“While the Death Master File is certainly a valuable source of information, it should not be treated as gospel. The SSA itself has noted that there is incorrect information contained within the DMF,” said Keane’s Chief Compliance Officer, Debbie Zumoff. “Just because you get a positive hit when searching an owner’s SSN in the Death Master File does not mean you should move forward with a definitive action on the account or policy. Another step of research or due diligence is always recommended to truly verify that the person is deceased.”

Following the lead of Kentucky and Tennessee, Maryland’s SB 77 would require issuers of life insurance policies or annuity contracts to perform good-faith cross-checks of the insurer’s in-force life insurance policies, annuity contracts, and retained asset accounts against the most recent DMF on at least a quarterly basis to identify death benefit payments. The insurer must then conduct a good faith effort to confirm the death using additional resources and records. Failure to do so can result in a $2,500 fine for each violation in addition to paying restitution of up to the amount of the actual damages.

As the Maryland legislature moves forward with SB 77, a hearing was recently held in Washington to discuss the DMF as well as H.B. 3475, also known as the “Keeping IDs Safe Act of 2011.” This bill aims to prevent the information contained within the DMF from being made public. The impetus for both the hearing and the Bill is concern over the DMF’s accuracy, as well as the increasing number of reports suggesting that the DMF is often used by criminals to perpetrate identity fraud. The hearing was just conducted on Thursday, February 2^nd. Check back often, as we will have news and information as it becomes available.

Click here to go from Death Master File Searches Continue to be a Hot Button Topic

• Money Orders
• Any sum payable on a check, draft, or similar instrument
• All Banking Property
• All Life Insurance Property (from 4 years)
• All Securities Property Types
• All property held by a fiduciary including IRA property
• Gift certificates and credit memos
• Any tangible and intangible property held in a safe deposit box
• All other property not specifically addressed in the South Dakota’s unclaimed property law

The only type of property unaffected by HB 1270 is traveler’s checks, which retains its dormancy period of 15 years.

South Dakota is the most recent state to attempt to reduce dormancy periods for unclaimed property. Since 2007, 21 other states have passed legislation to do so. To put this into perspective, let’s look solely at the banking industry. In 2003, 36 of the 54 reporting jurisdictions had five-year dormancy periods, while only 12 had three-year periods. Since that time, the numbers have shifted as 30 jurisdictions still maintain a five-year dormancy period, and 21 operate under a three-year period.

These numbers are slightly more drastic for securities property, where the number of jurisdictions operating with a five-year dormancy period has decreased from 36 to 20 since 2001 and the number of jurisdictions utilizing a three-year period rose from 9 to 20 in that same period.

If in fact SD HB 1270 is passed, it will go into effect July 1, 2012. Check back for any future developments on SD HB 1270 and similar legislation.

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In the official agreement release, Prudential notes that “in view of the complex issues raised,” there is “the probability that long-term litigation and/or administrative proceedings would be required to resolve the disputes.” As a result of the settlement, Prudential has agreed to enhance its unclaimed property policies to include incomplete or missing social security numbers, transposed letters in first and last names, or transposed digits in birth dates and social security numbers. Prudential’s Chief Communications Officer, Robert DeFillippo, noted that these improvements “will supplement Prudential’s extensive prior efforts” to identify decedents and locate beneficiaries of life insurance policies.

In addition to the modifications of their beneficiary location policies, Prudential has also agreed to restore the value of any affected accounts as well as pay the beneficiaries 3% compounded interest on the value of the held amounts. With California taking the lead on the audit and settlement, Prudential also pledged to comply with California laws and report unclaimed property on an accelerated basis when heirs or beneficiaries cannot be located.

As acknowledged in Prudential’s official agreement release, there are a variety of complex issues at hand. These issues will continue to be discussed and debated by both the states and the insurers. As additional states propose more stringent beneficiary location policies, life insurance companies will be pressed to verify decedents through the use of the Death Master File or comparable sources. Check back often, as this is likely only the latest highlight in this ongoing debate.

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1. Life Insurance providers are required to complete a thorough comparison of its in-force life insurance policies and retained asset accounts (RAA) against the SSA Death Master File (DMF) or other comparable database or service. This must be performed on a quarterly basis at a minimum, using criteria reasonably designed to identify potential matches of its insureds.
2. If a match is identified, the insurer must complete a good faith, documented effort to confirm the death of the insured and determine whether benefits are due within 90 days.
3. In the event that benefits are due, the insurer must also exhibit a show of good faith in their beneficiary location efforts and provide appropriate claim forms or instructions to each beneficiary to make a claim. This includes the need to provide an official death certificate if applicable under the policy. To the extent permitted by law, the insurer may disclose minimum necessary personal information about the insured or beneficiary to a person whom the insurer reasonably believes may be able to assist the insurer in locating the beneficiary or other entitled person. An insurer may not charge insureds, account holders, or beneficiaries for any fees or costs associated with the search or verification.
4. Any benefits due, plus any applicable accrued interest, shall first be payable to the designated beneficiaries or owners. In the event those beneficiaries or owners cannot be located, the benefits will escheat to the state as unclaimed property.
5. With respect to group life insurance, insurers are only required to confirm the possible death of an insured when they are providing full record-keeping services to the group policy holder.
6. Upon expiration of the statutory escheatment period, the insurer shall notify the Treasurer that the beneficiary or retained asset account holder has not submitted a claim and the insurer complied with this Act and was unable to contact the retained asset account holder or any beneficiary.  Upon such notice, the insurer must submit the unclaimed life insurance benefits or unclaimed retained asset accounts, plus any interest, to the Treasurer.

