Corporate Actions Processing Ten Common Pain Points and How to Resolve Them 2

Corporate actions processing Ten common pain points and how to resolve them 2 | Corporate Actions Processing

This white paper will untangle some of the complexity that exists in the corporate actions arena. It examines ten common pain points and provides guidance on how to tackle them .

This communication is provided by Advent Software, Inc. (“Advent”) for informational purposes only and should not be construed as or relied on in lieu of, and does not constitute, legal advice on any matter whatsoever discussed herein. Advent shall have no liability in connection with this communication or any reliance thereon. | 3

Keeping Pace

Improving the efficiency of The Shifting Corporate the introduction of new and evolving investment vehicles and tax law, means corporate actions handling can Actions Landscape help cut costs, provide competitive there is exponentially more processing work involved. advantage through better client Corporate actions processing has long service, maintain regulatory been a byword for inefficiency and risk in Improving the efficiency of corporate compliance, and reduce operational the securities industry. While great strides actions handling can help cut costs, and reputational risks. were being made toward the nirvana provide competitive advantage through of straight through processing (STP) better client service, maintain regulatory in many other areas of the investment compliance, and reduce operational and realm, corporate actions were written reputational risks. By the same token, off as complex processes that were corporate action errors—a mislaid unsystematic, esoteric and hard to notification, a mistyped data input, a automate, and where IT spending offered misapplied event—can result in painful little tangible return on investment. financial losses. While precise figures are hard to come by, industry observers Today, however, that is changing—at estimate that 10 percent of annual least to some extent. Industry initiatives corporate actions processing costs are to create more standardized corporate attributable to “write-off” funds reserved action messages, enactment of cost for losses, which translates into tens of basis reporting legislation, and the arrival millions of dollars. of better vendor software systems are helping to drive up automation rates. This white paper will untangle some of the complexity that exists in the corporate And there is good reason for this actions arena. It will explain how corporate heightened emphasis if investment actions are typically handled today and managers—and the securities industry the challenges investment managers face as a whole—are to keep pace with the in processing them. It will then examine shifting landscape. The accelerating ten common pain points and provide rate of company mergers, acquisitions, guidance on how to tackle them. Finally, divestitures, and entity changes, and it will highlight the role technology can 4 | Corporate Actions Processing

Corporate actions processing has long been a byword for inefficiency and risk in the securities industry. | 5

Accurate actions processing is critical to the firm’s reputation for client service, as well as to its bottom line.

play in improving efficiency and accuracy, complex. The first is that they usually The subsequent outcome of the corporate and outline a series of best practices for involve “obtaining and verifying several action—for example, payment of cash and corporate actions processing. pieces of time-critical information.” shares following a merger—must then be correctly applied to the investment Secondly, the report continues, corporate manager’s portfolios. Mishandling this What Are Corporate Actions? actions are not one-time events, requiring process could mean anything from the a certain action on a specific date. Rather, manager trading shares it does not own to At this point it will be helpful to define they involve a series of actions spread having inaccurate valuations and accounts what we mean by a corporate action. In over a period of time: “a date upon which and misreporting clients’ tax positions. essence, a corporate action is any event information is officially released, a date Accurate processing therefore is critical to initiated by a company that changes its that shareholders can begin to take action, the firm’s reputation for client service, as capital structure or financial condition, a date by which they must submit their well as to its bottom line. and thus impacts its shareholders. Some responses (instructions regarding what examples include dividend payments, they would like to do in regard to the Ma Bell and Her Babies stock splits, stock buybacks, mergers, options made available to them), a date The history of AT&T, perhaps more than tender offers, spin-offs, name changes, and on which the payment or disbursement of any other company, illustrates the complex delistings. funds occurs, a date on which the return or and far-reaching impact of corporate distribution of shares occurs, and a date actions. American Telephone & Telegraph For investment managers, such corporate upon which all the aforementioned changes Company grew out of the Bell Telephone events have great significance, since to the security ‘settle.’” Company, founded in 1885 by Alexander they materially affect the value of their Graham Bell, and over the ensuing century portfolios. Yet keeping track of the For investment managers, this means it grew through countless acquisitions panoply of events and processing them ensuring they receive accurate notification to become the world’s largest telephone correctly—especially considering the of the impending corporate action, company. universe of securities portfolio managers research and assess what action (if any) oversee—is a monumental task. they need to take in light of it, and then As a result of a Justice Department respond with their instructions in the antitrust action, AT&T was forced to As Aite Group notes in its report, Corporate appropriate manner, often with requisite divest its seven regional Bell Operating Actions Systems Vendor Comparison: documentation, in time to meet the issuer’s Companies, known as the “Baby Bells,” One Step Closer to STP, two factors make response deadline. as independent companies in 1983, corporate actions processing particularly although it continued to offer long distance 6 | Corporate Actions Processing

