Borden's views on reform of Uniform Unclaimed Property Law featured in STA newsletter
BCG founder Jennifer Borden’s views on potential changes to the Uniform Unclaimed Property Law were featured as the cover story in the April 2015 edition of the STA newsletter. With permission from the STA, below is the reprinted content of that article:
Report on Efforts to Reform the Uniform Unclaimed Property Act
By Jennifer Borden
Founder, Borden Consulting Group
In March a federal court issued a bombshell decision in the unclaimed property world, denying Delaware’s motion to dismiss an action challenging many aspects of the state’s audit program. Fortune 1000 companies who have suffered through lengthy audits and seven-figure demands rejoiced at the prospect of a trial in which Delaware’s practices will be reviewed objectively. Additionally, the holding gave unclaimed property practitioners hope that in the near future the case translates to reform, given that the judge referred repeatedly to the Uniform Unclaimed Property Act (“UUPA”). Federal court attention to the UUPA increases the likelihood of widespread adoption of needed reforms in order to protect shareholder value and simplify compliance.
The Uniform Law Commission (“ULC”) has already worked for more than a year on revising the UUPA, with the first draft revealed in February. The Commissioners of the ULC reviewed thousands of pages of submissions from more than a hundred organizations, experts, and interested parties. Last updated in 1995, changes in technology, law, and business practices require an updated UUPA. For example, when the UUPA was last issued, SEC Rule 17Ad-17 had not yet been enacted; only a handful of states recognized limited liability companies, and the internet was in its infancy. Clearly we need a law that reflects the current environment. This article will describe the current revisions impacting securities, what still needs to be done, and what the STA members can do to advance improvements.
The single most important issue for the STA, issuers, and security holders alike is utilization of a “lost” standard for purposes of triggering dormancy and escheatment, as opposed to a “contact” or “activity” standard. Due to Rule 17Ad-17, transfer agents can ascertain with certainty whether or not an account is lost, thus triggering the start of the escheatment process. Compliance with the Rule is easily auditable, and understandable. To the contrary, there are no uniform standards for what constitutes contact with an owner or activity on an account. When the STA surveyed the states on the issues of contact and activity, no two states answered identically as to what would satisfactorily prove either concept. As such, compliance is complex, and accounts that are not abandoned are at risk of escheatment if the lost standard is not utilized.
After lobbying by the STA, SIFMA, the ICI and UPPO, the ULC adopted the lost standard for securities, including those enrolled in DRPs. However, there is also text which provides that securities may be presumed abandoned, “three years after the owner’s last indication of interest in the property for owners who do not receive communications from the holder by United States mail.” Accordingly, for non-dividend payers, or individuals who receive notifications electronically, the activity standard is still in play. Therefore, the STA must continue to build a case for the lost standard, by highlighting the losses that can occur with using an activity standard.
The STA’s Unclaimed Property Committee recommended numerous activities which could be deemed “indications of interest” sufficient to prevent escheatment. These activities were debated intensely, and all of our recommendations were adopted by
the ULC, except automatic payments or deductions from an account, which will not be deemed to be an indication of interest. While this will not be of concern for DRPs if the adoption of the lost standard remains in the UUPA, there may be other accounts that are negatively impacted, particularly for issuers who do not pay dividends, or shareholders who have opted for electronic communications and automated deposits.
In order to prevent negative tax consequences due to escheatment of tax advantaged accounts, the ULC adopted a thirty-year dormancy period for 529’s and similar plans. The states opposed, and this approach may change in the next draft. Accordingly, interested parties should be prepared to propose alternatives to this extended dormancy period.
Bonds issued by municipalities or non-profits are also now specifically escheatable as if they were corporate bonds. As such, STA members may have new reporting responsibilities for their issuer clients. While this is simply another compliance issue that STA members are well-equipped to handle, issuers will expect their transfer agents to be versed in this change to the law.
Property owed to foreign shareholders will not be escheatable under the UUPA. This is highly relevant to the STA, particularly considering all of the M&A activity pending with non-U.S. companies. The UUPA allows for voluntary remittance of foreign property for issuers who want to escheat and are not concerned with the risks of over reporting.
The current draft of the UUPA makes many improvements in the area of due diligence and reporting. It recognizes that in the reporting process the protection of the PPI of shareholders is of concern for securities issuers and transfer agents. New language requires the states to maintain the same degree of confidentiality of owner’s records as the issuer. Further, due diligence letters should not include any sensitive or non-public information concerning the owner’s property. E-mail would be an acceptable method for due diligence, if the owner has elected to receive notifications electronically. If the email fails, a second notice would be required by U.S. mail.
The STA and UPPO had proposed language that would not require the reporting of stock that is not freely transferrable. Stock would be deemed worthless if the cost of reporting, delivery, and liquidation exceeds its value. Restricted stock need not be reported unless and until the conditions of the restrictions have been lifted. The Reporter did not include this language, but it was apparently an oversight. The STA is resubmitting the language, and we expect it will be included in the next draft.
This UUPA provides for the issuer and the transfer agent to be indemnified by the state for property that is reported. Unfortunately, the indemnification provided does not encompass appreciation of stock, so it is of limited value. Due to the states’ tendency to liquidate, this is a concern. The STA and other groups lobbied for no liquidation, or an extended holding period in order to protect the value of the owners’ property, and reduce the risk of litigation for transfer agents and issuers. However, the states convinced the ULC that they need the cash, and liquidation after three years was adopted. This is an improvement over many states, which currently allow for liquidation “upon receipt” or “within one year” of reporting. While the STA will continue to lobby for protections for shareholders, at least the three-year rule increases a shareholder’s chances to claim the property prior to liquidation.
The STA will continue to monitor the revisions to the ULC, to insure that members’ and shareholders’ interests are being served. Additional education and lobbying may be necessary to preserve the gains made in the current draft. Most importantly, once the UUPA is finalized – which is still over a year away – members must lobby for its adoption in the states, or else all of the work will have been in vain. The federal courts and national media are finally focusing on this area of the law – STA members can continue the positive trends by sharing their knowledge and participating in the process.
Jennifer Borden is an attorney who has specialized in unclaimed property law for more than two decades. She is currently representing the STA as an official observer to the Uniform Law Commission.