Unclaimed property | What you need to know

As budgetary shortfalls hit, states are aggressively focused on unclaimed property (UP) as a source of revenue. Many are hiring private audit firms to track down entities that hold property owned by others for a set abandonment, or dormancy, period.

iStock_000001825418SmallAccording to a recent NICSA webinar featuring professionals from law firm Reed Smith LLP, assessing UP risk exposure should be a top priority for fund firms and fund service providers. That’s because penalties and interest for unreported UP can be high. States are also reducing dormancy periods.

Here are some examples of UP:

  • Un-cashed dividend or interest checks
  • Unclaimed securities (with no shareholder activity)
  • Unclaimed 12b-1 fees, shareholder fees, and dealer allowances
  • Unclaimed cash management accounts

Who is responsible for these assets? It depends on what service contracts say. It could be the holder of the shares, the owner of an omnibus account, the transfer agent, or the custodian. Determining the responsible party is state-specific and facts- and circumstances-driven. Firms must protect themselves, say the experts.

12 Steps to Protect Your Firm

  1. Ensure service agreements reflect responsibilities for reporting and remitting UP. Contracts should identify who is responsible, outline specific obligations (i.e. provide filed UP report copies), and indemnity provisions.
  2. Examine all unclaimed property and identify applicable states where there may be filing and payment obligations.
  3. Double-check applicable states’ dormancy periods and factors that affect those periods for the specific type of property your firm holds.
  4. Perform shareholder outreach regularly and check addresses annually.
  5. Retain records of all shareholder contact whether email, phone or mail.
  6. Assess audit risk by State and, if you are audited, minimize exposure by hiring a consultant experienced with UP and state audits.
  7. Consider voluntary disclosure programs (VDAs) to save time and money.
  8. Identify states that represent the biggest areas of exposure for your firm and deal with those first.
  9. Where the law is unclear, consider obtaining legal opinions, seek formal letter rulings regarding interpretations and establish financial reserves.
  10. If you’ve over-claimed, request a refund.
  11. Legally enforce your contractual indemnity provisions if necessary.
  12. Speak up about challenges with UP rules, ask outside counsel to comment on new legislation, and encourage state legislators to adopt the Federal model.

How has your firm dealt with unclaimed property? Do you have policies and procedures in place to address this issue? Please share your experience with NICSA.

NICSA: 8400 Westpark Drive, 2nd Floor McLean, VA 22102 • Tel: 508.485.1500 • Fax: 508.485.1560