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Delaware Releases Drafts of New Proposed Regulations and Forms to Convert an Unclaimed Property Audit to a Voluntary Disclosure Agreement

By: True Partners Consulting Staff |

Proposed Changes to Delaware Regulations
Two versions of the highly anticipated proposed regulations to Delaware’s Abandoned or Unclaimed Property Law were released: one by the Delaware Department of Finance (“DOF”) on April 1, 2017, and another by the Delaware Department of State (“DOS”) on April 7, 2017.

The stated goal of the proposed regulations was clear: Draft regulations regarding estimation methods that would create consistency in any unclaimed property examination or voluntary disclosure agreement (“VDA”). Specific items to be addressed were: permissible base periods; items to be excluded from estimation calculations; aging criteria for outstanding and voided checks; and, the definition of what constitutes complete and researchable records.

In addition to the DOF’s set of proposed regulations, on April 7, 2017, the DOS also released a set of proposed regulations along with the instructions and the official form to be used for a holder to convert an unclaimed property audit to a VDA.

April Fools’ jokes aside, based on the drafts of the proposed regulations and the VDA conversion form, the holder community may have gotten exactly what it was promised, but nothing more.

Why Now?
On February 2, 2017, Delaware Governor John Carney, Jr. signed Delaware Senate Bill 13 (“SB 13”) into law, which effectively rewrote the provisions of the Delaware (“State”) unclaimed property program (see prior True Alert, February 3, 2017). Among the provisions enacted by SB 13 was 12 Del. C. § 1176 (b), which required that the State Secretary of Finance work with the Secretary of State to draft and release proposed regulations by July 1, 2017 regarding the use of estimation in audits or VDAs with the State.

Like many of the provisions in SB 13, both sets of draft regulations also appear to be part of the State’s response to the recent decision in Temple-Inland, Inc. v. Cook et al., 2016 U.S. Dist. Lexis 83567 (D. Del. June 28, 2016), where the Delaware District Court rebuked the State regarding the estimation methodologies it used when performing unclaimed property audits.

Highlights of Proposed Regulations
The bulk of the DOF’s proposed regulations consist of the Delaware Department of Finance Abandoned or Unclaimed Property Program Manual, which provides guidelines for audits, while the DOS’ VDA guidelines are contained within the Delaware Department of State Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program Estimation Regulations.

Contained within them, and of most interest to the holder community, is the State’s response to some of the specific issues raised in Temple-Inland, as well as the directive to create estimation regulations per 12 Del. C. § 1176(b):

  • Estimation – The State may use 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. However, if sufficient dormant years of records are unavailable, the audit manager and holder can discuss which records to review, with the State Escheator possessing the sole authority to determine the base period if no agreement is reached. However, while the DOF’s proposed regulations provide that base periods must consist of at least three (3) years of complete and researchable records, the DOS’ proposed regulations provide that the base period used by the holder must consist of at least the two (2) oldest continuous years where the holder has complete and researchable records. Both provide that, in some cases, the State may consider including non-dormant periods in the base periods.
  • Items to be Excluded from Estimation Calculation – Items payable to an owner that is a United States federal department or agency, and funds returned in the normal course of business prior to the issuance of the examination notice, or prior to enrollment into the DOS’ VDA program, are to be excluded from the estimation calculation.
  • Sampling – While the DOS’ proposed regulations don’t address specific sampling methodologies, the DOF’s proposed regulations provide that stratified sampling is typically to be used when a population is too large to be reasonably tested on an actual basis. However, holders are allowed the option to research the entire population of a given property type if they can perform the research in a reasonable timeframe. If the holder has not maintained records for all entities for the entire examination period, the State may test a sample of the holder’s entities during an examination and extrapolate the findings, if applicable, to the other Delaware entities that were not selected for a detailed review. If sampling is required, the population to be tested is to be divided into strata from which samples will be drawn (“stratified sampling”) such that the sample mean for each stratum will be within 10% of the population mean for that stratum at a 90% confidence interval.  However, more relaxed confidence and precision levels may be allowed for low-value strata where the impact is likely to be immaterial to the overall liability.
  • Funds Returned – Funds returned in the normal course of business, prior to the issuance of the examination notice will not be included in the population of potential unclaimed items, while funds returned outside of the normal course of business (i.e. change in process) after issuance of the examination notice, will be included in the population of potential unclaimed items.  In general, holder outreach letters issued after the issuance of the examination notice must be approved by the State, and are to be submitted to the auditor for review and approval prior to sending out to the apparent owners.
  • Aging Criteria for Outstanding and Voided Checks – The DOF’s proposed regulations provide that checks that remain outstanding less than 90 days after issuance and checks that are voided within 30 days of issuance shall be excluded from the population, unless the State determines that a redefined aging criteria is necessary.  However, the DOS’s proposed regulations provide that checks that are outstanding or voided less than 90 days after issuance shall be excluded from the estimation population.
  • Projection – Projection techniques may be used to determine the reportable amounts if the books and records of the holder are incomplete or do not exist. However, the DOF’s proposed regulations provide that all sampling, projection, and estimation techniques used by an auditor must be approved by Delaware prior to use and, while the State will permit the holder to comment on or suggest an alternative technique, the ultimate decision to employ a particular technique is at the sole discretion of the State although the holder may challenge this decision at the close of the examination. The DOS’ proposed regulations provide that under a VDA a holder must present to, and get approval by, the DOS for all sampling, projection, or estimation techniques used.  Finally, both sets of regulations have language indicating that names and addresses identified in the base period shall not be used to determine which state has the priority claim to the abandoned property estimated to be due over periods where records of owners’ addresses do not exist.
  • Complete and Researchable Records – If a holder does not have complete and researchable records for a period of seven to eight years from the date of the examination notice, the State and the holder may discuss the option to use an alternative data set with fewer years. “Researchable” records are described as “records to which the holder may research the resolution of an item,” with the proviso that, at a minimum, researchable records shall include those items that contain a last known address of the owners.  12 Del C. § 1139 defines a last-known address of an owner sufficient to establish priority as a description, code, or other indication of the location of the owner on the holder’s books and records which identifies the state of the last-known address of the owner.

