[ M A R K E T
R E V I E W
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C O R P O R AT E
I
t is probably safe to assume that for
many asset managers, corporate
actions and proxy voting are not
at the top of the list of priorities when
managing a portfolio. In their minds,
attention is better focused on areas that
generate profit for underlying clients, as
well as coping with copious amounts of
regulation.
Well imagine the shock to many that
failing to take notice of the value of op-
portunities offered to managing corpo-
rate actions is in the billions of dollars.
According to a recent white paper from
law firm Greenberg Traurig LLP, asset
managers are failing to optimise corpo-
rate actions decisions on a massive scale.
Greenberg Traurig concluded that it’s
‘only a matter of time’ before legal and
regulatory action is taken against them
for their failings.
Specifically, the paper found average
“It’s now only a matter of
time before regulators
commence investigations
and enforcement cases and
civil plaintiffs commence
lawsuits against asset
managers.”
ROBERT FRENCHMAN,
GREENBERG TRAURIG, LLP
aggregate losses to beneficial owners
from scrip dividends - a payment that
gives shareholders the choice of receiv-
ing a cash dividend or the equivalent in
additional shares of the company - totals
$1.3 billion annually, and between 2011-17,
approximately $8.9 billion were missed.
“It’s now only a matter of time before
regulators commence investigations,
enforcement cases and civil plaintiffs
against asset managers that systematically
fail to maximise the value of corporate
action determinations,” says Robert
Frenchman of Greenberg Traurig.
“We think the courts are especially like-
ly to uphold fiduciary obligations, where
many are knowingly failing to recover
the full value of corporate action events
that are the undisputed property of their
investors.”
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Global Custodian
Spring 2019
A C T I O N S ]
Authors of the white paper insist that
“there is no reason that asset manag-
ers (or the custodians that act on their
behalf ) should not have systems in place
that value corporate action determi-
nations on the election date, and that
process corporate action determinations
such that the full value of the optimal
election is captured for the beneficial
owner.”
If there has been so much lost as a result
of inefficient corporate actions decisions,
why has this not been realised sooner?
One reason is that is has little to do with
actual corporate actions processes, but
rather the people involved in it. “It is im-
portant to stress the problem is not neces-
sarily the processes, but it is down to the
decision making because every manager
has the ability, but the decisions they are
making are often suboptimal ones which
leads to inefficiencies,” says Jonny Ruck,
co-CEO, Scorpeo US, a corporate actions
technology firm. “Many see corporate
actions as a distraction to managing the
portfolio, and therefore overlook the val-
ue on offer. The value is far too great for
that to be an excuse.”
“On an individual basis, managers
tend not to care because it is just a small
amount per fund per issue, but what you
get is incremental losses where at the
end of the year, there is a significant loss
in value. Until you utilise some of the
technology on offer that automates corpo-
rate actions, this problem will continue to
exist because managers won’t be chang-
ing their ways.”
Are custodians to blame?
Asset managers are potentially more
susceptible to these inefficiencies than
other market participants because of the
number of data providers involved in the
execution of their business. The fact there
are so many intermediaries involved, and
for some that may have up to 10 custo-
dians providing conflicting event data,
sometimes in non-STP formats, means
they are more open to losses.
The amount that is lost in revenue
reflects the inefficiencies of the data/in-
formation exchange within the corporate
actions and proxy voting chain. This is
because a lot of the information from a
proxy event is not standardised or dig-
itised from the source. Rather, there is a
lag when custodians manually input the
information into an electronic format and
then passed on to the next intermediary.
This where the information is most sus-
ceptible to deviate and even be delayed
for the end investor as this process is
repeated.
“Many see corporate actions
as a distraction to managing
the portfolio, and therefore
overlooking the value on
offer. The value is far too
great for that to be an
excuse.”
JONNY RUCK, CO-CEO, SCORPEO US
“They [custodians] scrub the data using
their own tools and disseminate to the
next intermediary in the chain, who will
also apply their own scrubbing process,”
says Jon Smalley, co-founder of Citi’s
Proxymity.
“Once it finally gets to the end-investor,
who has to make the decision on that
vote, you have the potential to get several
different versions of the truth. The net
effect it has on asset managers is that
decision times are so compressed.”
However, it is wrong to assume that
custodians are entirely to blame. To a
large extent, the entire corporate actions
process continues to be manually-driven,
with a lack of investment in automated
solutions still prevalent in a lot of market
segments.
According to Michael Wood, global
product manager at Broadridge Global
Asset Servicing, fragmented architectures
at many of the larger-sized firms compli-
cates the objective of normalising the data
needed for efficient corporate actions
decisions.
“Asset servicing is at the end of the
processing chain and getting consistent,
up-to-date access to a global stock record
or global Security Master across multi-
ple business lines has historically meant
bespoke integration across 10+ systems,”
says Wood.
In addition, he explains a lack of coor-
dination between the front- and back-of-
fice at both investment banks and asset