INSURANCE INDUSTRY DEVELOPMENTS

Transcription

1 Summer 2011: Volume 9, Issue 3 The first unclaimed property compliance quarterly newsletter, published exclusively by Keane since Keane is the country s leading provider of unclaimed property communication, compliance and consulting services. in this issue: Insurance Industry Developments Current Events...Cover Keane Welcomes Cornel Lupu...Cover Keane Welcomes Michael R. Wood... 2 Kelmar: The Unclaimed Property Auditor with a New Face... 3 Kentucky s Dormancy Reduction for Traveler s Checks... 3 Legislative Updates...4 INSURANCE INDUSTRY DEVELOPMENTS CURRENT EVENTS By Valerie M. Jundt, Managing Director, & Cornel Lupu, Manager, Keane s National Consulting & Advisory Services Group The financial services sector has always been highly regulated by numerous federal and state agencies such as the Securities and Exchange Commission, Office of the Comptroller of the Currency, the National Association of Insurance Commissioners (NAIC) and the National Association of Unclaimed Property Administrators (NAUPA), to name a few. These and other agencies were created to protect the public while also promoting competitive markets. In order to achieve these goals, a multitude of laws have been passed and these agencies are constantly striving to ensure that the laws are enforced. The recent focus of state regulatory agencies has been the insurance industry, with an increased effort to enforce the industry s compliance with unclaimed property laws. As a result of these enforcement initiatives, there has been an increase in unclaimed property audits and targeted market conduct exams. State Unclaimed Property officials and State Insurance Commissioners have engaged third-party auditors, primarily compensated on a contingency basis, to conduct unclaimed property audits and market conduct exams. Verus Financial, LLC ( Verus ) is the primary private auditing firm retained by approximately 37 states to perform these audits. Some states contracted with Verus as early as July, Over the past three years it is estimated that more than 20 insurance companies have received an audit notice from Verus. The sudden surge in unclaimed property audits and the results they have produced, has garnered substantial media attention as well as a concerted enforcement effort by many states. Indeed, the audits are identifying significant issues in the eyes of the state agencies as evidenced by the following chain of events: On May 17 th, working in conjunction with the NAIC, state regulators formed an unclaimed property task force to help coordinate the investigations related to the claim settlement practices of life insurance companies. continued on page 2 Insurance Industry Standards... 8 SEC Takes on 17Ad-17, Final Rule Anticipated...10 Reporting Deadlines Based on State Fiscal Years...11 New to Keanotes? Register for on-line access and realtime alerts at Keane Welcomes Cornel Lupu Former internal auditor and unclaimed property insurance specialist joins Keane s National Consulting & Advisory Services Group. We are pleased to announce that Cornel Lupu has joined our National Consulting and Advisory Services team as a Manager. In this role, Cornel will help clients navigate complex unclaimed property audits, identify gaps in compliance, and develop best practices. He brings to Keane 20 years of diverse and extensive experience in the insurance industry. His areas of specialty include unclaimed property audits, continued on page 7

2 continued from cover page Insurance Industry Development - Current Events On May 17 th, John Hancock Life Insurance Company (U.S.A.) entered into a settlement agreement with the State of Florida agreeing to pay the Florida agencies $2.4 million to cover investigative costs and attorney fees. The agreement stipulates that John Hancock is to undergo business reforms that require the implementation of specific policies and procedures to strengthen its ability to comply with the unclaimed property laws. These policies and procedures must include the use of the Social Security Death Master File ( DMF ) on a quarterly basis to identify potential deceased policyholders. The Florida Office of Insurance Regulation ( FOIR ) held unclaimed property hearings on May 19 th with invitations extended to the representatives of MetLife Inc. and Nationwide Mutual Insurance Company. Senior representatives were required to answer questions about their companies unclaimed property practices. The California Department of Insurance and the California Controller s Office held a hearing on May 23 rd where executives from MetLife testified, addressing allegations related to their practices of searching for policy owners who might have died. On June 1, John Hancock signed a Global Resolution Agreement ( GRA ) with Verus. Approximately 29 states have approved this agreement. This agreement predominately mirrors the settlement agreement that was entered into with the Florida agencies. Also in June, the California Department of Insurance retained Verus to examine all aspects of insurance companies practices > 2 related to benefit payments with a focus on, but not limited to, the unclaimed property issue. Recently, the New York Attorney General began to issue subpoenas to various life insurance companies to investigate their use of the DMF and compliance with New York s abandoned property laws. On July 18, the media reported that the National Conference of Insurance Legislators (NCOIL) would consider an amendment to the 2010 Beneficiaries Bill of Rights during their annual conference in November. Requirements to search, track and properly report to the various states under their unclaimed property laws will be addressed. While the audits of the above mentioned insurance companies are still ongoing, they have already paved the way for possible legislative changes in the insurance industry. The settlement agreement with John Hancock will most likely set the industry standard for the design of policies and procedures required to comply with unclaimed property laws and to identify deceased policyholders. However, since the majority of unclaimed property audits can last anywhere from three to five years, there will likely be additional findings and conclusions as these audits progress. In addition, it should be noted that the goal of the state regulators is to construct best practices