Pursuant to Delaware’s recently enacted SB13, any holder currently under examination that received a Notice of Examination from the State Escheator on or before July 22, 2015, except any securities examinations in which estimation is not required, may convert the pending examination into a review under the Secretary of State’s voluntary disclosure program (See 12 Del. C. § 1173.).
As part of a recent communication, the Secretary of State (SOS) provided details explaining the administrative requirements that a holder must use to convert an existing audit to a voluntary disclosure agreement (VDA). In addition, the SOS provided details regarding (i) the VDA process for holders that convert their examinations, (ii) look-back period for examinations converted to a VDA (ten reporting years), and (iii) the use of estimation as part of a VDA.
Regarding estimation, the SOS has proposed estimation regulations that can be found at: "Delaware Proposed VDA Conversion Guidelines".
The public comment period for these proposed regulations end on May 3rd . It is anticipated that Delaware will issue final regulations shortly thereafter.
These proposed estimation regulations include sections dealing with their effective date, the scope of the VDA, permissible base periods, items to be excluded from the estimation calculation, aging criteria for outstanding and voided checks, and accounts receivable. In addition, there are sections dealing with projection and complete and researchable records.
It should be noted that as a requirement of SB13, Delaware’s Department of Finance (DOF) recently proposed regulations regarding its’ abandoned or unclaimed property reporting and examination manual. Click here to see our recent blog post for more information.
There is a great deal of similarity between the sections of the DOF’s proposed regulations dealing with estimation, projection and complete and researchable records and those of the SOS. However, there are some differences as follows:
- In an audit, the DOF requires the use of at least three years from the universe of complete and researchable records. However, the SOS requires that the base period consist of at least the two oldest continuous years for which the holder has complete and researchable records.
Aging Criteria for Testing Populations
- In an audit, the DOF allows for the exclusion of checks that are outstanding less than 90 days and for the exclusion of checks that are voided within 30 days of issuance. The SOS allows for the exclusion of both checks that are outstanding or voided less than 90 days old after they were issued.
- While the DOF is silent regarding accounts receivables, the SOS states:
“it is expected that holders will perform the following analysis of its accounts receivable: a) an analysis of aged credit balances remaining on the company’s books and records, and b) an analysis to determine whether accounts receivable credits have been written off.
For the former, holders may review quarterly accounts receivable aging reports for accounts receivable credits aged 90 days or greater. For the latter, the holder should conduct a credit tracing analysis of accounts receivable credit balances to test for any accounts receivable credits that may have been adjusted off of a customer’s account. All credits adjusted off a customer’s account and all of the accounts used to adjust credits off a customer’s account should be included in the holder’s review.”
- In an audit, the DOF permits a holder to comment on or suggest an alternative technique with respect to sampling, projection and estimation techniques. 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. However, in a VDA, as the process is voluntary, all sampling, projection and estimation techniques used by the holder shall be presented to the SOS for agreement by the parties.
- One important matter to highlight: As with the DOF regulations, the SOS regulations allow for the use of projection techniques 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”.
Complete and Researchable Records
- As with the DOF’s regulations, the SOS’s regulations state 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 the SOS stating that, at a minimum, the only attribute a “researchable” record must have is an address?
- One major difference between the DOF regulations and those of the SOS, is the omission from the SOS regulations of any language pertaining to sampling. The DOF regulations has significant detail on this subject. The omission of this topic by the SOS is unusual, as sampling is a major component of estimation. We will have to see if any additional proposed language is released by the SOS for comment prior to May 3rd.
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 the SOS is taking with respect to estimation.
For holders currently under audit by Delaware, the finalized SOS 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 SOS 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.
Holders will need to carefully consider their options when deciding if they should convert from an examination to a VDA. It is advisable to consult with an unclaimed property expert to help you understand your options. If you decide to convert to the VDA process, your unclaimed property advisor can assist you with all aspects of the process, ensuring that your company is in compliance and that your companies’ personnel can remain focused on your core business activities.