November 21, 2013

1. UNCLAIMED PROPERTY:
What Funds and their Service
Providers Need to Know
November 21, 2013
Timothy S. Johnson
tjohnson@reedsmith.com
412.288.1484
Sara A. Lima
slima@reedsmith.com
215.851.8872
www.nicsa.org

2. AGENDA
What is Unclaimed Property?
Why Should We Care?
Specific Issues for Funds and Fund Service
Providers
Tools and Resources
www.nicsa.org

3. WHAT IS UNCLAIMED PROPERTY
 All 50 states + DC have UP laws
 Property “owned” by one person, and “held”
by another for a set “abandonment” period
 Examples:
Uncashed dividend or interest checks
Unclaimed securities
Unclaimed cash management accounts
Unclaimed 12b-1 fees, shareholder services fees,
and dealer allowances
www.nicsa.org

4. WHY DO I CARE ABOUT THIS?
 State aggressively focusing on this area
 contingent-fee, private auditors (Verus, Kelmar)
 multi-state audits
 Audits leading to huge assessments
 Delaware’s skin in the game
 Over $500 MM collected in FY 2013
 $55MM paid to contingent fee auditor
 Third-highest revenue source for the state
 Ambiguous rules lead to risk of liability
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Inconsistency between state and federal law
Whistleblower actions
Civil liability for wrongful escheat
Financial reporting issues
www.nicsa.org

5. SPECIFIC ISSUES FOR FUNDS AND
FUND SERVICE PROVIDERS
www.nicsa.org

6. WHO IS RESPONSIBLE?
ISSUER? TRANSFER AGENT? SOMEONE ELSE?
 “Holder” defined
Entity with underlying obligation or debt?
 Issuer of Fund Shares/Units
 Record owners – Financial intermediaries
Entity in possession?
 Transfer agent with access to the account
 Custodian in possession of
funds
www.nicsa.org

7. WHEN TO REMIT?
 Property becomes unclaimed and reportable
upon the expiration of the “abandonment” or
“dormancy” period set by the state
 Significant reductions in dormancy periods
 When does the abandonment period begin to
run?
Shareholder “contact”
Date of “maturity”: 529s, IRAs
www.nicsa.org

8. DUE DILIGENCE REQUIREMENTS
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Federal due diligence: SEC Rule 17Ad-17
State due diligence: 15 Del Reg 1330 (3/1/12)
Indemnification
Costs for compliance – recoverable?
Best Practices
www.nicsa.org

9. WHICH STATE GETS IT?
 Primary Rule: Owner’s state of residence
 Secondary Rule: Holder’s state of incorporation
Where there is no record of owner’s state
If owner’s “state”…“does not provide for escheat”
 But what about:
Owner lives in a foreign country that “does not
provide for escheat”?
Where holder has only a zip code– is that a “last
known address”?
www.nicsa.org

10. RISKS OF AUDIT: DELAWARE
EXPOSURE EXAMPLE
Annual Liability
$ 50,000
Audit Lookback to 1981
x 30 years
$ 1,500,000
Estimated Penalties (75%)
$ 1,125,000
Liability Before Interest
$ 2,625,000
Estimated Interest (50%)
$ 1,312,500
Total Delaware Exposure
$ 3,937,500
www.nicsa.org

11. VDAs & AMNESTY
 Delaware VDA Program (enter by June 2014)
 Look back to 1993
 Administered by Secretary of State’s office
 No penalties or interest
 Massachusetts VDA Program
 No “entrance” letter
 Nine-year look back
 No penalties or interest
 Maryland VDA Program
 Look back varies
 No penalties or interest
www.nicsa.org

12. TOOLS & RESOURCES
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Comments to regulations
Working groups and litigation coalitions
Contractual indemnity provisions
Legal opinions and reserves
Open records act requests
Letter ruling requests
Refund claims
Civil actions
www.nicsa.org

13. QUESTIONS?
www.nicsa.org

14. CONTACT INFORMATION
Timothy Johnson
Reed Smith LLP
412.288.1484
tjohnson@reedsmith.com
www.nicsa.org
Sara A. Lima
Reed Smith LLP
215.851.8872
slima@reedsmith.com