by Dorothy Flynn
As states struggle to balance their budgets, they increasingly look to generate revenue by enforcing unclaimed property laws-a goal they are pursuing by conducting an unprecedented level of unclaimed property audits. As a result, the question organizations are asking themselves is not, "Will my company be audited?" but rather, "Are we prepared to address and survive an audit when it happens?"
While on the surface it may not seem to impact the financial planner, there are a few key reasons you need to pay attention. Normal business and life events create circumstances that generate unclaimed property compliance obligations that could put your client relationships and assets under management at risk. Although you should be aware of the possibility of an audit and subsequent fines and penalties for non-compliance, what you should be most concerned about is the potential negative impact on your customer base. When you lose track of your customers or aren't maintaining healthy data records, you not only jeopardize your current clients and accounts but also lose the opportunity to continue to sell to those accounts.
Unclaimed property issues have been top-of-mind in the past few years due to the continually evolving regulatory landscape. Dormancy periods are shrinking on the state side. Requirements are increasing on the federal side. The bottom line is: your company must comply because it's the law. Coming into compliance means that accounts that meet certain criteria-such as dormancy periods or account inactivity-will escheat to the state. Obviously, this is bad from a business perspective, as those accounts represent assets under management and losing them will have an impact on your book of business. Because of this, you should proactively manage red flags in your data so when compliance time rolls around, it doesn't negatively impact your business.
Common Red Flags
Here are common red flags financial planners should familiarize themselves with to help protect their clients and their businesses.
Address accuracy: How many customers are out of touch with you because you have the wrong address? Nearly 40 million people move to a new address each year and many don't update their addresses, so make sure your client addresses are up to date. Returned mail can be a trigger for dormancy, which can ultimately lead to escheatment by the state of last known address.
Client's life status: A client's status in your system can be a matter of life or death-literally. For instance, nearly 2.5 million people die each year, 60 percent of whom fail to execute a last will and testament, leaving their estates and beneficiaries with no knowledge of their investments.
Consider this: A bank was defrauded when someone claimed that stock and dividends owned by a married couple had been lost, requiring replacement. At the time the affidavits were filed with the bank, the married couple was deceased. Replacement dividend checks and stock certificates totaling $467,000 were issued and transferred to accounts controlled by the person who made the fraudulent claims. Had the bank's records been updated, it would have known this couple was no longer alive, and the perpetrators would have been stopped in their tracks.
Account activity: Do you have inactive accounts? By law, states can-and will-escheat funds from bank accounts, mutual funds, stocks, bonds, etc. after a specific amount of time without "owner-generated activity." Generally speaking, three to five years is the trigger for dormancy, but it varies by state. It's imperative for you to educate your clients about the value of remaining active on all accounts. For example, your clients should log in to all online accounts at least once per year. For each bank or brokerage account, it is recommended holders make at least one balance inquiry, deposit or withdrawal each year. Companies including ING Direct are rolling out comprehensive education programs to ensure their account holders understand the implications unclaimed property laws can have on their assets.
Overall data quality: Some of these "red flag" issues arise simply because of poor data quality, where the inability to communicate is simply the result of erroneous or poorly entered data. After analyzing more than 24 million shareholder accounts, The Keane Organization has found that 8 to 15 percent of client data records contain errors-from mistyped Social Security numbers to outdated addresses. Sometimes these errors create the misperception that clients are living when they're really deceased. The opposite is also true. One interesting statistic is that 40 percent of the deceased accounts Keane identifies are situations where the shareholder has been deceased for more than five years-a clear fraud risk. In fact, in one case, a company had an "active" shareholder account for someone who died more than 70 years ago!
Often, these anomalies persist because data quality issues prevent proper diagnosis and resolution. These types of situations are ripe for identity theft and compliance concerns. For example, a stranger could be cashing in on a deceased shareholder's dividend checks, rightful heirs could be unknowingly denied their inheritance or confidential company information could end up in the wrong hands.
New Federal Rules
Unclaimed property is an area that is continually changing, and states have been ramping up their attention to inactivity. State governments collect billions in abandoned assets each year, but it's not just an issue on the state level anymore. On July 21, President Obama signed the Restoring American Financial Stability Act of 2010 in which federal requirements regarding unclaimed property are now being expanded. For example, the act requires an expansion of current SEC rules that mandate searches for investors when mail is returned as undeliverable and checks are uncashed. The new rules will apply to broker-dealers who had previously been exempt. In addition, the new regulations require all stock issuers, transfer agents, broker-dealers, investment advisers-or any other person who accepts payments from the issuer of a security and distributes the payments to the holders of the security-to send notice to a security holder when a check over $25 due to that security holder goes uncashed. A notice must be sent if the person does not cash the check in six months or before the issuance of the next regularly scheduled check. The new rules, to be formulated by the SEC, must be enacted by July 21, 2011.
Keep in mind that simply being compliant with the new regulations doesn't mean you're protecting your client base. Your best opportunity to service clients and grow your business lies in your ability to proactively mitigate the escheatment red flags as quickly as possible-ideally before they even become compliance issues. By better understanding these risks and keeping a watchful eye on your records, you can ensure your business remains healthy and successful.
Dorothy Flynn is CEO of The Keane Organization Inc., a provider of compliance and enterprise risk management solutions to corporations, mutual funds and financial institutions.
What Is Unclaimed Property?
According to the National Association of Unclaimed Property Administrators (NAUPA), a nonprofit affiliated with the National Association of State Treasurers and the Council of State Governments, "unclaimed property" refers to accounts in financial institutions and companies that have had no activity generated or contact with the owner for one year or more, depending on the state.
- Common forms of unclaimed property include:
- Savings or checking accounts
- Un-cashed dividends or payroll checks
- Trust distributions
- Insurance payments or refunds
- Life insurance policies
- Certificates of deposit
NAUPA's website, www.unclaimed.org, explains that state laws protect consumers by instructing companies to turn forgotten funds over to state officials who try to contact the owner or the owner's heirs.
- Carly Schulaka