On August 1, 2017, the Delaware Department of Finance (DOF) issued a revised proposed Department of Finance Abandoned or Unclaimed Property Reporting and Examination Manual (“Proposed Regulations”) related to the enforcement of Delaware's Abandoned or Unclaimed Property Law (APL). As stated by the DOF, a number of substantive changes were made after the DOF received comments regarding the earlier version of the proposed regulations. Although a detailed description of each such change is beyond the scope of this summary document, highlights of the more noteworthy items in the revised Proposed Regulations are as follows.
Comment Period for DOF Regulations
Holders may comment on the new proposed regulations until 4:00 pm Eastern Time, August 31, 2017. The DOF indicates that upon the conclusion of the comment period, it will make a determination of whether to adopt the proposed regulations “…based upon the results of DOF analysis and the consideration of the comments and written materials filed by other interested persons.”
The overall estimation methodology has not changed from the prior version of the proposed regulations. As expected, and consistent with the prior draft regulations and the Secretary of State estimation regulations, the key concerns expressed by the Delaware U.S. District Court in the Temple-Inland case do not appear to have been addressed in the revised Proposed Regulations.
Conversion of Existing Audit to VDA
Any holder currently undergoing a Delaware audit that received a Notice of Examination from the State Escheator on or before July 22, 2015, except for any securities examination in which estimation is not required, is potentially eligible to convert the pending examination into a VDA. However, in order to effect the conversion, a holder is required to file an executed copy of a Notice of Intent to Convert within sixty (60) days of the effective date of DOF estimation regulations. While the DOF has not yet adopted such regulations, it appears the earliest these estimation regulations will be adopted is October 1. Delaware law currently requires for estimation regulations to be adopted by the DOF no later than December 1, 2017.
Indication of Owner Interest in Property
Both the earlier and current versions of the Proposed Regulations delineate certain actions which do not include owners’ interest in their property such as “…automatic postings, automatic investments, computer system conversion dates, and non-return of mail (other than a non-returned IRS Form 1099 for ACH or Dividend Reinvestment accounts.)” The latest Proposed Regulations contain a new Section 2.5.4 which states: “Proof to the satisfaction of the State Escheator that an Owner has had contact with a designated representative of the Holder in the period of dormancy may be considered an indication of owner interest in the property.” The new language indicates a broader view of owner contact will be considered, as well as the possibility of reviewing property specific circumstances. However, it gives the State Escheator the authority to agree or disagree with what constitutes such owner contact.
The earlier version of the DOF’s proposed regulations did not provide any specific examples of records to be retained by the holder. The latest Proposed Regulations offer more detail and guidance, outlining a broad range of records to be retained including “…the date, place, and nature of the circumstances that gave rise to the property right. These records may include the following: tax returns (including consolidated and affiliation schedules), organization charts, charts of accounts, unclaimed property filing history (for all states if the holder is incorporated or formed in Delaware), prior completed and accepted VDAs and examinations, bank statements, bank reconciliations, outstanding check lists, detail general ledgers, aged accounts receivable reports, aged accounts payable reports, policies and procedures related to record retention, accounting, and unclaimed property, and, if applicable, information surrounding gift card issuances and redemptions.” See revised Section 2.9.
Ability to Enter into VDA
The earlier proposed regulations stated the issuance of the official examination letter terminated a holder’s ability to enter into a VDA with Delaware. The revised Section 2.12.1 specifies the ability to enter into a VDA is only excluded as an option until the examination is concluded, which potentially offers expanded flexibility for holders.
Stored Value Card or Gift Card
Delaware law currently provides that for a stored value card or a gift card, the amount unclaimed “…is the amount representing the maximum cost to the issuer of the merchandise, goods, or services, represented by the card.” See APL, Section 1133(14). Both versions of proposed regulations contain a type of calculation formula which is not likely to be perceived as favorable to holders. However, the new section 220.127.116.11 has helpful language, in that it provides “[o]ther reasonable alternative calculations may be proposed by a holder and shall be considered on a case-by-case basis by the State Escheator.”
