Regulation 965 is titled, “Regulation on Practice and Procedure for Establishing Running of the Full Period of Dormancy for Certain Securities and Related Property.”  While the title purports to address the abandonment of securities property, the regulation, in fact, seeks to create a brand new obligation to perform due diligence in Delaware with respect only to “Securities and Related Property.”

“Securities and Related Property” is defined to mean Property that consists of:

1. Intangible ownership interests in corporations, whether or not represented by a stock certificate, bonds and other securities
2. Dividends, cash, stock and other distributions made (or attempted to be made) by issuers of securities in respect of the securities issued
3. Certificates of membership in a corporation or association
4. Funds deposited by a Holder with fiscal agents or fiduciaries for payment to Owners of dividends, coupon interest and liquidation value of stocks and bonds
5. Funds to redeem stocks and bonds

The new due diligence obligation does not include non-securities related properties or general ledger items.  As such, it appears that this is an effort on the part of Delaware regulators to respond to the backlash caused by the wave of Kelmar (Delaware initiated) audits across the securities arena over the past 18 months.

Currently, Delaware is one of a few states that does not statutorily mandate due diligence.  Under the proposed regulation, holders will now be required to attempt to contact an apparent owner of securities and related property, where the property has a value of $250 or more.  A first class letter must be sent no more than 120 days and no less than 60 days before reporting the property.   Notice is not required if the Holder has no record of an address or if the Holder has already given notice to the apparent owner in substantially similar form under other existing state or federal laws within 90 days of the required time period set forth in this regulation.  If any letter is returned to the Holder undelivered, or if any letter appears to have been delivered but the apparent owner of the property fails to respond to the letter before the Holder’s report of Abandoned Property is due, the Securities and Related Property shall be deemed Abandoned Property against which a full Period of Dormancy has run.  Holders may charge the cost of postage and other reasonable administrative costs, not to exceed five dollars per mailing, against the Securities and Related Property.  No indication is provided as to how exactly that deduction can occur in the securities context.

Regulation 959 addresses the practices and procedures for the appeal of any determination by the Audit Manager.  In July, 2010, the Delaware legislature amended §1156 providing for appeals of unclaimed property audit findings to the Secretary of Finance, thus  allowing for a procedure that was not previously available.  The proposed regulation provides in depth details concerning that procedure.  The regulation provides for specifics on topics such as deadlines, designation of an independent reviewer, the form of submissions, hearings and evidence, the issuance of proposed Findings of Fact and Conclusions of Law, post-hearing briefs and appeals to the Delaware Court of Chancery.  The proposed appellate procedure can be found in its entirety at http://regulations.delaware.gov/register/january2012/proposed/15%20DE%20Reg%20959%2001-01-12.htm

Comments are being accepted for both proposed regulations. Comments should be written and submitted to Mark Udinski at the Department of Finance, Escheator of the State of Delaware, Carvel State Building, 820 North French Street, P.O. Box 8763, Wilmington, Delaware 19899-8763. Comments must be received on or before January 31, 2012.

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Kentucky’s proposed law includes the following requirements:

• Like NCOIL’s model law, life insurance companies would be required to perform a comparison between its in-force life insurance policies and RAAs against the DMF, or equally comprehensive service. This comparison must be performed on a quarterly basis at minimum.
• If during this process, the life insurance company identifies a match with one of its insureds, they must complete a good faith, documented effort to confirm the death and determine whether benefits are due. This must be done within 90 days.
• If benefits are due, the insurer must use good faith efforts to locate the beneficiary(ies) and provide appropriate claim forms or instructions on how to make a claim. When permitted by law, the life insurance company may disclose some personal information about the insured or beneficiary to help identify other potential beneficiaries or entitled heirs. Life insurance companies would not be permitted to charge insureds, account holders, or beneficiaries any fees associated with the search or verification processes.
• The benefits from a life insurance policy or RAA (plus any applicable accrued interest) would be payable to the designated beneficiaries or account owners. In the event that they cannot be found, the benefits would escheat to the state as unclaimed property.

It’s important to note with this last point that if the statutory dormancy period expires and no beneficiaries have submitted a claim, the insurer would have to notify the state Treasurer that the beneficiary or RAA holder has not come forward. The insurer will also have to submit proof that they complied with this Act and were still unable locate a beneficiary. Once this notice has been filed, the assets – plus interest – can then be escheated to the Kentucky State Treasury.