for use of the DMF and require compliance by the nation s largest life and annuity insurance companies. This can only mean one thing: More audit notices are on their way and the insurance companies on this audit list may be at risk for noncompliance with unclaimed property laws. This appears to be just the beginning of the long journey of business reforms within the insurance industry. Whether under audit or not, the key is to be proactive in becoming and remaining compliant. Due to the complexity and number of unclaimed property laws, many firms will find achieving compliance very challenging. However, it can and must be done. Reviewing the details of the John Hancock settlement agreement provides an understanding of the scope and nature of anticipated changes that may be on the horizon. Keane Welcomes Michael R. Wood Process management expert Michael R. Wood will help clients analyze and improve IT systems to optimize liability oversight and efficiency. We are pleased to announce that Michael R. Wood, CPA, has joined our National Consulting & Advisory Services team as the firm s IT & Process Improvement Specialist. In this role, Michael will help clients establish efficient and compliant unclaimed property handling procedures by bridging the data and process management gaps that exist between most IT departments and unclaimed property reporting teams. Wood s specialized analysis and suggested workflow improvements will empower clients to address unclaimed property reporting and compliance obligations in a systematic and streamlined fashion. He will help companies create long-term liability reduction, simplify continued on page 9

3 Summer 2011: Volume 9, Issue 3 for unclaimed property in most states, the timeframe for compliance may be expanded in the audit context, creating the basis to estimate liability for many historical years. This can result in an increase in the liability exposure by three to eight times, translating into millions of dollars potentially owed to states in fines and penalties. In addition to Delaware, Kelmar has over a dozen key states under contract that are also interested in pursuing audits. Some of the states represented to date include: Arizona, Florida, Massachusetts, Michigan, Missouri, Nevada, New Hampshire, Rhode Island, Tennessee and West Virginia. Kelmar: The Unclaimed Property Auditor with a New Face Why securities audits are a greater threat and what to do about it. By: Debbie L. Zumoff, Keane s Chief Compliance Officer It s been frequently mentioned that in today s tough economic times, unclaimed property serves as an additional source for state revenues, by boosting budgets without imposing tax increases on residents. Because of this, states will continue to audit companies that may not appear to be fully compliant with unclaimed property laws, and they will use 3 rd party contingency auditors to do so. One of the realities over recent years has been that the vast majority of these audits have tended to focus on the general ledger side of an enterprise (e.g. vendor checks, customer credits, refunds, uncashed payroll, etc.) and not the securities side of the business since proprietary and commercial transfer agents have worked most diligently to comply with state unclaimed property requirements. However, over the last twelve (12) months we ve seen a recent shift from examining the general ledger side of the business to scrutinizing the securities side on an increasing basis. The result is a resurgence of unclaimed property concerns that issuers and their transfer agents now must take into consideration. The Kelmar Audits Kelmar is an auditing firm that is well known to most large companies especially those incorporated in Delaware because of their prominent audits of general ledger property. By using estimation techniques, companies have been impacted by significant assessments based on an inability to provide accurate or sufficient records. And because there s virtually no statute of limitations Late in 2010 and at the beginning of this year, Delaware began issuing demand letters authorizing their audit agent, Kelmar, to request much broader information with an emphasis on potential equity and debtrelated properties during its escheatment audits. This means that, as a publically traded company, you will be asked to provide information relating to common stock, preferred stock, records from recent mergers, acquisitions, redemptions, employee stock purchase plans, dividend reinvestment plans, restricted stock, corporate trust relationships, reconciliation procedures, and odd lot programs. In addition, Kelmar is asking for specific data around other areas of the business as well, including: Merger and acquisition data from over the last twelve (12) months Account histories and contact information on nominee accounts Records back to 1981 According to several transfer agent representatives who were interviewed for this article, Kelmar is giving issuers very little time to produce the requested information. As a result, those same issuers are becoming anxious and are turning to their transfer agents for guidance on how to handle these requests. There is considerable concern over Kelmar s extrapolation techniques as applied in the general ledger world, and just how those techniques would be generalized to the securities arena. continued on page 9 > 3

4 Legislative & Regulatory Updates Update Key Summer /17/2011 through 7/14/2011 Introduced used for Legislation Passed used for Legislation Proposed used for Regulations Adopted used for Regulations Prefiled drafted bills and resolutions to be numbered, printed, made available for public review, and scheduled for hearing before the actual start of session. Arizona SB 1103 Proposed 1/11/2011, Passed 4/12/2011; Effective 4/12/2011 This bill exempts from the unclaimed property law child support funds that are collected through the child support clearinghouse. California SB 495 Proposed 2/17/2011, Amended 5/10/2011, Passed Senate 6/2/2011 This bill changes California s provisions for retirement accounts. The current law states that retirement accounts are not escheatable until distribution becomes mandatory. This bill retains that provision, but also adds that if an account does not have a mandatory distribution date, the account shall be considered to have reached mandatory distribution if it is such under