Auditor Security Protocols
The new Confidentiality and Non-Disclosure Agreement (NDA) provisions require an auditor to (i) provide a holder with information regarding the auditor’s security measures, upon the reasonable request of holder, including data security protocols with respect to any electronic file transfer process used in the exam, and (ii) prevent any disclosure of confidential information by its representatives not otherwise permitted under the examination agreement. These requirements should be beneficial to the holder community. See NDA Section 3(f)-(g).
New language has also been added in the NDA section 8 providing auditors shall promptly, and without undue delay, notify a holder in writing of any unauthorized use or disclosure of the Confidential Information, and shall reasonably cooperate with a holder to mitigate the effect of such unauthorized use or disclosure.
Updated language has been added in the new NDA section 4 generally restricting auditors from informing other states or jurisdictions that Delaware has undertaken an audit. Additionally, auditors may not solicit other states or jurisdictions to commence an examination of the respective holder. However, these restrictions do not prohibit the auditor from disclosing Delaware’s involvement in the audit to another participating state, once the other state has issued a formal notice of examination to the holder.
Prior Unclaimed Property Reports
Section 2.15.2 has added new language clarifying that Delaware, upon request by the holder, shall provide all records of previously filed unclaimed property reports. Although this should assist holders in constructing affirmative defenses during a Delaware audit, the better practice remains for holders to retain any unclaimed property reports filed with the various states.
Abatement of Penalties and Interest
Interest and penalties may be abated for good cause at the discretion of the State Escheator in accordance with 12 Del. Code sec. 1185. According to language now in Section 2.15.5, some of the factors the State Escheator may consider in determining good cause include a holder’s filing history, the responsiveness of the holder during the examination, and whether the holder used “ordinary business care” in its compliance efforts.
Due Diligence/Owner Notification
The DOF has provided a different form of recommended “due diligence” letter to be sent to apparent owners before their property is turned over to Delaware. For example, Section 2.22.2 now provides in part that “[t]he State may sell property that is not U.S. legal tender.”
Outreach Remediation Letter
For property that is included as part of the sampling population during the estimation process, the Proposed Regulations now provide a sample outreach “remediation” letter approved by the DOF in Section 2.22.
A new provision in Section 2.25 provides that Delaware shall publish a form titled “Intent to Expedite Completion of Examination,” which will outline expectations for this process.
Updated Form for Conversion of Audit into VDA
On August 2, 2017, the DOF released an updated form titled DISCLOSURE AND NOTICE OF INTENT TO CONVERT UNCLAIMED PROPERTY EXAMINATION INTO A REVIEW UNDER THE SECRETARY OF STATE'S UNCLAIMED PROPERTY VOLUNTARY DISCLOSURE AGREEMENT PROGRAM PURSUANT TO Del. C. § 1172(b), which clearly contemplates that holders may make an election at this time to convert eligible audits into the Secretary of State’s Voluntary Disclosure Agreement (VDA) program. Because the estimation regulations have now been finalized by the Secretary of State, and have remained unchanged through two versions of the DOF Proposed Regulations, holders may now have essentially all information they need to make an informed decision on converting an eligible Delaware audit into a VDA at this time.
Some holders may determine they have essentially all information they need to make a decision to convert an eligible audit into a Secretary of State VDA. However, at the latest, qualifying holders will have 60 days after the effective date of the DOF final estimation regulations to make the significant decision whether to convert an existing audit into a VDA, convert to an expedited audit, or remain in the current (unexpedited) audit process. For those holders who may elect to wait until such time as the DOF final estimation regulations are adopted, they are encouraged to continue vigilant efforts to ascertain and address areas of potential unclaimed property exposure, and analyze with their unclaimed property advocate or counsel the pros and cons of each option, based on their particular facts and circumstances.
Holders seeking additional clarification on how these matters relate to their specific circumstances can contact their Ryan AUP representative.