Unclaimed Property Update
Lawsuit Highlights Unclaimed Property Risks Associated With Asset Management
Unclaimed property actions are beginning to affect the asset management
industry and its customers. A recent court filing in Delaware concerning the
escheatment and liquidation of purportedly unclaimed securities highlights
the risks faced.
Two Belgian scientists filed suit this
summer against officials in Delaware,
claiming that their pharmaceutical
company stock was improperly
transferred to Delaware without
notification. The escheatment to
Delaware came after the state changed
its rules in 2008 for determining when the
owners of assets should be deemed lost
or unreachable and the state reduced
the time period that these unclaimed
assets can be held by the custodian from
five years to three years.
Without the plaintiffs’ knowledge,
Delaware quickly liquidated the stock
after its seizure in 2009. Five years
later, with the cash value still in the
state’s possession, a major international
pharmaceutical company acquired the
scientists’ company at eight times the
liquidation value Delaware had obtained.
Although Delaware offered to return the
liquidation amount, the plaintiffs are
claiming $12 million in damages from
Delaware’s improper escheatment and
liquidation of the shares. The plaintiffs
want the full amount gained from the
acquisition appreciation, as well as
other damages and court costs. The
plaintiffs also have filed lawsuits against
the acquired pharmaceutical company,
the asset management company,
the transfer agent, and the acquiring
pharmaceutical company.
This case highlights the growing risks
facing broker-dealers, custodians,
transfer agents, and other companies
holding customer securities or funds.
Under tight budget constraints and
increasing pressure to hold down taxes,
states have recognized unclaimed
property as a fruitful source of revenue
to meet budget shortfalls. Many states
hire third-party, contingent-fee audit
firms that use aggressive tactics to
identify new streams of unclaimed
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property, such as customer assets from
custody services, which may include
brokerage accounts, trust accounts,
retirement accounts, and other asset
management accounts.
As the number of unclaimed property
examinations grows and the audit
methodologies used by states and
their contingent-fee auditors become
increasingly aggressive, holders of
investment assets face challenges.
These include:
■■ As noted, legal exposure associated
with improperly handling and
escheating customer assets, which
may be expected to significantly
appreciate for years but – unbeknownst
to customers – are being escheated
and subsequently liquidated by states.
■■ Lack of clear statutory guidance or
case law regarding escheatment of
securities and investment products.
A majority of unclaimed property
statutes were adopted in 1981 and
1995, years before many of these
investment products became popular
or even existed.
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Contact Information
As states become increasingly
aggressive with escheatment actions,
the risks associated with both overcompliance and undercompliance
grow. To schedule an executive
briefing on these issues with
Crowe Horwath LLP, please contact
Bob Maryan at +1 469 801 4330 or
[email protected].
■■ Layers of regulation involved in
multistate audits and the conflicts
between those contrasting statutory
laws and federal regulations presiding
over these types of assets, such as
Securities and Exchange Commission
Rule 17Ad-17, the beneficiary
“five-year rule,” and IRS RMD.
Often, complying with one regulation
requires reinterpreting or potentially
jeopardizing another.
■■ Conflicts between fiduciary
responsibility – protecting client assets
– and state and federal compliance
requirements.
■■ Lack of deep industry knowledge
by the auditors, resulting in timeconsuming audit proceedings.
■■ Difficulty in developing prospective
unclaimed property statutory
compliance processes due to the
vagaries of existing laws, rapidly
changing state guidance, and federal
layers of regulation.
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Preparations should be made to
understand the new approaches
that these third-party, contingent-fee
auditors are using to demonstrate
the presumption of abandonment of
customer securities and funds held by
broker-dealers and asset managers, as
well as the tactics used to force reporting
and compliance, often with limited
statutory foundation. The very nature
of these types of assets – large and
accumulative balances, potential for tax
consequences, and intended to be held
long term – makes this a fertile ground for
organizational exposure.
Analyzing existing laws and legal
requirements, remaining attuned to
how these audits develop, strategically
navigating the audit process, and
balancing the auditors’ positions
with competing fiduciary duty to your
customers can assist in striking a
balance between over-compliance and
undercompliance.
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