The law also provides recommendations for group life insurance. In this instance, insurers would only be required to confirm a death if the insurers provide full record-keeping services to the group policyholder.

This request has been pre-filed for the 2012 legislative session. We’ll be sure to provide the latest as this unfolds.  It is likely that the model law, or variations of it, will be proposed and discussed by many states across the country starting in January when the legislatures return to session.  Since this has been a prominent issue over the last year, it is likely that we will see examples of this type of legislation being passed into law at some point in the 2012 legislative season.  We will continue to track those developments and share them on this blog throughout the year.

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The dormancy change was added by a Committee amending the bill shortly before it was sent to the Governor to be signed. The new law became effective immediately on June 16, 2011. The law includes a "conditional" dormancy period provision unlike any other that Keane has seen before. The law provides that if a holder reported more than $10 million of property on its most recent report, the dormancy period for the following property types is reduced from three years to two years:

This bill, originally introduced back on February 8th, 2011, did not address Nevada unclaimed property provisions. It made its way around the Assembly and Senate and several amendments were published. The bill’s history indicates that there was a conference report on June 6th that was adopted but not advertised (meaning the text wasn’t available).

On June 8th, the entire bill was reprinted for the fourth time. This is the first time where the new text pertaining to the dormancy changes appears.

On June 13th, the bill was sent to the Governor and was signed on June 16th. The process is certainly very curious and offered no opportunity for the public and the holder community to evaluate or comment upon the proposed change.

Aside from the bizarre nature of the changes, the creation of a two- year dormancy period for securities is a very unpopular concept. As you may recall, when Arizona changed its securities reporting requirements, the holder community outcry was quick and loud because the two-year dormancy period potentially conflicted with federal requirements under SEC Rule 17Ad-17.

We imagine the same response may happen here and we encourage clients to write to Governor Brian Sandoval’s office, as well as the Nevada Senator, Dean Rhoads, the bill’s sponsor. Contacting the local press in Nevada, would also be an effective tool.

Please note we will continue to track any changes regarding new Nevada unclaimed property law in our Unclaimed Property Blog and our quarterly unclaimed property newsletter, Keanotes.

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1. The dormancy period for “wages and other compensation for personal services” has been reduced from 2 years to 1 year.
2. This bill makes the following North Carolina unclaimed property reporting changes:
1. Removes the NAUPA reference from the statute so that electronic formats are now simply "prescribed by the Treasurer."
2. Provides for the aggregate reporting of properties worth less than $50.  Property reported in the aggregate requires no owner detail information.
3. Holders whose intangible unclaimed property value is $250 or less in any one given year need not report any property in that year, but are required to report that property in any subsequent year when their North Carolina unclaimed property value exceeds $250.
4. For all reported property, except travelers’ checks and money orders, the holder must include the following owner detail: address, social security number or tax ID number, date of birth, driver’s license number or state ID number, and email address.  Previously, only the social security number or taxpayer identification number of the owner was required.  It is important to note that the information is required to be reported to the state "if known". Thus if the holder has an email address on file (even if it’s bad) it should be included when the property is reported.
5. In the case of an annuity or a life or endowment insurance policy, the report must contain the full name and last known address, social security number or taxpayer identification number, date of birth, driver’s license or state identification number, and e-mail address of the annuitant or insured and of the beneficiary.  Previously, only the name and last known address were required.
6. For all North Carolina unclaimed property reporting having a value of $50 or more, the report must contain, in addition to a description of the property, an identification number and the property amount.

The changes will become effective on 10/1/11. However, additional guidance was provided yesterday stating that “changes concerning the reporting of unclaimed property will not be enforced until the 2012 reporting cycle (May 1, 2012 for Life Insurance and November 1, 2012 for all other holders) to allow holders the opportunity to make needed changes to reporting software, procedures, etc.

Holders may begin implementing these changes, and are encouraged to do so, beginning with their November 1, 2011 report.”  Please use this link to access the full Summary of Changes: Summary of Changes HB 692.

Please note we will continue to track any changes regarding new North Carolina unclaimed property reporting legislation in our Unclaimed Property Blog and our quarterly unclaimed property newsletter, Keanotes.