Investment managers commonly obtain their event notifications from multiple sources—their custodians, the exchanges, and data vendors.

service. In 1991, AT&T acquired NCR factor in the accelerating pace of mergers A further complication is that investment Corporation to get into the computer and acquisitions in today’s business managers commonly obtain their event business, and during the decade it went on environment, and you begin to appreciate notifications from multiple sources—their to acquire a series of cellular telephone the magnitude of the impact of corporate custodians, the exchanges, and data ven- and cable TV companies, including McCaw actions and the urgent need to develop dors. The information from custodians may Communications, TCI, and Media One. better ways to deal with them. be incomplete or late, requiring managers to research the information manually After deregulation of the telecom industry from the issuer’s website or company in 1996, AT&T divested NCR again and Today’s Processing press release. Meanwhile, subscribing to spun off Bell Laboratories as Lucent Environment multiple data vendor feeds in order to get Technologies. In 2001, as part of a major a comprehensive and accurate picture of reorganization, it spun off AT&T Wireless, events is an expensive and time-consuming in what was then the world’s largest IPO, Since the turn of the millennium there proposition. along with its cable TV businesses, and both has been a notable uptick in efforts of these newly independent businesses to automate the corporate actions A Taxing Problem subsequently merged with other process. At an industry level, SWIFT Perhaps the hardest part of handling companies. Finally, in 2005, former Baby and the Securities Market Practice corporate actions for many managers Bell SBC Communications, having acquired Groups (SMPGs) have made significant lies with the tax opinions and cost basis most of its sibling companies in the years progress in developing and deploying a information. First, firms need to obtain since divestiture, acquired its parent and standardized communication format, using and interpret the relevant tax opinions— took the AT&T name as well as its historic T ISO 15022, for relaying corporate action no small task in itself. Next, they must (for “telephone”) ticker symbol, coming full messages. Many market participants now determine how to transfer the corporate circle and closing a tumultuous chapter in use standardized electronic messaging, action information to their portfolio the history of American business. but adoption is by no means universal, management systems in alignment with the particularly among the reorganizing tax opinion, so their trading departments Every one of these events involved issuers and companies themselves. can start to take action. multiple corporate actions that affected Indeed, too often the data sent by issuers thousands of investment managers and is in non-standardized formats and may In addition, cost basis information is millions of shareholders. Multiply this be inaccurate, incomplete, or untimely. necessary for reporting gains or losses single example by the hundreds of stocks Worse yet, many still rely on paper-based when filing tax returns, and for quantifying an investment manager may hold, and communication methods. the unrealized gains or losses of a | 7

Industry initiatives to create more standardized corporate action messages, enactment of cost basis reporting legislation, and the arrival of better vendor software systems are helping to drive up automation rates.

