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 manag- ers 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