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The bill includes multiple changes to the New York Abandoned Property Law that affect holders required to file with New York for the next reporting cycle.   The New State Comptroller’s Office of Unclaimed Funds has also added an alert to its website summarizing the recent changes.

See http://www.osc.state.ny.us/ouf/oufhandbook.  According to the alert, effective April 1, 2011, dormancy periods have been lowered, publication obligations streamlined, and preliminary and negative reporting requirements have been discarded for banks, utility companies, insurance companies and condemnation award reports.

With respect to dormancy periods, reductions from five (5) years to three (3) years are currently in effect for many property types.  As such, for the next reporting cycle due diligence and reporting will have to be performed on property types covered by the changes which have been dormant for three, four and five years.   For your ease of reference, the following property types have been affected by the dormancy reductions:

Code      Property Type – 3 year Dormancy Period

1A          Demand Deposit Accounts

1B          Savings Accounts (includes Club, Security Deposit, and Retirement Accounts)

1C          Time Deposit Accounts

1D          Money on Deposit to Secure Funds (if separate from 1A and 1B)

1E           Unidentified Deposit (if separate from 1A and 1B) and Suspense Accounts

1F           Escrow Funds (Mortgages, Performance Guarantees, Surety Bonds, etc.)

1G          Credit Balances Arising from Loans (includes liquidated mortgages, consumer loans, etc.)

7A          Trust Funds

7B          Bail Funds

7C          Funds for Support of Spouse or Child

7D          Condemnation Awards

8D          Surplus from the Sale of Pledged Property

8E           Lost Property (cash only)

The elimination of preliminary reporting, negative reporting and notarization requirements for banks, utility companies, insurance companies and condemnation awards are subtle, but provides significant benefits to lessen the complexities of reporting for holders.  As a state government becomes more engaged in the unclaimed property reporting process, they are more likely to make efforts to improve the process for all three parties: states, holders, and owners.

The changes in New York State abandoned property are significant, but need not be intimidating for your company.  Keane’s expertise in reporting requirements and other areas of unclaimed property consulting are at your service to aid in the navigation of New York’s changes, and any other changes you may encounter in the always-changing field of unclaimed property.

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On April 25th 2011, Keane reported that California’s State Controller announced a large settlement with life insurer, John Hancock, regarding an insurance company unclaimed property audit.   In his announcement, State Controller Chiang asserted that insurers are not doing enough analysis of dormant accounts; and therefore are engaging in a practice of improperly failing to pay death benefits to the beneficiaries of life insurance policies.  It appears that the issues uncovered during California’s audit concerning the life insurer’s practices and compliance with unclaimed property laws have caused an escalation of the attention paid by the States to the insurance industry.  It has now been reported that 37 states have hired the third party audit firm, Verus, to determine whether life insurers are doing enough to find out whether life insurance policy insureds have died, locate the beneficiaries when the insureds have died, and turn unclaimed property over to the appropriate state agencies.

At the same time, the National Association of Insurance Commissioners (NAIC) has formed an unclaimed property task force to conduct examinations focusing on insurance company unclaimed property issues.  The State of Florida is chairing the NAIC 10-state task force evaluating insurers’ claim settlement practices and compliance with unclaimed property laws.  The states participating in the task force in addition to Florida are Pennsylvania, New Jersey, Illinois, California, West Virginia, Iowa, New Hampshire, Louisiana and North Dakota.

The Florida Office of Insurance Regulation (OIR) plans to hold an unclaimed property hearing May 19th and has invited representatives from MetLife Inc., and Nationwide Mutual Insurance Company to participate.  Florida OIR spokesman Jack McDermott says “before we can take regulatory action, or recommend statutory changes (if any) to the Legislature, we must ascertain the facts.  This is the purpose of the ongoing examinations, and the purpose of the evidentiary hearing on May 19th.”

Please note we will continue to report on developments related to insurance company unclaimed property as well as track any changes regarding new legislation in our Unclaimed Property Blog and our quarterly unclaimed property newsletter, Keanotes.

