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Unclaimed Property Focus
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UNCLAIMED PROPERTY FOCUS is a blog written by and for UPPO members, featuring diverse perspectives and insights from unclaimed property practitioners across the U.S. and Canada. We welcome your submissions to Unclaimed Property Focus. Please contact Tim Dressen via tim@uppo.org with any questions about submitting a blog post for consideration and refer to our editorial guidelines when writing your blog post. Disclaimer: Information and/or comments to this blog is not intended as a substitute for legal advice on compliance or reporting requirements.

 

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Hot topics in securities audits

Posted By Administration, Tuesday, March 1, 2016

Every industry with potential unclaimed property liabilities has its own unique nuances. In the securities world, the number of entities involved in transactions, and the volume of data required to track accounts and to comply with applicable regulations present some interesting challenges, particularly during audit examinations.

 

As part of the recent Escheatment Requirements in the Securities Industry webinar, presenters Matt Hedstrom, partner from Alston & Bird, LLP, and Michael Unger, unclaimed property manager from Crowe Horwath LLP discussed several hot topics surrounding today’s unclaimed property audits in the securities industry.

 

Proper Target

Several financial institutions may be subject to unclaimed property exams. They include introducing brokers, clearing brokers, transfer agents, issuers, mutual fund complexes, and custodians. The holder is the entity required to comply and remit unclaimed property, and is typically responsible for any liabilities for not doing so. In theory, identifying the proper audit target should be simple based on who the holder is under state law. However, in complex financial transactions, multiple companies may fit the definition of “holder.”

 

In instances when a financial company offers broker accounts, it may be straightforward—the company possessing the assets is the holder. But in the context of an introducing broker and a clearing broker, which is the proper entity? It’s unclear.

 

“Unfortunately, the states haven’t definitively said which entity they believe to be the holder of those accounts when you have two or more entities or two or more brokers involved,” Hedstrom says.

 

Another consideration for identifying the proper exam target is which entity has the best access to information. Often, the company holding the account is not the same company that has the relationship with the owner. The entity reporting the property may take instructions from an unrelated company. Is the broker that maintains the client relationship and dictates when property should be escheated responsible, or is the escheating broker responsible?

 

“That’s where we have challenges,” Hedstrom says. “This is very different from traditional unclaimed property exams that focus on accounts payable, payroll and accounts receivable, all of which are often held by one entity. What we are seeing is that multiple parties are being audited and some that are ‘holding’ the exact same property. How do states intend to deal with that? They may not even know at this point.”

 

Closing

One of the challenges with closing a third-party audit is whether the exam and its impact are truly complete. In the context of a general ledger audit, the end is generally clear. The company will pay an agreed upon amount of money, send first-priority liabilities to the states and be done with it.

 

With escheatment of securities, there’s the trailing risk related to owners, who may sue after property has been escheated and liquidated by the states. Thus, even when the audit process has ended, liability issues may still arise.

 

Tactics

Third-party firms conducting unclaimed property audits often use data-intensive and voluminous review tactics. It may be not be intentional or for lack of need. However, compiling data related to owner activity for potentially millions of accounts can be difficult. As a result of the large amount of information going back and forth between the holder and the auditor, audits can easily span several years.

 

If requested data isn’t already used as part of routine compliance tracking, the information may not be in a company’s system. Even if it is, it may not be readily available. Companies undergoing examination are constantly pulling additional information to clear certain accounts, remediate certain accounts or defend their data.

 

Because some contract auditors use a specific methodology that works for them, holders may be able to prepare for their requests by becoming familiar with their auditor’s usual methods.

 

“By doing so, you avoid getting behind the 8-ball because of the volumes of data you have to analyze,” Unger says. “You can establish a systematic way for analyzing data when it comes in rather than doing it reactively. Then you can quickly review some of those accounts rather than being up against the clock. So the biggest strategy I see is preparing in advance for what’s coming and getting in front of it.”

 

Pushing Back

Challenging the scope of an audit is difficult. Unclaimed property laws allow the states to review any records that are relevant to determine whether particular items of property are unclaimed or subject to escheatment. Even if information requests seem broad, if the data pertains to whether an account owner is active, it probably falls within the scope of the statute authorizing the review. One way to refine the scope of an audit is by refocusing requests.

