Thu, Dec 20, 2012

'Tis the Season for Reflection...On Unclaimed Property

As the year draws to a close, pundits reflect on the major political, economic and world events that shaped 2012.

The world of unclaimed property may often be considered obscure and highly technical, but many related developments made headlines (sometimes front-page news!) and many of these issues will impact corporate and regulatory activity in the New Year and beyond. Before the ball drops, let’s quickly review the three most important unclaimed property events from the last twelve months.

Federal Court Strikes Major Portions of New Jersey’s 2010 Gift Card Act
In 2010 New Jersey passed major legislation that imposed more robust record-keeping requirements on merchants selling gift cards and other forms of electronic cards in the Garden State. The statute established important new precedent: after a two-year dormancy period, New Jersey could collect the value of unredeemed gift cards if the seller did not collect the purchaser’s address, and the state of incorporation of the seller did not treat the unredeemed portion as unclaimed property. Other states started to get excited about the idea, and retailers rushed to implement record-keeping measures. However, the Circuit Court struck down major portions of New Jersey’s legislation, including the so-called transaction rule – sending a strong signal to other states that were hoping to replicate New Jersey’s assertive stance on jurisdiction over unredeemed stored value cards. Responding to pressure from major corporate lobbyist groups and threats by some companies to stop selling gift cards in New Jersey altogether, the Garden State repealed major portions of the Gift Card Act and suspended implementation of the remaining portions (including address collection requirements) for a minimum of four years.

Despite revenue concerns, New Jersey has yielded to pressure from the courts and corporations to soften its stance on the definition of property subject to its unclaimed property laws. Other states have been inconsistent; more than two-thirds of states still require at least a portion of gift or stored value cards to be reported as unclaimed property. Companies should carefully review their current and past practices to determine how much, if any, of their unredeemed gift cards, rewards programs and coupons are subject to unclaimed property laws.

Life Insurance Industry Slammed by Global Settlements with the States
As a result of multi-state audits initiated by the states through contingent fee agents, many of the major insurance companies have entered into large financial settlements. They agreed to do a far better job of identifying life insurance beneficiaries that are entitled to receive death benefits. 

The magnitude of these large settlements caught many industry experts by surprise. While the life insurance industry’s general practices appear consistent with the unclaimed property statutory guidelines for reporting, the recent audits serve as an example of how third party auditors - working on behalf of the states - have expanded traditional unclaimed property requirements to now include additional regulatory databases and market studies. Look for expansion of audits in these and other previously untested area for additional scrutiny.

Softer Side of Delaware
Thanks to the unclaimed property laws, Delaware has become the most aggressive state in the country when it comes to collecting revenues from hundreds of corporations that are legally organized in the state. Many of these settlements resulted from third-party audits or audits that were initiated by voluntary submissions from corporations. Even the most sophisticated companies faced multi-million dollar liabilities reaching back 20-30 years, due the absence of a statute of limitations. Due to pressure from various industry groups and the risk of many publicly traded companies reincorporating outside of Delaware, the State passed legislation that made coming forward on a voluntary basis more collaborative and predictable. Doing so also eliminates risk of audit, eliminates potential penalties and interest and significantly reduces the years subject to review. For more on the new guidelines and answers to questions, click here.

There may be tremendous uncertainty about whether our Federal government will fall off the fiscal cliff. However, from a state perspective, corporations that agree to voluntarily come forward will be provided with considerable certainty that any past due (or potentially past due obligations) can be resolved expediently without unnecessary delays. The same representations cannot be made by our Federal elected officials.

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