On April 1, 2017, The Delaware Department of Finance release proposed regulations relating to its Abandoned or Unclaimed Property Law. These proposed regulations can be found at: "Delaware Proposed Regulations 4/1/2017".
The public comment period for these proposed regulations end on May 3rd. It is anticipated that Delaware will issue final regulations shortly thereafter.
As required by Delaware’s recently enacted SB13, these proposed regulations include sections dealing with many aspects of estimation, including permissible base periods, items to be excluded from the estimation calculation, sampling, funds returned and aging criteria for outstanding and voided checks. In addition, there are sections dealing with projection and complete and researchable records.
In light of recent and pending litigation, of most interest to the holder community are sections of the draft regulations dealing with the following:
- Estimation The State may utilize 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. In addition, if the holder fails to retain sufficient dormant years of records, the State and the holder shall discuss which records are to be utilized for the base period. In the absence of agreement, the State shall possess the sole authority to make a reasonable determination for the base period in order to prepare an estimate. Base periods shall consist of complete and researchable records and shall consist of at least three years from the universe of complete and researchable records. However, depending on the unique facts and circumstances of each holder, the State may consider including non-dormant periods in the base periods.
- Items To Be Excluded from Estimation Calculation This section excludes items payable to a US federal department or agency and funds returned in the normal course of business prior to the issuance of the examination notice. However, it does not exclude items with non-Delaware addresses or items with addresses in states where specific statutory exclusions exist.
- Sampling Statistical sampling, generally in the form of stratified sampling, may be employed. However, if a holder wishes to research an entire population, this research must be performed “in a reasonable time”. No definition is provided as to what constitutes “in a reasonable time”. In addition, the State may elect to sample and test a number of entities of a holder in lieu of testing all Delaware entities and then extrapolate these results to non-tested Delaware entities.
- Funds Returned Funds returned in the normal course of business prior to the issuance of an examination notice will not be included in the population of potential unclaimed items. However, 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.
- Aging Criteria Checks that remain outstanding less than 90 days after issuance and checks that are voided within 30 days of issuance are to be excluded from any testing populations. However, the State may adjust these periods, if, in its’ sole discretion, a redefined outstanding period is necessary.
- Projection Projection techniques may be used to calculate amounts due for periods where records do not exist. However, to the extent permitted by law, names and addresses identified in a base testing period, shall not be used to determine which state has the priority claim to the abandoned property estimated to be due for periods where records do not exist. This appears to challenge what Judge Sleet stated in the Temple Inland case. The State “failed to follow the fundamental principle of estimation where the characteristics of the sample set are extrapolated across the whole”. In addition, all sampling, projection and estimation techniques used by an auditor shall be approved by Delaware prior to use. However, the ultimate decision to employ a particular technique is at the sole discretion of the State. The holder may challenge this decision at the close of the examination.
- Complete and Researchable Records Where a holder may not have the expected 7-8 years of researchable records, the State and the holder may discuss the circumstances and use an alternative data set with fewer years. In addition, Delaware is also stating that “Researchable records are records to which the holder may research the resolution of an item. At a minimum, researchable records shall include those items that contain a last known address of the owners of property.” It is unclear what this last sentence means. Is Delaware stating that, at a minimum, the only attribute a “researchable” record must have is an address?
It is important to note that these are proposed regulations which will likely not be finalized until early May. Notwithstanding this timeline, a review of these proposed regulations shows the direction that Delaware is taking with respect to estimation.
All holders need to be aware that under these proposed regulations, Delaware is permitted to examine a holder for any reason. Consequently, all holders, especially those incorporated in Delaware, should determine whether they have a potential exposure. The best way to do this is to perform a risk assessment focusing on such things as gaps in existing policies and procedures, inconsistent prior filings and results of prior non-Delaware audits.
Additionally, for holders currently under audit by Delaware, the finalized regulations will be a critical piece of information as they consider the various options detailed in SB13 - whether to continue with the current audit process, elect to convert to an expedited audit or join the Secretary of State’s VDA program. In accordance with the requirements of SB13, this election must be made within 60 days of the adoption of the estimation regulations.
It is critical that holders under audit immediately start performing the necessary modeling and analysis so that they are armed with all the necessary information to make an informed decision within the legislated timeframe. Engaging with an unclaimed property advisor can assist holders to make decisions specific to their situation and achieve the best results.
If you have any questions about these pending regulations and how they will impact you and your business, contact one of our experts today:
Jon D'Amato David Poehler Clive Cohen
T. 404.264.8554 T. 404.857.1894 T. 917.538.8900