Industry Group Proposes Best Practices for Processing Corporate Actions
Attention back office jocks: The Asset Managers Forum recently published a draft paper on processing corporate actions, such as exchanges, tender offers, and merger announcements. The 27-page "Corporate Actions Best Practices Initiative: Aid to Public Comment" identifies a number of current flaws in the current method of processing corporate actions and suggests best practices.
Written comments are due by November 30.
Currently, there is no standard way for issuers to announce corporate events, and advisers may receive information on such events from multiple sources at multiple points in time, leading to inaccuracies and errors. Moreover, instructions related to corporate actions are typically delivered through manual processes, such as phone, fax, and e-mail. "While not widely discussed, most firms have experienced a significant cost resulting from a Ďmissed faxí or incorrect processing of a corporate action notification and/or instruction," said the paper.
The paper notes that voluntary corporate actions, such as a decision whether to take a dividend in stock or cash, require a decision to be made by the investment adviser. Those decisions often are made at the last minute while the portfolio managers evaluates the market. Because an adviserís back office staff typically communicates the portfolio managerís instruction to the custodian via the custodianís website or fax, "both entities are open to significant financial risk in the event any of these manual processes fail."
The paper contains a number of best practice recommendations. For example, it suggests that exchanges of 144A securities for public securities be mandatory. Custodians should use two sources of information about corporate actions, when possible, and should cross-check them for accuracy. And announcements of corporate actions should contain a number of specified data points.