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UNCLAIMED PROPERTY FOCUS is a blog written by and for UPPO members, featuring diverse perspectives and insights from unclaimed property practitioners across the U.S. and Canada. We welcome your submissions to Unclaimed Property Focus. Please contact Tim Dressen via tim@uppo.org with any questions about submitting a blog post for consideration and refer to our editorial guidelines when writing your blog post. Disclaimer: Information and/or comments to this blog is not intended as a substitute for legal advice on compliance or reporting requirements.

 

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Insights from the NAST Symposium, Part 3

Posted By By Christa DeOliveira and Michael Unger, Thursday, August 8, 2019

The National Association of State Treasurers’ (NAST) Annual Treasury Management Training Symposium held during May 2019 in Providence, Rhode Island, was engaging and enlightening. The National Association of Unclaimed Property Administrators (NAUPA) is affiliated with NAST and led the well-attended unclaimed property track of educational workshops and sessions. This blog post is part three in a series about the topics discussed in the symposium sessions. Read part one hereRead part two here.

 

Securities

Securities have a unique set of challenges, including sometimes complex transfer steps; various corporate actions, such as dividends being declared and stock splits; and fluctuating values. During the the conference session about securities, the demands of securities maintenance were a central topic. 

 

Speakers discussed the pros and cons of immediately liquidating securities. Pros include: 

  • Requires less portfolio maintenance, including tracking and addressing corporate actions/dividends. 
  • No need to reregister shares, eliminating the associated costs and any confusion with claimants.
  • No perception of market play, if schedule is set up correctly with custodian, as it removes state staff from the liquidation process.
  • Lower custodial costs. 

Cons include: 

  • Claimant complaints regarding liquidated shares.
  • Fluctuating security prices.
  • Holder needs to make holder claims, such as needing to claim back property if there was a reporting error.

 

Speakers stressed that, even when immediate or early liquidation is pursued, states will still require a securities staff. There remains a need to publish shares on the website or liquidate before properties go on website, and conduct outreach to owners with shares – all under stringent policies and procedures. The session also included a discussion of holders liquidating securities before reporting. Because SEC regulations prohibit holders from liquidating securities in the name of the owner, this is a controversial topic for holders. 

 

While a very small portion of securities, worthless securities come with unique challenges, which were addressed during the session. Not all states accept worthless securities, but some do. Some states sell their worthless securities to Raymond James for $0.01 per position, and after one year any that have not returned to value are written off. At the time of the conference, 31 states engage in this service.

 

Finally, this session discussed that not all states update their owner/property records to reflect corporate actions. Rather, some states wait until there is a claim and then pay claims based off the original reported shares and any effects of corporate actions according to the state’s custodian’s records. 

 

Cryptocurrency

Like the 2018 symposium, there was considerable interest in cryptocurrencies at this year’s event. A session was dedicated to education on blockchain as a decentralized, digital ledger and blockchain transactions. There were comparisons made between longstanding markets and exchanges and crypto exchanges, citing both similarities and the differences. Similarly, there were parallels drawn to reporting, receiving and maintaining stock and how cryptocurrency could work. There was also some discussion of who are holders and not holders in the crypto context. 

 

There are distinct differences with cryptocurrency when compared to traditional markets. One such difference is that, in traditional markets, different entities fulfill the roles of broker, exchange, clearing house and custodian. Whereas, with cryptocurrency one company can fulfill all of these roles. Also, there is not a single DTCC number or single receiving account to transfer various currencies for custody and subsequent maintenance. Therefore, a state’s delivery instructions could be rather complicated. 

 

To transfer, holders need a receiving address, which can be an alphanumeric string or a QR code representing the string. Each currency has its own specific address format, which are different lengths. For example, a Bitcoin address is 42 characters and a Litecoin address is 34 characters. Additionally, while state unclaimed property systems support decimal places for shares, cryptocurrencies need to have more decimal places to properly report and remit.