1 Also known as the “effective date,” this marks the cutoff point for who has entitlement to the corporate actions. Generally, whoever holds the shares on the day before ex-date is entitled to whatever is being offered, e.g. a rights issue. securities position, which is a difficult and corporate actions notifications to produce does occur, investment managers are left lengthy task. so-called “golden copies.” susceptible to staff turnover that could leave them short-handed and lacking the However, basis information is typically Meanwhile, a number of institutions are knowledge of how those ad hoc, in-house not available until at least several days developing corporate action messaging processes operate. after ex-date.1 Therefore, if firms process services to exchange information between corporate actions prior to receiving investment managers and custodians. cost basis information, letting their Their goal is to replace the multitude of Key Corporate Actions traders act immediately, they will have to interfaces investment managers would Challenges rebook the event once that information otherwise need in order to communicate becomes available, resulting in significant proxy voting and election subscription/ operational inefficiencies. results effectively with their custodians. There are a number of challenges to overcome in order to improve the Legislation passed in 2008 requires In addition, various IT vendors have corporate actions environment and brokers, custodians and mutual funds to come out with front-to-back software reduce the associated costs and risks report cost basis for all stock dispositions that streamlines the entire corporate that continue to daunt the investment to the IRS on investors’ 1099 forms, actions processing chain. Such solutions management industry. starting with stocks purchased in may help with the collation, cleansing, 2011 (and for other securities types and normalization of the data feeds, Mounting Transaction Volume in subsequent years.) Many advisors entitlement calculations, notification of and Complexity also include cost basis in their year-end the client response, and settlement and The general trend is toward growing reporting to clients. Advisors have to make reconciliation of the client’s positions. volumes of corporate action activity, an extra effort to ensure that their cost exacerbated by new event types, more basis calculations are in synch with their Nevertheless, for all the strides made in complex securities products, and more custodians’—which is not always the case. technology, the adoption of automated complicated processing requirements. solutions remains patchy among industry Taken together, these trends make it Technology Takes Hold participants. In addition, many parts of harder for investment managers to keep Technology solutions have emerged to the process have defied automation to pace with the flow of information and their help with some of these processes. For date, and so remain dependent on manual resulting action requirements. example, several platforms focus on the intervention with the attendant risk of capture, validation, and normalization of errors. And where manual processing 8 | Corporate Actions Processing

Many issuers still rely on paper- based communication methods. | 9

The rise in cross-border holdings adds further complications. For one, securities are increasingly being traded and settled in multiple locations.

For example, investors are continuing response. Compounding the problem, the and allow firms to meet their reporting to up their exposure to evermore exotic details provided may be incomplete and in deadlines. derivative instruments and structured non-electronic form. Yet getting accurate, products, which brings more demands in advance notification of events is critical Tax Implications tracking and compiling accurate event if the investment manager is to make Much of the manual work involved in information and entitlements around all the proactive investment decisions that can processing corporate actions stems underlying securities. Corporate actions make best use of the change at hand. from the need to interpret complex tax information for these products can also be consequences that result from the events difficult to communicate using structured Data Capture correctly. Firms must then determine how message formats such as ISO 15022. For many investment managers, data to process the events in their portfolio capture is characterized by a tangle of data management systems to accurately reflect The rise in cross-border holdings adds vendor feeds and reliance on information the appropriate tax opinion. further complications. For one, securities filtered down by their custodians are increasingly being traded and settled in some time after the fact, followed by Changing Regulation multiple locations. manual research to validate the details. As noted earlier, custodians are now Therefore, eliminating manual research and required to include adjusted cost basis on Cross-border holdings also necessitate streamlining the capture of scrubbed data annual 1099 reports to taxpayers and to currency conversions and adjustments for is imperative for greater efficiency and the Internal Revenue Service. Previously, different tax rates between the security’s accuracy. 1099s only displayed proceeds from the country of origin and the shareholder’s sale of securities, and it was the duty of domicile during processing. And then there Timely Processing taxpayers (with their accountants) to is always more tax law coming into play Without efficient processing capabilities, it report cost basis and gains or losses on in different jurisdictions, which requires is easy to get buried beneath the mountain their 1040s. Now, investment managers continual monitoring and adaptation. of events. Yet missing or incorrectly face an even greater onus of obtaining, processing a corporate action can have managing, and accounting for cost basis Advance Event Notification serious consequences for investment information. Timeliness of event information remains managers and their clients. By contrast, problematic. Often, notification of an event keeping pace with the flow of event by the issuer is made at short notice— notifications and responses so they a few days before or even on the same are processed in a timely manner will day that shareholders must submit their make downstream reconciliations easier 10 | Corporate Actions Processing

Since the turn of the millennium there has been a notable uptick in efforts to automate the corporate actions process.

