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As I consider the current unclaimed property landscape and try to predict the future, a number of issues and concerns vie for attention.
States Are Torn Between Consumer Protection and Revenue Generation
State enforcement will be shaped by competing forces of consumer protection and revenue generation. Consumer protection is an unquestionable priority for state administrators, and holders that proactively maintain active relationships with their customers, shareholders, employees and other property owners will be far better-positioned than those that hire an army of advisors for audit defense. On the other hand, the states’ mass outsourcing of examinations to contract audit firms that are compensated on a contingent fee basis underscores the competing revenue generation motivation. Indeed, the 2016 Revised Uniform Unclaimed Property Act (RUUPA) blesses this arrangement, and numerous states have considered adoption of RUUPA (and I predict that RUUPA, or at least its updated and unique provisions, will become the most broadly adopted of the Uniform Laws Commission’s uniform unclaimed property acts within a 5-year period).
The holder-domicile states’ use of estimation will continue to attract challenges, to the extent that such methodologies apply presumptions designed to boost unclaimed property liabilities (e.g., 31+ day presumption of impropriety for voided checks) without regard to a specific holder’s practices and filing history, and given that the use of estimation serves as a disguised tax by virtue of the fact that none of those dollars will ever be returned to actual owners/state residents.
New Property Interests Raise Potential Concerns
Business to Consumer (B2C) and Business to Business (B2B) will create property interests that defy easy classifications. In this regard, I am contemplating promotional/loyalty/rewards instruments, instruments for which no direct consideration is provided by the recipient, contingent/conditional/forfeitable property rights and non-custodied instruments (e.g., blockchain virtual currency platforms). Holders must consider the unclaimed property implications of these programs, transactions and business models in real time, or they risk producing the “next wave” of audit assessments. To be clear, the states are already studying these property interests and their starting point generally seems to be: “If it was issued or recorded as an obligation on your books, it is [potentially] escheatable.”
Investment assets will continue to generate audit disputes and litigation. Foreign investors are the most significant victims of these escheat regimes, given their complete lack of awareness of U.S. escheat laws – much less their understanding that Delaware or another state with which the foreign resident has zero connection is holding their property – but the current regime should bear a universal “caveat investor” label. We are now seeing certain states grapple with an increase in U.S. resident owner claims to shares and to accounts – both retirement and non-retirement – shortly after escheatment, where the owners claim that “they were not lost” or “they were in contact with the custodians.” Unwinding the escheat, much less the liquidation of assets, is burdensome and mistake-prone for both states and holders.
The risks to holders of post-liquidation claims to the “market” differential value of such assets (states will only return the liquidation values to claimants) has become clear. When audit firms and/or state administrators assert that a state’s securities-specific dormancy standard – which is generally premised upon undeliverable mail triggers to run the dormancy period – does not apply to securities housed within an account, the potential for future litigation among states, holders and owners is amplified.
Conflicts Likely to Continue Between Holders and Third-Party Auditors
Suspicions and adversity will continue to flavor interactions between the holder community and state administrators and their contract audit firms. I have been shocked to hear state administrators and auditors assert that holders only want to retain property in order to impose fees on the owners, or because the holder presumes the right to a windfall from unclaimed property, in scenarios where the holders are merely asserting that the state’s law does not apply (e.g., where a statutory exemption from escheat applies, or in settings where federal preemption of the state’s unclaimed property laws is patent). Holders will need to engage in more education and outreach if such misperceptions and suspicions are to be allayed.
Areas that are ripe for cooperation between holders and states in 2018 and beyond include a review and expansion of National Association of Unclaimed Property Administrators (NAUPA) property codes, as well as the drafting of model audit and reporting/compliance regulations. Another prospective focus should be the development and implementation of uniform voluntary disclosure/compliance programs, which can be accompanied by educational programs that reach the mid-size and smaller businesses that seem to be much less aware of these laws and their associated compliance requirements.
By Kendall L. Houghton, Alston & Bird LLP