® Summer 2016: Volume 14, Issue 2 The first unclaimed property compliance newsletter, published exclusively by Keane since 2003. Keane is the country’s leading provider of unclaimed property compliance solutions.

in this issue: California Securities Escheatment Update

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Too Much “Unclaimed Property?”

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Legislative Updates

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Unclaimed Property 101

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Litigation Updates

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Retirement Plan Products

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Too Much “Unclaimed Property?” By Karen Anderson and Maureen Ferrari

California Securities Escheatment Update Is the Ground Beginning to Tremble? By Debbie L. Zumoff, Chief Compliance Officer and National Consulting Practice Leader Background: The California Unclaimed Property Law, Section 1516(b) states the following: “…, any intangible interest in a business association (such as shares of stock),…, escheats to this state if (1) the [owner of the stock has] for more than three years has neither claimed a dividend or other sum referred to in subdivision (a) nor corresponded in writing with the association or otherwise indicated an interest…, and (2) the association does not know the location of the owner at the end of the three-year period.” This statutory dormancy trigger for securities has two clear conditions: 1) no owner-generated activity/contact; and 2) that the holder doesn’t know where the owner is located or is “lost.”

The message holders receive today as the result of aggressive state enforcement measures is: “report every item that is outstanding as defined and required by state statutes.” This mantra has reverberated throughout the holder community to the extent that many holders send reports and remittances to states with trepidation as to whether they are considered to have timely reported all of the items required by state statutes. As this anxious shuffling and remitting of property occurs in an effort to prevent punitive audits, sometimes holders “over-report” property that legitimately is not “unclaimed property” or may not be reportable unclaimed property. Accounting Errors: Not Unclaimed Property No matter how automated and well-structured a business’ processes are, errors do occur that cause accounts payable or accounts receivable items to seem to be outstanding, when in reality they are not. In other words, an item sometimes only appears outstanding and “unclaimed” and ready to be escheated to the appropriate state once the applicable dormancy time period has expired. The appropriate research may uncover information indicating that the seemingly “outstanding” item is actually a duplicate payment or the same credit mistakenly recorded twice. continued on page 3

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continued from page 1 UPPO Annual Conference – State Panel In March 2016, the California Unclaimed Property Administrator, Gary Qualset, was a speaker at the 2016 Unclaimed Property Professionals Organization’s Annual Conference. During the Conference’s state panel session, Mr. Qualset indicated that the California State Controller’s Office’s Legal division has been working on a draft statement regarding questions surrounding CCP Section 1516(b). He elaborated that the interpretive statement is expected to confirm that CCP Section 1516(b) does not require any formal return mail requirement in order for dormancy to be triggered, thus having the potential to shift California to a pure inactivity dormancy standard. This revelation was a surprise to most attendees in the audience. The New 2016 California Reporting Handbook In a subsequent development, the following language appeared in the revised holder reporting handbook distributed by the California SCO on April 25, 2016: “Intangible Interest (Stocks), Dividends, Bonds, Interest and Principal Any dividend, profit, distribution, interest, payment on principal, or other sum held for or owed to a shareholder, certificate holder, bond holder, other security holder, or a participating patron of a cooperative, who has not claimed it or corresponded electronically or in writing with the holder or the holder’s transfer agent concerning that property within three years, escheats to the State. Any intangible interest in a business association, as evidenced by the stock records or membership records of the association, escheats to the State if the interest is owned by another person who has neither claimed a dividend or other sum or contacted the holder within three years. When stocks or other securities escheat, any dividend or other distribution attached to the stocks or security escheat at the same time. In the case of unclaimed intangible interest (stocks) or dividends, the issuing corporation is deemed to be the holder. The stocks referred to herein are those of record belonging to the shareholder, whether or not a certificate has been issued to, or is in the hands of, the shareholder or holder.

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Un-exchanged stock, unclaimed cash in lieu of fractional shares, or unclaimed cash held for the redemption of stock resulting from the merger, consolidation, acquisition, or similar event escheats beginning with the date on which the prior corporation lost contact with the owner and not the date of merger, consolidation, acquisition, or similar event. Law reference: CCP section 1516, Escheat Period: 3 Years” Although arguably a very subtle mention within the handbook, the SCO is now providing this guidance which clearly conflicts with, and entirely omits, the second prong of its own statute Section 1516(b) which requires that the location of the owner be unknown at the end of the dormancy period.

