A September 30 press release issued by American Express announced the company’s elimination of service charges on all American Express gift cards. The policy change included gift cards previously purchased by customers.

American Express, advocacy groups and the media widely hailed the development as pro-consumer. The company claimed to be the only major issue of open-loop (unrestricted usage) gift cards waiving all fees following the purchase of the card. However, other card issuers are expected to follow American Express’ lead.

Prior to September 30, American Express had been assessing a $2/month fee, beginning on the 13th month following purchase of the card.

Although service charges on unused gift card balances adversely affect consumers, there is little or no impact on unclaimed property, since unclaimed gift card balances are rarely reported to the states. Where the card issuer retains rather than reports the unclaimed balance, the waiver of service charges would not necessarily represent a significant sacrifice, as the card issuer ultimately is able to recognize the entire unused portion of the card as income.

To review American Express' press release announcing this change in policy, click here

David Salvatore was recently named Unclaimed Property Manager of the State of Rhode Island’s unclaimed property program. David succeeds Richard Coffey, who retired this past summer after 28 years of service.

David is not a newcomer to state government or treasury operations, having also acted as the General Treasurer’s Business Services Manager (a role that he continues to fill, contemporaneously with running unclaimed property). David previously worked at the Employees’ Retirement System of Rhode Island as an Accounting Manager, and spent 14 years in management positions with Staples, Inc.

There are a number of technology-based improvements that David hopes to implement for the Rhode Island program. Recently, for the first time, the General Treasurer’s website allowed for the downloading of reporting forms and other compliance tools. Additionally, the "Treasury Online Checkbook"  (http://www.ri.gov/opengovernment/treasury/) will allow the public to see how much unclaimed property is being returned to missing owners, the costs of running the unclaimed property program, and other information. David also is looking to utilize eBay to more efficiently and timely liquidate the contents of unclaimed safe deposit boxes.

When asked about the biggest surprise for David in his new role, he commented on “the large volume of claims that are made to unclaimed property by missing owners—there is an incredible number of people that we are able to find, and pay.”

A native of Providence, David is a graduate of Rhode Island College. He is currently attending Roger Williams College on a part-time basis, where he is pursuing a master’s degree in public administration.

Arizona Governor Janice K. Brewer has vetoed Senate Bill 1036, a budget reconciliation measure that sought to boost general revenues through a number of measures, including reducing many unclaimed property abandonment periods (as noted in the bill summary, the legislation " Accelerates by one or two years, depending on property type, the length of time for all property presumed to be abandoned and therefore unclaimed, except that the time period for travelers' checks is accelerated by 12 years and money orders by four years." A number of industry trade groups representing holders opposed the legislation; however, it is unknown whether the governor vetoed the bill based on her concern over other provisions.

[On August 20, 2009, SB 1025, containing the same reductions in abandonment periods, was passed by the Arizona legislature and sent to the governor for signature. The governor again vetoed the legislation on September 4, citing “the lack of a comprehensive state revenue strategy for FY2010 and future fiscal years.” Since Arizona’s budget reconciliation remains unresolved, similar legislation will undoubtedly be filed, which may very well include (for a third time) the reduction in abandonment periods.  The view of the governor on the unclaimed property issue is unknown; however, given the need for a state budget and the fact that Arizona’s governor lacks line item veto authority on taxing measures, Arizona may ultimately implement the surprisingly short abandonment periods.  In the event of this enactment, the Securities and Exchange Commission (and likely other parties) may very well challenge the two year abandonment period for securities, in that it will conflict with the agency’s lost security holder search regulation (Rule 17Ad-17).]

The Federal Trade Commission (along with five other federal agencies) has adopted new rules requiring financial institutions to establish “Identity Theft Programs” to “detect, prevent and mitigate identity theft.”  While the Red Flag Rules (so named because they require procedures to warn of and call attention to suspicious account activity) do not apply to state unclaimed property programs, their underlying purpose, and the body of knowledge surrounding the enactment of the rules, will be beneficial to state unclaimed property programs in battling claims fraud.