 

“If you look at a request and know there’s a way to scope it down to get at what the auditors really want to see, and they’re asking for information that’s overly broad, that’s a best practice,” Hedstrom says. “It helps focus the audit, moves it forward and limits the information that you would otherwise have to produce. In the grand scheme of things, limiting information, both from a data privacy perspective and an audit management perspective, is ideal.”

 

Some examples of data that audit firms may agree isn’t necessary include active stock plan service accounts or stock option accounts, employee accounts, zero-balance accounts, and closed accounts.

 

The Future

Unclaimed property issues continue to evolve at a rapid pace. Regulatory changes, litigation and the Uniform Law Commission’s ongoing work to revise the Uniform Unclaimed Property Act will likely drive even more changes in the coming months and years. Whether they will affect the securities industry’s audit challenges, and to what extent, remains to be seen.

 

To keep up with the latest noteworthy litigation, regulatory and legislative activity, UPPO members can access the govWATCH tracking service, and continue to monitor the UPPO blog for additional developments.

Tags:  audits  securities  unclaimed property 

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Death Master File Headline Watch

Posted By Administration, Thursday, February 25, 2016

Created and maintained by the Social Security Administration, the Death Master File (DMF) has become a controversial tool. Government agencies and private businesses rely on the DMF to verify the death of U.S. citizens, but questions about its accuracy and, thus, reliability continue to make it a contentious issue among insurers, consumers, government agencies and politicians. In the unclaimed property world, life insurers’ use of the DMF has been a source of debate, scrutiny, litigation and regulation over the past several years.

 

Recent DMF developments suggest the topic will continue to make headlines for the foreseeable future. Following are several stories to keep an eye on in the coming months.

 

Litigation

Life insurers continue to spar with states and their third-party auditors over required use of the DMF. In October 2015, three insurance companies filed suit in Illinois against the state treasurer and its contract auditor over whether applying a “DMF standard” for paying life insurance beneficiaries exceeds the treasurer’s authority.

 

In Kentucky, the governor and attorney general are butting heads over the governor’s decision earlier this month to drop a DMF-related lawsuit headed for the state Supreme Court. The case questions whether a 2012 law requiring life insurers to compare their records against the DMF applies to policies written before passage of the law. In dropping his defense of the suit, the governor agreed that the state shouldn’t apply the law retroactively. The attorney general disagrees and is seeking to continue to lawsuit.

 

Legislation

Several state legislatures are considering bills related to the DMF. Florida H.B. 1041 and S.B. 966, Illinois H.B. 4633 and S.B. 2396, Missouri H.B. 2150 and S.B. 863, New Jersey A.B. 2511 and South Carolina S.B. 972 are among the most recent bills that would require insurers to implement procedures for comparing its policies, annuity contracts and retained asset accounts against the DMF.

 

Examinations

States continue to conduct examinations of life insurers spanning several decades, identifying unpaid benefit payments owed in part because the companies did not regularly compare their records to the DMF. Most recently, Minnesota’s Department of Commerce announced on Feb. 2, 2016, a settlement with three insurance companies, bringing its total number of settlements to nine. In total, the settlements have resulted in $143 million in payments to beneficiaries and $31 million to Minnesota and other states as unclaimed property.

 

Model acts

Both the Uniform Law Commission (ULC) and National Association of Insurance Commissioners (NAIC) are working on model legislation that is likely to address the DMF. The ULC’s Revised Uniform Unclaimed Property Act is scheduled for completion in July. The commission released its most recent draft earlier this month. The NAIC issued its latest draft of the Unclaimed Life Insurance and Annuities Model Act in November 2015.

 

Campaign fodder

During the Feb. 15 Republican presidential candidate debate, Donald Trump said he would fix Social Security by identifying the “thousands and thousands of people that are over 106 years old” who are receiving Social Security even though the majority are presumably deceased. Fact-checking the candidates, CNN cites a March 2015 report confirming that although there are 6.5 million people over the age of 112 with Social Security numbers but no listings in the DMF, few of them are receiving benefits. The report did, however, caution that relying on the DMF could be problematic for private businesses and government agencies at all levels.