These and other differences that exist between the DOF’s and DOS’ proposed regulations are likely to be addressed during the public comment period ending on May 3, 2017.

Converting an Audit to a VDA
In addition to requiring estimation guidelines be drafted for audits and VDAs, SB 13 also provided in 12 Del. C. § 1172(b) that holders under audit that meet certain criteria may convert their audit to a VDA under the DOS’ VDA program per 12 Del. C. § 1173.

The option to convert an audit to a VDA has been eagerlyanticipated by the holder community. However, most agree that while the VDA instructions and form do not provide much new information that had not already been addressed, it did confirm a few things:

  • Not All Audits Qualify – Conversion option is available only to holders that received a Notice of Examination from the State Escheator on or before July 22, 2015, except any securities examinations where estimation would NOT be necessary.
  • 60 Day Deadline – Eligible holders must file an executed copy of the Notice of Intent to Convert within 60 days of the adoption of the regulation pursuant to 12 Del. C. § 1176(b), discussed above.
  • Scoping Remains – Entity and property scoping will be shared with the VDA group from the auditors when converted and is expected to stand in the VDA.
  • No Shared Workpapers – Examination workpapers will not be transferred to the VDA Administrator, and there will be no collaboration with the auditors after the conversion.
  • Lookback – The lookback period for examinations that convert to a VDA is ten report years (15 transaction years) from the year that the holder received the original Notice of Examination.
  • Estimations – Estimations are expected to be used for periods for which the holder’s records are unavailable or insufficient to prepare a report of past-due unclaimed property.
  • Partial VDAs – If a holder has already resolved specific property types or entities under audit, the VDA will be limited to only remaining entities and property types.
  • Timing – The VDA form states that “time is of the essence”, and that a holder’s delay in completing the review may result in either removing the holder from the VDA program, or the imposition of interest on the assessment, notwithstanding the interest waiver term in the VDA.
  • Audit Risk – If settlement is not reached for an entity or property type during the VDA, it will be excluded from the final VDA settlement and release agreement, and it will be referred back for an audit.

What This Means To Holders
The general consensus is that both sets of the proposed regulations read more like a list of general procedural guidelines versus detailed procedures on proper estimation methodologies. While less robust than many had hoped for (e.g., estimation based solely on Delaware addresses, foreign, and owner unknown property), the proposed regulations do at least document what many see as the State’s existing estimation practices.

Holders and their advocates wishing to provide comments or suggestions regarding the proposed regulations must submit them to the State by Wednesday, May 3, 2017.

For holders under an examination, it’s important to be aware that once the DOF’s and DOS’ regulations have been finalized (expected to be on or around June 1st), the 60 day countdown begins for holders to elect to convert their existing State audit into a review under the DOS’ VDA program, or to notify the State Escheator of their desire to expedite their audit pursuant to 12 Del. C. § 1172.

Both options provide for a waiver of interest and penalties for holders that successfully fulfill the terms of their election. However, as outlined above, holders wishing to convert their audit into a VDA need to be aware of their responsibilities under the DOS’ VDA program, and the risks of failing to meet the proposed criteria.

In Closing
The proposed regulations provide a 60-day window from the date that the regulations are finalized (expected to be on or around June 1st) to elect to convert an audit into a VDA. True Partners Consulting’s Unclaimed Property Management Solutions Team has the expertise and experience to help you through this complex decision process. In addition, our team is available to discuss the impact that the regulations and new VDA guidelines may have on your specific fact pattern. In the future, True Partners will continue to monitor the proposed regulations and other legislation impacting your company as it arises, and will release relevant updates as additional information is available.