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2/15/16 12:58 PM

Delaware unclaimed property manual falls short of transparency, predictability and fairness

by Jon D’Amato

delaware-unclaimed-property-law-udpates.jpgThe recent release of the Delaware Department of Finance’s statutory unclaimed property manual is a great demonstration of the fact that unclaimed property laws and regulations are continually changing and holders must stay on their toes to keep up. The manual is also a perfect representation of the legendary conflict existing between unclaimed property holders and state unclaimed property administrators.

The stated intent of Delaware SB 11, passed in January of last year, was to “ensure greater transparency and predictability” to help holders know what to expect during a Delaware unclaimed property examination. However, when the first draft of the new manual was released at the beginning of this month, the industry began to voice concerns about the law as represented in the manual.

There is no doubt, the manual includes a number of positives for holders:

  • It requires that the state’s goal in every examination is to be “fair and consistent.”

  • Holders under audit are allowed to remediate items discovered during the audit, before they are included in required escheatment amounts.

  • Holders are allowed to see copies of the state’s audit agreements with its third-party auditors.

  • Holders are allowed to have direct contact with state officials during an examination.

  • The handbook includes sample documents to help holders anticipate notices they might receive from the state: an audit notice, a confidentiality and nondisclosure agreement, and a remediation outreach letter.

These provisions of Delaware’s law are a good start in providing transparency, predictability and fairness, but other details in the manual create concerns and issues for holders:

  • There is an overall lack of detail and clarity, which could lead holders to misunderstand what is expected by the state and risk technical noncompliance.

  • The state has officially approved nondisclosure agreements (NDAs) of the audit firms it contracts, and auditors are not required to allow holders to ask for changes in the language of the NDAs.

  • Audit firms are allowed to add additional states to an audit, even after a nondisclosure agreement is executed, which for holders could result in additional costs of managing an audit.

  • The state is allowed to audit holders up to three years after a VDA is closed, and also can assess penalties and interest on all property due for all reporting years, if the state determines the property reported under a VDA is “materially under-reported.” This increases holders’ exposure to the risk of penalties and interest, and could keep some holders from voluntarily agreeing to a VDA.

  • Auditors are allowed to divide an audit into separate sections by property types and report years. Some sections of the audit can be closed independently, while others are left open and active. This will likely increase the time and cost holders must spend on an audit, and it makes negotiation more difficult.

  • If a holder company was incorporated or otherwise formed in the state of Delaware, the state claims the right to demand escheatment of property for which an owner’s last known address is a foreign address. There’s a question whether the state can back up this right legally, especially if the property is being held in a foreign country.

  • Last but not least, state administrators do not have to show the reason they believe a holder is in noncompliance before engaging them in a costly and lengthy audit.

At MarketSphere, we believe Delaware’s statutory manual is a good step in the right direction to bridge the gap between the states’ need to compel compliance and holders’ need to minimize the cost of unclaimed property compliance. However, even though Delaware has declared an intention to address holder concerns and improve transparency and predictability, the recent draft of the manual includes details that still seem to put an unfair and undue burden on holders.

The manual hasn’t been finalized, and won’t be executed into law until after the comment period ends on April 1. We encourage holders to contact the state directly to express concerns, or contact us to discuss ways to weigh in and become involved in the process.

Topics: Delaware