Significant legislative changes made to Delaware's unclaimed property law; immediate action may be required for holders currently under audit

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July 28, 2021
2021-1429

Delaware Governor John Carney has signed 2021 Del. Senate Bill 104 (SB 104), which modifies the law governing the state's unclaimed property program. Among other changes, SB 104, signed on June 30, 2021, establishes a permanent expedited audit program that affects certain unclaimed property holders (Holders) currently under an unclaimed property audit in which Delaware is a participating state. The deadline for applying for this program for certain Holders is September 30, 2021.

SB 104 also does the following:

Changes the dormancy period for certain types of bonds to three years (from five years)
Clarifies that food service-related Holders do not need to remit unredeemed gift card property with an original issue amount of $5 or less (changed from a face value of $5 or less)
Extends the response time that Holders have to enter into a voluntary disclosure agreement (VDA) with Delaware to 90 days (from 60 days)
Prohibits the use of documents obtained in an examination initiated by Delaware to be used in a multistate examination, unless the Holder agrees to such use in writing
Allows only hourly compensation to be paid to third-party audit firms conducting examinations for Delaware incorporated Holders, except for specific securities and life insurance examinations
Differentiates and reduces the dormancy period for individual retirement accounts (IRAs) depending on whether the Holder has knowledge of the owner's death

Unless otherwise noted, these changes and those discussed below take effect August 1, 2021.

Expedited audit program

Section 14 of SB 104¹ establishes a permanent expedited audit option in Delaware. Depending on their circumstances, Holders may elect the permanent expedited audit option: (1) immediately, if undergoing an audit that began after February 2, 2017; (2) upon receipt of a new audit notification after August 1, 2021; or (3) in response to a VDA invitation from Delaware.

Program benefits

The possible benefits of participating in the expedited audit program include:

Paying 1% "nominal" and unwaivable interest on the total past-due examination liability, including any estimated liability
Completing the exam within two years and receiving from Delaware a "statement of findings produced at the conclusion of the expedited examination"

Logistics, timeline and required actions

Holders with audits initiated after February 2, 2017, and before August 1, 2021, must submit their expedited audit election package by September 30, 2021 (within 60 days of the August 1, 2021 effective date of SB 104).

A Holder may request an expedited audit election by submitting the following:

Written notification on a form provided by the Delaware State Escheator (this form has already been provided to many impacted Holders directly from the Delaware Department of Finance)
Responses to all pending or outstanding requests for records, testimony and information made by the person conducting the current examination
A detailed workplan and schedule for completing the expedited examination (this template has already been provided to many impacted Holders by the Delaware Department of Finance)

The Delaware State Escheator has 60 days from the date of the Holder's application to return a decision on acceptance into the expedited audit program.

After acceptance, the examiner must request all records, testimony and information from the Holder within 18 months.

The audit assessment must be received by Delaware by the earlier of:

90 days after the State Escheator issues a statement of findings and request for payment
Three years after acceptance into the expedited audit program
180 days after the date of a single extension (to be granted at the sole discretion of the Delaware State Escheator)

For Holders with future audits to be initiated after August 1, 2021, the law does not specify an exact time frame for the required expedited audit election after an audit notification.

Failure to complete the expedited audit requirements

If a Holder fails to meet the expedited audit requirements, the Delaware State Escheator may terminate the agreement and the Holder will be subject to the following non-expedited audit interest and penalty provisions, dependent upon the audit initiation date:

For audits initiated before August 1, 2021: 0.5% per month interest, not to exceed 50% of the assessed liability (of which up to 50% of the calculable interest may be waived)
For audits initiated after August 1, 2021: a minimum 20% non-waivable interest

Implications

Delaware has not historically applied statutory interest upon audit settlement; however, as a means to incentivize Holders to participate in the expedited program, it is possible that interest may be enforced more readily and without waiver.

We expect Delaware to promulgate regulations to further describe the parameters and differentiators in the expedited audit program.

Overall, Holders currently under audit that qualify for the expedited audit election should carefully consider whether the program meets their objectives given their anticipated Delaware audit exposure (particularly if Delaware is the state of incorporation of the business), stage of the current audit and complexity of the Holder's review. This analysis may prove difficult if a decision must be made before any regulations on the expedited audit program are released by the state.

