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0 Valerie M. Jundt, Senior Manager Deloitte & Touche LLP UNCLAIMED PROPERTYWhat’s New and Why You Should Care!Shareholder Services AssociationChicago, IllinoisSeptember 17, 2008Valerie M. Jundt, Senior ManagerDeloitte & Touche LLP
1 IntroductionThis presentation contains general information only and Deloitte* is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentationAs used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries
2 Brief overview of the basics History of the LawUnclaimed Property Defined54 Jurisdictions/2 Canadian ProvincesAll states have a law though no two laws are identical
4 U.S. Supreme Court rulings Texas vs. New Jersey (1965)Pennsylvania vs. New York (1972)Delaware vs. New York (1993)
5 Where to report State of owner’s last known address State of holder’s incorporation or domicile if address not known*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
6 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. atIn 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
7 Potential property types – securities SharesCertificatedReturned by Post Office (“RPO”)Book entryDividend ReinvestmentUnexchangedBondsCashDividendsLiquidationsCash-in-LieuRedemptionsInterest payments
8 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 r 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 searchCannot charge living shareholder a fee for the 1st two searchesDeceased shareholders, corporations, non-human entities, and accounts less then $25 are exempt from search requirementsIntent of requirement was to include unexchanged shareholders and closed accounts with un-cashed funds over $25Database must be updated 4 times a year, contain at least 50% of the adult population, geographically equalSEC July 2008 Alert
9 What’s new… States are facing significant budget constraints Consumer protection vs. revenue generatingPredominant use of contract auditorsNew companies/audit firms surfacingIncreased use of estimatesCalculations that include suggested liabilities not defined by statuteEnforcement focus on new property typesDue Diligence enforcementsPenalty and interest assessments on the riseGreater scrutiny of reporting practices and fees assessed to states (i.e. especially in those situations where they are paying for services)
10 Holder obligations under the unclaimed property laws Duty to file a reportDuty to perform due diligenceDuty to remit the propertyDuty to maintain copies of the reports and supporting documentationEven if you outsourceDuty to protect the funds until reported and transferred to the stateEven if you use Transfer Agent
11 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 statutesSarbanes-Oxley ActSection 302 requires that CEOs and CFOs include, with any periodic financial report filed at the SEC, a written statement certifying the accuracy of reportInternal control is a significant focus of Sarbanes-Oxley due to recent financial and accounting scandalsSection 404 review includes identification and testing of the internal controls that have been implementedCompliance by SEC registrants is non-negotiable
12 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.
13 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 liabilityExample: Young AmericaImportant: Don’t assume that by contracting with a third party (i.e. transfer agent) that your company has outsourced your responsibility and liability.
14 Unclaimed property audits Key problem indicatorsWhat triggers a state auditNot reporting all property typesContract auditorsWho 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?
15 Fines & penaltiesA holder can be assessed penalties and/or interest for:Failure to report/remit the propertyFailure to comply with the statuteInterest generally applied at 10%–25% of property valueCivil/Criminal penalties for failure to report/remit/deliverOR 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 propertySome States – Class B misdemeanor
16 Inadequate or lack of records Systems ConversionsMergers and AcquisitionsThe burden of proof is on the holder to refute the presumption of abandonmentStatistical sampling and estimation may be used to estimate holder liabilityDevelop a “base year” or select a statistical sample from the population of unclaimed property recordsExamine base year or sample for potential unclaimed propertyCalculate 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 expenseUse the unclaimed property ratio to estimate unclaimed property over the reach back period
17 Amnesty vs. Voluntary Disclosure initiatives Statutory or Administrative AmnestySpecific conditions are postedDeadlines are providedGenerally no “pre-authorization” requiredVDAFormal vs. informalConditions include reach-back and pre-authorizationFormal signoff and release from penalties/interestAbility to conduct audit is generally preserved
18 Internal controls/fraud Until the property is transferred, ensure that proper internal controls are in place!Ensure your Transfer Agent is protecting your Shareholder RecordsSet up specific procedures for claims processingFinders and feesWhistle Blower laws!
19 Corporate areas affected CEO/CFOOffice of General CounselChief Risk OfficerFinancial reportingAccounts payable/receivableInformation technologiesInternal auditEthics & complianceExternal contactsOutsourced functions
20 Unclaimed property update California - Injunction and recent activities; new requirements for due diligence, report/remittance rulesDelaware – 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 auditorsOregon – 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, 2008Illinois – VDANew York - Amnesty & OutreachMichigan - Holder OutreachPennsylvania - Holder notification and outreach; Bill approval allows appeal of treasurer decision to commonwealth court
21 Examples of some successful industry practices Review your contract with Transfer agentWho is responsible for reportingAsk for copies of reportsIf in-house; develop and maintain detailed processes and procedures for tracking and reporting unclaimed propertyConduct self audits or audit of your Transfer Agent’s unclaimed property processes and proceduresForm an unclaimed property committee that is responsible for complianceInclude key personnel, including but not limited to internal audit, legal counsel, upper management, treasurer, comptroller and tax director
22 Unclaimed property websites/resources Bureau of National Affairs Corporate Law PortfolioUnclaimed Property Portfolio 74-2nd
23 Questions/Contacts Valerie M. Jundt Senior Manager Deloitte & Touche LLPAre there any questions?