Unclaimed property compliance for broker dealers and the financial services community can often be an overlooked area of compliance. In addition to Federal regulations such as SEC Rule 17Ad-17, maintaining compliance with 55 unique sets of state escheat law is critical to protecting investor accounts and valuable client relationships.
Below are 8 additional unclaimed property concerns for the brokerage industry.
IRPAC Report – IRA Escheatment
In its 2016 Annual Report to the IRS, the Information Reporting Program Advisory Committee (IRPAC) outlined its recommendations on a variety of issues.
The report requests guidance from the IRS that IRA assets escheated to state governments is a reportable distribution and asks that a new distribution code to Box 7 be added to Form 1099-R. The report also recommends that “distribution escheated to a state agency” be added to the list of reasons for missing the 60-day rollover when completing a waiver under the recent Rev. Proc. 2016-47. (Burden Reduction Subgroup – Page 36).
This recommendation has been brought up by IRPAC in the past, but has not been acted upon by the IRS to date. If the IRS ever chooses to implement this recommendation, this change will impact how broker dealers are required report IRA accounts.
The full IRPAC report can be found here: 2016 Public Report
Non Transferable or Worthless Securities
Broker dealers are faced with challenges remitting securities tied to a holder report that cannot be delivered to the state custodian or contra broker. Each state takes a different stance as to how securities fit these criteria. Some states allow broker dealers to establish an account in the name of the state in order to facilitate a transfer of shares to the state. This allows the broker to keep the property on the holder report and report the client account in its entirety.
Other states have recently taken a different approach whereby they are instructing holders not to report any shares that cannot be delivered or transferred to the states assigned custodian or broker. It’s generally not until later in the reporting and remittance process that the broker learns that a security cannot be delivered to the state’s custodian or contra broker.
In instances where states do not want securities that fit this criteria, the broker dealers have to reinstate the worthless security back to the client account that it originated from. Broker dealers are required to maintain the account and only report the shares if and when they become transferable.
Unclaimed Property Audits – If Not Now, When?
The more things change, the more they stay the same. The threat of an unclaimed property audit still looms large for broker dealers and financial services companies. If you haven’t already received an audit notice from one or more states, chances are you will soon.
Organizations not currently under audit would be well advised to consider a comprehensive assessment of any potential exposure and begin a proactive remediation plan prior to receiving an audit notice.
New Activity in Delaware
Delaware, the state of incorporation for many financial services firms, recently made sweeping changes to its unclaimed property program with the passage of Senate Bill 13. The new law establishes a standard record retention period, statute of limitations, and look-back periods for both voluntary disclosure agreements and audits – all of which have been set to ten years.
Holders currently engaged in an audit that began prior to July 22, 2015 will have the opportunity to convert the audit into a voluntary disclosure agreement under the program overseen by the Secretary of State.
Holders under audit will also have the opportunity to enroll in the yet-to-be-promulgated “Expedited Audit Option”, which will allow the holder to receive a full waiver of penalties and interest if the audit is completed within two years.
Following previous legislation, all holders must receive an invitation to enroll in the VDA program before receiving an audit notice. Delaware is expected to be sending additional VDA invitations in the coming months – as well as audit notices to holders that were previously informed of the VDA opportunity and chose not to enroll.
Mandated Use of the Death Master File
It is important to note that death is not yet a specified trigger for escheatment in any state laws regarding brokerage accounts or securities. However, many states are making efforts to require holders to conduct regular searches of the Social Security Administration’s Death Master File in order to identify deceased investors.
Additionally, third-party contingent fee auditors are leveraging the use of the DMF to identify potential liabilities. This practice originated within the life insurance industry, but has been replicated in multiple industries in recent years.
The broker dealer community is still buzzing about the recent changes to Pennsylvania’s unclaimed property law and its handling of Individual Retirement Accounts. Formerly, IRAs were considered eligible for escheatment three years after the date of mandatory distribution, or when the owner reached the age of 70 ½ years.
With the passage of PA HB 1605, an IRA owner is considered “lost” when two items of mail sent to the owner have been returned by the post office to the holder as undeliverable (“RPO”) regardless of the owner’s age or the date of mandatory distribution. This RPO status then triggers a three year dormancy period which can only be reset if there has been owner-generated contact or activity during the three year period.
The broker dealer industry has adamantly voiced their opposition to Pennsylvania’s change and is waiting with baited breath to see if the state intends to keep these new provisions in place
Broker-Controlled Accounts: The Unclaimed Property Hot Potato
Many questions have emerged regarding a specific set of property types collectively referred to as broker-controlled accounts. Despite the fact that both mutual funds and broker-dealers touch these accounts, neither side will claim sole responsibility as the holder with unclaimed property reporting responsibility. In reality, the issue of who the holder is, in a variety of hypothetical situations, is an issue for the mutual fund and broker dealer industries to resolve together.
Revised Uniform Unclaimed Property Act – Inconsistent Uniformity?
This past summer, the Uniform Law Commission passed the 2016 Revised Uniform Unclaimed Property Act (RUUPA). This most recent iteration addresses a multitude of business issues raised by the holder community, including statutes of limitation for audits, RPO as the dormancy trigger for securities, liquidation of securities, foreign addressed property, contingent fee auditors, and many others.
While it’s still too early to tell, indications are that states will continue to pick and choose what portions of the 2016 RUUPA they want to put in place. Some states, such as Maine, will introduce legislation that would enact the 2016 RUUPA as a whole; while others such as Utah have chosen to install some, but not all portions of the RUUPA.
Unclaimed Property Help for Broker Dealers
Keane assists brokerage firms and financial services organizations proactively address these issues and more through our comprehensive suite of compliance and risk remediation services.
For additional information on Keane’s services or to speak with a representative, please contact us online or call us at 800.848.8896. You can also look for us at next week’s 2017 SIFMA Operations Conference in Boca Raton, Florida.