 

There remain many unanswered questions or unresolved processes related to this property type. For example, in the current NAUPA reporting format, there are not fields able to accept the necessary information for reporting. What if property was received from an unknown party and there is not an ability to reconcile it, or duplicate remittances occurred? How could this be identified? Would property be returned? 

 

Other possible hurdles encompass whether states or NAUPA should endorse specific exchanges. What should states do to restore an owner’s property? For example, if a holder had to swap currencies to be able to report it to a state, does the state need to switch it back to the original to satisfy the claim? How would states handle safe deposit box contents that include a paper or hardware wallet? How would this be safeguarded? Would it be converted to cash or kept in its original state? How would states detect and thwart fraudulent claims?

 

No exchange deals with all of the more than 2,500 different cryptocurrencies. How would states handle reporting and remitting of any cryptocurrencies that a state does not or cannot hold? Should states have holders convert to a main currency before remitting or perhaps convert to U.S. dollars? States could have as many wallets as needed to cover all currencies, but would they pursue this? States could even have holders not report and remit this property or only over a certain value threshold? 

 

The educational workshops and sessions at the unclaimed property track of the recent NAST Symposium covered important insights on securities and cryptocurrency topics. While the topics covered may not directly or indirectly impact all property type holders, it is worthwhile to remain aware of NAUPA developments. It is also important to be informed of opportunities to work together with states, where our expertise and needs are aligned, and we can share our respective unique expertise and insights, and related unclaimed property challenges or issues.  

 

More information on this symposium will be available in a future blog post.

 

Christa DeOliveira is chief compliance officer with Linking Assets Inc. Michael Unger is a senior manager with Crowe LLP’s unclaimed property practice. 

Tags:  cryptocurrency  NAST  NAUPA  securities  Unclaimed Property 

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New Tennessee Administrative Rules go into Effect

Posted By Administration, Thursday, March 7, 2019

On March 4, 2019, new administrative rules regarding unclaimed property went into effect. The rules are the latest in a series of updates to the state’s unclaimed property laws and practices, which also include the passage of H.B. 420, the state’s version of the Revised Uniform Unclaimed Property Act, and H.B. 2278, which changed the state’s unclaimed property reporting date from May 1 to Nov. 1. 

 

Noteworthy sections of the rules for holders include:

 

Reporting

  • Electronic reporting is required.
  • Negative reports may be filed. 
  • Reported cashier’s checks must include the name and address of the payee and purchaser, if known.
  • When filing initial safe deposit box reports, property should continue to be held for an additional year before filing a final report and turning over the property to the state.

 

Property Delivery

  • Most property should be remitted electronically via ACH or other method approved by the treasurer. 

 

Securities

  • Remitted securities shall include all dividends, interest, warrants or other rights, or associated cash payable by check or electronically.
  • Holders shall remit securities in such a form that future earnings will be delivered in cash rather than an increase in the number of shares. 
  • Holders shall remit securities in a form that allows the treasurer to sell them. 

 

Examinations

  • Holders will receive a notice of examination at least 30 days before an examination begins.
  • An examination will begin with an entrance conference at which time the examiner will identify other states participating; a tentative timeline and duration; a description of responsibilities; the potential types of records subject to examination; the lookback period; and an explanation of methods and estimation techniques that may be used.
  • An examination may include records of current accounts, dormant accounts and accounts that may have been closed and archived; agreements regarding the deduction of service charges; increases or decreases in account value; and interest payments; and policies and procedures.
  • If records are unavailable, estimation of liability may be used. The examiner will provide written notice of the estimation methodology and for which years. The examination subject may object to the estimation methodology by following the process defined by state law. 

 

Due Diligence

  • Holders are expected to conduct due diligence.
  • The return of first-class or superior mailing sent to the owner’s last-known address is considered evidence that the owner’s location cannot be ascertained. 
  • First-class or superior mailings that are not returned as “undeliverable” are considered owner contact and an indication of interest in the property. Examples include computerized account  or interest earning statements. 