any federal or state law, or the owner has reached age 70 1/2. The bill substitutes banks, banking organizations, and financial organizations with holders in Section 1520, its general reporting statute. The bill also substitutes the same language with business associations in its securities reporting statute, Section The bill adds a new section, Section , to read: The Controller shall establish a compliance program to identify holders of unclaimed property who are not in compliance with the unclaimed property report filing requirements of Section Also, the bill amends Section 1518, which deals with property held by fiduciaries. Previously, any intangible personal property held in a fiduciary capacity for the benefit of another person becomes escheatable if, within 3 years, the owner has not (1) increased or decreased the principal, (2) accepted payment of principal or income, (3) corresponded in writing, or (4) otherwise indicated an interest. Under the bill provisions, escheatment of a fiduciary account can be avoided through action by the fiduciary. If, in the last 3 years, the fiduciary does any of the following, the account should not be reported: (1) held another deposit or account for the benefit of the owner, (2) maintained a deposit or account on behalf of the owner in an IRA, (3) held funds or other property under a retirement plan for a self-employed individual, established pursuant to the IRS laws. Also, the fiduciary may avoid escheatment of the account by communicating electronically or in writing with the owner at the address to which typical account communications are regularly sent. The bill also seeks to amend Section 1536(b). Existing law requires a person holding funds or other property escheated to the state to file a report with the Controller and to pay or deliver the escheated property to the Controller within a specified time, unless another person has established his or her right to any of the property specified in the report. Under existing law, the person holding the property is required to report that property to the Controller as well as any other property that does not appear to be subject to escheats. This bill would instead require the person holding the property to report to the Controller only the property subject to escheat. Connecticut HB 5003 Introduced 1/5/2011, Failed 3/17/2011 This bill proposed that section 3-65a of the general statutes be amended to require banks to notify a holder of an inactive account by certified mail, within one year before a presumption of abandonment of such account is to take effect, that evidence of interest must be indicated or any funds remaining in such account will be transferred to the Treasurer and subject to escheat to the state. The stated purpose is to protect inactive account owners by requiring banks to notify them by certified mail within one year of presuming an account abandoned that the account funds will be subject to escheat to the state. HB 5200 Introduced 1/11/2011, Failed 3/25/2011 This bill creates a bottle refund deposit of $0.15 for wine and liquor containers. The objective of the bill is to increase the amount of unclaimed bottle deposit funds that escheat to the state. Delaware HB 229 Introduced 7/1/2011 The bill proposes that for all holders, records may not be examined from any calendar year prior to For holders who enter or have previously entered into a voluntary disclosure agreement, the examination of records is prohibited for any calendar year prior to Delaware s current practice is to examine records during an audit starting from the year 1981 and examine records for a Voluntary Disclosure Agreement starting from the year The current practice is not a statutory requirement, but instead an administrative policy. The bill further proposes to remove the requirement that the State Escheator notify a holder concerning a report filed incorrectly. Instead, the bill sets forth requirements with respect to initiating an audit of a holder. Specifically, the bill proposes that with respect to any and all reports filed on or after July 22, 2002, the State Escheator shall, as soon as is practicable > 4

5 Summer 2011: Volume 9, Issue 3 after a report is filed, determine whether audit is to be undertaken and notify the holder, in writing, that the Escheator is initiating the audit. After the audit is completed, the Escheator shall send a written Statement of Findings and, if applicable, Request for Payment by certified mail to the holder within three years after receipt of the report. The bill is not scheduled to be heard until January HB 133 Introduced 5/26/2011, Passed 7/5/2011, Effective 7/5/2011 The bill proposes language be added to section1203, Delaware s immunity provisions, to remedy issues relating to the interpretation of certain escheatable property and the timing that such property escheats, as addressed by the Delaware Supreme Court in A.W. Financial Services, S.A. v. Empire Resources, Inc. The bill explains that in certain cases, a legal argument can be made that 1203(a) and 1203(b) apply contemporaneously to the same set of facts. The proposed language eliminates such a nonsensical result by making clear that subsections (a) and (b) are mutually-exclusive, whereby the application of subsection (a) is to the exclusion of subsection (b), and vice versa. This bill is effective immediately. IDAHO HB 174 Proposed 2/17/2011, Passed 3/25/2011, Effective 7/1/2011 HB 174 changes securities reporting requirements in Idaho from a pure inactivity trigger basis to a combination inactivity and RPO trigger. Under the new law, any stock, shareholding or other intangible ownership interest in a business association is considered abandoned if the owner of such interest (1) fails to either claim a dividend, distribution, or other sum payable or communicate with the association regarding the interest or a dividend, distribution; and (2) the location of the owner is unknown at the end of the five (5) year dormancy period. The legislation also implements new requirements for dividend reinvestment accounts to be considered abandoned. Ownership interest enrolled in a plan that provides for the automatic reinvestment of dividends, distributions, or other sums payable as a result of the interest are not considered abandoned unless: (1) that the owner has not within five (5) years communicated or (2) that five (5) years have elapsed since the location of the owner became unknown to the association and the owner has not within those five (5) years communicated in any manner described in this chapter. ILLINOIS HB 1560 Introduced 2/15/2011, Passed 8/9/2011, Effective 8/9/2011 This bill amends the Uniform Disposition of Unclaimed Property Act. It provides that unclaimed wages, payroll, and salary in any form, held or owing by a banking or financial organization, are presumed abandoned after one year (instead of 5 years). HB 19 Proposed 1/12/2011, Passed House 4/6/2011, Referred to Assignments 5/13/11 This bill provides that before filing the annual report, the holder of property that is presumed abandoned under the Act shall send a letter to the owner by first class (instead of certified) mail. However, if the value of the property exceeds $1,000, 2 copies of the letter shall be sent, one by first class mail and the other by certified mail. Such mailing shall include the steps necessary to prevent abandonment of the property from being presumed. If passed, the bill would become effective upon passage. MAINe HB 200 Introduced 2/1/2011, Passed 7/6/2011, Effective 10/6/2011 This bill provides that gift obligations and stored value cards sold on or after December 31, 2011 are not presumed abandoned unless a single issuer sells at least $250,000 in face value of gift obligations and stored value cards in the previous calendar year. Sales of gift obligations and stored value cards are considered sales by a single issuer if the sales were by businesses that operate either under common ownership or control with another business or businesses in the State or as franchised outlets of a parent business. MASSACHUSETTS HB 1987 Introduced 1/20/2011, Negative Report from Committee 6/20/2011, Failed in House 7/11/2011 For each instance the word abandoned appears in Massachusetts Abandoned Property Law, the words and unclaimed are added. HB 1118 Proposed 4/26/2011, Referred to committee 4/27/2011 This bill amends the Uniform Unclaimed Property Act to remove the requirement that the Treasurer of State publish in a newspaper of general circulation in Maine a notice of unclaimed property that has been paid or delivered to the Treasurer. The Treasurer still has to publish notice that is likely to attract the attention of owners, but it no longer has to be in a newspaper of circulation throughout the state. MICHIGAN MI HB 4563 Introduced 4/14/2011, Passed House 6/8/2011 The bill would amend the Uniform Unclaimed Property Act to exempt from the Act property issued, held, due, or owing in any transaction between two or more business associations or other business entities, except with respect to property in a demand, savings, or matured time deposit with a banking or financial organization or property held in a safe deposit box or other safekeeping repository. MISSOURI HB 401 Proposed 2/2/2011, Recommended for passage by committee 4/4/2011, Failed 7/14/11 This bill proposed to create a business-to-business exemption in Missouri. The proposed law exempts any intangible property due or owed by a business association to, or for the benefit of, another business association resulting from a transaction occurring in the normal and ordinary course of business from escheatment. In addition to this stipulation, a statute of limitations is proposed. If enacted, this bill will prevent the state treasurer from enforcing the Unclaimed Property Act for a given reportable period more than three years after 1) the holder filed a report, or 2) the holder gave notice of a dispute under the Act. If no report is filed, there is no limitation on the Treasurer. In the case of fraudulent reports, the Treasurer may enforce the Act for up to 6 years following the false report. If no report is filed, there is no limitation on the Treasurer. The bill failed due to a default rule in the Missouri legislature. There is a more qualified B2B exemption already on the books in MO that remains unchanged. NEVADA SB 136 Introduced 2/8/2011, Passed 6/16/2011, Effective 6/16/2011 This bill provides that the dormancy period for certain types of property is reduced from 3 years to 2 years if the holder reported more than $10 million of property presumed abandoned on their most recent report. The property types are: securities, bonds, checking accounts, savings accounts, CDs, money or credits owed to a business customer, and property under the catch-all provision. > 5

6 > 6 To clarify, the named property types in Nevada s law not covered by this bill are: traveler s checks, money orders, life insurance funds, dissolution property, court funds, wages, utility deposits, and retirement accounts. AB 219 Introduced 3/1/2011, Passed 6/17/2011, Effective 7/1/11 This bill provides for the escheatment of slot machine wagering vouchers. Nevada s Unclaimed Property Law explicitly exempts gaming chips or tokens. This bill makes slot machine vouchers escheatable by excluding them from the definition of the currently exempt gaming chip or token and providing a definition of their own. The bill provides for the reporting of slot machine vouchers by amending the gaming law, not the unclaimed property law. The new law will apply to holders of a non-restricted gaming license in Nevada. Those holders will be required to keep a record of all unpaid slot machine vouchers pursuant to regulations to be promulgated later. After 180 days, or the expiration date printed on the voucher, whichever is less time, the obligation to pay the patron any value for the slot machine voucher expires. The Gaming Commissioner may shorten this time period by regulation. The holder will remit 75% of the value of unpaid vouchers on a quarterly basis (calendar quarters). The remittance is due on the 24th day of the month following the end of a calendar quarter. The money is then transferred from the Gaming Commission to the State Treasurer. A slot machine wagering voucher is defined as a printed wagering instrument, issued by a gambling establishment that has a fixed dollar wagering value which can only be used to acquire an equivalent value of cash or credits. The bill will be effective July 1, 2011 and applies to any wagering voucher issued after that date. NEW YORK AB 4011; SB 2811 Introduced 2/1/2011, Passed 3/31/2011, Effective 3/31/2011 This bill lowers the dormancy periods from 5 years to 3 