As the duration and complexity of Delaware unclaimed property audits have progressively increased over the years, so too have holder demands for additional clarity and fairness in how the Delaware unclaimed property program is administered. Accordingly, Senate Concurrent Resolution 59 (2014) established a Legislative Task Force to study and make findings and recommendations to improve the fairness and compliance in Delaware’s unclaimed property program. In December 2014, a number of recommendations were made by the Delaware Unclaimed Property Task Force. Shortly thereafter, Senate Bill 11 was introduced relating to contingent fee auditors and developing an audit manual. It was passed by the Delaware General Assembly with amendments and signed into law by Governor Jack Markell on January 29, 2015. Highlights of that bill were furnished in a Ryan Abandoned and Unclaimed Property (AUP) Alert issued earlier this year.
Senate Bill 141, introduced in the Delaware State Senate on June 16, 2015, was approved by the State Senate on June 18, 2015. It addresses a number of the key recommendations made by the above-mentioned Legislative Task Force and proposes a number of substantial changes to Delaware unclaimed property law. Although the bill could be amended, our understanding is that the bill is likely to be passed before the end of the legislative session (June 30, 2015) and enacted into law thereafter. Highlights of the bill are as follows.
- Limitations on State Escheator’s Ability to Select Companies for Audit - The bill essentially provides that, effective July 1, 2015, the State Escheator shall not initiate any new examination or investigation of a business association or organization [i.e., a holder, unless the holder has first been notified in writing by the Delaware Secretary of State (SOS) that it may enter into a voluntary disclosure agreement (VDA) administered by the SOS or unless a holder has failed to comply with a requirement of the VDA SOS program]. Thus, the State Escheator may only select for audit those holders who have received a written invitation to join the SOS VDA program and who either declined an invitation to participate or who failed to meet the requirements of the SOS VDA program.
- Audit Look Back Periods are Shortened - The bill provides three new rules, all of which (i) shorten the audit look back period, and (ii) are determined by when the audit commenced. First, for all audits that were pending on the date of enactment of the bill into law, the State Escheator may not seek payment of any amounts related to any transactions before January 1, 1986, which is five years shorter than the current look back period for such audits. Second, with respect to any audits commenced from the date of enactment of this legislation through December 31, 2016, an even shorter look back period will apply, such that the State may not seek payment of any amounts “…arising from such examination…with respect to any transaction prior to January 1, 1991.” Finally, for audits commenced on or after January 1, 2017, the State Escheator may not seek to examine records related to transactions more than 22 years prior to the report year in which a holder is provided written notice of the examination nor seek payment of any amounts with respect to any transaction that is more than 22 years prior to the calendar year in which the State Escheator provides written notice of the audit. In effect, the current “1981 fixed date rule” is replaced by a “rolling 22 year look back rule.”
- Secretary of State’s VDA Program is Extended -The bill extends and makes permanent the VDA program administered by the SOS. However, if the SOS requests that any holder enter into a VDA, and the holder does not evidence its intent to enter into a VDA within 60 days, the bill directs the SOS to refer the holder to the State Escheator for examination. Note: In practical terms, for many companies, 60 days is a short window to receive a notice, get it routed to the correct personnel, and respond appropriately. Holders will want to take measures to ensure they do not allow this critical 60-day time period to expire.
- VDA Look Back Periods are Modified - New rules are provided in this area. First, with respect to holders who enter the SOS VDA program on or before September 30, 2014, and who make payment in full or which enter into a payment plan no later than June 30, 2016, will utilize a look back period commencing with the transaction year beginning January 1, 1996. Second, holders which enter the SOS VDA program after September 30, 2014 and on or before December 31, 2016, and make payment in full or who enter into a payment plan within two years will also utilize the VDA look back period to transaction year 1996 with respect to their unclaimed property liability. Finally, with respect to any holder whose intent to enter into a VDA was accepted by SOS on or after January 1, 2017, the look back period is 19 years prior to the year in which the holder’s intent to enter into a VDA was accepted by the SOS. Notably, the new 19-year look back period for VDAs is three years shorter than the new 22-year look back period for audits.
- Timing for Completion of SOS VDA - With respect to any holder who is accepted into the SOS VDA program after September 30, 2014, the general rule is that the holder must make payment, or enter into a payment plan, within two years of the date of entry into the program. However, the bill gives the SOS “sole discretion” to amend the due date for completing the VDA and making payment arrangements. If the due date to complete the VDA is not met, the matter could be referred to the State Escheator for examination.
- Reinstatement of Interest -The billamends the penalty section of Delaware law to provide that Delaware may assess interest at a rate of 0.5% per month on “any late-filed unclaimed property that is reported and remitted on or after March 1, 2016.” However, the total interest that may be due is capped at “25% of the amount required to be paid,” which is measurably less than the previous 50% interest cap that was repealed in 2014. The bill makes clear penalties otherwise due under Section 1159 of the Delaware unclaimed property law “shall not be deemed to be interest”; (i.e., there are again both penalties and interest that can be assessed on audit by the State Escheator). Note: Since no interest is assessed under the SOS VDA program, the VDA program may likely be seen as even more attractive to the holder community. Also, as this refers to “any late-filed unclaimed property,” it could have implications tied to any late properties discovered and reported as part of any ongoing compliance reporting processes.
- Annual Reminder Notice from the State Escheator -Finally, a provision in the bill states that “[t]he State Escheator shall send a notice no later than 120 days prior to March 1 to holders that have filed reports in the past five report years, notifying the holder of their apparent obligation to file a report.” Note: Negative reports are not required in Delaware, as the bill states that holders of funds deemed abandoned under Delaware law are to file a report. However, Ryan recommends that negative reports be filed.
- Designation of Holder Contact -The bill provides that each report is to identify a designated individual employed by the holder who is to serve as the contact with the State for all correspondence related to the reporting and remittance of unclaimed property. The holder is obligated to notify the State in the case of any change of the designated individual or their contact information.
In summary, the bill generally is a considerable step in the right direction for holders seeking additional clarity and fairness in Delaware’s unclaimed property compliance program. The bill effectively highlights advantages of entering into a Delaware SOS VDA vis-à-vis a State Escheator audit: (i) shorter look back periods, (ii) absence of penalties and interest, and (iii) for most holders, completion of the SOS in a much shorter time period than likely would be the case in such an audit. We note that not all holders are eligible for the SOS VDA program. Holders seeking additional clarification on either how these changes may affect their specific factual situation or whether they are eligible for the SOS VDA program, may contact their designated AUP representative or one of the Ryan contacts shown below.
TECHNICAL INFORMATION CONTACTS:
Mark A. Paolillo
Principal
Ryan
857.288.1976
mark.paolillo@ryan.com
Susan Han
Principal
Ryan
442.244.2447
susan.han@ryan.com