Going Forward: Many financial services industry groups are distressed by the combination of Mr. Qualset’s comments during UPPO, the anticipated interpretive notice from SCO Legal and the recent holder handbook changes. Several groups are contemplating dialogue with the SCO legal division in an effort to ensure retention of the formal RPO element which is part of California’s statutory securities dormancy trigger. Meanwhile, legal experts with unclaimed property expertise are advising that nothing should change in terms of holder analysis and reporting to California. The analysis for notice and remit reports should remain consistent with prior years using both DOLC and RPO dates to identify account populations eligible for California reporting. Barring a worst case scenario in which California amends its Unclaimed Property Law by removing the second RPO prong of the securities dormancy trigger, all holders would be prudent to consider the initiation of an aggressive and comprehensive owner outreach campaign. In today’s unclaimed property enforcement climate, leveraging mail and phone communications to generate updated dates of last contact for all owners with California addresses within their books and records is a best and maybe even essential practice.

Too Much “Unclaimed Property?” continued from page 1

There are a myriad of other types of accounting errors that can cause a “false positive” designation or that can cause an item to appear to be outstanding/unclaimed property. Examples include a check payment that wasn’t voided when your company returned merchandise or when your company paid for a service/product with a credit card but a check was issued as well. In the accounts receivable area, “false positives” could be caused by such things as a misapplied payment or a credit recorded prematurely when a client indicates it will return merchandise, but decides not to do so. If a report of outstanding accounts payable or aged credits is run and used for unclaimed property reporting, “over-reporting” could result due to accounting errors. Exclusions/Exemptions: Not Unclaimed Property or Not Reportable Unclaimed Property Failing to apply statutory exclusions or exemptions may also cause “over-reporting.” There are state unclaimed property statutes that either “exclude” certain types of items from the definition of unclaimed property or “exempt” the property from reporting and remitting. An example of a state “exclusion” appears in the Maryland unclaimed property law whereby outstanding checks or credits issued to vendors or commercial customers in the ordinary course of business are excluded from the definition of “personal property.”1 The result is that the Maryland statutory holder obligations of due diligence and reporting do not apply to the excluded property. Reporting such items would be voluntary and some may argue that reporting these items is “over-reporting.” Further, consider that there are state unclaimed property laws that include exemptions from reporting and remitting. By way of illustration, consider that the Tennessee unclaimed property law exempts any outstanding check, draft, credit balance, customer’s overpayment or unidentified remittance issued to a business entity as part of a commercial transaction in the ordinary course of a holder’s business.2 Also, there are “de mininis” exemptions that permit the holder to refrain from reporting and remitting property valued under a specified dollar amount like the recently enacted Michigan $25 or less exemption. If a holder does not take into account these exemptions when preparing unclaimed property reports and remittances, chances are they may be “over-reporting.”

the remediation and still meet the statutory timeframes for due diligence and reporting. The state due diligence time periods and thresholds must be taken into account as some of the items selected for review and research ultimately may not be reversed as an accounting error or as exempted/excluded property and therefore, due diligence will need to be performed. Setting an item value threshold permits the review and research to focus on those items that are the highest liability. In addition, the types of potential accounting errors, the state requirements or specifications for exemptions/exclusions and the documentation necessary to substantiate item reversals must be clearly identified and stated in written procedures for consistency in application. It may be necessary to have legal counsel interpret certain state requirements to minimize the risk of misapplying them and possibly subjecting your company to liability in the event of an unclaimed property audit. Also, careful consideration of the documentation necessary to substantiate conclusions that items are accounting errors or that an exclusion/exemption applies to them may be important in passing the future scrutiny of an unclaimed property auditor. Keane’s Remediation Services If you believe your company has reported “too much” to the states and you would like to explore opportunities to review and remediate your current liability, Keane has launched a new General Ledger Remediation and Recovery Service. By reviewing your outstanding check population, Keane’s experts can identify items that may be subject to mitigation, statutory exemptions or precluded from escheatment for a variety of reasons. Contact Keane to learn more about how this new service can benefit your organization.