The focus of the rules is on the identification of “relevant patterns, practices, and specific forms of activity that [signal] possible identify theft.”  Most of the examples of “red flag” activity provided by the FTC have applicability to state unclaimed property claims operations.  For instance, the red flag of “presentation of suspicious documents” can manifest itself in terms of claims documentation that may appear to have been altered or forged.  Similarly, “presentation of suspicious personal information” can signify a red flag for state unclaimed property programs where an address or a telephone number provided by a claimant is non-existent, or appears to belong to another person.  FTC-identified red flags in the form of “alerts, notification, or other warning received from consumer reporting agencies” regularly turn-up in state claims research, where a credit bureau or other database denotes a fraud alert, information discrepancy, or other irregularity.

However, as noted by the FTC, the identification of “red flags” is by itself insufficient to stem identify theft.  Accordingly, financial institutions are additionally required to respond appropriately to any red flags so detected, and ensure that the Identity Theft Program is regularly updated to keep current with changes in identity theft risks.  Stressing the importance of the identity theft problem, the FTC requires that the Identity Theft Program be formally approved through the institution’s board of directors, with ongoing oversight performed by the board or by senior management

State unclaimed property programs would be well-served to institute their own “Red Flag Rules” and comprehensive “Identify Theft Program,” so as to reduce the possibility of unclaimed property being erroneously paid to a fraudulent claimant. With the Red Flag requirements becoming effective on August 1, 2009, it can be expected that additional materials on the subject will become publicly available.

For more information concerning the Red Flag Rules, see www.ftc.gov/opa/2007/10/redflag.shtm

If the migration of Americans from one address to another increases levels of unclaimed property, will a significant drop in the relocation of Americans lessen the likelihood that they will misplace their assets?

A common explanation offered for the existence of unclaimed property is the fact that Americans so frequently relocate.  This was certainly true during the 1950s and 1960s, when one-fifth of the population moved in any given year.  However, during the last 40 years, this rate of migration has slowed.  Between 2007 and 2008, the monthly Current Population Survey (a monthly survey of households conducted by the Bureau of Census for the Bureau of Labor Statistics) found that less than 12 percent of Americans had relocated—the lowest level since statistics were first compiled in 1940.  The number of people relocating between 2007 and 2008 (34 million) was the lowest since the 1959-1960 period, when the population of the country was significantly smaller.

The Pew Research Center, “a nonpartisan fact tank that provides information on the issues, attitudes and trends shaping America and the world,” has recently completed a study in conjunction with the Census data.  The Pew Research study, which was compiled from survey data, included a number of interesting observations for state unclaimed property programs:

• 57% of respondents have always lived in the same state; 37% have always lived in the same town.  (These numbers were highly variable from state-to-state; for instance, in New York, 81% of the residents were born in the state; by contrast, less than 14% of current residents of Nevada were born there.)
• In the Midwest, nearly half of respondents have always lived in the same town; less than one third of respondents in the West have spent their entire lives in their hometown.
• Metropolitan areas and small towns have more movers than stayers; migration rates are lower in rural areas.
• 75% of college graduates have moved at least once; just over half of those with no higher education have relocated.
• College graduates move longer distances and more often than other groups.
• Affluent individuals are more likely to have relocated.

The Pew Research study notes that nationally, migration has slowed for two particular reasons.  First, the graying of America; as individuals age, they are less likely to relocate.  Second, the growth in two-career couples has made the act of moving much more difficult to undertake.  The study went on to state that the current economic downturn has resulted in even less migration, “because jobs are typically one of the key magnets that induce people to move.”  However, it would appear that a loss of work—and the loss of a home—could likewise increase the movement of individuals from one place to another.

A United States Census Bureau report issued in April 2009 validated the Pew Research Study.

