Unclaimed Property laws are complex and often difficult for holders to interpret. This complexity also makes the unclaimed property laws challenging to enforce. However, as states continue to closely monitor their budgets and look increasingly to unclaimed property as a source of revenue, once-previously overlooked provisions are now being enforced in an effort to increase the rate of compliance. Recent news from Delaware and Illinois regarding compliance requirements for dividend reinvestment accounts and non-dividend paying accounts illustrate this point.
In both Delaware and Illinois (and presumably other states), dividend reinvestment plans and non-dividend paying accounts have become a hot topic of discussion. These accounts are often considered active in the eyes of brokerages, public corporations, and their respective transfer agents, as part of an owner’s obvious “buy and hold” strategy, but are considered inactive by the State based on the rules set forth by the unclaimed property laws.
Recently, the Securities Transfer Association (STA) reached out to the State of Delaware for clarification on how to handle these accounts. According to the State response, shareholder accounts are considered dormant after three years of inactivity. At that point, the assets are to be escheated to the state. There is no requirement that accounts have returned mail of any kind, meaning that accounts are considered reportable even where it is apparent that the mail is being delivered. Also, automatically-generated account transactions (such as automated dividend reinvestment) do not count as activity. In order to interrupt the dormancy period, there must be owner-initiated activity, like a withdrawal, deposit, or cashing of a dividend check.
It’s worth noting that while Delaware’s reporting deadline is March 1, it is allowing companies to request extensions until May 1, should they wish to attempt to re-establish contact with shareholders in an effort to avoid account escheatment this year.
Similarly, the State of Illinois is choosing to actively enforce the inactivity provisions within its law now, even though the provisions have been in place since 1994. The State specifies that company contact to shareholders in the form of mailings, clearing house transfers, automatic postings to accounts, or computer system conversion dates do not count as activity and will not prevent an account from escheating.
Companies must have a record of — and be able to prove — that owner contact has been made in order to defend their choice to retain an account in the event of an audit. For that reason, numerous stock transfer administrators are performing special due diligence mailings in an effort to solicit responses from “inactive” shareholders.
The simple bottom line is that the inactivity rules of every state must be considered to ensure that you stay compliant with state unclaimed property laws. But beyond that, companies should ensure that they are making a thorough effort to locate and reconnect with any account owners or shareholders whose accounts have been inactive for more than a year. Not only is this a best practice, but it will protect many customers and account owners who will otherwise have their accounts escheat.