DELAWARE PUBLISHES UNCLAIMED PROPERTY REGULATIONS

DELAWARE PROPOSES UNCLAIMED PROPERTY REGULATIONS

OVERVIEW

To comply with SB 13, enacted in February of 2017, the State of Delaware has published their new proposed unclaimed property reporting and examination regulations, effective on the date of adoption by the state. The intent is to repeal and replace any current regulations with the new ones. It also contains a new reporting/instruction manual and estimation methods used in VDA’s (Voluntary Disclosure Agreements) with the state. The rules were published April 1, 2017. The rules will apply to all examinations commenced after that date, and may apply to any ongoing examinations that began prior to the effective date of the Regulations.

If companies are undergoing existing audits, they need to be aware of the proposed language: “[t]o the extent practical, the Regulations shall apply to any ongoing examination that commenced prior to the effective date of these Regulations though the failure of the State to have conformed to Manual not-yet-in-existence would not invalidate an examination”. However, the new regulations do not provide any additional guidance on the “expedited” audit process or “compliance reviews” referenced in Senate Bill 13. Pertinent sections include:

OWNER ACTIONS

• The code defines various owner actions which constitute an “indication of owner interest in property.” It states “Actions which do not indicate the owner’s interest in the property include, but are not limited to, automatic postings, automatic reinvestments, computer system conversion dates and non-return of mail (other than a non-returned IRS Form 1099 for ACH or Dividend Reinvestment accounts).
• It allows holders to cross-reference an indication of interest in one investment or account with another investment or account with the same Holder if the records of the Holder indicate the same name on the account, signature card or contract.

REPORTING

• As of November 10, 2015, the State no longer accepted paper reports. The State will continue to accept reports in an electronic format through February 28, 2018. Beginning March 1, 2018, reports will be required to be submitted in a web-based record.
• Although not required by the Law or regulation, negative reports will be accepted.
• Beginning February 1, 2018, a Holder’s request to extend the date for filings shall be made a minimum of 15 days prior to the date specified for the Holder.
• The State Escheator may grant an extension of the date of filing for good cause. Good cause includes, but is not limited to, a natural disaster, criminal activity related to the Holder’s books and records, recent changes in the form of ownership of the Holder through merger, acquisition or reorganization.
• For holders with having three or fewer employees, a recent change in management. Beginning February 1, 2018, good cause shall not include a failure to perform a requirement such as due diligence pursuant to §§1148 and 1149 of the Abandoned or Unclaimed Property Law.
• The State no longer requires the Holder to retain sufficient information for the delivery of mail. Rather, the Holder may retain a description or code that evidences the state of the owner’s last known mailing address. A code or description shall include two of the following three data points, which must not conflict with each other: a City, a State or foreign code, and a zip code. The location of the transaction is not evidence of the last known address of the owner.
• Records to be retained by the Holder include sufficient records of items which were not reported as unclaimed property to determine whether the Holder has complied with Law.

AUDITS

• The State Escheator has the authority to examine the records of a person or the records in the possession of an agent, representative, subsidiary, or affiliate of the person under examination.
• The State has the authority to enter into agreements with organizations to identify abandoned property to be escheated to the State by means of audit, examination or otherwise. Similar, if not identical, language has appeared in the State’s budget for decades.
• The State of Delaware will examine selected Holders’ books and records for compliance with the Abandoned or Unclaimed Property Law. The examination will be assigned to an auditor or to a third-party auditing firm that has been retained by the State for such purposes. At the request of a Holder, the State’s third party auditor will enter into a confidentiality agreement with the Holder in a form approved by the State Escheator before any of the Holder’s confidential records are produced. (See Section 2.14, Confidentiality and Non- Disclosure Agreement, for a form NDA approved by the State.)
• The State Escheator possesses the authority to resolve an examination via negotiation and settlement with a Holder or their duly authorized representative.
• The State is permitted to examine a holder for any reason. When identifying a Holder to be examined, the State may consider several factors. These include, but are not limited to the following:
  – A review of past Holder reports for inconsistencies, omissions or a lack of detail;
  – A comparison of a Holder’s past reports to the reports of similar Holders within the same industry and of the same approximate size;
  – Any information available from the State, such as Holder reporting and compliance history; and
  – Available public data regarding the Holder, including annual company reports, and press materials.
  – Holders selected for examination will be notified by a letter from the DOF’s Audit Manager.
• All Delaware unclaimed property examinations begin with an official examination letter from the State’s Abandoned Property Audit Manager. The letter will notify the Holder that its books and records (including those belonging to subsidiary and related entities) are subject to examination, identify the assigned auditor or third-party auditing firm, and include auditor contact information. The issuance of the official examination letter terminates the Holder’s ability to enter into a VDA with the State of Delaware.

