As everyone was preparing for the Christmas holidays last week, California announced that it and 34 other states had entered into a multi-state audit with Morgan Stanley, a Delaware incorporated company, for lost and abandoned brokerage or customer accounts. The audit is to be conducted by Verus Financial which has been the lead auditor for most of the life insurance audits. This audit and settlement is notable because it has Verus expanding beyond life insurance and into other major markets. The Social Security Death Master File ("SSDMF") and the US Postal Service's National Change of Address ("NCOA") and Coding Accuracy Support System ("CASS") databases are all to be used during this audit.
Verus first applied the use of the SSDMF in the context of life insurance audits to determine if insureds were deceased and thus triggered a life insurance company's obligation to pay the proceeds on a life insurance policy. Although state laws did not require companies to use the SSDMF as a reference, this new matching process was incorporated into the settlement agreements for the industry. Now, Verus is expanding the use of these databases to other industries, including financial services. With the ongoing audit of the securities industry via third party transfer agent Computershare, one could presuppose that the states and their auditors will continue to expand the use of these databases into other areas of unclaimed property compliance.*
Under the Agreement, there is a rebuttable presumption that there is no owner-generated activity in an account if the owner is found on the SSDMF. In addition, if the NCOA shows that the owner has moved from the address on the Company's books and records or if the address does not meet CASS standards, there is a rebuttable presumption of returned mail. Unless the Company can rebut the presumption or there is actual owner-generated activity during the applicable dormancy period, the account will be reportable as unclaimed property.
Morgan Stanley is required to perform due diligence on all potentially unclaimed accounts prior to reporting the accounts as unclaimed property. Due diligence will include at a minimum the standard due diligence letter sent to the account owner. If the Company knows that the address is wrong, it is required to conduct an address database search for a current address for the account owner unless the account owner is known to be deceased or is not a natural person or if the account is less than $25 or the applicable state due diligence threshold.
In a win for Morgan Stanley, the states agreed to waive penalty and interest on any accounts reported past the dormancy period and under the agreement.
Delaware, the state of incorporation, is not a participant in this audit.
Implications for Other Companies
First it was the life insurance companies. Now it is financial service companies. Who's next to see the application of the Social Security Death Master File? As alluded to earlier, securities are a prime target for use of the SSDMF. Barganier has already seen several audits where Delaware and Kelmar are auditing not only general ledger property but also securities related properties. During these audits, the states are requesting shareholder information that would permit them to search the SSDMF.
While the SSDMF searches are concerning, most companies should also be concerned about the application of the NCOA and CASS database searches. Could companies be required in the future to search for property owners in these or similar databases during the due diligence process? How will that affect your compliance process? Due diligence, sometimes seen as a nuisance during the reporting process, is continuing to become more complicated for holders.
For Account Owners
Under the Settlement Agreement, accounts are not reportable as unclaimed property if there has been owner-generated activity. Owner-generated activity includes any financial transaction as well as account log-ins and calls to financial advisors. In order to prevent escheatment, account owners are encouraged to sign in to their online accounts and talk to their financial representatives. Furthermore, account owners should not ignore correspondence that they may receive from Morgan Stanley in the near future. If the account owner is not interested in continuing their relationship with Morgan Stanley, it is generally easier to claim an account from the company than it is the state unclaimed property office. Furthermore, some states are required to liquidate stocks and similar financial holdings shortly after receipt. Your investments may not realize any gains that the stock market sees in the interim.
* Clarification: Computershare asked that we clarify that they are not an auditor. The reference to a "Computershare audit" is to an audit being conducted by Kelmar of multiple companies' stocks through their transfer agent, Computershare.