 

60 Minutes

In March 2015, 60 Minutes aired a story about the DMF, focusing on consumers whose financial accounts were frozen because they inadvertently appeared on the DMF. Multiple sources tell UPPO that the CBS television program is working on a follow-up story focusing on the life insurance industry. No air date has been announced.

 

For additional information about noteworthy unclaimed property cases and legislation, visit UPPO’s govWATCH website. If you’re planning to attend the 2016 Annual Conference, March 20 – 23 in Palm Springs, Calif., don’t miss the “Industry Focus: Life Insurance” session, for additional discussion about the Death Master File.

 

Tags:  compliance  Death Master File  life insurance  unclaimed property 

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Benefit Soup

Posted By Administration, Thursday, February 18, 2016

Most companies with established unclaimed property compliance processes know that payroll checks are one of the most common property types requiring escheatment to the states. However, many companies offer employment benefits beyond a simple paycheck, like health insurance, retirement savings options, and disability insurance. So, do companies have a responsibility to report those property types as well? Unfortunately, unlike with payroll checks, the answer isn’t quite so clear.

 

During the “Benefit Soup” session at the 2016 UPPO Annual Conference, Samantha Petersen, west region unclaimed property practice leader for KPMG’s state and local tax practice, will discuss the nuances surrounding employee benefits as unclaimed property and explore arguments on both sides of the issue, helping holders consider whether they have an obligation to report.

 

Because companies often employ third parties to administer their benefits, they may believe the responsibility for reporting those unclaimed property types falls to their administrators. However, that is not the case. Even when companies have contracts in place requiring their third-party administrators (TPAs) to handle their unclaimed property, the states still consider the employer to be the holder and, thus, the responsible party.

 

Some TPAs have processes in place, to provide their clients with proper documentation to complete or verify necessary unclaimed property reporting. However, some may not.

 

“Although many states still deem the company responsible for unclaimed property reporting, it often comes down to the contract regarding what the third party is obligated to do from an unclaimed property perspective,” Petersen says. “Even if the contract doesn’t specifically address carrying out unclaimed property reporting, it should at least say the company will receive adequate records to allow them to complete their own unclaimed property reporting.”

 

Once companies are aware of their responsibilities, they are faced with establishing which benefit types must be reported.

 

Many employee benefit plans were established under the federal Employee Retirement Security Act of 1974 (ERISA). A common position for companies to take is that because federal law dictates how benefit plans should be administered under ERISA, states are preempted from claiming the money associated with those plans. Although the states may not have the ability to pursue the property, that doesn’t necessarily erase companies’ obligations.

 

Looking to the courts for answers yields little clarity. Although there has been some litigation related to employee benefits as unclaimed property, decisions have not been consistent.

 

“The arguments on both side are compelling,” Petersen says. “Until there’s more litigation around this, and more definitive direction, this is going to continue to be an area companies struggle with regarding whether they have an obligation to report or they don’t. And if they do, what specifically do they have an obligation to report?”

 

While states usually honor federal preemption when companies can demonstrate with documentation that their benefit programs were properly established under ERISA, some property types, such as most workers’ compensation plans, fall outside of the scope of the federal law.

 

To date, states and auditors have been less aggressive going after employee benefits compared to other property types, perhaps because of its complexity and the lack of consistent court rulings. However, it may well become a target as states and auditor firms seek to expand their reach. Until then, what should holders do?

 

“It’s a Pandora’s Box for holders,” Petersen says. “Presently, the states haven’t been very aggressive coming after it because it’s still an area this is not fully understood. So why would a company start reporting something that it may or may not have an obligation to report, depending on who you ask. That’s the issue.”

 

For a more extensive look at the intricacies of employee benefit issues, attend the “Benefit Soup” session at the 2016 UPPO Annual Conference, March 20 – 23; Palm Springs. Register today.

