws are identical


Uniform acts

• 1954 Uniform Unclaimed Property Act• 1966 Uniform Unclaimed Property Act• 1981 Uniform Unclaimed Property Act• 1995 Uniform Unclaimed Property Act


U.S. Supreme Court rulings

• Texas vs. New Jersey (1965)• Pennsylvania vs. New York (1972)• Delaware vs. New York (1993)


Where to report

1. State of owner’s last known address

2. State of holder’s incorporation or domicile if address not known

3. *State of holder’s incorporation or domicile if address of apparent owner is in a foreign country and if holder is incorporated or domiciled in the U.S.

*Provision language added in the 1981 Uniform Act


Delaware v. New York 507 U.S. 490 (1993)

• Most of the funds at issue in the case were unclaimed dividends, interest, and other securities distributions held by intermediary banks, brokers, and depositories in their own names for beneficial owners who could not be identified or located.

• The Court first held that the “debtor” (or holder) for purposes of the Texas v. New Jersey analysis was the intermediary, and not the issuer of the securities. 507 U.S. at 504-505.

• In addition the Court reaffirmed the Texas v. New Jersey holding and in doing so rejected New York’s argument to adopt a principal place of business test, reasoning that the state of incorporation was found to be “the most efficient way to locate a corporate debtor.” Id. at 505-506.


Potential property types – securities

• Shares– Certificated– Returned by Post Office (“RPO”)– Book entry– Dividend Reinvestment– Unexchanged– Bonds

• Cash– Dividends– Liquidations– Cash-in-Lieu– Redemptions– Interest payments


SEC17ad-17 Lost Shareholder Searches

• The SEC requires transfer agents to conduct a database search for a better/valid address for lost shareholders.

– Mail returned as undeliverable; either re-mail within 30 days or code lost immediately.

– Perform two searches; 1st 3-12 months after account was coded lost, 2nd 6-12 months after first search

– Cannot charge living shareholder a fee for the 1st two searches– Deceased shareholders, corporations, non-human entities, and

accounts less then $25 are exempt from search requirements– Intent of requirement was to include unexchanged shareholders

and closed accounts with un-cashed funds over $25– Database must be updated 4 times a year, contain at least 50% of

the adult population, geographically equal– SEC July 2008 Alert


What’s new…

• States are facing significant budget constraints• Consumer protection vs. revenue generating• Predominant use of contract auditors• New companies/audit firms surfacing• Increased use of estimates• Calculations that include suggested liabilities not defined by

statute• Enforcement focus on new property types• Due Diligence enforcements• Penalty and interest assessments on the rise• Greater scrutiny of reporting practices and fees assessed to

states (i.e. especially in those situations where they are paying for services)


Holder obligations under the unclaimed property laws

• Duty to file a report• Duty to perform due diligence• Duty to remit the property• Duty to maintain copies of the reports and

supporting documentation • Even if you outsource

• Duty to protect the funds until reported and transferred to the state• Even if you use Transfer Agent


Important points to consider• Failure to properly account for an unclaimed property liability

could be in violation of Generally Accepted Accounting Principles (GAAP)

• Unclaimed property compliance is required under all state statutes

• Sarbanes-Oxley Act– Section 302 requires that CEOs and CFOs include, with any periodic

financial report filed at the SEC, a written statement certifying the accuracy of report

– Internal control is a significant focus of Sarbanes-Oxley due to recent financial and accounting scandals

– Section 404 review includes identification and testing of the internal controls that have been implemented

– Compliance by SEC registrants is non-negotiable


Role and responsibility of the agent, fiduciary, third-party agents (“TPA”)

• Delaware v. New York revisited:

Issuers of securities cannot be considered "debtors" (or Holders in Unclaimed Property (“UP”) parlance) once they make distributions to intermediaries that are record owners since payment to a record owner discharges all of an issuer's obligations to the beneficial owner under Article 8 of the Uniform Commercial Code.

As a result, an intermediary serving as the record owner is the "debtor" insofar as it has a contractual duty to transmit distributions to the beneficial owner. Unlike an issuer, it remains liable should a "lost" beneficial owner reappear to collect distributions due under such a contract.


Role and responsibility of the agent, fiduciary, third-party agents (“TPA”)

• After Delaware v. New York, many states amended their laws to clarify that an original obligor may be able to satisfy its obligation to report and remit unclaimed property by transmitting payment to an intermediary.

