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Holder Considerations: Delaware Senate Bill 13

Delaware Senate Bill 13: Holder ConsiderationsAs the state of incorporation or domicile for many of the country’s largest corporations, Delaware holds a prominent position within the unclaimed property landscape. As such, when Delaware makes changes to its unclaimed property laws, the holder community surely takes notice.

Signed into law on February 2nd and effective immediately, Delaware most recently revised its unclaimed property law with Senate Bill 13.

Keane recently hosted a live webinar featuring the Delaware Secretary of State, Jeffrey Bullock, and Geoffrey Sawyer of Drinker Biddle & Reath, the administrator of Delaware’s voluntary disclosure agreement program. The webinar addressed many concerns and questions from the holder community that were provided to Keane in advance of the webinar.

Lookback Periods, Record Retention Requirements and Statute of Limitations

Delaware Senate Bill 13 made some very substantive changes. One of which is that the look-back period for both audits and voluntary disclosure agreements (VDAs) was reduced to 10 report years. This means that a 2017 VDA or audit is going to look back to reports that should have been issued or filed in 2007.

DE Senate Bill 13 also created a very clear statute of limitations of 10 years that begins to run once the duty to report the unclaimed property arose. Some state statutes only trigger the statute of limitations to run if a report is filed. In this case, Delaware has adopted a statute of limitations provision where the statute of limitations begins to run regardless of whether a report is filed, which is significant and certainly in the holder’s favor.

What is significant about the lookback periods, record retention requirements, and statute of limitations, is that all of them are 10 years. All three provisions are also consistent with a good majority of states. And so, when companies expressed the desire to see more consistency, Delaware responded favorably.

Mandatory Assessment of Penalties & Interest

The new Delaware law also contains a mandatory interest provision, capped at 50% of the holder’s unclaimed property liability. By assessing mandatory interest, Delaware is looking to incent voluntary compliance.

Converting a Delaware Audit into a Voluntary Disclosure Agreement

One of the most significant aspects of Delaware Senate Bill 13 is that it provides two options for holders who are currently under audit to efficiently and fairly resolve their past due unclaimed property liabilities.

For holders who received a notice of an examination prior to July 22, 2015, those holders have the option of converting their audit into a VDA and receiving the same complete waiver of penalties and interest for past-due property.

Electing a Fast-Track Audit

Any holder who is currently under audit by Delaware can alternatively elect a fast-track audit that will be administered by the Delaware Department of Finance.

With respect to the fast-track audit, the statute says:

  1. There will be no interest and penalties.
  2. There is a two-year window to complete the audit.
  3. The auditor has 18 months from the date of holder enrollment into the fast-track audit to provide all audit information requests to the holder.

Delaware’s Use of Estimation in Unclaimed Property Audits

On or before July 1, 2017, Delaware will introduce regulations regarding its unclaimed property estimation methods. The regulations will address the permissible base period to be excluded from estimation, aging criteria for disbursements, and what constitutes complete and researchable records.

One of the bigger questions still pending is whether Delaware will adjust its historical unclaimed property estimations, commonly referred to as gross estimation or second-priority estimation.

Holder Considerations: Convert, Enroll, or Stay the Course?

Once Delaware issues the final clarification of its estimation methodologies by July 1st, holders under audit will have 60 days to decide how they want their audits to proceed. Holders must choose to convert to the VDA process, enroll in the fast-tracked audit, or to stay the course in the existing audit.

Because every decision will be unique to each individual holder, here are some factors to consider:

  • Is your audit still at the scoping phase of the review?
  • Has it progressed through the identification of at-risk transactions and subsequent research and remediation?
  • Does it remain some place in between?

Holders in the early audit phases may want to consider opting into the VDA. Those close to audit completion with limited exposures or concerns may instead want to consider the fast-tracked option or trying to reach a settlement with the Department of Finance prior to the conversion deadline.

Holders may also consider staying the course with a current audit if they are close to completion and approaching settlement, or if they believe that they may have to formally challenge the auditor’s position. If there is ever a situation where you think you may have to take legal action in order to get your case heard, holders may want to consider staying the course with the formal audit.

It’s also important to note that if a company does elect the VDA or the fast-track exam, they will have two years to complete the project. For those companies that elect to stay the course with their current audit, no timelines have been provided in any of the legislation.

Delaware’s Overall Goal

With the introduction and passage of Delaware Senate Bill 13, the state is looking to further its efforts to create an effective compliance model, as opposed to a model focused on enforcement. The VDA program is intended to make unclaimed property compliance for Delaware companies not only easier, but also cheaper and faster.

Clearly, the process is not a fire sale, in that Delaware isn’t giving anything away. It’s still a rigorous process, intended for most holders to find it fair, predictable and efficient.

Another critical aspect of the VDA program is setting expectations for holders when they enroll. Those expectations are based on the Delaware Secretary of State Voluntary Disclosure Agreement implementing guidelines that were initially published and then later revised based on actual holder experiences.

The end result, from Delaware’s perspective, is that there is now a much more streamlined statute providing more clarity, clear expectations and, most importantly, greater consistency with other state unclaimed property statutes.

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