Ten Common Pain Points Action: Book the results of the event Risk: Investors often assume record (share distribution or cash payment) on date denotes the date of entitlement, Corporate actions can throw up a ex-date so the portfolio valuation in the which is not always the case. As a result, multitude of idiosyncrasies that make accounts is correct, but note that the dis- they may sell the shares after that day, accurate processing a veritable minefield, tribution won’t settle until pay date, when it erroneously thinking they have locked in particularly when it comes to their tax is actually received. Administrators should the entitlement. implications. The following are ten of the also restrict the shares from trading until more prevalent or possible scenarios that they are delivered/paid to avoid shorting Action: Assess the sequence of events need to be addressed, along with their the shares. In this way, both the firm’s per- to determine entitlement. Generally, corresponding risks and recommended formance and reconciliation will be correct. investors must hold the parent shares on actions to mitigate them. the appropriate latter date to be entitled to the distribution. 2. Ex-Date Versus Record 1. Ex-Date Versus Pay Date Date Entitlement Processing Considerations 3. Confirming Tax Compliant Cost Basis and Fair Market Record date is the date the issuing While an investment manager will book company uses to determine how many Values a corporate action event on ex-date, shares will be distributed. Ex-date is set the custodian won’t make the actual by an exchange to mark the cutoff point Generally, company tax opinions related distribution until later, on pay date. As a for entitlements. If record date comes to cost basis allocations include boiler result, there is a short window when the first, followed by ex-date, then ex-date plate language assigning cost allocations in manager’s books and what it holds are not generally becomes the date of entitlement, proportion to relative fair market values as reconciled. and vice versa. So if the sequence is ex- of the date of distribution. However, most date, record date, pay date, shareholders often investment managers and companies Risk: The firm’s traders could sell shares must generally hold on record date to will use valuations on ex-date, because they don’t yet own and so short the be entitled to the distribution. But if the that is when both the parent and resulting position. They would then have to buy back sequence is record date, ex-date, pay date, security are separate entities, producing the shares or cover the short, potentially shareholders must generally hold the day what appears to be a cleaner valuation at resulting in a loss or gain. before ex-date to be entitled. that point. | 11

Corporate actions can throw up a multitude of idiosyncrasies that make accurate processing a veritable minefield, particularly when it comes to their tax implications.

Risk: Basis allocations resulting from later on another firm acquires that same quantity, so everything rolls forward and ex-date or distribution date valuations are ticker and reactivates it. can be updated automatically. both theoretically correct, but distribution date valuations are more closely aligned Risk: Take an example. Sears used to But with a taxable stock dividend, you with the tax opinion. Therefore, if there hold ticker S, but as a result of its merger establish a new holding period and the is an audit and the auditor challenges a with Kmart it changed its ticker in March basis of the new shares equals their firm on the numbers used, it will be an 2005 to SHLD and ticker S was delisted. distribution date fair market value. The easier case for the manager to make if In August of the same year, Sprint changed value of the shares received should be tax compliant numbers have been used. In its name to Sprint Nextel Corporation and booked as a cash dividend paid to the addition, the numbers used by the manager recycled ticker S. However, if you haven’t parent, with a trade amount equal to the need to match those reported by the adjusted your historical information, when fair market value on distribution date of custodian on the investors 1099 form. your traders buy Sprint it will show up in the new shares received. It will then be your quarterly reports as Sears. reported to the IRS when the investor files Action: Find the date of distribution tax returns. valuations and put those numbers into Action: Rename delisted securities in some your cost basis formula. Communicate consistent manner—for example, S.old— Risk: If a dividend is wrongly booked proactively with brokers and custodians to avoid confusion if the ticker is recycled. as non-taxable, the investors’ year end to be sure all parties are accounting for reports will be incorrect when their the transaction in the same way. Also, accountants file the tax returns. If they closing or opening price would not be the 5. Taxable Versus Non-Taxable subsequently sell those shares they would fairest valuations; an average of the high/ Stock Dividends have established an incorrect initial basis low prices would be fairer and more in for them, and so their realized gains would alignment with tax opinion specifications. also be wrong. A common misconception in the marketplace is that any distribution in Action: Account administrators should 4. Avoiding Recycled Ticker which an investor receives stock is non- assess the tax opinion to determine Errors for Delisted Securities taxable. But that is not always the case. whether the dividend is taxable or non- A non-taxable stock dividend is really taxable. a payment in kind. The holding period Problems can occur when companies stop carries forward, and the cost basis of the trading and their ticker is delisted, but then old shares averages into the new share 12 | Corporate Actions Processing

