United States

Delaware releases proposed unclaimed property regulations

Use of estimation in examinations and voluntary disclosures

INSIGHT ARTICLE  | 

On Feb. 2, 2017, Delaware Gov. John Carney, Jr. signed Senate Bill 13, enacting significant changes to the state’s unclaimed property laws. Section 1176(b) of Senate Bill 13 directed the Secretary of Finance, in consultation with the Secretary of State, to promulgate regulations regarding the method of estimation in any examination (audit) or voluntary disclosure. The regulations must include permissible base periods, items to be excluded from the estimation calculation, aging criteria for outstanding and voided checks, and the definition of what constitutes complete and researchable records.

The legislative directive applies to two independent programs: 1) The Department of Finance Unclaimed Property Audit Program, and 2) the Department of State Voluntary Disclosure Agreement Program. Those programs are administered separately, and no holder, or its subsidiaries and related entities, are permitted to enter both programs.

On April 1, 2017, the Department of Finance introduced proposed regulations, which included an examination manual addressing how the legislative directive will be administered in the Department of Finance Unclaimed Property Audit Program. On April 3, 2017, the Secretary of State introduced proposed regulations on how the legislative directive will be administered in the Department of State Voluntary Disclosure Program. 

Both the Department of Finance and Department of State are accepting comments from the holder and practitioner community until May 3, 2017. The adoption of these regulations, with or without amendment, will be based on the comments received. It is important for holders to be aware of these proposed regulations to determine how they may impact their potential unclaimed property liabilities. 

These regulations will become effective the date they are adopted. The regulations will apply to all Department of Finance examinations or Department of State voluntary disclosures commencing after the adoption date. To the extent practical, the regulations will also apply to any ongoing examination or voluntary disclosure that commenced prior to time in which the regulations became effective. It should be noted, however, that failure by either department to adhere to these not-yet-in-existence regulations would not invalidate an examination or previously settled voluntary disclosure agreements.

Summary of regulations regarding use of estimation

Base periods

The base period is the period of time for which the holder possesses complete and researchable records. Delaware requires holders to retain records for a minimum of 10 years plus dormancy (i.e., 15 years total for most property types). Both the Department of Finance and Department of State expect holders to maintain several years of records even if they do not possess records for the entire 10-year period. To the extent complete and researchable records are not available for 10 years plus dormancy, a base period will be used to draw a representative error rate which will be used to derive an estimated liability for the years in which complete and researchable records are not available.  
 

Department of Finance Unclaimed Property Audit Program Department of State Voluntary Disclosure Program
  • Audit manager and holder shall discuss what records to be utilized for the base period. If an agreement cannot be reached the State Escheator shall make the determination.
  • Shall consist of at least the three oldest continuous years the Holder has complete and researchable records outside the dormancy period.
  • Based on the holder’s facts and circumstances, the Department of Finance may allow the holder to include non-dormant periods in the base period.
  • At the conclusion of the record production phase of the audit, the CFO or other officer of the holder shall provide a representation to the State Escheator regarding what records are available for each property type and for what years.

 

  • Department of State and holder will agree on the records to be utilized for the base period.
  • Shall consist of at least the two oldest continuous years the holder has complete and researchable records outside the dormancy period. (Holders may use more than two years for the base period).
  • Based on the holder’s facts and circumstances, the Department of State may allow the holder to include non-dormant periods in the base period.
  • At the conclusion of the scoping phase of the voluntary disclosure, the CFO or other officer of the holder shall provide a representation to the Department of State regarding what records are available for each property type and for what years.


Excluded items

Both the Department of Finance and Department of State’s proposed regulations allow for items payable to the U.S. government or state agency to be removed from the estimation population.  In addition, funds returned in the normal course of business, prior to the issuance of the examination notice or enrollment in the voluntary disclosure program, will be excluded from the population of potential escheatable items.

Aging criteria

Aging criteria defines which transactions will be excluded from the estimation population. Both sets of proposed regulations have also provided guidance on aging, however, vary as follows: 

Department of Finance Unclaimed Property Audit Program Department of State Voluntary Disclosure Program
  • Checks outstanding less than 90 days after issuance shall be excluded from the population.
  • Checks voided less than 30 days after issuance shall be excluded from the population.
  • The regulations do not explicitly provide guidance on the aging criteria for accounts receivable credit balances.