 

Tags:  compliance  employee benefits  unclaimed property 

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Building positive relationships: Be open to talking to one another

Posted By Administration, Thursday, February 11, 2016

Any relationship that involves one party ensuring another party follows specific rules has the potential to become contentious. This is certainly the case with unclaimed property, in which state administrators enforce holder compliance with pertinent regulations and the possibility of an audit notice. However, relationships between holders and state administrators don’t have to be divisive. When both sides make a concerted effort to get to know each other, positive relationships develop, benefiting holders and administrators alike.

 

Often, contact between a state administrator and holder occur when there’s an issue, such as a problem with the holder’s reporting or the beginning of an audit. This isn’t the ideal scenario for establishing a relationship. Therefore, taking proactive steps when no such issues are in play is a much better strategy for making contact.

 

“Calling the administrators and introducing myself helps immensely,” says Lori Fitzgerald, director of unclaimed property at Computershare. “I’ll ask if there are any issues with our reporting, and the administrators have been very receptive. If something is outstanding or there are ways we can do things better, I’m giving them the chance to tell me. Once discussed, if there are any issues, responsiveness to the state is key. They don't forget that, and as long as they know you are addressing a concern, that’s all that they want.”

 

In fact, Fitzgerald has expanded her outreach beyond state administrators, building similar relationships with state reporting, reconciliation and claims unit personnel as well. Establishing those relationships makes it easier to contact the correct people when questions arise and, in some cases, to get a quicker response. When the people at the other end of the line already know you from previous, positive interactions, they may be inclined to give your issue a higher priority that those of other holders they don’t know.

 

Unclaimed property events, like the UPPO Annual Conference, provide ideal opportunities for holders and administrators to establish and build positive relationships.

 

“UPPO does an excellent job at its conference to create a positive environment where the states and holders can come together without the pressures they may face in their daily responsibilities,” says Chris Jensen, director of abandoned and unclaimed property for Ryan. “Holders and states can use that opportunity to establish relationships and then continue the dialogue after the event.”

 

Although not all state administrators regularly attend unclaimed property professional events, those who do find them beneficial, as do many holders and their service providers. For example, Texas has been extremely receptive to invitations to unclaimed property professional events, according to Jensen.

 

“Speaking in front of holders and networking afterward helps get them in an environment where they can establish relationships outside of the unfortunate circumstances that often bring the two parties together,” he says. “There’s no relationship without engagement, and that responsibility falls on both sides.”

 

Kathleen Lobell, director of the Louisiana Unclaimed Property Division, has participated in past UPPO events and recently presented during a NAUPA webinar that attracted more than 800 holders. Her office has also held its own holder seminars. Communicating with holders in these forums builds familiarity and gives holders and state administrators common reference points when initiating one-on-one discussions later. She encourages holders to reach out with questions as often as necessary.

 

“That line of communication is so important,” Lobell says. “I find that other state administrators feel the same way. We don’t want to be seen as an enemy.”

 

Being flexible and open to understanding each other’s points of view can go a long way toward creating mutually beneficial relationships. For example, although Louisiana doesn’t have a formal voluntary disclosure agreement (VDA) program, Lobell encourages holders needing to come into compliance to simply file their reports and include a letter requesting that they waive penalties and interest.

 

“We try our best to be very flexible when dealing with holders,” she says. “In my time here, we’ve never assessed any penalties and interest on voluntary disclosures.”

 

Leigh Underwood, senior manager of unclaimed property and insurance taxes for HCA Healthcare, echoes the advice to, first and foremost, do the right thing and make efforts to properly comply.

 

“Don’t wait on an audit notice to begin filing,” she says. “Go through a VDA program. If the state knows you’re not trying to pull the wool over their eyes, it goes a long way.”

In some cases, the holder may even find they share common challenges and can work together to find solutions. For example, Nevada requires separate entities to file separate reports. HCA Healthcare has more than 5,000 legal entities, making this requirement extremely cumbersome. Presenting the holder point of view to the state with UPPO’s assistance, Underwood has found Nevada to be open to working toward process improvements.

 

“They’re receptive to our issues,” she says. “They’re trying to make changes so it’s easier for both parties. In the meantime, we’ve worked out an agreement on how to file in a way that works for everybody.”