Understanding the mobility data may be helpful to state unclaimed property programs in establishing successful return strategies, particularly in reviewing what has worked well in other states with similar mobility patterns.  A synopsis of the Pew Research study can be viewed at pewresearch.org/pubs/1058/american-mobility-moversstayers-places-and-reasons and the complete study is available at pewsocialtrends.org. The subsequent US Census Study can be viewed at http://pewresearch.org/pubs/1058/american-mobility-moversstayers-places-and-reasons

The federal Worker, Retiree, and Employer Recovery Act of 2008 was signed into law by then-President Bush on December 23, 2008. This legislation was designed to address various employment welfare and retirement benefits. The legislation additionally included Individual Retirement Accounts (IRAs) in terms of suspending the requirement that a “minimum required distribution” be withdrawn from retirement accounts during 2009. It is this aspect of the legislation that is of interest to state unclaimed property programs.

IRAs are tax-advantaged assets.  However, the deferral of taxation is not indefinite.  The owner must begin making withdrawals from the IRA within a year of reaching the age of 70 ½.  This is known as the “required beginning date.”  The smallest withdrawal that must be taken as of the “required beginning date” is known as the “required minimum distribution.”  The amount of this withdrawal is based on a life expectancy factor.

State unclaimed property laws similarly defer the classification of IRAs as  abandoned until after the “required beginning date” has been reached. Under the language of the 1995 Uniform of Unclaimed Property Act, the abandonment period begins to run upon “the date…specified in the income tax laws of the United States by which distribution of the property must begin in order to avoid a tax penalty….” The statute’s predcessor, the 1981 Uniform Act, speaks to the date on which the IRA became “payable or distributable,” which is further defined as a date certain on which “under the terms of the account…distribution of all or part of the funds would then be mandatory.”

In terms of unclaimed property compliance, a question arises as to reporting IRAs which would have otherwise become reportable, absent the moratorium on minimum required distributions during 2009.  Does the Worker, Retiree, and Employer Recovery Act of 2008 in effect extend the abandonment period for these accounts?  The answer would be “no,” because the abandonment period begins to run from the “required beginning date.”  If an owner has already failed to take the “required minimum distribution” for several years, the federal legislation would have no impact on the state provision.

What about accounts where the “required beginning date” for an owner occurs during the 2009 moratorium period?  Here, the federal law would seem to in effect redefine the “required beginning date,” and the abandonment period would not appear to commence for such accounts until such time as the moratorium is lifted (presumably 2010 but perhaps later).

There is, however, an ambiguity with respect to the language of the Uniform Acts.  It is possible to have an IRA or other retirement asset where there is a required beginning date earlier than age 70 ½.  This date is set not by the Internal Revenue Code, but rather as part of the account or plan documents.  State unclaimed property laws recognize this, and both the 1981 and 1995 Uniform Acts provide that where a “required beginning date” that is earlier than 70 ½ is provided for, the earlier date is controlling.  What happens then if an account or plan document simply sets the age of 70 ½ as the “required beginning date,” without reference to the Internal Revenue Code, as it may be amended from time to time?  Since the “required beginning date” for these accounts is earlier than that under the “modified” Internal Revenue Code, there may not be a basis to extend the abandonment period.

The recently enacted Credit Card Accountability, Responsibility and Disclosure Act of 2009 included significant protections for consumers, not only with respect to credit cards, but gift cards as well.

• Gift cards must remain valid for not less than five years; and an expiration
  date after five years must be clearly disclosed on the card.
• Dormancy or service fees are prohibited, except where the card has not
  been used 12 consecutive months, the fee is disclosed, and only a single fee
  is charged per month. (NOTE: the original Senate version of the bill
  prohibited dormancy or service fees for 24 months, and thereafter limited
  the fees to $1 per month).
• States may adopt stricter regulations than the federal law, in which
  case the state law takes precedence.

The new law applies to all gift certificates, store (closed-loop) gift cards, bank (open loop) gift cards.  Cards exempted from the federal law include certain promotional cards, discounted cards used in conjunction with fundraising, pure stored value cards not marketed or labeled as gift cards, and telephone calling cards.