• Third-party auditors are not authorized to engage in any examination or audit without prior consent from the State of Delaware, Department of Finance.
• Effective July 1, 2015, the State Escheator shall not initiate any new examination of records or an investigation of any person pursuant to the Delaware Abandoned or Unclaimed Property Law unless first the person has been notified in writing by the Secretary of State that the person may enter into an unclaimed property voluntary disclosure agreement, or if the person fails to otherwise comply with a requirement imposed on such person pursuant to §1172 of the Delaware Abandoned or Unclaimed Property Law.
• Holders may retain third party advocates (the “Advocate”) to assist them in the examination process.
• The State’s examination shall not be limited to a review of work papers, compilations or record summaries prepared by the Holder or the Advocate, but shall include access to the Holder’s original books and records deemed by the State to be necessary to ascertain the Holder’s compliance with the law.
• The State and its Auditors shall keep Holder representatives directly informed of the progress of the examination. It is the responsibility of the Holder to make available to the State and its Auditors the employees most likely to have first-hand knowledge of the Holder’s day-to-day operations.

NON DISCLOSURES

• Holders are given the opportunity to enter into a NDA with the assigned auditor. The State has approved the proposed NDAs of the auditing firms with which it contracts and will not require the firm to edit language for purposes of the examination. If the Holder opts not to use an NDA approved by the State and the Holder and auditor cannot reach an agreement on the terms, the parties shall rely on the confidentiality provisions of 12 Del.C. §1189.
• The State and its agents are prohibited from disclosing the amount of abandoned or unclaimed property that has been reported to and received by the State by any Holder and disclosing the terms of or supporting documentation related to any annual filing, unclaimed property VDA, or settlement agreement resulting from the reporting of any unclaimed property. The state provides a sample agreement on their website. The rules establish detailed procedures for audits from notification to closure.

ESTIMATION

• The state requires Holders to retain records for 10 years after the date the report was filed. The “Base Period” is the period of time for which the holder possesses complete and researchable records. Consistent with a majority of states, Delaware requires that a Holder retain records for a minimum of 10 years plus dormancy (15 years total for most property types). The State may utilize any available dormant records to estimate an unclaimed property liability for the period of time for which the holder does not possess complete and researchable records.
• If the Holder fails to retain sufficient dormant years of records, the Audit Manager and Holder shall discuss which records are to be utilized for the base period. In the absence of agreement, the State Escheator shall possess the sole authority to make a reasonable determination for the base period in order to prepare an estimate.
• Base periods shall consist of complete and researchable records. In order to draw a representative error rate, the base periods utilized shall consist of at least three (3) years from the universe of complete and researchable records. Depending on the unique facts and circumstances of each Holder, the State may consider including non-dormant periods in the base periods.
• The rules establish procedures for estimations and sampling that fall within the scope of the examination.
• The State will review the Holder’s policies and procedures for treatment of day-to-day operations related to potential unclaimed property.

The rules continue with applicable reporting types and dormancy periods that may be found on their website.

If you have questions or need assistance with any of your unclaimed property processes, contact our knowledgeable staff at UPCR.

The concept of “complete and researchable records” is somewhat defined. This is the standard used to determine whether projection is necessary to years for which such records do not exist. The concept of complete and researchable records has been a problem in some audits. Complete records are those that can be reconciled to the general ledger. Researchable records are those that lead to the resolution of the item. (But see below).