 

State administrators often don’t know how their operational policies affect holders until someone takes the time to clearly explain the challenges and ask if they can work together to find a reasonable solution.  While state administrators may be able to work toward improvements to unclaimed property reporting processes, it’s helpful to keep in mind that they aren’t responsible for making the laws. They too are sometimes hamstrung by the manner in which the laws were written.

 

“If a holder doesn’t like the law, the administrator, unfortunately, can’t do anything about that,” says Barbara Rice, state compliance liaison for Keane and former South Carolina unclaimed property administrator. “The administrator is obligated to enforce the law as written.”

 

Ultimately, positive relationships between holders and state administrators come down to open communication from both parties, a willingness to understand the other’s position and mutual respect.  

 

“Most state administrators are very willing to work with the holder community,” Rice says. “Just keep the conversations open and keep in mind we’re all after the same thing—getting the money back to the rightful owners.”

 

Tags:  unclaimed property 

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Can’t We All Just Get Along?

Posted By Administration, Thursday, February 4, 2016

Every day, unclaimed property holders and their advocates face the challenge of complying with inconsistent, sometimes vague regulations while under the constant threat of resource-heavy audits. Meanwhile, state administrators and their third-party auditors seek to enforce these regulations and ensure compliance by understandably defensive holders. It’s no surprise that relationships between the parties involved in the unclaimed property process are often fraught with confusion, frustration and tension. It’s easy for holders, advocates, state administrators and third-party auditors to develop an “us vs. them” mentality, leaving everyone wondering if it’s possible to live together in harmony.

 

During the “Can’t We All Just Get Along?” session at the 2016 UPPO Annual Conference, panelists will address frequent points of contention, explore the reasons behind each party’s approach and consider whether it is possible for everyone to get along.

 

Conflicts often arise because each party in the unclaimed property process has a different perspective. Panelist LeeAnn Dionne is a compliance officer with Boston Financial Data Services, the nation’s largest mutual fund transfer agent. In her industry, people often invest in mutual funds for the long term. They buy and hold, without the need to interact or make contact for long periods of time. This may be different than in other industries, causing frustration when unclaimed property regulations, especially inactivity rules, are applied to these shareholders.

 

Despite companies, including Dionne’s, investing significant resources on investor outreach, some property owners simply don’t respond, resulting in their funds being escheated and possibly liquidated by the state.

 

“These investors then don’t understand why their money is no longer invested in mutual funds,” Dionne says. “So there’s been an increase in investor claims, an increase in calls to investor services lines and an increase in complaints to the states to get their money back. The investors are not lost. They just chose to not take action on accounts that were meant to be long-term investments.”

 

State administrators share similar frustrations. Panelist Karen Anderson, vice president, reporting compliance at Keane, is a former administrator for Illinois and served as the first director of the National Association of Unclaimed Property Administrators (NAUPA). Her experience on the state side has given her significant insight into many of the unclaimed property nuances that may not otherwise be obvious in her current role as an advocate.  

 

“We don’t always stop to consider things from the other point of view,” Anderson says. “We just get frustrated about having to do something.”

 

For example, some states that require reporting electronically in the NAUPA format also require holders to send a hard copy. On its face, this seems counterintuitive. If the state has the data, why would they need a printed copy? Anderson explains that states receive so many reports simultaneously that they are unable to quickly load them all into their software systems. Thus, they need the hard copy to pay claims until the data is loaded.

 

“Sometimes there are really good reasons why they make these requests,” Anderson says. “They’re not doing it just to create extra steps in the process.”

 

Acting on behalf of their state clients, third-party auditors employ several strategies that confuse and frustrate holders. Panelist Jim Sadik, managing director of unclaimed property for True Partners Consulting, previously worked as a third-party auditor. In his current role as an advocate, he works with holders, who often become frustrated by the audit process. However, he understands the “methods behind the madness” from his previous work.

 

“It is not always obvious from the auditor’s perspective which legal entities should be included in the audit scoping, let alone what legal entities exist in the first place given the availability of public information,” Sadik says. “Consequently, auditors will initially include all subsidiaries and affiliated entities, throwing a big blanket over the entire organization with plans to whittle away at what’s actually included in the liability quantification, after the initial information request.”