Preventing Over-Reporting: Remediation While some holders knowingly “over-report” unclaimed property due to convenience, others may want to consider putting into place a program for preventing accounting error and exclusion/ exemption-related over-reporting. Holders that issue a large volume of checks and/or have a significant number of customer transactions may be more likely to consider implementing procedures to prevent “over-reporting” through remediation. Remediation is a process of reviewing outstanding items, performing research on selected items, adjusting the items if warranted due to the research and documenting substantiated adjustments. To establish a remediation process, the holder must establish a timeline and item value thresholds that would permit it to perform

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Maryland Uniform Disposition of Unclaimed Property Act, § 17-101 (m)(3)

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Tennessee Unclaimed Disposition of Unclaimed Property Act, § 66-29-104 (3)(C)

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Unclaimed Property 101 By Maureen Ferrari

Lesson 2: Effective Due Diligence Welcome back to our three-part series on unclaimed property reporting. In part one of the series we discussed data collection and analysis and emphasized the importance of gathering the appropriate data and maintaining the most up-to-date compliance rules to ensure a complete and accurate eligibility analysis. Once the eligibility analysis has been finalized, the next steps are determining which accounts qualify for the statutory due diligence mailing, when the state requires the mailing of the letters and the content of the letter. In this article, we will not only discuss the statutory due diligence requirements but will share best practices to ensure that your due diligence program is successful in retaining accounts and reuniting the rightful owners with their funds. Statutory Due Diligence

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There are a few states that exempt the due diligence requirement if the address of record is known to be a “bad” address, meaning that mail has been returned as undeliverable to that address. Timing

As with most things in life, timing is everything and due diligence is no exception. Mailing within 60 to 120 days prior to the reporting deadline is the most common time frame either mandated or recommended by the states. States began to impose timeframes for sending due diligence to discourage holders from mailing letters too close to the reporting deadline. Instead, the states wanted to allow the owner at least thirty days to respond to the letter, and acknowledge his or her ownership interest in the property held by the holder, prior to escheatment.

In general, states require a notice to be sent to the last known address of the owner of the funds as indicated in the holder’s records. The exception to this requirement is Pennsylvania, where there is no due diligence requirement, and Delaware, where the due diligence requirement is limited to securities-related property over $250 in value. The purpose of the requirement is to give the owner one last opportunity to claim their funds or reactivate their account before it is turned over to the state. Over the years, states have placed greater emphasis on due diligence, with new or enhanced requirements on qualifications for due diligence, timing of the mailing, letter content, method of delivery and even attestations of mailing.

Like all aspects of unclaimed property regulation, there are states that vary from the norm. Some, like California, require letters to be mailed within 180 to 365 days prior to the property becoming reportable. Michigan requires letters to be mailed within 60 to 365 days prior to the report deadline, and New York requires first class letters to be mailed 90 days prior to the deadline and a certified mailing to take place (on accounts valued over $1,000) 60 days prior to the deadline. Mailing letters to owners in foreign countries is also required. Keep in mind that additional time may be needed for the mail to reach the owner and for the owner to respond. While most states do not mandate how much response time should be given to the owner, the standard recommendation is 30 to 45 days.

Qualification

Content

In evaluating whether or not due diligence is required, there are several factors that must be considered, including: property type, state of the owner’s last known address, value of the account, and possibly, whether or not the address is a known “bad” address.

While the state requirements on letter content vary, with California being the most precise in its specifications, the majority of states require that one or more of the following provisions or statements be contained in the due diligence notification:

• The nature and identifying number and/or description of the property

Above and Beyond—Enhanced Due Diligence

• A statement relaying that the property must be validated by the owner otherwise the property will be transferred to the State Treasurer/Controller.

If you follow each state’s statutory mandate, you will likely have a due diligence response rate of about 20%. To improve your response rate and retain assets under management, or ensure that the payment of funds is going from you to your customer instead of from the state to your customer, an enhanced customer outreach program is a suggested practice.

• Information on the steps required to claim the property. • The date the property will be reported to the state, if proof of claim is not satisfied. • Contact information for your company.

California further requires: • The face of the notice to contain a heading at the top of the letter stating: “THE STATE OF CALIFORNIA REQUIRES US TO NOTIFY YOU THAT YOUR UNCLAIMED PROPERTY MAY BE TRANSFERRED TO THE STATE IF YOU DO NOT CONTACT US” or substantially similar language. • Specification that since the date of the last activity, or for the last two years, there has been no owner activity on the account (must be in boldface type or in a font a minimum of two points larger than the rest of the notice). • Identification of the account number (which does not have to exceed four digits). • Notice that the account is in danger of escheating to the state. • A statement that the Unclaimed Property Law requires business associations to transfer funds that have been inactive for three years.