Detailed discussion of other changes in SB 104

The following is an in-depth discussion of the changes to Delaware's unclaimed property law contained in SB 104.

Bill section

EY commentary / Impact of changes

Del. Code tit. 12, Section 1133. When property presumed abandoned

(SB 104, Section 2)

Reduces the dormancy period from five to three years for bearer bonds, original-issue-discount bonds and state municipal bonds including the interest, dividends and principal payments. Although this change represents an accelerated escheatment of these properties, the change is consistent with treatment of these property types as "securities like" in practice.

Clarifies that there is no change to the dormancy computation for IRAs where the Holder has no knowledge of the owners' death; but if the Holder has knowledge of death, escheatment is reduced to one year following the required minimum distribution age, following the death of the owner.

This provision may need to be considered along with the federal SECURE Act, which generally provides for distribution of IRA proceeds 10 years after death.

Del. Code tit. 12, Section 1143. Content of report.

(SB 104, Section 3)

Applies to Holders in the businesses described in Del. Code tit. 30, Section 2906 (e.g., snack bar, soda fountain, take-out food service, catering service, private eating or drinking club, or other eating establishments). The modified law provides that "[n]o reporting shall be required solely by virtue of holding property constituting consideration paid for unredeemed gift cards which, in the aggregate, for the reporting period have a face value of less than $5,000, or for gift cards having an original issue amount of $5.00 or under." The clarification to this section relates to original issue amount compared to the remaining face value, the latter of which was observed to apply in practice.

Del. Code tit. 12, Section 1148. Notice to owner by Holder

(SB 104, Section 4)

Allows the Delaware State Escheator to instruct the Holder to send owner notification/due diligence letters during an exam or review "at any time as directed" so long as certain criteria are met.

Del. Code tit. 12, Section 1153. Effect of payment or delivery of property to Delaware State Escheator

(SB 104, Section 6)

Limits Delaware's indemnification to the underlying liability, excluding penalties and interest if imposed or assessed by another state for property reported to Delaware that should have been reported to another jurisdiction.

Clarifies that if property is delivered to Delaware in good faith, the Delaware State Escheator shall "defend the holder against the claim and indemnify the holder against any liability on the claim, except that a holder shall not be indemnified against penalties imposed by another state" or foreign jurisdiction.

Del. Code tit. 12, Section 1156. Periods of Limitation

(SB 104, Section 7)

Clarifies the tolling of the 10-year limitation period for starting an escheatment action is the earlier of:

The date the holder was invited into the VDA program
The date on which the holder entered into the VDA program

The date of audit notification

Del. Code tit. 12, Section 1160. Recovery of securities or value by owner

(SB 104, Sections 8 and 9)

Del. Code tit. 12, Section 1166. When State Escheator must honor claim for property

(SB 104, Section 10)

Del. Code tit. 12, Section 1167. Claims and rights of appeal

(SB 104, Section 11)

Changes current law, under which Delaware is required to notify an owner in writing before liquidating a security (e.g., shares of stock) that was reported to the state as unclaimed property.

Clarifies in Section 8 that if a claim is made for a security within 558 days (formerly 18 months) from the date notice was mailed by the State Escheator to the rightful owner, and Delaware has already disposed of the security (pursuant to Del. Code tit. 12, Section 1159), the claimant is entitled to the replacement of the security or the market value of the security at the time the claim is filed, plus any dividends, interest and other increments on the security paid to the Delaware State Escheator.

Keeps the provision that if a claim is made for a security more than 558 days (formerly 18 months) from the date notice was mailed by the State Escheator to the rightful owner, the claimant is entitled to the net proceeds of the sale of the security, plus dividends, interest and other increments on the security.

Provides in Section 9 that a claim is made on the "date of the claimant's first documented contact with the State Escheator regarding the property or claim, including a request for a property search, if the claim is made within 60 days of such contact."

Clarifies in Section 10 how claim denials are handled and adds that determinations must specifically be sent to the claimant via a written record. Empowers the state to initiate a formal investigation if it suspects that a claim was filed fraudulently.

Changes the time limit in Section 11 to appeal a claim determination from four months to 120 days.

