The Delaware Department of Finance and Secretary of State (collectively, the Delaware UP Authorities) issued Proposed Regulations that are intended to address the lack of remedies in Delaware's recently revised unclaimed property laws (see Del. Laws 2017, SB 13). The revisions followed the federal court's ruling in Temple-Inland, Inc.,¹ which criticized key aspects of Delaware's unclaimed property audit process.

Perhaps the most awaited piece of the Proposed Regulations relates to the state's method of estimation (i.e., the process by which unclaimed property exposure is calculated in years under the look-back period for which no accounting records or owner details exist). The Proposed Regulations, however, do not appear to "fix" the issues with the state's method of estimation noted in Temple-Inland, Inc., as they do not alter the long-standing administrative procedures utilized in this calculation. Instead, they propose that Delaware continue to include several factors in the calculation and continue to include property due to any of the 54 other US jurisdictions that require reporting and remission of unclaimed property, even if that jurisdiction chooses to exempt the property from its unclaimed property laws.

The Proposed Regulations are expected to be finalized by July 1, 2017.

Proposed regulations

According to the Delaware UP Authorities, the Proposed Regulations are intended to "establish instructions and guidelines for the administration of the State of Delaware's Abandoned or Unclaimed Property program." More specifically, the Proposed Regulations attempt to provide holders of unclaimed property (hereafter, holders) a clear and consistent understanding of the state's use of estimation, aging criteria for checks, and the definition of what constitutes complete and researchable records. Additionally, once the Proposed Regulations are finalized, a holder will have 60 days to decide whether to convert an audit existing before July 22, 2015, into a voluntary disclosure agreement (VDA) (audit to VDA conversion option) or agree to an expedited audit process for those audits in process as of February 2, 2017 — both of these options were made available by SB 13.

Concurrently with the issuance of the Proposed Regulations, Delaware Secretary of State Jeff Bullock released the "DE SOS Conversion Policy" for holders that qualify for the audit to VDA conversion option. This Policy contains information on the administrative process, scope expectation, and anticipated resolution of such an audit to VDA conversion option. For example, the guidance notes "… the holder's examination work papers will not be transferred to the VDA Administrator, and there will be no coordination or consultation with the Department of Finance or any third-party examination firm." Secretary Bullock further indicated that the VDA is expected to conclude quickly and efficiently for holders that have substantially completed their examination and choose to convert to a VDA.

A summary of how the Delaware UP Authorities will use estimation and projection in their unclaimed property audits and VDA reviews follows, along with a closer look at some of the significant items to consider in the Proposed Regulations.

Estimation and projection

The Proposed Regulations provide that the Delaware UP Authorities will "expect" holders to possess a minimum of seven to eight years of records from the date of an examination notice. The term "complete records" would be defined as those that "reconcile to the general ledger with the understanding that immaterial differences may occur" and "records to which the holder may research the resolution of an item." Further, the Proposed Regulations note that, at a minimum, researchable records must include those items that contain a last known address of the property owners.

As revised by SB 13, the state's statutory look-back period for both an unclaimed property examination and VDA is 10 reporting years or 15 transaction years (from the date of commencement or initiation). When a company does not have complete records going back 15 years, the Proposed Regulations state that the Delaware UP Authorities will use a base period of at least three dormant years that are complete and researchableto calculate the error rate for projection to non-complete record years.

When considering the base period and resulting estimation calculation in terms of what type of transactions to utilize or remove, the Proposed Regulations specify items that should be excluded and included.

Items that would be excluded:

— Items that are payable to a US federal department or agency
— Funds that have been returned to the rightful owner in the normal course of business "prior to issuance of the examination notice"

Items that would be included:

— Funds returned outside of the normal course of business (i.e., change in process) after issuance of the examination notice will be included in the population for potential unclaimed property.
— Checks that remain outstanding over 90 days and voided over 30 days from the date of issuance will be included in the population for review. (Prior guidance issued by the Delaware UP Authorities for its VDA program indicated a void convention of 90 days, not 30).

In the event the base period of items to review is too large to reasonably research each item, the use of statistical sampling would be permitted. The Proposed Regulations describe guidance in calculating the sample parameters and process, for which there is no departure from historical administrative procedures.

Further, the Proposed Regulations would allow holders to apply results from the review of certain Delaware incorporated legal entities to other Delaware incorporated legal entities. In essence, the Proposed Regulations would codify sampling and projection performed at the legal entity level. This can be an advantageous approach for holders when records and resources are limited to complete the overall review and has been observed in practice historically.

The following chart lists relevant sections of the Proposed Regulations and describes additional changes and their implications for holders:

Implications

Despite the attention and response to the court's ruling in Temple-Inland, Delaware's proposed position on the calculation of estimated unclaimed property under the Proposed Regulations remains materially unchanged. Holders should consider if the time-sensitive implications of the Proposed Regulations apply to their fact pattern (including those facing current audits in which Delaware is a participating state) and determine if the election for VDA conversion or expedited audit should be made.

Additionally, as the Proposed Regulations represent the final piece of the go-forward puzzle for Delaware's unclaimed property administration, an increase in VDA letter mailings, audit initiations, and VDA settlements is anticipated. If an organization is currently under audit or already participating in the VDA program in Delaware, assessing a plan for resolution is critical.

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ENDNOTES

¹ Temple-Inland, Inc. v. Thomas Cook, Civ. No. 14-654-GMS (U.S. Dist. Ct., D. Del. June 28, 2016).