 

  • Checks that are outstanding or voided less than 90 days after issuance shall be excluded from the population.
  • Holders are expected to review quarterly accounts receivable aging reports for credits aged 90 days or greater. In addition holders are expected to perform a 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 adjusted credits and the respective accounts used to adjust the credits should be included within the scope of the holder’s review.


Projection

Perhaps the most anticipated guidance the holder community has waited for relates to Delaware’s use of projections for the periods for which records are not available. In the wake of last year’s Temple-Inland case, Delaware’s approach of sourcing all estimated liabilities to a holder’s state of domicile appeared to be in limbo since one of the key findings in the case was that extrapolation methodologies used should properly replicate the characteristics of the liabilities.

The Department of Finance and Department of State’s proposed regulations allow projection methods when the amount of reportable property cannot be determined due to the unavailability of the holder’s records. However, Delaware’s position regarding projection has remained unchanged, and to the extent permitted by law, names and addresses identified in the base period shall not be used to determine which state has the priority claim to the abandoned property estimated to be due over the periods where records of the owners’ addresses do not exist. 

Complete and Researchable Records

Under both the Department of Finance and Department of State’s proposed regulations, it is expected that, at a minimum, the holder has seven to eight years of researchable records. In circumstances where a holder does not have researchable records meeting this expectation, the state and holder can discuss the use of an alternative set of data with fewer years. Both sets of proposed regulations define a complete record as an item that reconciles to the general ledger, with the understanding that immaterial differences may occur. A researchable record includes items that, at a minimum, contain the last known address of the owner of property.

Sampling

Sampling is permitted under both the Department of Finance and Department of State proposed regulations. 

Department of Finance Unclaimed Property Audit Program Department of State Voluntary Disclosure Program
  • All sampling, projection, and estimation techniques used by the auditor to determine unclaimed property due to Delaware shall be approved by Delaware prior to use.
  • The proposed regulations include suggested parameters to be used in the audit to meet Delaware’s approved sampling process.
  • All sampling, projection, and estimation techniques used by the holder to determine unclaimed property due to Delaware shall be presented to and agreed upon by the Department of State.


Conversion from examination to the VDA program

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. The Notice of Intent to convert must be filed within 60 days of the adoption of final regulations (scheduled to be on or before July 1, 2017). In addition to the required form, the Secretary of State released administrative guidelines for holders that wish to convert their examination into a voluntary disclosure. Specifically, the Secretary of State has clarified the following regarding the conversion process:

  1. Holders are not expected to begin the voluntary disclosure process from the beginning (refer to 3 below);
  2. The holder’s examination work papers will not be transferred from the Department of Finance or third party audit firm to the voluntary disclosure administrator;
  3. For examinations that have already been scoped under audit (entities, property types, and/or years), the voluntary disclosure Administrator and holder will receive a memorandum describing the previously agreed upon scope of the examination from the Department of Finance. Aside from this, there will be no further coordination or consultation with the Department of Finance or third party audit firm related to the holder’s examination. Holders can expand the previously agreed upon scope in the Voluntary Disclosure program;
  4. Holders should utilize the records reviewed and analysis performed to-date under the examination and perform any additional self-review to present their findings of past due liability to the Secretary of State for validation and ultimate settlement;
  5. The lookback period of the voluntary disclosure will be ten report years plus dormancy from the year the original Notice of Examination was received by the holder;
  6. If a holder has formally resolved specific property types/and or legal entities with the Department of Finance in an executed settlement agreement prior to converting to a voluntary disclosure, the voluntary disclosure will only cover the remaining property types or legal entities;
  7. Holders will have 30 days after two years from the effective date of the voluntary disclosure agreement to either pay the abandoned property due or enter into a plan with the Secretary of State to make payment for the amount due. 

Takeaways

The much anticipated proposed regulations provide guidance regarding the approach and methodologies that the holder community can expect to see in Delaware examinations or voluntary disclosures.  However, the proposals fall short of providing some of the more dramatic changes holders and practitioners wished to see with regard to estimation and projection given the issues risen in recent litigation. It is important that holders understand these proposed regulations and their potential impact since impacted holders will have to act within 60 days of their adoption should the holder wish to convert their examination into a voluntary disclosure or expedited audit. 

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