Tennessee is the second state to propose such legislation in less than a month, and it’s likely that other states across the company will follow suit. The purpose is to institute more stringent and proactive use of the Death Master File, ensure that regular life insurance beneficiary location policies are established, and to allow policy benefits that can’t be reunited with the beneficiary to be escheated to the states as unclaimed property. Given the timeframes involved, insurers will need to employ proactive beneficiary location and communication services (that have not previously been necessary) in order to minimize escheatment. Check back in the coming weeks, as Tennessee may not be the last domino to fall in this chain of events.

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As previously discussed here, Keane had described how the District Court in New Jersey held that the “place of purchase” presumption ran afoul of the priority rules outlined in the United States Supreme Court opinion of Texas v. New Jersey and granted the plaintiffs’ motion for a preliminary injunction, and now the Third Circuit has affirmed that decision of the District Court.

While the Third Circuit agreed with the District Court that the “place of purchase” presumption was invalid, the Third Circuit upheld New Jersey’s right to require holders to collect zip codes from gift card purchasers.  The District Court had granted the preliminary injunction against the zip code collection requirement, also referred to as the data collection requirement, on the basis that its only purpose was to facilitate the escheatment of gift cards pursuant to the “place of purchase” presumption.  The Third Circuit held that the zip code collection requirement was severable from the “place of purchase” presumption.  The Third Circuit stated that this data collection is consistent with the Supreme Court holdings in Texas v. New Jersey and other decisions because those decisions have consistently allowed for states to escheat pursuant to the last known address of the purchaser.  The opinion of the Third Circuit is vague as to whether or not the Third Circuit considered a zip code as solely sufficient to establish an address to report unclaimed property under the first priority rule in Texas v. New Jersey.

The Third Circuit also considered the application of New Jersey’s new gift card escheatment provisions.  The original law had attempted to apply retroactively to gift card and stored value card property.  The Third Circuit agrees with the District Court that the law cannot be applied retroactively as it infringes on contractual relationships of the issuers of the stored value cards.  However, the Third Circuit did uphold New Jersey’s ability to apply its two-year dormancy for gift cards prospectively.  The state’s basis for the law had been challenged as it was alleged that raising revenue was the sole motivation behind the bill.  The Third Circuit stated that as long as raising revenue was not the only legitimate purpose, the legislation passes the rational basis test and is therefore constitutional.

To summarize, the Third Circuit’s decision prevents New Jersey from enforcing its “place of purchase” presumption which violates Texas v. New Jersey, but New Jersey has been given clearance to enforce its zip code collection requirement and its new two-year dormancy provision for stored value cards and gift card escheatment.  While holders should certainly begin their preparations to comply with the surviving portions of New Jersey’s new gift card and stored value card law, the Third Circuit’s decision is an important installment in the legacy of Texas v. New Jersey and the courts’ willingness to adhere to the priority rules.  Keane is available to guide you and your company through any issues with complying with the new law, and will be monitoring any further developments should they arise.

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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To refresh your memory, SEC Rule 17Ad-17 mandates that all transfer agents must complete two database searches in an attempt to locate missing security holders. Within 3 to 12 months of the account being designated as return mail, the first search must take place. The second search, if necessary, must take place within 6 to 12 months of the completion of the first search. While Rule 17Ad-17 has had an impact felt throughout all publicly traded companies and the entire transfer agent industry, this new handbook change specifically affects the mutual fund industry and how it addresses unclaimed property within the state of New York. Accounts that you may have thought were not due to escheat for another two years may be due for reporting in the upcoming cycle.

For those impacted, it’s imperative to have policies, procedures, and systems in place to respond to this change, and maintain compliance with New York law.

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As detailed previously on this blog, the plaintiffs were granted a preliminary injunction against the place-of-purchase presumption in January 2011.  Accordingly, New Jersey was also prohibited from enforcing the zip code collection and maintenance provisions while the litigation ran its course.

The litigation has reached another major step in the process as attorneys argued an appeal of the issues before the Third Circuit.  Members of the unclaimed property team of Alston & Bird, LLP were in attendance and subsequently provided a detailed summary of the legal arguments presented by both sides.