Confusion may arise when a cash payment is reported as a return of capital distribution, which is often an international classification for the event and may not have the same meaning as “return of capital” under the US Internal Revenue Code.

6. Return of Capital Misnomer tion exceeded earnings and profits—after Risk: It is common for reclassification of their fiscal year end. In the meantime, the the original dividend to be overlooked. Confusion may arise when a cash prudent approach would be to book 100 That means the investor’s books will be left payment is reported as a return of capital percent of the distribution as dividend with an error that may not be uncovered distribution, which is often an international income and make adjustments when the until there is an audit. Once discovered, the classification for the event and may not final results are confirmed. original mistake and all downstream events have the same meaning as “return of would have to be analyzed and manually capital” under the US Internal Revenue rebooked. Code. For US shareholders the return of 7. Return of Capital capital designation may be a misnomer, Reclassification Action: Monitor company announcements since the cash distribution is generally for notification of any reclassifications treated as a dividend, and so is taxable as and adjust accordingly. It is also helpful to ordinary income. Therefore, it shouldn’t be This can occur when a corporate entity footnote the dividend, letting shareholders applied against the original cost basis to makes a cash distribution that is classified know that potential year end adjustments reduce the cost of the investors’ holdings, as a dividend, only to discover after year may be pending. unless it exceeds earnings and profits. end that a portion of that distribution exceeded earnings and profits. As a result, Risk: If investors believe it is a return the dividend has to be reclassified as a 8. Exercising Rights Issues of capital and adjust the cost basis return of capital. Investment managers will accordingly, should they subsequently then have to rebook that distribution in This area often presents confusion for sell the shares at the reduced cost their their previous year’s accounts as a negative shareholders. For example, what happens realized gains would also be incorrect. dividend—because the dividends have now if they don’t exercise their rights to a been overstated—and book that value as distribution before the rights lapse? Can Action: Account administrators need to a return of capital instead, which would they still allocate costs to those rights? assess the tax opinion to determine if what decrease their original costs. However, if And where cost allocation is appropriate, is reported as a return of capital should the resulting adjusted cost from the return how much cost should they assign to the instead be taxable as a dividend or is sub- of capital exceeds their cost basis, the rights? ject to other taxation for US tax purposes. excess would, in turn, have to be rebooked Typically, companies will publish return of as a capital gain. capital and/or capital gain reclassifications related to the distribution—if the distribu- | 13

A common misconception is that any distribution in which an investor receives stock is non-taxable. 14 | Corporate Actions Processing

Further technology advances will be necessary before the full benefits of STP can be realized across the board.