Method of Delivery

While first class mail is the generally accepted or mandated method of delivery, there are a few states that require a notice to be sent via Certified Mail. Most notably, New Jersey requires all due diligence notices for properties greater than $50 to be mailed via Certified Mail and New York requires a certified letter to be mailed to all account holders valued at $1,000 and greater if they do not respond to a first class letter. Ohio requires a certified letter for accounts $1,000 and greater, and Iowa requires banks and financial institutions to mail notices certified. To offset the cost of the due diligence mailing, some states allow a deduction to be taken for a portion of the expenses. Consult the state statute for details on the allowance. State Enforcement of Due Diligence Requirements State auditors will ask for proof of due diligence compliance. To satisfy such a request, it is recommended that a holder retain documentation showing that statutory due diligence was performed including copies of the letters that were reported. Some states are now including a due diligence attestation as part of the annual reporting process while others are asking for the number of due diligence letters mailed to be documented on the state cover sheet.

If taking a few extra steps would increase your response rate from 20% to as high as 80%, what would these steps be? 1. Search for an updated address. There is nothing in the state statutes precluding you from trying to locate the owner and sending a letter to the updated address. This could be done prior to the statutory due diligence mailing and may save money in the long run, especially for states that require certified mailings. 2. Clearly state the purpose of the letter. While the statemandated due diligence letters may have certain language that states require, an enhanced customer outreach letter can be more customer-friendly and reflect the company style and brand. 3. Give the customer multiple options to respond such as returning the customer outreach letter, calling a toll-free number, emailing, logging-into your website and selfauthenticating using a PIN and password, or visiting a branch location. 4. Create a sense of urgency. Be sure your customers or investors understand the ramifications of not responding to your outreach. 5. Make phone calls to customers with high dollar value accounts. While there are a plethora of state requirements involved in the due diligence process, it is possible to make the process work to achieve your organization’s goals. Whether it is retaining accounts, minimizing your liability, or achieving compliance, an effective due diligence program can convert the statutory obligation into a winwin situation. In our next and final segment of this series, we will explore the process of creating and submitting your state reports. It’s often not as easy as pressing a button on the reporting software. The process comes with its own set of rules and requirements. Until next time, class dismissed!

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Litigation Update By Karen Anderson, Deputy Chief Compliance Officer

During Q4 2015 and Q1 2016, important unclaimed property-related lawsuits were filed and significant developments occurred in two existing cases. Interestingly, with the exception of the Minnesota case, the lawsuits are focused on gift cards, retail credits, and money orders. Summaries of these lawsuits and their potential implications are provided below. Retail Merchandise Credits - California Bed, Bath and Beyond v. Chiang, No. 37-2014 (Super. Ct. San Diego, CA), Mar. 4, 2016) A recent California lower court determination sheds some light on the abandoned property treatment of retail merchandise credits. On March 4, 2015, a California Superior Court determined that the California unclaimed property law’s (UPL) reach does NOT extend to unused merchandise credits redeemable for merchandise only. Further, the Court stated that the credits were exempted from the law as the features of the credits are similar to loyalty or promotional cards which are a subset of gift cards under California law. The lawsuit, Bed Bath, & Beyond (“BB&B”), Inc. v. John Chiang was filed in 2014 by BB&B against the California Controller to retrieve over $1.8 million dollars in store merchandise credits that it had reported and remitted to the California Controller’s unclaimed property division from 2004 to 2012. BB&B tried to reclaim the funds from the Controller’s unclaimed property division contending that it was reported in error. The claim was denied by the Controller and BB&B filed suit. 1

In response to the lawsuit complaint, the Controller argued that the property was properly escheated under the UPL’s “catchall” provision (Section 1520) which covers all “intangible personal property….. that is held or owing in the ordinary course of the holder’s business.” However, in the order granting BB&B’s motion for summary judgment, the Court indicated that since the merchandise credits in question are not redeemable for cash, BB&B did not “owe” money to the owner. Further, the Court noted that the law permits BB&B’s “no cash refund” policy for return without a sales receipt and that under the Controller’s analysis, “those same store credits could then be escheated and operate as cash available to a consumer when the consumer was never entitled to cash.” In addition, the Court indicated that the credits in question are similar to gift certificates/cards issued under awards, loyalty or promotional programs. As gift certificates/cards that do not have an expiration date are exempted from UPL, the Court went on to say 16