Del. Code tit. 12, Section 1170. Request for report of property; compliance reviews

(SB 104, Section 12)

Gives Delaware the authority to send a request for information regarding verified reports and compliance reviews to "a person or an agent in possession of the records, including an agent, representative, subsidiary, or affiliate of the person subject to review."

This language currently exists in the context of examination records, and Section 12 appears to apply the same language to verified reports and compliance reviews.

Del. Code tit. 12, Section 1171. Examination to determine compliance with chapter

(SB 104, Section 13)

Allows Delaware to examine a holder's records to verify their completeness or accuracy, even if the records may not identify property reportable to Delaware (e.g., transactions addressable to other jurisdictions but required to prove that a complete universe of records has been provided).

Appears to authorize Delaware to issue its own due diligence letters as well as direct a holder to send letters at any time during an exam, as noted in Section 4. "The [Delaware] State Escheator, at reasonable times and on reasonable notice may do any of the following: Send, or direct a person to send, owner notice in accordance with [Del. Code tit. 12, Section] 1148 … [ ]"

Del. Code tit. 12, Section 1172 Rules and procedures for conducting an examination.

(SB 104, Section 15)

Allows the Delaware State Escheator to authorize an examination of records of any holder without any specific or detailed reason or justification other than it relates to determining compliance with Delaware unclaimed property laws.

Del. Code tit. 12, Section 1173 Voluntary property reporting outreach program

(SB 104, Section 16)

Changes the current VDA program by:

Allowing the Delaware Secretary of State to request "via certified mail or any other commercially reasonable means of correspondence that includes evidence of delivery" that a Holder entered into a VDA
Extending the response period for a Holder to accept the VDA invitation and enter the program from 60 days to 90 days after "delivery" of the invitation

Alternatively, within 90 days after the request to enter the VDA program was delivered, a Holder may notify the Delaware State Escheator, by certified mail or other means deemed acceptable by the Delaware State Escheator, of its request to expedite an examination under [Del. Code tit. 12, Section]1172(c) by providing written notification on the applicable form.

Del. Code tit. 12, Section 1174 Records obtained in examination or voluntary disclosure

(SB 104, Section 17)

Restricts the use of information obtained for Delaware audits and VDAs exclusively to Delaware, "unless the person subject to examination consents to such use in writing." This section also removes the provision in the current law requiring that other states involved in exams have substantially similar confidentiality provisions. As such, future audits in Delaware may be relegated to Delaware only.

Del. Code tit. 12, Section 1178. Delaware State Escheator's contract with another to conduct compliance review and examination and limit on future employment.

(SB 104, Section 19)

Revises and clarifies the compensation model between Delaware and its third-party audit firms from a contingent fee structure to an hourly basis, for exams where Delaware is the state of incorporation. The hourly basis compensation does not apply to securities audits (differentiated from what is referred to as general ledger audits) and life insurance company audits.

Del. Code tit. 12, Section 1183. Interest and penalties

(SB 104, Section 21)

Removes paragraphs (1) and (2) of Del. Code tit. 12, Section 1183(a), which gave the Secretary of State the authority to waive interest on VDAs and the Department of Finance to waive interest on expedited audits.

Moves the authority to waive interest on VDAs to SB 104 Section 22 paragraph (b), and no waiver of interest appears possible on audits initiated after August 1, 2021.

Del. Code tit. 12, Section 1185. Waiver of interest and penalty

(SB 104, Section 22)

Clarifies that interest for audits commencing after August 1, 2021, applies to the "per incident" or "total past-due examination liability, including any estimated liability." Under this definition:

Holders that do not complete an expedited examination are subject to a minimum, non-waivable 20% interest assessment.
Holders that complete the expedited examination program are subject to a non-waivable 1% interest assessment
Waiver of interest continues to be available under the Delaware Secretary of State's VDA program

Del. Code tit. 12, Section 1189. Confidentiality of records

(SB 104, Section 24)

Explicitly excludes policies and procedures related to the determination of claims and fraud prevention from public record/freedom of information act (FOIA) requests.

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Contact Information
For additional information concerning this Alert, please contact:

State and Local Taxation Group
• Sarah Toi (Sarah.Toi@ey.com)
• Aurianne Lopatka (Aurianne.Lopatka@ey.com)

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ENDNOTE

¹ Modifies Del. Code, tit. 12, Sec. 1172 "Rules and procedures for conducting an examination."