Risk: If shareholders miss a rights issue, or employed, the custodian would round up 10. Tax Consequences of don’t receive notice that it took place, they and sell 80 of the investor’s shares for the Combination Mergers lose the opportunity to sell the rights or cash payment, and exchange the remaining exercise them. 20 shares for the new shares. Combination mergers, where both cash Action: If the rights lapse there is no cost Each custodian has its own proration and shares are exchanged for the parent allocation to those rights. Where cost methodology, which varies from event to shares, can result in varying tax opinions, allocation is in order, if the distribution event: some custodians will round up at the most common of which are completely date fair market value of the rights is 15 a specified level; some will truncate two, taxable or only partially so (for instance, percent or greater than the parent shares, three, or four spaces to the right of the the merger results in a taxable gain but not cost allocation is generally required. But if decimal; and some won’t round up at all. a loss). it is less than 15 percent, cost allocation is generally optional. Check the tax opinion Risk: Portfolio management systems Risk: Custodians may report only the pertaining to the rights. have difficulty automatically factoring in cash as the proceeds (excluding the fair rounding at the rate of proration, which market value of the shares received means the system records have to be in error) for both taxable and partially 9. Custodial Rounding at the adjusted manually. Clients with multiple taxable combination mergers, and 1099 Rate of Proration custodians will need to understand all forms do not always reflect the correct the different calculations made and tax consequences. This puts the onus on make the appropriate adjustments for advisors and accountants to report the Proration occurs when options are each. If an accounting error is made, the correct proceeds and gain results to their oversubscribed and there are insufficient investor’s portfolio positions and cash clients and the IRS. funds or shares available to meet the will be incorrect, causing a reconciliation elections submitted by shareholders. So if headache and potential trade errors. Action: Be careful to assess the tax an investor with 100 shares elected cash, opinion. If it says both gain and loss but the cash option was oversubscribed, Action: At present this is a part of the recognized, it is completely taxable. the investor would instead receive cash corporate action process that requires If no loss is recognized then it is for a portion of those shares, while the manual intervention. As with cost basis partially taxable, with very different tax remainder would be tendered in stock. reporting, custodians need to adopt consequences. Advisors need to document That split may be prorated at, for example, uniform processing methods if there is to company tax opinions and their tax lot 79.8 percent. In that case, if rounding is be standardization, and thus automation, calculations, so they can validate the of these actions. | 15

The rise in corporate action volumes and complexity means reliance on manual processing is no longer viable for today’s managers in light of the risk of operational errors that could occur.

transactions they booked when under audit shares, with the basis of the new shares managers in light of the risk of operational or challenged by clients. generally equaling the original cost minus errors that could occur. Automation cash received plus gain recognized. may not be ubiquitous in the processing Exposure to operational risk resulting chain, but advances in the last few years from unmatched items Action: There are three potential tax lot mean that automated solutions are now consequences: available for several key areas. Particular Generally, the basis of the new shares progress has been made in the capture and equals their legal effective date fair > If there is a loss, a $0 gain is reported to validation of event notifications to produce market value, and the holding period of the IRS, and the basis of the new shares an automated stream of golden copies. the new shares begins the day after the equals the original cost minus cash merger’s effective date. The gain or loss received plus $0 gain. The next stage in this process will be for recognized from the combination merger issuers as a whole to embrace the use of equals the difference between the total > If the cash is the lesser value, the cash standardized communication formats when proceeds (cash received plus the fair is reported to the IRS as the gain, and sending out their notifications, so that market value of the new shares) and the the basis of the new shares equals 100 automation is embedded right at the start original cost of the parent security. percent of the original cost (original cost of the chain. And with the emergence of IT minus cash plus cash). infrastructures that can electronically trans- Action: Book the event by buying the new mit the notifications and resulting response shares in with a trade amount equal to their > If the gain realized is the lesser value, it instructions quickly and accurately between fair market value, and selling the parent is reported to the IRS as the gain, and the relevant parties, the industry is finally shares with a trade amount equal to total the basis of the new shares equals their on its way toward STP, at least for the pre- proceeds (i.e., cash plus fair market value fair market value. decision and decision parts of the process. of the new shares). Certainly there is growing interest in and Partially Taxable Opinion Technology Offers uptake of technology solutions. System deployment may not come cheap, but the In a partially taxable situation, no loss is Effective Solutions benefits of workflow automation—risk recognized, whereas a gain is recognized reduction, cost economies, and staff to the extent of whichever is of less value, The rise in corporate action volumes and productivity increases—mean that the the gain realized or the cash received. The complexity means reliance on manual resulting bottom line impact yields a strong holding period carries forward to the new processing is no longer viable for today’s ROI argument. 16 | Corporate Actions Processing

Corporate actions involve many moving parts, with a corresponding potential for error, and there are some areas of the processing chain where manual intervention remains necessary.

