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State Treasurers Give Some New Protections To Shareholders Alleged To Be ‘Lost’... But Many Predatory Practices Continue Unabated

An Interview With Jennifer Borden, Executive Vice President And General Counsel Of UPRR

Optimizer: Unclaimed property laws have always been billed as consumer protection statutes, designed to preserve the rights of property owners. For years the Optimizer has been incredibly concerned about how these statutes end up negatively impacting people, particularly  shareholders. For the last two years we have seen changes in laws and administrators’ interpretations that continue to cause consternation for the industry. Was 2013 any better, for shareholders, or corporations?

Borden: Over the last year, we have seen a continuation of a few key trends, both from a legislative perspective, and through litigation. Insurance issues continued to dominate the news, through the audits of the country’s largest insurers, which frequently led to multi-million dollar settlements, to the many states passing legislation mandating proactive identifi of decedents, to class actions regarding holders’ obligations, and holder challenges to the over- reaching of the states and their contingent fee auditors. We saw an interesting blend of new laws that both help and hurt consumers and companies, and a smorgasbord of court rulings across the country. The year was certainly interesting for the unclaimed property community!

Optimizer: We’re glad to hear that there were some law changes that were positive! Can you give a few examples?

Borden: There were hundreds of bills proposed, and dozens enacted this year, but some of my favorites were in Michigan, Delaware, and Alabama. Michigan passed a statute designed to standardize audit protocol, so that the corporation isn’t at the mercy of the auditor’s whims. Delaware expanded its voluntary disclosure program as a part of its effort to reclaim its business-friendly reputation, and was rewarded with hundreds of participants. Alabama had a plethora of changes, including ones that eliminated the requirement to escheat automatically renewable investments so promptly; eased reporting requirements for holders; and provided better indemnifi for holders who report in good faith.

Optimizer: What about legislation that wasn’t as beneficial?

Borden: I look to all of the abandoned property statutes that now require insurance companies to check the Social Security Administration’s Death Master File, or DMF, frequently to identify policyholders who are deceased as closely as possible to their dates of death. These statutes are designed to accelerate the escheatment of the policies if the benefi aren’t then quickly found.

Optimizer: Figuring out that someone is due a benefi quickly seems like a positive. Why don’t you see these laws as beneficial?

Borden: I completely agree that  early  identifi of entitlement, along with location of the owner, is tremendously positive! I agree in concept, and support insurers’efforts to pay benefi where due. In my experience, insurance companies are proud of their relationships with their policyholders, who frequently are also their shareholders. Nevertheless, I have four concerns. First, abandoned property statutes should deal with abandoned property. They should not dictate the daily operations of companies in an attempt to increase the population of escheatable property. Second, all of these increased burdens on the insurer have turned out to be a lot of work for minimal benefi Our clients report that the frequent proactive searches have only increased claims by 1%. A full 99% of claims are still being paid the old-fashioned way – the benefi reports the death, and the claim is processed. Thus, we have tremendous burden on the company, without signifi benefi to the  owner.  A troubling side effect of the quarterly searches is that often insurers are reaching out to next of kin about a possible death benefi before the benefi  is prepared to cope with the administrative realities of the death of their loved one. I know it is a business, but these are human beings we are talking about, and they should be allowed to contact the insurance company on their own time tables. Finally, if a state abandoned property administrator is going to dictate mandatory searches of the DMF to increase escheatment of insurance policies, then what is preventing the states from mandating such searches of a common fi Nothing. It is truly a slippery slope.

Optimizer: Do these issues just impact the insurance industry?

Borden: Defi  not. The states’ contingent fee auditors are already accessing the DMF and challenging the accuracy of the transfer agent’s records based on the results. What we see a lot are deceased shareholders, where the widow continues to cash dividend checks issued in her husband’s name.  The  auditors’ check  of  the  DMF  reveals  the husband’s death, and suddenly instead of a case where the widow is innocently cashing checks that would inevitable pass properly to her, the auditor acts like they have discovered the proverbial smoking gun. The validity of the transfer agent’s records is being questioned, the “contact” with the shareholder is suspect, and the issuer has a major headache. These shares are not escheatable property – we know where the widow is, we just need to re-register the shares. But suddenly the account is on an audit report. It is not inconceivable that statutes will soon be amended to require DMF searches for owners of all investments, not just of insurance policies and annuities.