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A.      Proposed Changes

1.       Brokers and dealers will now be subject to the same requirements as transfer agents.  However, the Commission clarifies that "[a]s a practical matter, however, the Commission preliminarily believes that the only brokers and dealers that would have obligations under the amended rule would be those that carry securities for the accounts of "customers" within the meaning of Exchange Act Rule 15c3-3.  Such brokers and dealers generally are referred to as "clearing firms" (as opposed to "introducing firms") and tend to be the larger brokerage firms."

NOTE:  This statement bears some clarification from the Commission as it is causing some confusion among those in the industry.

2.       A "paying agent" will be required to provide written notification no later than 7 months after the sending of any uncashed check to each "missing security holder" to inform the missing security holder that they have been sent an uncashed check.  The notification may be sent with a check or other mailing subsequently sent to the missing security holder but must be provided no later than seven months after the sending of the not yet negotiated check.

• "Paying agent" is defined as any issuer, transfer agent, broker, dealer, investment adviser, indenture trustee, custodian or any other person that accepts payments from an issuer of securities and distributes payments to security holders.
• A person would be considered a "missing security holder" if a check is sent to the security holder and the check is not cashed before the earlier of the paying agent’s next regularly scheduled check, or 6 months.
• Paying agents are excluded from the notification requirements if the check is worth less than $25.

 NOTE:  Paying agents issuing monthly checks are challenged by this requirement and should question their available options in comments to the Commission.

3.       Paying agents will be required to keep records to demonstrate compliance with the rule.  Records must be kept for at least 3 years.  The previous year’s records are to be kept in an easily accessible place.  The Commission believes that the collection of information is necessary to enable transfer agents, brokers, and dealers and paying agents, as custodians of records that determine the ownership of securities and the entitlement to corporate distributions, to reduce the number of lost and missing security holders.

4.       Regulation 17Ad-17 will be re-titled to demonstrate it applies to personnel other than transfer agents.  Specifically, the Commission proposes to re-title the rule "Transfer agents’, brokers’, and dealers’ obligation to search for lost security holders; paying agents’ obligation to search for missing security holders".

5.       The SEC has preliminarily chosen one year from final action on the rule as an effective date.

B.      The proposed rules include the following requests for Public Comment:

1.       The Commission has been directed to avoid requiring multiple paying agents to send written notification to a missing security holder regarding the same not yet negotiated check. The Commission states that it does not believe that multiple notifications by different paying agents for a given check is a likely scenario under the proposed rule amendments because an issuer would not use two paying agents for the same distribution. However, the Commission requests comment on the likelihood of such an occurrence and, if such an occurrence is probable with any frequency, on ways to avoid it from happening.

2.       Comment on how brokers and dealers anticipate complying with the proposed rule’s requirement to search for lost security holders.

3.       Comment on whether the new term "missing security holder," and its related requirements and timeframes will be confused with the rule’s existing term "lost security holder" and its related requirements and timeframes. The Commission requests particular comment regarding whether brokers, dealers, and transfer agents, which are also included in the definition of "paying agent," foresee issues that may result from the use of the two terms.

4.       The Commission requests cost data for implementation of the proposed revisions by industry participants.

5.       Comments on any burdens to commerce that might result from the proposed rule amendments. Commentators should provide empirical data to support their views.

6.       With respect to Section 17A(g)(2)’s requirement that in preparing these amendments to Rule 17Ad-17 the Commission shall seek to "minimize disruptions to current systems," the Commission requests comment on any potential disruptions that may result from the proposed revisions and how to minimize any such potential disruptions.

7.       Comments on the proposal to establish a compliance date for the amendments of one year following final action by the Commission.

Comments are Due 45 days after publication of the proposed rules in the Federal Register. 

Rules were published on 3/18/11 – Comments are due on 5/2/2011.

Comments may be submitted electronically or by paper – see instructions below:

Electronic comments:

Use the Commission’s Internet comment form – (http://www.sec.gov/rules/proposed.shtml);

• Send an e-mail to rule-comments@sec.gov and include File Number S7-11-11 on the subject line; or
• Use the Federal eRulemaking Portal (http://www.regulations.gov) and follow the instructions for submitting comments.

Paper comments:

Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.