Nevertheless, some challenges remain Best Practices in Corporate 3. Rely on the source: Get automated in the post-decision and distribution access to company tax opinions. phases of the corporate action processing Actions Processing chain. And it is here where automation 4. Calculate and verify cost basis falls short, in large part because of the Clearly, corporate actions involve many allocations and fair market values in complex array of tax implications that moving parts, with a corresponding po- accordance with company tax opinion need to be interpreted and applied before tential for error, and there are some areas specifications to avoid audit challenges; the resulting decisions can be fed into of the processing chain where manual work with custodians to make sure your downstream portfolio management intervention remains necessary. Neverthe- calculations match the cost basis being systems, which may need to be further less, there are a number of measures firms reported to the IRS. manipulated as later recalculations come can put in place today to maximize their to light. Further technology advances will processing efficiency and limit the risk of 5. Establish in-house, tax compliant be necessary before the full benefits of errors and their financial consequences. procedures for booking complex events STP can be realized across the board. to ensure they are handled consistently While not exhaustive, the ten steps below and in line with auditors’ requirements. provide the framework for a best practices approach to corporate actions processing. 6. Communicate back office processing considerations with traders and front 1. Subscribe to a proxy/tender office staff to establish realistic notification and voting service to avoid expectations and effective procedures. missing the opportunity to participate in voluntary events and to foster 7. Teach internal staff how to analyze an educated, timely election/voting and interpret complex tax opinions process. and familiarize them with the ten pain points highlighted in this white paper, 2. Get a full universe of corporate action so they will be aware of the risks event notifications via an automated involved and will know what actions to data capture and validation service in take to mitigate them. order to make proactive investment and processing decisions for your investors. | 17

Particular progress has been made in the capture and validation of event notifications to produce an automated stream of golden copies. 18 | Corporate Actions Processing

System deployment may not come cheap, but the benefits of workflow automation—risk reduction, cost economies, and staff productivity increases—mean that the resulting bottom line impact yields a strong ROI argument.

8. Provide advisory staff with access to a Toward True STP But these best practices should not be team of corporate action specialists as seen as an end state. Further systems well as legal counsel. Improvements in corporate actions advances and standardized processing processing have come a long way in recent procedures can be expected—and will 9. Be prepared for the implementation years, as the industry at large wrestles be needed—in the coming years, as will of cost basis legislation and with the enormous costs and risks with adoption of those new capabilities and scrub portfolio cost basis details which this area is associated. Technology procedures by industry participants. Only accordingly to get a jump on the solutions, most notably in the shape of then will true STP for corporate actions prospective changes to firms’ reporting messaging standards and automated data become a reality. requirements and ensure compliance capture and validation services, are taking with regulatory requirements. hold, bringing lower error rates, reduced operational overheads, and improved client 10. Process tax compliant transactions via service. For all the strides made, however, an automated transaction validation chunks of the processing chain remain service to minimize the risk of errors subject to manual intervention, especially from manual intervention, improve when dealing with the tax ramifications of reconciliation and performance a corporate actions event. accuracy, and benefit from the efficiency advantages of straight Under the current circumstances, through processing. investment managers should seek to adopt a series of best practices, as outlined in As new technologies—whether industry- the previous section, that combine the wide initiatives or individual vendor benefits of automation where available— systems—emerge, further improvements for example, around event notification, to the corporate actions processing chain data capture, and transaction processing— will be possible down the road. With with effective manual procedures where those will come even greater operational necessary. In this way, firms can satisfy efficiencies, reduced risk, and fewer their regulatory responsibilities, exceed financial losses. However, the adoption of customer expectations, and minimize current and future best practices remains internal costs and risks. the key. | 19

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