that, “the UPL does not apply to BB&B’s store credit because they are in the form of a gift certificate.” While this decision is favorable for retailers that issue store credits for returned merchandise and could have a ripple effect in other jurisdictions, it is likely that the Controller will appeal the Superior Court’s decision. Further, some will argue that its application may be limited to the factual situation presented in this case: 1) there is a legal store policy in place that cash refunds are not provided for returns without a sales receipt; and 2) the store issues a credit for merchandise only which must be presented at the time it is being redeemed; and 3) the credit has no expiration date. In this case, the Court declined to opine about the situation when the customer returns merchandise, submits the original sales receipt and is provided a store credit certificate, but fails to redeem it within the catchall dormancy period stated in the UPL. “Other Similar Instruments“ and the Priority Rules Commonwealth of Pennsylvania, et. al v. Delaware State Escheator, No. 1:16-cv-00351-JEJ,USDC Middle District of Pennsylvania, February 2016 In late February, the Pennsylvania State Treasurer initiated a lawsuit against the Delaware State Escheator and Money Gram Payment Systems, Inc. (“MoneyGram”) alleging that Delaware advised MoneyGram to escheat - and retained the escheatment of - nearly $10.3M dollars in official checks that were purchased in Pennsylvania. In its complaint, Pennsylvania asserts that the federal Disposition of Abandoned Money Orders and Traveler’s Checks Act2 applies to the checks in question in the suit. This federal law prescribes that for money orders, travelers checks or “other similar instruments” (other than third party bank checks) on which a banking or financial organization or business association is liable, the state where the instrument was purchased is the state entitled to take custody. Pennsylvania argues that its unclaimed property law includes a definition of financial organization applicable to MoneyGram. Further, they indicate that because MoneyGram’s money orders and official checks have the same characteristics (i.e., the funds used to purchase both are held by MoneyGram until the instruments are negotiated), they are considered “other similar instruments” covered by the federal law. More directly, the complaint states, “no material commercial difference exists between money orders and official checks.” 1 2

Bed, Bath and Beyond v. Chiang, No. 37-2014 (Super. Ct. San Diego, CA, Mar. 4, 2016). 12 USC Sections 2501 – 03.

Pennsylvania explains that prior to being incorporated in Delaware, MoneyGram was incorporated in Minnesota, and in 2015, Minnesota turned over $200,000 to Pennsylvania for abandoned official checks issued by MoneyGram which were purchased in Pennsylvania. Also, the Pennsylvania Treasurer explains that other states (including Texas and Colorado) have requested that the Delaware State Escheator remit to them sums payable on abandoned MoneyGram checks that were purchased in their respective states, but remitted by MoneyGram to Delaware.

Originally, the DOF issued a notice of examination to Blackhawk’s predecessor company, Parago, Inc., in February 2011. Kelmar Associates was contracted by the DOF/State Escheator to perform the examination. According to the recent complaint, “Parago has refused to fully cooperate with the State Escheator and has interfered with the State’s ability to exercise its statutory right to examine Parago’s records….” Further, the DOF alleges that Parago indicated that it would not comply with the summons without a court order directing it to so comply.

The complaint details the history of Pennsylvania’s outreach to the Delaware State Escheator in its effort to retrieve the MoneyGram funds remitted to the Escheator, which began in mid-2015 and included letters and requests for meetings with Delaware to resolve the issue. Delaware was somewhat unresponsive and initially refused to meet in person or by phone with Pennsylvania officials taking the position that the MoneyGram official checks were “third-party bank checks” which are not subject to the federal law but covered by the Delaware abandoned property statute.

This factual situation is reminiscent of the Fitzgerald v. Young America Corporation lawsuit,5 when third party rebate processor Young America was under audit by 40+ states (including Delaware) through their audit contractor, Affiliated Computer Services, Inc. In that litigation, particular Young America client companies were impleaded into the case and those companies (i.e., Sprint, T-Mobile, and Walgreens) settled with the states participating in the audit.

Regarding MoneyGram, Pennsylvania notes that they had recently audited MoneyGram, which is how the almost $10.3M of abandoned official checks purchased in their state was uncovered, and that they had communicated to MoneyGram their belief that these were owed to Pennsylvania. Further, Pennsylvania indicates in its complaint that it has requested that MoneyGram “immediately cease remitting sums payable on official checks purchased in Pennsylvania to Delaware,” and have asked the Court to award it the $10.3M and penalties and interest from MoneyGram. As of the time of this writing, discovery had been stayed by the Court pending decision on motions to dismiss the suit for lack of subject matter jurisdiction which were filed in late April by Delaware State Escheator Gregor and MoneyGram. The case is resonating with Delaware politicians, some of whom have recently argued that Delaware’s reliance on unclaimed property as a revenue stream is unstable and inconsistent. As Representative Paul Baumbach noted in a recent article on the case, “[t]his particular amount of money is relatively small for us, so I don’t think it’s going to create any big shifts by itself…but it reinforces the need for us to work together to come up with systemic changes.”3 State Senator Bryan Townsend echoed that sentiment and emphasized that the case shows that Delaware is not the only state that relies on unclaimed property as a revenue stream: “I think it shows how important this is to Delaware, and that other states are going to try and grab as much as they can….”4 Audits and Rebates Delaware Department of Finance v. Blackhawk Engagement Solutions, Inc., Case No. 11737, Delaware Court of Chancery In November, 2015 the Delaware Department of Finance (“DOF”) brought suit against Blackhawk Engagement Solutions, Inc. (“Blackhawk” formerly Parago, Inc.) incorporated in Delaware. Blackhawk is a third party rebate processor serving retail company clients. The action was brought to enforce the administrative summons that the DOF served on Blackhawk in February 2015, under which the DOF sought sworn testimony and the production of documents (including client contracts) related to uncashed rebate check payments returned to Blackhawks client companies or subject to an express per-transaction fee discount to its Client companies.