The law takes effect August 21, 2010; however, it will not be fully implemented until administrative regulations are adopted. 

In October, H.R. 3639, The Expedited CARD Reform for Consumers Act of 2009 was filed by Representative Carolyn Maloney (D-NY). This bill would establish earlier effective dates for various consumer protections, including a December 1, 2009 effective date for the gift card provisions included in the original CARD legislation.

To read the Credit Card Accountability, Responsibility and Disclosure Act of 2009 in its entirety, click here.

Marking a further step in the long and convoluted movement to eliminate physical (paper) stock certificates, the Securities and Exchange Commission has approved the New York Stock Exchange's lifting of a prohibition against NYSE listed companies from charging shareholders for the issuance of stock certificates.

Although alternatives to physical certificates have been available for some time, the NYSE had, until recently, felt that shareholders should not be economically forced to select book entry securities. However, technological advances in electronic transfers and the growing costs of handling physical securities have resulted in a rethinking of the policy.

In its order approving the NYSE request, the SEC cited a Securities Industry and Financial Markets Association ("SIFMA") study that indicated more than 1.2 physical securities are replaced each year due to loss, destruction or theft, at an estimated cost of $65 million. Additional SIFMA research suggests that most physical securities are issued not because of a perceived need on the part of small investors, but rather due to outmoded operational practices within the securities industry.

What impact will this development have on unclaimed property? Many have believed that physical securities provide owners with a "more tangible" reminder of their assets and thus lessen the incidence of abandonment. While a book entry share statement does not have the same "visibility," it should be acknowledged that physical securities, by their nature, greatly contribute to the owners becoming disconnected from their property. When a physical security is misplaced, there is a cost to replacing the certificate; many an owner, unwilling to incur this cost, has later forgotten their ownership interest--or in fact allowed it to become abandoned. Where the issuer of the security merges or is acquired, resulting in a requirement that the security be tendered in exchange for stock in a new company, again the owner may, intentionally or unintentionally, allow the security to become abandoned rather than incur the cost to replace it (indeed, many an unsophisticated investor has wrongfully concluded that a lost certificate is lost forever--and cannot be replaced, at any cost).

The fact is that physical securities are inefficient and costly. A system based entirely on book entry would allow more shareholders to buy, sell and transfer securities more efficiently. Granted, in some cases the existence of a physical security might better serve as a reminder of ownership (particularly in the case of an estate, where an administrator is trying to piece together the holdings of a descendant). But all and all, the public interest would be served by the elimination of physical securities.

The new NYSE policy won't result in the elimination of physical securities. It will likely cause the issuance of new physical shares to be prohibitively expensive. But tens of millions of previously issued physical certificates are still held. Over time, these physical certificates will be eliminated, as they are sold or transferred, or the issuer undergoes a corporate action, or they are reported as unclaimed. But we are still decades away from the ultimate goal of "dematerialization"--the elimination of the use of physical securities altogether.

To view the SEC's January 30, 2009 order, click here.

Move over, British Columbia: the next foreign jurisdiction to enact unclaimed property legislation may be none other than the East African nation of Kenya. Recent articles published in Business Daily Africa have tracked the progress of the legislation, and have made a solid statement in support of the Unclaimed Financial Assets Bill of 2008.

Justifications for passage of the law are similar to those articulated in the United States for unclaimed property legislation: namely, the government would have the benefit of lost assets pending unification with the owner, and owners could more readily locate lost assets where held in a central repository.

Prior to 2006, Kenyan law allowed holders to retain unclaimed property. In that year, legislation was enacted requiring lost assets, unclaimed for seven years, to be transferred to an investor compensation fund.

In 2005, Kenya's GDP was $39 billion, or roughly the same as the State of Alaska.  A joint public/private sector task force conducted a survey that found there is 8.8 billion KSh (approximately $112.6 million) currently being held by Kenyan financial institutions and corporations; however, the task force suggested that the actual amount of unclaimed assets might be ten times higher than indicated by the survey.