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Gift Card Escheatment Regulations

CALIFORNIA GIFT CARD ESCHEATMENT
SB 885
Introduced 1/19/2010, Passed 8/25/2010, Vetoed by Governor 9/24/2010
This bill would require that a gift certificate with a cash value of less than $10 be redeemable in cash for its cash value, and would require that a gift certificate contain a statement to that effect. This bill would also delete the exceptions to the prohibition on the sale of a gift certificate that contains a dormancy fee.

NEW JERSEY GIFT CARD ESCHEATMENT

HB 3330
Introduced 10/7/2010
This bill provides that gift cards and gift certificates be redeemable at full face value in perpetuity. The bill also creates a separate category of “store gift card” which is a gift card that is redeemable at a single retail mercantile establishment or an affiliated group of retail mercantile establishments that share the same name, mark or logo. As to stored gift cards, the bill requires a retail mercantile establishment, at which a stored gift card is redeemable, to: (1) upon request, disclose to the consumer the remaining value of the stored gift card; and (2) permit a transaction in an amount that is less than the remaining value of the stored gift card.

HB 3315
Introduced 10/7/2010
This bill makes it an unlawful practice for a retail mercantile establishment to advertise merchandise for sale indicating the availability of a rebate that is to be redeemable as a gift card, gift certificate, prepaid bank card, or stored gift card without disclosing that the rebate is available only as a gift card, gift certificate prepaid bank card, or stored gift card. These disclosures must be made by retail mercantile establishments in advertisements of the rebate and at the time of sale.

SB 2407
Introduced 11/8/2010
This bill exempts stored value cards usable solely for telephone services from State’s escheatment processes.

State Dormancy Periods Legislation

MICHIGAN DORMANCY PERIODS
HB 6421
Introduced 9/8/2010, Passed House 9/16/2010, Passed Senate 9/23/2010, Signed by Governor 10/5/2010
This bill reduces dormancy periods as follows:

1. General dormancy period from 5 years to 3 years
2. Money orders from 7 years to 3 years
3. Any sum payable on a check, draft, or similar instrument from 5 years to 3 years
4. Any demand, savings, matured time deposit or funds paid toward the purchase of a share, a mutual investment certificate, or any other interest in a banking or financial organization from 5 years to 3 years
5. Trust accounts and accounts under the gifts to minors act from 15 years to 3 years
6. Funds owed under any life or endowment insurance policy from 5 years to 3 years
7. Gift cards from 5 years to 3 years

Starting in 2011, the report shall be filed on or before July 1 for the 9-month period ending on March 21, 2011. For years ending after December 31, 2011, the report shall be filed on or before July 1 of each year for the 12-month period ending on the immediately preceding March 31.

MISSOURI DORMANCY PERIODS
HB 64
Introduced 12/7/2010
This bill proposes to reduce the dormancy period for payroll checks from 5 years to 1 year beginning January 1, 2012.

NEW JERSEY DORMANCY PERIODS
NJ 3250
Introduced 9/20/2010
This bill proposes to reverse the changes to the unclaimed property law just recently enacted with the passage of A3002. A 3250 proposes to do the following:

1. Restore the dormancy period for travelers checks to 15 years (from 3 years)
2. Restore the dormancy period for money orders to 7 years (from 3 years)
3. Restore the previous statutory standard of unconscionability for limiting service charges on travelers checks
4. Restore the statutory standard of unconscionability for limiting fees associated with a failure to redeem a credit balance, customer overpayment, security deposit, refund, credit memorandum, unused ticket, and similar instruments
5. Eliminate the State’s claim on unused stored value cards (i.e. return stored value cards to exempt status)
6. Eliminate A3002′s requirement that businesses gather contact information from customers buying gift cards.

Lastly, the bill grants the State Treasurer emergency regulatory authority to implement the proposed changes and to reimburse issuers that reported unclaimed property under the recent 2010 changes, which otherwise would not have been due as reportable.

Unclaimed Property Audit Regulations

NEVADA UNCLAIMED PROPERTY AUDIT
NV 5137
Proposed 8/17/2010
Nevada has proposed a regulation relating to unclaimed property establishing requirements relating to the selection of persons to be audited by the Administrator of Unclaimed Property. Five percent of audits would be conducted at random. The other 95% of audits would be conducted based upon an objective method established by the Administrator using common risk factors and other weighted criteria deemed useful by the Administrator. The details of the objective method shall be confidential.

Unclaimed Property Reporting Laws