If the DOF prevails, holders involved with rebate and incentive programs or that use other third party disbursement vendors, should review their program or agreement terms and take measures to minimize possible exposure related to such arrangements. As of this writing, in the Blackhawk case a motion by the plaintiff for a judgment on the pleadings had been filed and was pending. Application of Gift Card Exemptions Delaware ex. Rel. French v. Card Compliant, LLC, et al., C.A. No.: N13C06-289 FSS (CCLD), Delaware Superior Court for New Castle County In June, 2013, a qui tam (“whistleblower”) suit under the Delaware False Claims and Reporting Act6 (“DFCRA”) was filed under seal in Delaware Superior Court against about two dozen retail businesses (including Netflix, Sony Electronics and Sketchers), their third party contractor Card Compliant, and the National Restaurant Association. The plaintiff is a former Card Compliant employee who also was the founder of Card Fact, a company that competed with and was purchased by Card Compliant. He was joined by the State of Delaware as a plaintiff in March, 2014. The plaintiffs claim that the defendants entered into agreements with Card Compliant (then Card Fact) to avoid paying Delaware the value of unredeemed gift card balances. The suit was unsealed and became public during the first few months of 2014 when many of the defendants became aware of the lawsuit. The plaintiffs assert that the scheme involved the use of special corporations to issue the gift cards on behalf of the retailers. These corporations were incorporated in states whose unclaimed property statutes exempt unredeemed gift card balances from being reported and remitted as unclaimed property. Under United States Supreme Court decision7 the applicable unclaimed property law for items where the owner is unknown is that of the state of incorporation of the business holding the property. Due to the nature of gift cards the owner is typically unknown to the gift card issuer and therefore, unredeemed balances would be governed by the state unclaimed property law where the issuing business is incorporated. In 2015, the defendants filed a motion to dismiss the suit. The defendants argued, among other things, that due to the agreements delawareonline, http://www.delawareonline.com/story/news/politics/firststatepolitics/2016/03/01/ pennsylvania-sues-delaware/81127442/ (March 1, 2016) 4 Ibid. 5 Fitzgerald v. Young America Corporation, No. CV 6030 (Iowa District Court, Polk County, Jan. 5, 2009) 6 Del. C. Section 1201 (2009) 7 Texas v. New Jersey, 379 U.S. 674 (1965) 3

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Litigation Update continued from page 17 the retailers had with the third party contractor and its special corporations, the retailers delegated the debt to the contractor/ special corporations. As the contractor/special corporations are not incorporated in Delaware, the defendants argued that Delaware escheat laws do not apply to them. The Court rejected this argument indicating that as the debt involves personal services it could not be delegated without the express consent of the party to whom the debt is owed. So, the “customer” would have to have expressly agreed to the debt delegation to the contractor/special corporation. Six of the retail defendants moved to dismiss based on the fact that they are limited liability companies (LLC) with principal places of business outside of Delaware. However, the Court indicated that Texas v. New Jersey8 and Delaware law would dictate that jurisdiction is based upon the LLCs’ state of formation/organization which for these defendants is Delaware. The Court did grant motions to dismiss for 3 of the defendants that were not parties to the third party contractor agreements and for a defendant that successfully argued that as it was previously audited by the Delaware State Escheator that it could not be subjected to proceeding involving the same allegations. The Court also granted the motion to dismiss of the National Restaurant Association as its part of the purported scheme in marketing the service to its members was too tenuous to have caused the harm alleged. Owner Notice and Just Compensation Timothy Hall Hr., Beverly Herron, Michael Undlin and Mary Wingfield v. State of Minnesota and Commerce Commissioner Michel Rothman, No. 62-CV-15-2112, Minnesota Second Judicial District Court, Count of Ramsey The plaintiffs filed a class action lawsuit during the second quarter of 2015 in which they claim that the state of Minnesota, through its Department of Commerce, has over a period of years developed a scheme that minimizes efforts to notify owners of the unclaimed property the state has received while maximizing the receipt of such revenues. They claim that the due process and takings clauses in the United States and Minnesota Constitutions are violated by this scheme. In their complaint they indicate the systematic lowering of dormancy periods and dilution of owner notice requirements (i.e., elimination of required owner outreach mailings and newspaper publication) have created a situation where owner communication efforts are inadequate (via providing information on missingmoney. com) and permit the state to retain owner funds. Further, plaintiffs point to the state’s failure to pay interest on interest bearing property when paying claiming owners. In addition, the complaint indicates the state seizes and liquidates IRAs, mutual funds, HSAs, ESAs and other securities and pays claiming owners only the net proceeds from the sale with no consideration for any appreciation in the value of the property after the sale. In addition, in their compliant the plaintiffs allege that Minnesota has escalated its effort to enforce the unclaimed property statute. Specifically, the “Minnesota Department of Commerce attributes 18