years for the following property types: Money or securities held in escrow, but excluding escrow accounts for which the duty or obligation for which such amount was deposited has not been performed and such performance is still required. Amounts due on deposits or any amount to which a shareholder of a savings and loan or a credit union is entitled. Accumulations of interest or other increments held by a bank for payment of an interest in a bond and mortgage apportioned or transferred by it. In addition to adjusting dormancy periods, the new law amends New York s reporting provisions. There are three major changes: 1. Publication requirements: Every banking organization must publish on or before September 1 st of each year a notice naming potential owners of unclaimed property being held by the banking organization. This provision provides a little more flexibility in that the previous requirement mandated that the banking organization had to publish the notice within 30 days of filing their report. 2. Preliminary reports no longer required: Certain industries (mainly in the financial services industry) were required to file a preliminary report and conduct a publication prior to remitting a final report/remittance. This bill removes the preliminary report requirement. The bill further confirms the reporting deadlines and cut-off dates. Once the statutory due diligence and publication requirements have been satisfied, the report and remittance would be due (for banking institutions) by November 10 th. 3. Miscellaneous: The Verification and Checklist (AC2709) notarization requirement has been lifted. NY State law still mandates that all unclaimed funds valued at $20 and higher follow the statutory due diligence requirements. The State Controller s Office posts all owners entitled to property valued at $20 and higher on their website for at least one year. Gift cards remain at a 5 year dormancy period. NORTH CAROLINA HB 692 Introduced 4/6/2011, Passed 6/23/2011, Effective 10/1/ The dormancy period for wages and other compensation for personal services has been reduced from 2 years to 1 year. 2. This bill makes the following reporting changes for North Carolina: a. Removes the NAUPA reference from the statute so that electronic formats are now simply prescribed by the Treasurer. b. Provides for the aggregate reporting of properties worth less than $50. Property reported in the aggregate requires no owner detail information. c. Holders whose intangible unclaimed property value is $250 or less need not report any property, but are required to report that property in any subsequent year when their unclaimed property value exceeds $250. d. For all reported property, except travelers checks and money orders, if known, the holder must include the following owner detail: address, social security number or tax ID number, date of birth, driver s license number or state ID number, and address. Previously, only the social security number or taxpayer identification number of the owner was required. e. In the case of an annuity or a life or endowment insurance policy, the report must contain the full name and last known address, social security number or taxpayer identification number, and if known, date of birth, driver s license or state identification number, and address of the annuitant or insured and of the beneficiary. Previously, only the name and last known address were required. f. For all property reported having a value of $50 or more, the report must contain, in addition to a description of the property, an identification number and the property amount. Effective date for implementation is property to be reported in 2012; based on an administrative directive from the state. HB 733 Proposed 4/6/2011, Referred to committee 4/7/2011 An Act to provide that multiple payee checks may be presumed abandoned with respect to an owner not claiming the check within 3 years. The same type of check, when issued to a single payee, currently has a dormancy period of 7 years and that remains the same. The bill also limits the scope of the regulation of property finder agreements to only those agreements that involve property once it is presumed abandoned. Previously, the regulation indicated that finder agreements were void if commenced once the property was distributable to the owner. SB 728 Proposed 4/19/2011, Referred to committee 4/20/2011 See NC HB 733 above; this bill isolates the provision on finder agreements. The bill limits the scope of the regulation of property finder agreements to only those agreements that involve property once it is presumed abandoned. Previously, the regulation indicated that finder agreements were void if commenced once the property was distributable to the owner. oregon SB 756 Introduced 2/17/2011, Passed 6/14/2011,

7 Summer 2011: Volume 9, Issue 3 Effective 1/1/2012 This bill requires issuers of gift cards to give the customer the option to redeem the card for cash if it has been used at least once and the value is below $5. However, this prohibition does not apply in certain situations: (1) when the gift card was given for free as a donation or promotional offer, (2) when the gift card is redeemed using an online account for the purchase of goods or services, and (3) when the entity issuing the card is subject to the federal Communications Act of TEXAS HB 257 Introduced 3/2/2011, Passed 6/17/2011, Effective 9/1/2011 and 1/1/2013 Dormancy Reductions: 1) The dormancy period for checking/savings accounts and matured CDs has been reduced from five years to three years. 2) The dormancy period for money orders has been reduced from seven years to three years. 