Optimizer: Besides legislation, any other notable developments, like in litigation?

Borden: Over all, I think it has been a pretty good year for holders. The cases being litigated put the spotlight on issues that are fundamentally unfair to corporations, and the media took notice. Vipal Monga of the Wall Street Journal did a great series on how Delaware’s execution of its unclaimed property audit program benefi the state and the auditors, but not necessarily the owners of the property. Much of the litigation this year favored holders, and I am grateful for all of the insurers who suffered through litigation that will benefi all companies. Early on we saw a great case in federal court in Massachusetts, and a similar case in state court in Ohio. After many insurers voluntarily agreed to search the  DMF  proactively,  the  benefi of shareholders sued insurers for not having reached out closer to the time of

death in order to transfer benefi Both the state and federal courts held that the terms of the insurance contract, which required that the benefi notify the insurance company of the death before benefi could be paid, should prevail. The courts held that valid contract terms would be honored.

Optimizer: How does that impact corporations?

Borden: I believe that a valid contract that forestalls the escheatment of an investment, whether we are talking about an automatically renewable CD, or a DRP, or a bond, will be honored if presented competently to the court. In other words, the states will not be able to demand escheatment of a DRP because the owner is not “active”, since the contract establishing enrollment in the DRP outlines the terms of the investment, and activity is simply not required. These insurance holdings will be advantageous to the securities, debt, and banking industries.

Optimizer: Any other cases of note this year?

Borden: I am fascinated by the ANICO and Thrivent cases in California state court, and the Select Medical case against Delaware in federal court. In the ANICO cases, the Controller launched a public relations attack on the company in the course of the litigation, and the fi holdings could set a dangerous precedent for any company under audit. The Controller is asserting that the unclaimed property statute allows him to look at whatever records he wants whenever he wants, even if the records have nothing to do with compliance with California’s unclaimed property law. In the Thrivent case, it is clear from the pleadings that the holder attempted to work with the state to resolve legitimate procedural issues, and the state responded by threatening that any challenge to the auditors’ demands would be met by a lawsuit, and the threat of interest and penalties. The state followed through on this threat and sued Thrivent, who had simply asked for a meeting with the state to clarify the scope of the audit. Clearly this is not governing based on the rule of law.

Optimizer: Wow, what about the Select Medical case? Why does it matter?

Borden: Similar to previous holders, Select Medical (“Select”) sued Delaware, alleging various constitutional and administrative issues with the implementation of the state’s audit process. In particular, Select objected on constitutional grounds to the state’s insistence on estimating its liability, which Delaware alleged would be due to them as Select’s state of incorporation.  Unlike prior actions, Select was brought in federal court. After an initial fl of activity wherein the state postured aggressively against the holder and attempted to remove the case to a friendlier state venue, this month we saw a complete about face by the state.  In advance of the court’s December 19, 2013 hearing, Delaware fi affi that provide that they will not estimate the holder’s liability, and they have withdrawn their demand that Select make payment to the state at this time.

Optimizer: That sees like great news for the corporation!

Borden: It is good news for Select, although they will still be forced to continue with the expensive and tedious audit to continue to prove that the state’s earlier demands were incorrect. The bigger issue is that the audit will continue out of the public eye, without the objective court getting a glimpse of the objectionable audit methodology that caused the action. More importantly, Delaware doesn’t want this action to move forward. If the court holds that any elements of the Delaware audit program are invalid, not only would hundreds of audits be called into question – the state could also be subject to refund claims from all of the companies who have paid Delaware hundreds of millions of dollars utilizing what some think is a bogus methodology. The last thing that Delaware wants is precedent that says they can’t do estimation. The goose who lays the golden eggs would be killed.

Optimizer: So is this just a Delaware issue?

Borden: No, because if the wild estimations of unclaimed property liability for the state of incorporation are invalidated, the contingent fee auditors will simply switch their methodology of burdensome audits in the name of estimation, to burdensome audits in the names of the other states. The pleadings in the Thrivent case include a letter to the company from counsel for the state which basically says that the contingent fee auditors can do whatever they want, and if the company raises concerns with the state, the state will sue for non-cooperation. I favor a more collaborative approach, and don’t fi it acceptable to threaten litigation right out of the gate. That is why I am so proud of the work that we do to communicate the issues better to the states, level the playing fi for corporations, and most importantly, help preserve the rights of the shareholders. Cross your fi that the courts remember these principles too!