approximately half of the 100 percent growth in its unclaimed property since 2005 to its efforts to target life insurance companies and to four new auditors it has added to review company records, locate and force the remittance of funds to the State in that time.” In August 2015, the defendants filed a motion to dismiss the case based on procedural and substantive issues. The Court entered an order in early December granting the motion to dismiss only with regard to the State of Minnesota and the plaintiffs’ federal 42 U.S.C. Section 1983 claim. The motion was denied with regard to all the other counts. Some of the comments made by the Court in its order provide food for thought. With regard to the due process and owner notice claim, they stated, “The Court is skeptical whether the Commissioner’s limited attempts to provide notice satisfy even MUPA.”9 Further, with regard to the taking clause and just compensation the Court indicated that, “Plaintiffs have all alleged they did not intend to abandon their property. Yet Defendants have put their property into a fund for use by the State. This is effectively putting Plaintiffs’ property back into the public domain. On such facts, Plaintiffs no longer have an interest in their property, the property has been taken for public use, and Plaintiffs are entitled to just compensation.”10 This Minnesota class action lawsuit is somewhat similar to the federal court challenge to the California Unclaimed Property Law that is the basis of Taylor v. Yee.11 The difference though is that in the Taylor case, the state (California) is sending pre-escheat direct notices to the owners of property valued over $50 if the state has owner social security numbers to use if verifying the owner address or discovering a better address. The Taylor case was appealed by the plaintiffs to the United State Supreme Court (USSC) which on February 29, 2016 denied the request but comments by Justice Alito hinted that while the facts of the case were inappropriate for Supreme Court review the issues presented may be ripe for decision in a different case. Another similar Oklahoma state court lawsuit where similar constitutional issues were presented about the Oklahoma unclaimed property law and challenges is Dani, et. al. v. Ken Miller, Treasurer of the State of Oklahoma, et.al12 The plaintiffs in this suit alleged that the Oklahoma unclaimed property law and its administration was a “taking” equating to a “ponzi scheme” designed to garner state revenue. The lawsuit was filed in June 2015 and, in November of the same year, the Oklahoma District Court dismissed the lawsuit without merit. The Oklahoma Supreme Court upheld this decision in March 2016. After the Court’s decision on the motion in Hall was rendered, the State asked the court to certify questions to the Court of Appeals. This motion was still pending at the time of this writing. Id. Hall, et. al v. State of Minnesota and Commerce Commissioner Michael Rothman, 12/9/2015 Order, p. 16. Id. at p. 20 11 Taylor v. Yee, 780 F.3d 928 (9th Cir. 2015; writ of certiorari filed 8/5/2015) 12 Oklahoma County District Court, No. CJ-2015-3445 (11/4/2015) 8 9

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Retirement Plan Products— An Unclaimed Property Perspective By Joe Lichty, Director of Marketing

More than $24 trillion in assets are currently held in retirement plans like 401k, 403b, pension, or individual retirement accounts (IRAs). A good portion of these retirement assets are shielded from state unclaimed property laws as they are governed by a Federal law called the Employee Retirement Security Act (ERISA), which, in certain instances, preempts state laws including state unclaimed property laws.1

2. Check related plan records. Plan administrators are advised to compare their records for related plans, such as group health insurance plans, for updated contact information. States adopting the NCOIL Model Act for unclaimed life insurance benefits mandate that life insurers conduct similar comparisons with information from other books of business, such as annuities.