 

Holders with unclaimed property reportable to Tennessee can access the new rules, related Tennessee laws and regulations, and additional compliance information on the state’s Treasury Department website.  

Tags:  audits  due diligence  examinations  reporting  securities  spring reporting  Tennessee 

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IRS Extension Provides IRA Holders an Extra Year

Posted By Administration, Thursday, November 29, 2018

On May 29, 2018, the Internal Revenue Service issued Revenue Ruling 2018-17, clarifying the agency’s position on traditional individual retirement account escheatment. Specifically, the ruling states that IRA holders – or trustees – must withhold 10 percent federal income tax and issue form 1099Rs when reporting unclaimed IRAs to the states. At that time, holders were given a compliance deadline of  Jan. 1, 2019, or as soon as it becomes “reasonably practicable” to do so.

 

UPPO worked closely with the Holders Coalition and other organizations, including SIFMA and ICI, whose members are likely to be affected by this ruling to formulate a strategy for raising these issues with the IRS and other agencies, such as the SEC and FINRA, which may have conflicting opinions on the practice. Members of the Holders Coalition, including UPPO representatives Jen Borden and Dana Terry, met with the IRS in September to discuss a variety of concerns.

 

These efforts contributed to an extension of the compliance deadline from Jan. 1, 2019, to Jan. 1, 2020. On Nov. 20, 2018, the IRS issued Notice 2018-90 announcing an extension:

 

“Relief is extended to payments made before the earlier of January 1, 2020, or the date it becomes reasonably practicable to comply with the withholding and reporting requirements described in Rev. Rul. 2018-17.”

 

Revenue Ruling 2018-17 clarifies that Section 3405 of the Internal Revenue Code considers “any distribution or payment from or under an IRA… as includible in gross income,” and thus subject to tax withholding by the holder/trustee. Some holders already have held this position and routinely withhold tax and issue 1099Rs for escheated IRAs. Others do not. 

 

Although the IRS ruling provides clarity and paves the way for consistent practices, it creates challenges for securities holders, who would need to liquidate property before reporting it to the state and withholding the 10 percent federal income tax. This practice could conflict with other regulations.

 

The extension allows for an additional 12 months to seek guidance and clarification from other regulatory bodies and put practices in place to comply with the IRS requirement.

 

UPPO will continue to monitor issues related to the IRS ruling and will provide members with any relevant updates that occur. 

Tags:  1099  banks  IRS  securities 

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Five Emerging Securities Audit Trends

Posted By Administration, Thursday, November 15, 2018

Unclaimed property holders in any industry may be subject to audit, but the nuances of the audit will vary depending on the property types involved. For holders working with securities, several audit practices are becoming more common. 

 

Transfer Agent Record Requests 

Auditors examining transfer agents are increasingly requesting documentation about their issuer clients. Those records belong to the securities issuer, so the transfer agent should not provide such records without their clients’ authority.  

 

Overreaching Requests

Auditors often ask for information that is not necessary to determine which shareholder accounts could be considered unclaimed property. For example, requests for contracts with transfer agents or search firms retained to locate share owners, account open dates and shareholder Social Security numbers are not relevant to establishing whether accounts represent unclaimed property. 

 

“Holders can push back on overreaching requests,” said Freda Pepper, counsel for Reed Smith LLP. “Just because an auditor is requesting information doesn’t mean it’s relevant and that it’s appropriate to be provided.” 

 

Long Silences

After providing large amounts of information to auditors, holders may not hear from them again for months. In some cases, such “radio silence” may continue for years. Some holders may choose to “let sleeping dogs lie,” while others prefer to seek confirmation that the audit has ended. 

 

Follow-up Requests

When following up on information the holder submitted, auditors often seek: 

  • Proof of contact, including system-generated reports or screenshots.
  • Proof that contact is actually “owner generated,” demonstrating that it was sufficient to restart the dormancy period. 
  • Cash transaction history. 
  • Date of last first-class mailing, proven with a screenshot.
  • Additional escheat filing detail. Auditors often ask for unclaimed property reports that have been filed within the past two years, which is unusual since the states they are representing already have this information. Increasingly, they are also requesting a preview reports before the next escheat report deadline. 

