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5/16/16 10:00 AM

Pennsylvania Abandoned and Unclaimed Property Auditors Focus Efforts on Equities

by Greg VerMulm

pennsylvania-law-updates.pngThe Commonwealth of Pennsylvania recently hired unclaimed property auditors, Kelmar Associates, to conduct unclaimed property audits of publicly held companies. Specifically, the audit company has been asked to audit transfer agents to identify unclaimed shares belonging to Pennsylvania residents.

Recent changes in Pennsylvania unclaimed property law has some stakeholders in the unclaimed property world worried, because it seems to align with a trend toward this state and others taking a hard line when it comes to securities-based property.

Before we even touch on issues of law, the concern is in part with Kelmar as the audit company. Technically, the company has every right to conduct unclaimed property audits, and its auditors presumably follow the law or they would be embroiled in lawsuits. However, this particular company is known for pushing into gray areas of the law and relentlessly pursuing unclaimed-property-related assessments, in the process making things difficult for holders.

The involvement of Kelmar, combined with recent Pennsylvania unclaimed property law changes involving equities, seems to indicate a conscious effort on the part of the Commonwealth’s lawmakers to target securities companies and retrieve as many dollars in unclaimed property assessments as possible, as well as any applicable penalties and interest.

Why are they doing it? We can’t be sure what’s been going on behind closed doors in the Pennsylvania treasurer’s office, but it has been suggested that states such as Pennsylvania may have exhausted sources of unclaimed property in other segments of the market and are looking to previously-ignored industries and property types to keep money flowing in.

Some may say there’s nothing wrong with Pennsylvania’s focus on equity-related abandoned and unclaimed property, because all companies must remit unclaimed property according to the law. However, others in the industry are questioning whether the strength of Pennsylvania’s push to retrieve equity-related unclaimed property is going too far.

Unclaimed property holders in other industries have experienced a similar hyperfocus on their unclaimed property operations. This focus has been so relentless, some holders have taken states to court to press for fairer treatment.

We firmly believe this claim is untrue in some states. However, we have to consider the possibility that this may be true in certain jurisdictions. As advocates for our clients, we would be remiss if we did not help them prepare for this potential onslaught of attention to securities.

As with a number of other states, recent changes in Pennsylvania unclaimed property law have been described as “drastic”. The biggest potential problem with recent changes from the holder’s point of view — and likely from the shareholders’ perspective — is that the Pennsylvania state treasurer is required to immediately sell the shares it receives as unclaimed property remittances, without any notification to the shareholder.

When and if shareholders come to the state to retrieve their property, they will have lost any appreciation or dividends that would have been gained on their stocks from the moment they were sold by the state.

Holders are finding themselves between a rock and a hard place in this situation. If they don’t report the equity properties to the state, they could be charged penalties and interest, but remitting equities they know will be cashed-in to the detriment of their stockholders can be damaging to their business and even put them at risk for lawsuits brought by their stockholders.

Other changes in Pennsylvania law that are not unclaimed property holder or shareholder friendly:

  • The dormancy period for securities was shortened from five to three years.
  • There is confusion over the dates that should be used to determine when shares become dormant.
  • Holders may not question the Pennsylvania Treasury Department’s selection of an auditor.
  • Any records obtained during an audit can be shared with other states.
  • The Commonwealth may charge holders for the cost of a third-party auditor, up to $200 a day, as long as the audit reveals reportable property.

We are likely to see more changes similar to this as stakeholders in the unclaimed property arena push and pull to gain advantages. It’s more important than ever for holders to consider aligning themselves with professional unclaimed property specialists who can help them stay on top of the law, watch for ongoing changes and become absolutely clear about their rights and their financial and legal obligations.

Topics: Reporting, Pennsylvania