Conversely, IRAs are not governed by ERISA and are therefore considered reportable and subject to unclaimed property statutes. Indeed, many state laws reference these products in their unclaimed property statutes. IRAs are subject to many unclaimed property compliance requirements including tracking activity and sending due diligence.

3. Check with designated plan beneficiaries. Again similar to the NCOIL Model Act for unclaimed life insurance benefits, FAB 2014-01 aims to leverage information obtained from plan beneficiaries in order to ascertain a better address.

In spite of the preemption from state escheat laws of certain retirement products, administrators of these types of Plans are subject to obligations similar to those in the unclaimed property world. More specifically, they are subject to the practices of locating lost or terminated participants. Keane has observed parallels between enforcement of obligations in the retirement industry and other industries that are tasked with the complexities of compliance. DOL FAB 2014-01 & Unclaimed Property Processes In August 2014, the United States Department of Labor (DOL) issued Field Assistance Bulletin No. 2014-01 (FAB 2014-01). This Bulletin outlines the responsibilities of the fiduciaries of defined contribution plans when terminating the Plan itself. Specifically, FAB 2014-01 requires plan fiduciaries to exhaust the following four processes when attempting to locate lost or missing participants while terminating a defined contribution plan. Each of the four steps below correlates to existing processes in place from an unclaimed property perspective. 1. Use certified mail. Similar to some state due diligence statutes (i.e., NJ, NY, OH) certified mail is an efficient method to confirm the validity of the participant’s address of record.

4. Use free electronic search tools. FAB 2014-01 encourages the use of Google searches, social media research, and public data sources to locate participants and/or beneficiaries. As a result of the availability of these electronic resources, the IRS and Social Security Administration have discontinued their respective letterforwarding services that were once a staple of the 401k plan termination process. If these four actions above do not yield a result, fiduciaries are encouraged to utilize additional resources such as commercial data sources, credit searches, and third-party locator services when deemed appropriate. The mandate to utilize a variety of methods to locate lost or missing participants is similar in nature to the requirements of SEC Rule 17Ad-17, where a combination of electronic and postal outreach to locate missing security holders and unresponsive payees is mandated. In addition to the steps outlined above for terminated 401k and defined contribution plans, recent initiatives from the Department of Labor indicate there will be added scrutiny for defined benefit plan administrators, in the form of additional examinations of their procedures to locate and pay eligible lost participants of Plans in good standing. Plan sponsors are encouraged to perform a thorough review of their existing policies and procedures for locating missing or lost participants. continued on page 20

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Retirement Plan Products—An Unclaimed Property Perspective continued from page 19 Prior Experience Predicts Plan Performance Based on Keane’s experience in assisting life insurance carriers and financial services firms, many of whom operate retirement investment vehicles comprising the $24 trillion in assets, the retirement industry would benefit from borrowing some best practices from other industries to proactively protect its participants. In many cases these best practices have come to light as a result of increased regulation, enforcement efforts, and the threat of audit. The activities within the insurance industry are one such example. What started as a series of examinations of life insurers by a thirdparty auditor on behalf of several states has resulted in more than 25 states passing or proposing legislation that requires carriers to conduct regular comparisons of the Death Master File to identify deceased insureds, and then conduct additional research to confirm the deaths and identify beneficiaries when benefits are due.

take note and begin implementing policies that identify deceased participants, verify and update addresses, and prevent participants from becoming lost. Indeed, Keane is aware of at least one state which, in the course of an audit, has even gone so far as to run IRA populations against the Death Master File. Between the actions of the Department of Labor and those of the state unclaimed property auditors, it is evident that the administrators of all retirement assets, whether governed by ERISA or the unclaimed property law, should take proactive steps to ensure that all Plan participants are in good standing. 1

While states do not include a formal exemption for ERISA governed property within their unclaimed property statutes, the pre-emption has been supported through case law as well as a line of Department of Labor Advisory Opinions.

The third-party auditor that sparked the life insurance examinations has since leveraged this same playbook to initiate similar audits of businesses in the broker-dealer, mutual fund, oil & gas, and now the health insurance industry. If prior experience is any predictor of what’s to come, retirement plan providers would be wise to

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The content presented in this newsletter represents Keane’s understanding of evolving legislation and case law governing unclaimed property compliance up to its publishing date. The content is provided for informational purposes only and should not be considered legal advice or legal opinion. For more information, please contact Debbie L. Zumoff, Chief Compliance Officer, at 610.232.0700 or via e-mail at [email protected]. ©Keane 2016

Unclaimed Property. Uncompromising Performance.

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