    “From a practical and logistical standpoint, doing a one-off preview report early in the cycle may be costly or not feasible, so holders may wish to push back on such requests,” Pepper said. 

 

Death Master File Use

As a result of success in the life insurance industry, auditors are increasingly using the Social Security Administration’s Death Master File as an audit tool for securities audits as well. Comparing records to the DMF, they seek to determine holders who may be deceased and accounts that are overdue to the state as unclaimed property. States and their auditors argue that the dormancy period for unclaimed property begins upon the date of death rather than the triggers established by state law. 

 

After identifying potentially deceased property owners, auditors claim the burden shifts to the holder to prove an account is active. Holders may choose to remove Social Security numbers from information provided to the state and its auditors for this reason. However, providing only names may result in even more work. Auditors may run account owner names against the DMF, receive false positive hits for common names and insist the holder prove such account owners with matching names are still alive. 

 

The 2019 UPPO Annual Conference will feature industry-specific breakout and educational sessions that offer attendees the chance to discuss and learn about trends facing the industries in which they work. Multiple educational sessions, including Audit 101, Third-Party Auditor Differences, and Estimation Under Audits and VDA, will also focus on audit trends. Visit UPPO’s Annual Conference website for details and registration. 

Tags:  Audits  securities 

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Tennessee Reduces Dormancy Period, Adds Requirements

Posted By Tim Dressen, UPPO, Thursday, August 10, 2017
Updated: Wednesday, January 9, 2019

Among the first states to pass a version of the Revised Uniform Unclaimed Property Act this year was Tennessee. On May 25, 2017, Tennessee Gov. Bill Haslam signed H.B. 420 into law, effective July 1, 2017. The new law includes several substantial changes to the state’s unclaimed property requirements. Noteworthy provisions include:

 

New property types: Among the new property types addressed in H.B. 420 are health savings accounts (HSAs) and stored value cards. HSAs are presumed abandoned if unclaimed three years after the earlier of either the date distributions must begin to avoid tax penalty or 30 years after the account was opened. Stored value cards (other than payroll or gift cards) are presumed abandoned five years after the later of: Dec. 31 of the year in which the card was issued or funds were last deposited; the most recent indication of owner interest in the card; or a verification of the balance by or on behalf of the owner. 

 

Due diligence: Holders must perform due diligence for property valued at $50 or more. Notices must be sent to apparent owners by first-class mail between 180 days and 60 days before the unclaimed property report is filed. Owners who have consented to receive electronic communications must be sent the notice by both first-class mail and email unless the holder believes the email address is invalid. 

 

DMF matching requirement: The new law specifies that life insurers must perform searches of the death master file and comply with the Unclaimed Life Insurance Benefits Act. 

 

Dormancy periods: Most property type dormancy periods have been reduced from five years to three years under H.B. 420.

  

Record retention: Holders are required to retain records for 10 years after the unclaimed property report was filed or was due to be filed. 

 

Promulgation of examination rules: The new law specifies that the state treasurer should develop rules for examinations, including procedures and standards for estimation, extrapolation and statistical sampling.

 

Sale of securities: H.B. 420 requires the treasurer to sell a security between eight months and one year after receiving it and giving the apparent owner notice. If the treasurer sells the security within five years, and a valid claim is filed before the five-year period expires, the owner will be entitled to receive a replacement of the security or its market value plus interest.

 

Informal conference provision: This law establishes provisions for an informal conference in situations where an examination results in a determination that a holder has failed to pay or deliver reportable property to the treasurer. It also allows for judicial review of the treasurer's decision. 

 

Exemptions: The law retains the state’s business to business and gift card exemptions. 

 

For the latest information about this and other noteworthy unclaimed property bills, visit UPPO’s govWATCH website

 

Tags:  audits  DMF  dormancy periods  due diligence  record retention  RUUPA  securities  Tennessee  unclaimed property 

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