3) The dormancy period for utility deposits (defined as a refundable money deposit that a utility requires a user of the utility service to pay as a condition of initiating the service) has been reduced from three years to 18 months. Filing Deadline: Effective with the report due in 2013, Texas now joins Michigan in instituting a July 1st filing deadline. Specifically, under the new law the due date for filing the unclaimed property report and remitting the property has been changed. Previously the due date was November 1st with a cut-off date of June 30th. The new deadline effective with reports due in 2013 is July 1 st, with a cut-off date of March 1st. Accordingly, Texas due diligence statute is amended to match the new deadline. Under the new law, due diligence mailings must go out by May 1st for property deemed abandoned before March 1st. Previously, holders were required to mail a due diligence letter by August 1st for property deemed abandoned before June 30th. Miscellaneous: The new law increases the fee per month a holder of an unclaimed money order may charge for maintenance from $.50 to $1.00. Effective Dates: The new July 1st filing deadline and the corresponding due diligence deadline changes will become effective 1/1/13. The remainder of the changes will go into effect on 9/1/11. SB 1535 Introduced 3/10/2011, Referred to committee 3/22/2011 This bill defines unclaimed class action proceeds as property to be reported to Texas 90 days after it had become payable. The bill also amends Texas unclaimed property law concerning who may act on behalf of a corporation attempting to claim property from the state. For a corporation to reclaim its abandoned property from the state, only legally authorized parties may do so from the corporation. This new bill outlines in detail what persons or entities would qualify to take property on behalf of a corporation including, but not limited to: the president, officer of the board of directors, a person authorized under corporate bylaws or board resolution, a corporate bankruptcy trustee, or the sole surviving shareholder(s). HB 1886 Introduced 2/28/2011, Passed House 5/12/2011 Provides that class action proceeds are presumed abandoned if proceeds are unclaimed on or before the 90th day after the date proceeds were made payable and available; requires a holder to deliver class action proceeds accompanied by a property report to the comptroller not later than the 60th day after the date the proceeds are presumed abandoned; defines holder as a court, a settlement administrator, or other person in possession of class action proceeds at the time the proceeds are presumed abandoned. SB 1811 Relevant Provisions Introduced by Amendment 5/21/11, Died 5/30/2011 This bill provides for the escheatment of utility deposits. A utility deposit shall be considered abandoned on the latest of: (1) one year after the date of the refund check for the utility deposit, (2) one year after the utility company last received documented communication from the owner, (3) one year after the issuance of a refund check that has gone without action. The dormancy period for money orders is reduced from 7 years to 3 years. The dormancy period for checking accounts, savings accounts, and certificates of deposit is reduced from 5 years to 3 years. The bill adjusts Texas reporting deadlines. Previously, Texas law provided for a due date of November 1st with a cut-off date of June 30th. The bill makes the reporting due date July 1st with a cut-off date of June 1st. Accordingly, the dates for due diligence are adjusted. A holder holding property valued at more than $250 on June 1st (previously June 30th) must mail a due diligence notice by the preceding May 1st (previously August 1st). HB 2611 Introduced 3/9/2011, Reported on favorably by committee 4/6/2011 This bill provides for the creation of an unclaimed property type as land grant mineral proceeds. Original land grant mineral proceeds are mineral rights derived from real property transferred to a holder, or ancestor of a holder, from Mexico, Spain, the Republic of Texas, or the current State of Texas. HB 3790 Introduced 4/14/2011, Postponed 7/11/2011 This bill proposes to move the date for transmitting unclaimed property to the state from November 1 to July 1. Accordingly, due diligence timeframes are adjusted. A holder who on June 1st (previously June 30th) holds property worth more than $250 that is presumed abandoned, shall on or before the preceding May 1st (previously the following August 1st ) send a due diligence mailing to owners. While the bill mirrored the unclaimed property reporting deadlines of the now-passed TX HB 257, it did not include the dormancy changes of that bill. For that reason, TX HB 257 represented a greater fiscal impact for Texas in the upcoming fiscal years. Furthermore, TX HB 3790 was an extensive bill relating generally to fiscal matters. The unclaimed property changes were then isolated to TX HB 257 and passed as that bill which focused solely on unclaimed property. continued from cover page Keane Welcomes Cornel Lupu internal audit, Sarbanes Oxley Section 404 and 302 compliance, and financial reporting. He will offer Keane clients unique insights into the common challenges that companies face in unclaimed property audits. Lupu has broad experience as it relates to unclaimed property and life insurance companies. He was formerly director of examinations for Verus Financial, LLC and he has served as a global compliance officer for a major insurer. In addition, he has experience implementing and managing global business ethics and compliance reporting systems. > 7

8 Insurance Industry Standards By Valerie M. Jundt, Managing Director, & Cornel Lupu, Manager, Keane s National Consulting & Advisory Services Group Insurance companies, like all holders, are required to comply with the unclaimed property laws for each of the 54 jurisdictions within the United States and its territories. Although there are some similarities, many states have different reporting requirements and dormancy periods. As of late, there have been many legislative changes affecting the unclaimed property laws. Therefore, keeping abreast of these changes and complying with these laws can be extremely challenging. In order to ensure compliance there should be a robust set of policies and procedures that must be followed in order to research, identify, record and report unclaimed property to the appropriate states. In addition, effective internal controls must be in place for each area of the company responsible for any aspect of compliance. It is essential that these controls be designed and implemented specifically for the effective adherence to the policies and procedures. Determining best practices for compliance with unclaimed property laws should be one of the top priorities in the insurance industry. Media attention and regulatory oversight have led to a heightened awareness within the insurance industry in recent months. Compliance with unclaimed property laws has been brewing for the past few years and the bubble is starting to burst as evidenced by the recent agreement between John Hancock and Florida regulators. This agreement was the result of an ongoing multi-state unclaimed property audit. The terms of the agreement are certain to reshape the way insurance companies approach unclaimed property compliance. Determining best practices for compliance with unclaimed property laws should be one of the top priorities in the insurance industry. Every insurance company, at a minimum, should be asking themselves the following questions: 1. Has our company ever failed to file unclaimed property reports to the appropriate jurisdiction? 