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And What About Legislative Changes For Other States’ Unclaimed Property Reporting?

On August 1, 2017 the Delaware Department of Finance issued a second draft of proposed regulations that apply to the state’s unclaimed property audits, updating the original draft that had been published on April 1.

Background

In 2016 a federal judge ruled that Delaware’s unclaimed property audit process was unconstitutional, saying that the process “shocks the conscience.”  (Temple-Inland, Inc. v. Cook)

On February 2, 2017, the Governor of Delaware signed into law Senate Bill 13, which revised and updated the Delaware Abandoned or Unclaimed Property Law.  The Bill directed the Secretary of Finance, in consultation with the Secretary of State, to promulgate regulations to create consistency in any examination or voluntary disclosure.

On April 1, 2017, the Department of Finance published a set of proposed regulations and sought comments from the public.  The Department received many comments and suggestions regarding the draft from Holders and practitioners.

On June 29, 2017, the Governor signed into law Senate Substitute 1 for Senate Bill 79, which further updated the Law and clarified portions of Senate Bill 13.

Taking into account some of the public comments regarding the April 1 version, the Department made several changes to its draft regulations and issued the complete set of revised proposed regulations on August 1, 2017, and requested public comment by August 31, 2017.  The regulations can be found here http://regulations.delaware.gov/register/august2017/proposed/21%20DE%20Reg%20123%2008-01-17.htm

What’s New or Different in the Second Draft?

The second draft proposed regulations are very similar to the April 1 version with only a few changes or additions, most of which are helpful for Holders and their advisors.  Some of the important ones include:

* Section 2.9 Retention of Records by Holder:  This section now contains a detailed description and list of the records that a Holder must retain — Records to be retained by the Holder include the date, place, and nature of the circumstances that gave rise to the property right. These records may include the following: tax returns (including consolidated and affiliation schedules), organization charts, charts of accounts, unclaimed property filing history (for all states if the Holder is incorporated or formed in the State of Delaware), prior completed and accepted voluntary disclosure agreements (VDAs) and examinations, bank statements, bank reconciliations, outstanding check lists, detail general ledgers, aged accounts receivable reports, aged accounts payable reports, policies and procedures related to record retention, accounting, and unclaimed property, and if applicable, information surrounding gift card issuances and redemptions.

* Section 2.14.3 Confidentiality and Nondisclosure Agreement:  This section now provides that the audit firm must provide the Holder with information regarding the audit firm’s security measures with respect to electronic file transfers, and also directs the audit firm to prevent any disclosure of Confidential Information by its representatives.  In the case of any unauthorized use or disclosure of the Confidential Information, the audit firm is to promptly notify the Holder and cooperate with the Holder to mitigate the effect of such unauthorized use or disclosure.  Additionally, there is new language mandating that the audit firm shall not inform other states or jurisdictions that Delaware has authorized an examination of the Holder, except to another Participating State once that state has issued a formal notice of examination to the Holder.

* Section 2.15.5 contains new language regarding possible abatement of interest and penalties.  The April 1 draft simply provided that interest and penalties may be abated at the discretion of the State Escheator as provided by the Law.  The revised draft now specifies:  Pursuant to 12 Del.C. §1185, in certain circumstances, interest and penalties may be abated for good cause at the discretion of the State Escheator. In determining good cause in this context, the State Escheator may consider, if applicable and without limitation, the following factors: whether the Holder has a significant history of filing unclaimed property reports; the responsiveness of a Holder during the examination; and whether the Holder used ordinary business care in its compliance efforts.

* Section 2.18.2.3 pertaining to certification by the Holder’s CFO regarding available records:  This section in the original draft regulations caused concern on the part of financial executives by requiring that the Chief Financial officer provide representation regarding the availability of records and stating that a determination by the State of a false statement will be considered willful misrepresentation made with intent to mislead the State Escheator.  The new draft modifies this section by providing that the Chief Financial Officer is to make the representation “to the best of his or her knowledge, after reasonable inquiry and due diligence.”  Additionally, a false misstatement will be considered willful misrepresentation “where it is made” with intent to mislead the State Escheator.

What’s Still Missing?

* Still missing from the August draft regulations are details about the election to expedite an audit’s completion; this election was specifically provided for in SB 13 for Holders that are currently under audits that were authorized prior to the passage of SB13, and is supposed to be filed with the state within 60 days of the adoption of the regulations.  While the new proposed regulations do not provide any information to Holders regarding making the election, the new draft does at least create section 2.25 that provides that the state shall publish a form “Intent to Expedite Completion of Examination” which shall outline the expectations of the Holder in that circumstance.

* Most important, the August 1 regulations do not contain the significant changes to the estimation and extrapolation techniques and the audit scope provisions that Holders and advisors had hoped for.  Thus it appears that audit calculation techniques similar to those that “shocked the conscience” of the federal judge in the Temple-Inland litigation will continue to be used by Delaware.

More Regulations Changes or More Legal Challenges?

The public comment period is through August 31, 2017.  We can hope that additional changes will be made by the state before the regulations are published in final form.  All Holders that are subject to Delaware unclaimed property reporting should continue to monitor developments, as some aspects of Delaware’s audit methodology contained in the current draft regulations remain open to challenge for producing results that “shock the conscience.”

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