Investment Operations

Asset Managers Failing to Optimize Corporate Action Decisions on a Global Scale

Greenberg Traurig

A new white paper published by Greenberg Traurig, LLP reveals that asset managers are failing to optimize corporate actions decisions on a massive scale. The paper highlights the costs to beneficial owners of suboptimal decisions in corporate actions as well as the regulatory and legal risks asset managers face for systematically failing to optimize corporate actions decisions.

Greenberg Traurig analysed losses by investors, including some of the largest asset managers in a dataset comprised of all scrip dividends globally between 2011 and 2017. The paper highlights include:

  • Average aggregate losses to beneficial owners from scrip dividends alone total $1.3 billion annually – and between 2011 and 2017, approximately $8.9 billion were missed. Findings also conclude that in 38% of scrip dividends, the majority of shares were elected in a suboptimal manner.
  • Aggregate losses from undersubscribed rights offerings exceed $100 million per year and losses are compounding each day. There were fewer rights offerings than scrip dividends between 2011 and 2016, but the missed value was far larger – approximately $662 million out of $485 billion capital raised.
  • As of the end of 2016, unfunded liabilities of private-sector defined benefit pension plans in the U.S. alone stood at $0.5 trillion. The approximately 10-basis points per year improvement that asset managers would derive from recovering missed value from scrip dividends alone, would add 1% to the return of portfolios over seven years.

Regulators are demanding increased transparency which means greater scrutiny leading to investigations and enforcement. Increased regulatory transparency also raises the prospect of lawsuits and civil liability. Significant risks exist for asset managers who ignore fiduciary obligations.

It’s now only a matter of time before regulators commence investigations and enforcement cases and civil plaintiffs commence lawsuits against asset managers that systematically fail to maximize the value of corporate action determinations,” according to Robert S. Frenchman, Esq. at Greenberg Traurig. “We think the courts are especially likely 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,” he added.

Asset managers require systems that value corporate action determinations on election date and ensure optimal election is captured for the beneficial owners. A compliant system needs to include capabilities to value each possible corporate action election as of the election date, the ability to determine whether the election made is optimal or suboptimal, and the opportunity to change the election and where the election is stock; lock-in the increased value for the client immediately at election.

According to Jonny Ruck, CEO of SCORPEO, a company specializing in capturing missed corporate actions value, “The problem the industry is facing is more daunting than many asset managers realize and the consequences of ignoring it are massive. Whether firms decide to leverage their own internal resources, or work with a corporate actions technology provider to put a system in place, asset managers need to act now. With the tools, technology and processes that exist today, there’s no reason investor beneficiaries should be incurring losses of this magnitude.” Ruck concludes that the industry needs to systematically improve the way it optimizes corporate actions. “These are critical functions that can no longer be neglected,” he added.