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Peeking Behind the Curtain of Mutual Fund Corporate Actions

Peeking Behind the Curtain of Mutual Fund Corporate Actions

The accurate and timely tracking of corporate actions is an integral component in the day-to-day management of mutual funds and the Broker Dealers, Bank Trusts and Record Keepers that distribute them. (We’ll refer to this group as “Distributors” or “Dealers” in this blog post.) Today in the U.S. there are more than 8,000 mutual funds available to distributors, representing $17 trillion of Assets Under Management (AUM), each of them operating with a different agenda and goal.

That means that distributors must constantly be prepared to accept and process those actions to maintain a current record of information about the funds that they offer to their clients. Ultimately, it is their responsibility to ensure that they are trading by the rules and guidelines defined by the mutual fund complex.

Primary examples of mandatory corporate actions for mutual funds include

  • Fund mergers
  • Fund liquidations
  • Fee changes
  • Changes in the purchase eligibility requirements (minimum purchase, fee breakpoints)
  • Name changes (rebrand) and CUSIP number changes

Corporate Action Initiation

Initiating a mutual fund corporate action can be a complicated process depending on the size and structure of a fund company. In general, many of the larger fund shops have a process including multiple roles and functions to create, approve and announce a corporate action. But in some of the smaller fund shops, the process may fall on the responsibility of one person, who completes all of the required tasks.

Who’s Involved in the Process

There are a number of parties behind the creation of any given corporate action, both in the Fund’s distributor and in the Fund’s service providers. The Fund’s product team works with the Fund’s board of directors, who decide that a particular action is in the best interest for the direction of the Fund. Once the action is formulated, the Product Team works with the legal and compliance groups to write out the corporate action. At this point Operations and the Fund’s key service providers, such as their TA and Fund Accountant, are brought into the loop and may contribute operational detail to the draft corporate action. The directors may step in to approve it again before it is passed on to the marketing team, who then formats a document that will be sent to the fund distributors. Typically, the corporate action will be formatted as a PDF that the distributor can file.

Lastly, the operations team who manages the contact list for the fund’s distributors will communicate the action to relevant parties. The flow chart image below illustrates the complicated process. (In a future post, we will discuss what happens after step 5 to include the various ways that distributors receive and process this information, and the risks associated with this process as it stands today.)

Fund Company Communications to Dealers
(Click on image to enlarge.) This particular graphic is helpful for visualizing what a typical origination process looks like at a larger fund company. At smaller firms, steps 1-5 may all be completed by only one to two people!

Using best practices, the entire trail of editing and approvals should be audited and then peer reviewed to ensure that the corporate action is accurate in both process and content before sending off to the distributors.

Reporting

While the process for initiating a corporate action is generally consistent across fund companies, a lack of uniform reporting standards in the industry means that actions sent to distributors will have a different format and style depending on the company sending them. For distributors that deal with hundreds (if not more) of fund companies, a number of emails and PDFs to sift through presents a laborious task heavy on manual processes.

Responsibility

The Funds are responsible for sending out accurate information and the distributors are responsible for processing that information correctly. If the Fund sends out incorrect information and the distributor processes that incorrect information, the Fund is accountable for the error, and vice versa. To mitigate the risk of misinterpretation, distributors often follow up with the Funds to verify the corporate actions.

Would you like more information on how to improve your corporate actions management? Contact us today to learn more.

 

Chris Maynard
Chris is a Project Manager / Business Analyst for Delta Data. He has been in the Financial Services Industry for 30 years, the last 19 with Delta Data. In Chris’s role as a product champion and client advocate, he has fostered many client relationships and helped them navigate the technologically complex and rapidly evolving world of back office mutual fund processing.
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