NDA

The pre-approved example Confidentiality and Non-Disclosure Agreement (NDA) included as part of the proposed regulations is a step in the right direction and fixes many of the reoccurring concerns with past versions utilized by the DOF. Specifically, the revised NDA contains: (i) a provision requiring holder consent prior to adding additional states to an examination; (ii) language making the third-party auditor responsible of any breach of the agreement by its representatives; (iii) a restriction allowing the third-party auditor to only disclose confidential information to the participating states that is relative to each particular participating state; (iv) a provision clarifying the restriction on the third-party auditor’s use of confidential information to solicit additional state participation; and (v) a restriction on disclosure of confidential information outside of the United States. (Some of these items were already being applied in practice). In addition, the revised NDA incorporates language relating to: (i) compelled disclosures; (ii) compliance with applicable laws; and (iii) injunctive relief.

VDA Scope

Holders may determine which entities and which property types are included in the VDA.

Reporting

Negative reports are now allowed.

Gift Cards

The regulations explain what part of a gift card’s value may be retained by the holder (ostensibly as profit that would have been received had the card been redeemed). The amount remitted to the state is determined by reference to the federal income tax return. The formula suggested is: Line 2 COGS + Line 27 Total Deductions – Line 19 Charitable Contributions – Line 20 Depreciation – Line 21 Depletion.

The Missing

Researchable Records

One problem is proving whether researchable records exist. A holder may believe it has documentation to reach a resolution on property for a certain time period but the auditor may impose a stricter standard. It might be helpful if the final regulations or subsequent guidance provide examples of what is and is not a record that provides a sufficient resolution.

Audit Payment and Release Form

Delaware should have a standard release form that releases holders from all property types and years through the end of the audit.

Modern Indication of Owner Interest

While the regulations provide examples of actions that do not indicate sufficient owner interest to toll the dormancy period, they do not address electronic communications.

The Not Great

Holders are required to provide documents that are retained in electronic format electronically to the auditor. Holders should have the option of an on-site review to protect sensitive documents (even the best security is not as good as maintaining a document in the first place).

The term “remediation” is not defined. The remediation process should be described as well as examples of what it means to remediate and item. Examples of sufficient proof that property is not unclaimed are important for both the audit process and general record retention guidelines.

The approved remediation letter should have an additional box to allow putative owners to check off that the item is not owed–period–with no additional explanation necessary.

The Monster under the Bed (and not in a Monsters Inc. way)

To absolutely no one’s surprise, the regulations explicitly retain the status quo in Delaware’s VDA and audit practices with regard to how property with known owner addresses will be used to project liability to years without adequate records (hint: the address is not likewise projected). This practice was specifically called out by the court in the Temple-Inland case last year, but the court did not explain if and how it should be addressed.

Also to no one’s surprise, the proposed regulations expressly provide that Delaware has jurisdiction over foreign-addressed property, a position that is currently being litigated in the JLI Invest case pending in the Chancery Court.

Things to Note

There are numerical differences between an audit and a VDA. The standard base period for VDAs is two years where for audits it is three years. The exclusion from the sample for voided checks is 90 days for VDAs and 30 days for audits.

For both VDAs and audits, holders are required to provide a binding representation regarding which records are available, for which property types and for what years. However, for VDAs this representation is done early, just after scoping is completed, while for audits it is completed nearer the end, after document production is complete. While it is to be expected that holders should have a better understanding of their records entering a VDA than an audit, the reality is that the process of reviewing records may disclose that the original understandings were incorrect, particularly for complex organizations.

Non-dormant periods may be used in both VDAs and audits if other records are inadequate.

A last known address must not have conflicting fields. For example, the state and the zip code cannot conflict for the first priority state to have jurisdiction. Sometimes an internet search can demonstrate the correct state and this should be sufficient for the first priority rule to apply.

Next Steps

Overall, the proposed regulations are what was expected and provide useful guidance to holders unfamiliar with the Delaware’s traditional audit practices.

The complete lack of reference to the expedited audit process or compliance reviews suggests that Delaware should issue additional guidance on these issues. Guidance on remediation and adequate records is also needed.

We encourage holders to contact the authors to discuss whether filing a written submission in opposition to all or portions of these regulations would be a productive exercis