2. Has our company ever filed inaccurately or failed to include all applicable property types? 3. Has our company ever filed unclaimed property reports that were late? 4. Has our company ever applied an inappropriate dormancy period to property that is due to be or has been escheated? 5. Do our policy administrative systems records need to be updated with the most current policy holder and beneficiary data? 6. Have we over-reported or incorrectly reported to the wrong jurisdiction? 7. Are we potentially holding past due unclaimed property (suspense accounts)? 8. Do we have any subsidiaries within the corporate structure that have never filed an unclaimed property report? 9. Are we delinquent or inconsistent in how we identify deceased policy / account owners? If the answer to one or more of these questions is yes, your company may be at risk for an audit, and it is imperative to reevaluate your internal controls, policies and procedures for compliance with the unclaimed property laws. There are a number of best practices that insurers should follow to decrease the risk of audit and establish a strong and effective governance structure. Centralize the governance over the unclaimed property policies and procedures. Incorporate the periodic use of the Social Security Death Master File to determine if a policy holder or annuity owner is deceased. Conduct internal audits of unclaimed property policies and procedures. Ensure all Third Party Administrator (TPA) agreements clearly define who is responsible for identifying and reporting unclaimed property to the states on your behalf. Establish and reconcile an unclaimed property liability account on the general ledger. Account for unclaimed property liabilities in accordance with Statement of Financial Accounting Standards (FASB) No. 5 Accounting for Contingencies. Conduct system reviews to ensure that all relevant owner data and dates are captured and updated effectively and timely. Engage an independent specialist to confirm current procedures and offer suggestions for improvement and enhancements. Consider filing a Voluntary Disclosure Agreement (VDA) with states which may either eliminate or significantly decrease penalties and interest for past due property. The laws are forever changing and can be very difficult to follow and interpret. With state enforcement on the rise, there is no better time than the present to proactively review and address your current compliance process. Following these best practices can help reduce your risk significantly. > 8

9 Summer 2011: Volume 9, Issue 3 continued from page 3 Kelmar: The Unclaimed Property Auditor with a New Face Navigating the Audit Landscape Because we are seeing heightened activity around securities-related audits, it is important for issuers to understand that current and previous reporting practices are being reviewed and if they outsource to a third-party agent (including a transfer agent), now is the time to proactively prepare. As with any audit situation, the audit will run much smoother if you are prepared and your organization s documentation is accurate and thorough. The audits include a comprehensive review of all records maintained by an outside transfer agency, benefits administrator, or other service provider. The audits probe into the accuracy with which you, or your designated agent, have: Accounted for and reported returned from the post office (RPO) accounts in a timely manner Monitored and reported accounts that are escheatable based on owner inactivity Reported uncashed dividend checks and, in the event of a qualifying string of uncashed checks, the entire underlying shareholder account Appropriately handled payables and balances stemming from various corporate actions Nominee accounts on unexchanged issues It is also critical to note that whether or not you have used a designated agent to maintain your organization s records, the responsibility for compliance and the reporting of any uncovered liability ultimately resides with the issuing corporation. If you receive a letter from Kelmar or any third party audit firm for that matter there will be certain documents and records that they will request you to provide. You will be expected to provide information concerning corporate trust agents, owner location firms, and vendor contracts. They will also request that you provide individual shareholder information including, but not limited to, the following: Name and address Account number and TIN Date account was opened Date of most recent ownerinitiated contact Date account became undeliverable (if applicable) List of outstanding dividend checks (with detailed information per check) List of suppressed checks List of outstanding shares How to Protect Your Organization In today s economic climate, it is important to keep in mind that no company is off limits or immune to audit. Even if your organization is not currently facing an audit, it s imperative that you take immediate action to ensure that your records are clean and that you are in compliance with state unclaimed property laws. Make sure to evaluate the efficiencies of your current unclaimed property compliance process, conduct your own independent review of all third-party agents, and ensure that record retention systems as they relate to unclaimed property compliance are in place. A great first step is to obtain copies of all historical reports filed on your behalf to the states. Next, with the help of your own internal auditor or independent specialist, test your internal procedures and processes. As with general ledger audits, there are many things companies can do to mitigate the liabilities identified during the audit. Companies should not blindly accept the findings and the terms as presented by the auditor and