The corporate securities industry is under audit by Kelmar Associates
Compliance Update: July 2017
Kelmar Associates has been retained as the third-party auditor initiating a recent surge in multi-state examinations that has taken place in recent weeks. These unclaimed property audits of public corporations are specific in scope to securities or equity-related property.
During this period of increased audit activity, audit notices on behalf of multiple states were sent directly to an individual at the issuer/holder or to representatives at the relevant commercial stock transfer agent.
In either scenario, it is important to note that for the purposes of unclaimed property liability the states typically consider the individual business as the entity with the ultimate responsibility for compliance. Notwithstanding contractual provisions to the contrary, the issuer, not the transfer agent, will be susceptible to fines, penalties, and interest imposed by the states for any out of compliance property.
If you are unsure if your organization has received an audit notice, you should consult with your internal counsel, Corporate Governance staff, or Transfer Agent representative to confirm receipt of an escheat audit notice. If in fact your company is currently under audit, it is recommended that you consider retaining the services of an independent and objective holder advocate to guide you through the audit process in addition to trusted in-house or external legal counsel.
Companies that have yet to receive an audit notice should take proactive and precautionary measures by revisiting their existing unclaimed property policies and procedures, as well as conducting a full risk and liability assessment to identify and remediate any compliance gaps or potential areas of exposure prior to the onset of an audit.
Keane Consultants are available to review your risk in anticipation of or to defend against an audit conducted by Kelmar Associates or any other third-party contingent fee auditor.
Kelmar Associates, LLC has recently (first few months of 2011) been demanding significantly more information from holders with an emphasis on potential equity and debt related properties during its escheatment audits. Previously, Kelmar’s Initial Document Requests (IDRs) commonly asked some limited scope questions about the Holder’s contractual relationship, experience or history with their transfer agent. Kelmar’s auditing procedures are now requesting more detailed and comprehensive information concerning the Holder’s securities-related property types.
In the spirit of March Madness, Kelmar’s new “full-court press” asks holders to confirm their compliance with unclaimed property laws through a showing of extensive documentation. The information requested covers all forms of securities issued by the company (often through their transfer agent) such as common stock, preferred stock, unexchanged or unredeemed stock positions in the wake of mergers and acquisitions or redemptions, employee stock purchase plans, dividend reinvestment plans, and restricted stock accounts. The Holder is also expected to provide information concerning corporate trust agents, owner location firms, and vendor contracts. In the event of an escheatment audit, requested individual shareholder information includes, but is not limited to, the following data elements:
- Name and address
- Account number and TIN
- Date account was opened
- Date of most recent owner contact
- Date account became undeliverable (if applicable)
- List of outstanding dividend checks (with detailed information per check)
- List of suppressed checks
- List of outstanding shares
Kelmar is exploring an area in which their previous audits had only scratched the surface. As always, escheatment audits run smoothly when a holder is prepared and the holder’s documentation is organized and thorough. Holders that are publicly held should seriously and promptly consider these developments when evaluating the efficiencies of their current record retention systems as they relate to unclaimed property compliance. Obtaining copies of all reports filed on your behalf to all states is a critical first step! Testing internal procedures and processes is highly recommended to prepare for an audit.
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