In a decision dated April 27, 2021, the California Superior Court for San Francisco County held that a Plaintiff had sufficiently alleged that the SCO had no authority to use third parties to conduct unclaimed property audits.
Specifically, the court found merit to allegations that the state had not satisfied the statutory prerequisite to promulgate official regulations through the Administrative Procedures Act (“APA”) under Civil Code 1571(c).
In response to the court’s decision, the SCO proposed regulations governing the activities of third-party auditors hired by the SCO to examine the records of a person who has failed to report property that should have been reported pursuant to the Unclaimed Property Law.
After considering comments received during the comment period and holding a public hearing on the matter, the SCO submitted the proposed regulations to the OAL for review in June 2024. On August 12, 2024, the OAL issued its decision denying approval for the proposed regulations because the regulations failed to comply with the clarity and necessity standards of the APA, as well as required APA procedures.
The SCO will need to resolve all issues raised in the OAL’s decision prior to the resubmittal of the proposed regulations within 120 days of receiving the decision. In doing so, the SCO will also need to make the revised regulations available for public comment for at least 15 days pursuant to subdivision (c) of Government Code section 11346.8.
Bottom line: Any company that receives an unclaimed property audit notice from California designating a third-party auditor may want to request removal of the third-party auditor. Further, if your company is currently undergoing an audit that is being conducted by a third-party auditor on behalf of California, you should contact counsel to discuss how the OAL’s decision impacts your audit.
Newsflash 2024-177