 

The holder doesn’t care for this process because they want the states and auditors to define which entities they are auditing upfront and to stick to it, something states are generally reticent to ever do. It’s not obvious which parts of a company likely hold material amounts of unclaimed property unless the audit is conducted, and a rational and timely scoping exercise that appropriately focuses on the primary areas of business activity benefits both holders and states in moving the audit process along.

 

In addition to entity scoping issues, other areas of frequent conflict between auditors and holders include unrealistic deadlines assigned for turning over large amounts of data, inconsistent estimation methods, inconsistent standards for determining what constitutes communication between holders and owners, and the inability to get states and their auditors to officially close audits with no findings.

 

Despite all these differences, some states are extending an olive branch to holders, offering a compliance alternative. Voluntary disclosure agreement (VDA) programs are, in many ways, substantively comparable to audits, but they typically have a shorter look-back period, reduced penalties and interest, and importantly, allow holders to maintain greater control of the process. Panelist James Doody is senior accounting director at Drinker Biddle & Reath, which administers Delaware’s VDA program. He previously worked as an auditor with Kelmar and as an advocate. Doody believes the VDA program offers a greater opportunity for holders to come into compliance with their historic unclaimed property liability in a manner that is more efficient, more business friendly, and more collaborative.   

 

“Our role in the VDA program is to validate the self-analysis performed by the company, a stark difference from a third-party audit, where the auditor controls the document production and ultimately the assessment,” Doody says. “Don’t get me wrong, in administering Delaware’s VDA Program, we are very thorough in our validation of the holder’s self-review, but giving holders some control over the analysis leads to greater efficiency as well as collaboration. No VDA is like another, so it is important that when issues in the analysis arise that they are resolved quickly and fairly.”

 

The VDA offers holders the chance to perform a self-review, completing an internal audit, submitting it to the state for validation and ultimately reaching an agreed upon liability. The holder isn’t subject to the same hurry-up-and-wait deadlines imposed in a third-party audit, according to Doody.

 

“I think it’s a very good alternative to an audit,” he said. “We’ve seen quite a few companies take the opportunity to clean up all past-due liabilities and come into compliance in all jurisdictions. They start with a clean slate going forward, usually implementing a new unclaimed property review and reporting process, so they avoid this issue of having any past-due exposure in the future.”      

 

So whether it’s through participation in VDA programs, greater communication or simply taking the time to consider other parties’ motivations, can everybody get along? Perhaps, but it’s going to take a lot of work.

 

“Part of the problem is the profit motivation that is prevalent in the industry,” Sadik says. “The states profit from being able to hold and use funds until they are returned to owners, and they ultimately keep a lot of it. The auditors profit from contingency fees paid against the value of the property recovered. This payment mechanism, which is often pointed to as creating an incentive for auditors to inflate assessments, has not been significantly improved upon in 30 years. Holders are often compelled to hire third parties to assist in providing legal and accounting support, over and above the time incurred by their own staff and management to defend against an audit.  The audit process is likely to remain adversarial as long as there is property not ultimately returned to the rightful owner—a condition that will always exist. The spike in litigation in the past three years tells me it’s getting worse and not better.”

 

With so many issues complicating the unclaimed property process, sometimes it’s easy to lose sight of the reason it exists in the first place—to reunite owners with their property. But that shared goal may be the basis for finding common ground.

 

“Most administrators want to make it a collaborative environment so the owners win in the end,” Anderson says. “As holders, we have to be willing to try to see things from their side and meet them in the middle. We’re not going to agree on every issue and we’re not always going to be successful in negotiating a solution we’re 100 percent comfortable with, but I think we need to make the attempt. What we all want is the same—a fair, reasonable, consistent process that gets money back to the owner. So we have to focus on that shared goal. It’s just how we get there that is usually the issue.”

 

Join these panelists and moderator Robert Joseph, manager of unclaimed property for True Partners Consulting, for an in-depth discussion at the “Can’t We All Just Get Along?” session at the 2016 UPPO Annual Conference. This unique session provides the opportunity to share experiences and gain new insights into what other unclaimed property entities are thinking. Register today.

 

 

Tags:  audits  compliance  unclaimed property 

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