• As a result, issuers may be able to contract away unclaimed property liability, and intermediaries must be aware of their potential liability Example: Young America

Important: Don’t assume that by contracting with a third party (i.e. transfer agent) that your company has outsourced your responsibility and liability.


Unclaimed property audits

• Key problem indicators – What triggers a state audit

• Not reporting all property types

• Contract auditors – Who are they?– Why should you care?

• What sort of oversight does the state exercise over contract auditors?

• What do auditors do in the absence of records?• How and when are interest and penalties assessed?• What recourse is available for a holder who disputes a state’s

audit findings?


Fines & penalties

A holder can be assessed penalties and/or interest for:

• Failure to report/remit the property• Failure to comply with the statute

Interest generally applied at 10%–25% of property value

Civil/Criminal penalties for failure to report/remit/deliver

OR filing a fraudulent report may include:• $100 – $200 per day ($10,000 maximum)• Varies from $1000 – $25,000 fine plus some states assess an

additional 25% of the value of the property• Some States – Class B misdemeanor


Inadequate or lack of records

• Systems Conversions• Mergers and Acquisitions• The burden of proof is on the holder to refute the presumption of

abandonment• Statistical sampling and estimation may be used to estimate holder

liability• Develop a “base year” or select a statistical sample from the

population of unclaimed property records• Examine base year or sample for potential unclaimed property• Calculate an unclaimed property ratio for the sample base year by

dividing the total of the outstanding property (e.g., payroll/accounts payable checks, credit balances, dividends) by a historical financial metric such as sales, operating expense

• Use the unclaimed property ratio to estimate unclaimed property over the reach back period


Amnesty vs. Voluntary Disclosure initiatives

• AMNESTY

– Statutory or Administrative Amnesty

– Specific conditions are posted

– Deadlines are provided

– Generally no “pre-authorization” required

• VDA

– Formal vs. informal

– Conditions include reach-back and pre-authorization

– Formal signoff and release from penalties/interest

– Ability to conduct audit is generally preserved


Internal controls/fraud

• Until the property is transferred, ensure that proper internal controls are in place!

• Ensure your Transfer Agent is protecting your Shareholder Records

• Set up specific procedures for claims processing• Finders and fees• Whistle Blower laws!


Corporate areas affected

• CEO/CFO• Office of General Counsel• Chief Risk Officer• Financial reporting• Accounts payable/receivable• Information technologies • Internal audit • Ethics & compliance• External contacts• Outsourced functions


Unclaimed property update

• California - Injunction and recent activities; new requirements for due diligence, report/remittance rules

• Delaware – Dormancy period for securities-related property reduced from 5 years to 3 years. Focus on increasing additional revenues (through abandoned property audits); Bill approval reinforces the state’s ability to use contingency fee auditors

• Oregon – Reduces dormancy periods from 5 to 3 years for most property held by banks, financial institutions and life insurance (securities/dividends)

• Alberta, Canada – Unclaimed Personal Property and Vested Property Act – effective September 1, 2008

• Illinois – VDA• New York - Amnesty & Outreach• Michigan - Holder Outreach• Pennsylvania - Holder notification and outreach; Bill approval allows appeal

of treasurer decision to commonwealth court


Examples of some successful industry practices

• Review your contract with Transfer agent– Who is responsible for reporting– Ask for copies of reports

• If in-house; develop and maintain detailed processes and procedures for tracking and reporting unclaimed property

• Conduct self audits or audit of your Transfer Agent’s unclaimed property processes and procedures

• Form an unclaimed property committee that is responsible for compliance– Include key personnel, including but not limited to internal audit,

legal counsel, upper management, treasurer, comptroller and tax director


Unclaimed property websites/resources

• www.uppo.org• www.unclaimed.org• www.missingmoney.com

• Bureau of National Affairs Corporate Law PortfolioUnclaimed Property Portfolio 74-2nd

www.bna.com

http://www.unclaimed.org/

http://www.unclaimed.org/

http://www.missingmoney.com/


Questions/Contacts

Valerie M. JundtSenior Manager

Deloitte & Touche LLP612-397-4541

[email protected]

mailto:[email protected]

Documents

Valerie M. Jundt, Senior Manager Deloitte & Touche LLP UNCLAIMED PROPERTY What’s New and Why You Should Care! Shareholder Services Association Chicago,