To download Kenya’s draft legislation, click here.

What happens when the author or other rights holder of a published work can’t be found?  Any unclaimed royalties would be reportable as unclaimed property. However, what if the book or manuscript has become “orphaned”?

In industry terms, an “orphaned” book is out-of-print, yet remains under copyright.  Because it is not being published, the book would not, in theory, yield further royalties.  But what if someone simply resumes publication—and seeks to profit from doing so?

In 2005, a class action suit was filed against Internet giant Google, by a group of publishers and authors, challenging Google’s plan to scan the pages of millions of books (including orphaned works), as part of an ambitious plan to create a massive digital library, and increase the volume of works that Google could sell.  Google disputed the claims, arguing that its scanning of the publications—and posting a limited portion of each scanned work on the Internet—was permitted under the copyright laws as “fair use.”  However, after protracted negotiations, Google, the authors and publishers have reached a settlement, which has received preliminary court approval.  The settlement is interesting because it creates a program which will most definitely generate unclaimed property (although the treatment of any unclaimed property would appear inconsistent with state law).

Under the settlement, Google will be permitted to continue to scan publications, and both display excerpts on line, and sell access to the scanned works.  Google will pay $34.5 million to establish a “Books Rights Registry,” the purpose of which will be to locate all affected authors and other rightsholders, collect revenue from Google, and distribute revenues to authors and rightholders.  Google will pay a minimum of $45 million to the Books Rights Registry as compensation for unauthorized digitizing of published works prior to May 5, 2009, and thereafter will pay 63% of all revenues derived from the future sale of any materials subject to copyright.

It can be assumed that many authors and other rightsholders will never be located.  The works that Google seeks to digitize number in the millions of volumes, covering many decades.  In many cases with respect to orphaned works, there will be no starting place to begin searching for the authors.  There will simply be no paper trail.  Although the per-book payment appears to be modest, there will be many works where the individual entitled to payment simply can’t be found.

As for the amounts that are unclaimed:  the current settlement agreement, which has received preliminary approval from a federal district court in New York, provides that royalties that are unclaimed five years after the period in which they are earned will not be reported and delivered to the states, but instead will first be utilized to cover operating expenses of the registry and, thereafter, will be utilized to ensure that all authors and other rightsholders who can be located receive all royalties owed them, per the revenue sharing model provided for in the settlement agreement. To the extent that there are any unclaimed funds remaining after satisfying the entitlements of the “locatable” authors and other rightsholders, the funds will be transferred to not-for-profit entities that “directly or indirectly benefit…the reading public.”

Objections to the proposed settlement were to be filed with the court by September 8. As reported by The New York Times, considerable opposition to the settlement grew over the preceding month, resulting in multiple challenges being filed. A number of groups, including competitors of Google, trade associations, and academicians, filed objections, citing both the rights of owners and the public good. Among the parties objecting were unclaimed property programs in Connecticut, Missouri and Texas. Among other arguments, Texas asserted that the settlement circumvented the unclaimed property law of Texas as other states, in that “the proposed distribution scheme for unclaimed funds violates [a] prohibition on private escheat.” In noting that “the states have a collective interest in ensuring that national settlements, like this one, recognize and respect their unclaimed property laws,” Texas requested that the court modify the settlement to require compliance with state unclaimed property law, so as to “ensure that class members’ rights are protected….”

On October 7, The New York Times reported that Google, along with the Authors Guild and the Association of American Publishers had redrafted the agreement. The New York Times quoted David Drummond, Google’s chief legal officer, as stating “[w]e have a good process now for taking into account some of the objections.” The court will first consider the revised agreement on October 8.

To learn more about the Google Book Settlement, click here.

To view the Attorney General of Texas’ letter to the United States District Court objecting to the proposed Google book settlement, click here.