As they argued at the District Court level, the plaintiffs contend that the New Jersey gift card law is preempted by both the Federal CARD Act and the federal priority rules for unclaimed property jurisdiction outlined in Texas v. New Jersey and subsequent case law.  With respect to the Federal CARD Act, the District Court had determined that the New Jersey law provided more protection for consumers than the federal law, and that companies in New Jersey could follow both laws simultaneously by honoring gift cards for 5 years, and seeking reimbursement from the state if the company was forced to honor a gift card after reporting it pursuant to New Jersey’s two (2) year dormancy period.  During oral arguments, the plaintiffs argued that this violated due process because it forced companies to “pay twice” – once to the state when reporting the property, and again to a cardholder seeking goods or services.  Plaintiffs also argued that this responsibility to honor gift cards after escheatment contradicted the New Jersey unclaimed property law which relieves holders of obligations once they turn the property over to the state.

The parties spent a large portion of the oral arguments on the issue of whether or not the New Jersey gift card law violated the priority rules of Texas v. New Jersey.  That decision requires holders to first report property to the state of the owner’s last known address.  Where that address is unknown, the holder must report to its state of corporate domicile.  During oral arguments, New Jersey argued that its place-of-purchase presumption is allowed when no other state with a higher priority is claiming a right to the gift card balance.  The plaintiffs countered by pointing out that New Jersey’s new priority system renders the Supreme Court’s second priority rule meaningless in some cases.  The plaintiffs supported their argument by stating that New Jersey’s additional priority rule further complicates a system mandated by the Supreme Court in order to simplify reporting for holders.  Finally, as was clarified in the injunction order, the plaintiffs reiterated that the data collection provisions are directly related to the place-of-purchase presumption as the collection’s sole purpose is to facilitate the new priority system.  If the place-of-purchase presumption should be found invalid, the plaintiffs argue, there would be no basis to enforce the data collection.

Other New Jersey Gift Card Legislation Issues

Violations of the U.S. Constitution were also at issue.  Oral argument was heard on whether the new law violated Substantive Due Process and whether the retroactive escheat requirement in the new law violates the Contracts Clause of the Constitution.

As pointed out by the team from Alston & Bird, it is unlikely that a decision will come down quickly from the Third Circuit.  A decision will likely take one to two months, and Keane will be alerting clients as soon as that occurs.

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Previously, holders were required to mail a due diligence letter by August 1st for property deemed abandoned before June 30th.  Under the amended bill, due diligence mailings must go out by May 1st for property deemed abandoned before March 1st.

The amended bill also proposes a dormancy reduction for money orders (7 to 3 years) and checking accounts, savings accounts, and CDs (5 to 3 years).  The bill also provides for an 18-month dormancy period for utility deposits.

Added only one day before passage in the Texas House, the amendments concerning Texas’ reporting due date are the most notable for holders.  As many companies are aware, states typically fall into either the more prevalent Fall reporting cycle or the Spring reporting cycle.  Passage of this bill with its recent amendments would result in a third reporting cycle that requires reporting on July 1st.  By utilizing that due date, Texas would join Michigan which enacted a July 1st due date in 2010.  While Keane is committed to guiding holders through the Texas unclaimed property rules, holders still have a strong incentive to encourage legislators to make their state’s reporting process simpler and more efficient.  This bill in Texas is a step backward from the goal of states all using a uniform reporting timeframe. 

The effective date for the newly proposed reporting deadline is January 1, 2013.  The remainder of the bill would be effective 9/1/2011.

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

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Chiang was critical of the way in which the industry has historically handled the payment of death benefits on life insurance and annuity policies – specifically, that there has been  insufficient analysis of dormant accounts, infrequent cross-checking with government databases listing the deceased, and circumstances where policy beneficiaries were not notified of the policy owner’s death.

The full article can be found at WSJonline.

Under the unclaimed property audit settlement, Hancock is required to:

• Restore the full value of more than 6,400 impacted accounts
• Create and adhere to methods for better identifying deceased policy holders and notifying their beneficiaries
• Fully comply with California’s unclaimed property laws and cooperate with the controller’s efforts to reunite more than $20 million of death benefits and matured annuities with their owners or, in many cases, the owners’ heirs
• Pay the state of California 3 percent compounded interest on the value of the held amounts from 1995, or from the date of the owner’s death, whichever is later

"These policies were purchased to give the owners and their families peace of mind," said Chiang. "I will move to quickly return those benefits to their rightful owners."

In the article, Hancock’s general counsel, Jonathan Chiel, said that the insurer has followed state laws. "We pay hundreds of millions of dollars every year in death benefits. They are taking the exceptions to the rule and suggesting some malfeasance. We followed the rules, and we did it right."

Similarly, Florida insurance regulators announced last Friday that they will be holding a hearing in May on insurers’ policies and practices with respect to unclaimed property compliance. In particular, regulators are curious to understand the different databases and best practices that insurance companies use to locate annuity policy owners as compared to those that are used to locate life insurance beneficiaries.

For more information about California Unclaimed Property, see the following additional resources:

California Unclaimed Property Reporting Gets Confusing, State Issues Guidance To Holders

California Escheat & Unclaimed Property Laws Overview & FAQ

California Unclaimed Property Eclipses $6.1B

California Unclaimed Property Reporting Procedures

Click here to access the rules for 2011 Reporting

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