assume that they have no options or flexibility. These extremely broad audits are triggering alarm among stock issuing companies across the country. However, if you understand the unclaimed property compliance process and take the necessary steps well in advance to ensure your organization s records are in order, you will mitigate your risk and reduce liabilities saving significant organizational resources and potential reputational risk in the long run. continued from page 2 Keane Welcomes Michael R. Wood internal accounting procedures, reinforce dormant account tracking, and support more manageable data handling practices all of which will help companies reduce costs and improve defensibility in the case of an unclaimed property audit. Wood has more than 30 years of experience providing clients with time and cost saving solutions through enhanced business process improvement and IT strategy. His industry background, knowledge and experience will help us provide clients with state-ofthe-art unclaimed property tracking and management systems that simplify dayto-day liability management and provide accurate, defensible data when an unclaimed property audit arises. > 9

10 SEC Takes Comments on 17Ad-17, Final Rule Anticipated By Timothy Holwick, Keane s Compliance Associate The Dodd-Frank Act, signed July 20, 2010, adds a new subsection to Section 17A of the Exchange Act which requires the Securities and Exchange Commission ( SEC ) to revise Rule 17Ad-17. The directive for the revision is to extend 17Ad-17 s requirement that transfer agents search for lost security holders to include brokers and dealers. The SEC is also required to revise 17Ad- 17 to require paying agents to provide notification for missing security holders. Paying agent is defined very broadly to include transfer agents, brokers, dealers, and any other issuers. Missing security holders are security holders who were sent a check that they have not cashed before the sending of the next scheduled check. Interested parties were encouraged to comment on the proposed rules in general, but specifically, parties were asked to comment as to whether or not the term missing security holder is confusing when placed along side lost security holder. The comment period concluded on May 9, 2011 and the SEC has published thirteen comments it received during the comment period. As would be expected, most of the comments come from major institutions or interest groups in the securities industry including BNY Mellon Shareowner Services, Committee of Annuity Insurers, Wells Fargo Advisors, American Bankers Association, Computershare, Securities Transfer Association and the Securities Committee of the American Bar Association. Almost all of the comment letters responded to the SEC s request for feedback on the potential confusion between the terms lost security holders and missing security holders. Each letter confirmed the common suspicion that the two terms were confusing and that the final rule should use more distinct language. The Securities Transfer Association ( STA ) suggested that the SEC use the term unresponsive payee as an alternative to missing security holder. Citing confusion between the requirements for lost and missing security holders and the inaccuracies of the term itself, the STA suggested unresponsive be used because it represents that a security holder may not be lost or missing at all. Rather, they have simply not yet decided to cash the check. As the STA was one of the first organizations to submit its comment letter, subsequent comment letters directly mentioned the STA s recommendation and supported the proposed revision. Accompanying confusion about the terms when used separately, several comment letters raised issues with how the terms of missing and lost security holders may interact or interfere with one another. Under the proposed rule, it is possible that an issuer would be required to send a notice to a missing security holder even though that security holder is already a lost security holder. Understandably, four of the submitted comment letters opined that it would be a waste of money to send a notice to a security holder when the issuer already knows it will be returned as undeliverable. The comment letters proposed a solution to this problem: the final rule s definition of missing security holder should explicitly exclude lost security holders. In general, the response of the securities industry to the proposed changes to Rule 17Ad-17 was an acknowledgement that the SEC was under Congressional mandate to make the changes. Very few of the letters challenged the basic necessity of the change and chose a more practical path of offering suggestions to improve the efficiency of the proposed rule. Among those suggestions were: Use more distinctive language to avoid confusion between missing and lost security holders, such as unresponsive payee. Make the definition of missing security holder exclude the lost security holders so issuers are not sending unnecessary notices to addresses already identified as bad. Standardize and lengthen the time period that triggers the obligation to send notices to missing security holders to avoid sending notices to customers who had simply chosen not to negotiate their checks right away. Allocate the rule s compliance burden to the broker-dealer with whom the customer has the primary relationship. Apply the rule only to checks issued after the rule s effective date. Define the scope of the new rule s application with specificity in terms of which brokers, dealers, and transfer agents are covered. Add a reference to 17Ad-17 in the 15b- series of rules. Since the new rule is embedded in the transfer agents area of the regulations, broker-dealers may not recognize that it now applies to them. Allow for statements reflecting the redepositing of uncashed checks into a customer s account to qualify as notice to the customer. Extend the rule s implementation period from 12 months to 18 months. Recognize and provide guidance for the possibility of conflict with state law. Permit the use of electronic correspondence to send notices. The suggested changes in the comment letters will hopefully result in a regulation that effectively serves the purposes of the Dodd- Frank Act s relevant portions while avoiding any substantial burden on business as usual in the securities industry. > 10