Upcoming Enhancements to Mutual Fund Services
The latest rollout of service enhancements will bring new efficiencies to the mutual fund industry, starting October 2008 and continuing into 2009.
Systematic Transactions and Target-Date Funds
The Model
The Profile Security database is structured on a four-level hierarchical model. Information flows downward from the Management Company, Share Class and Fund Portfolio levels to the Security Issue ID level.
With the emergence of mutual fund advisory programs and other non-traditional investment products, the need to accurately tag related transactions takes on heightened importance. “If they’re not properly identified, transactions could be rejected or categorized improperly. What results is excessive manual exception processing and errors, which we want to minimize,” said Romesh Gunaratnam, director, Product Development, Wealth Management Services.
On October 18, NSCC, the provider of Mutual Fund Services, will introduce modifications to Fund/SERV® (the industry standard for automated, standardized fund transactions and money settlement) to support fee-based (wrap) products. With the addition of new indicators to the service, fund companies will be able to properly identify purchase, redemption and exchange transactions from asset allocation rebalance programs. Funds also will be able to exempt these transactions from the standard rules surrounding fund minimum requirements, withdrawal thresholds and short-term redemptions, and calculate and track contingent deferred sales charge waivers.
Fund/SERV also is being enhanced to support target-date (also called life-cycle) fund processing. These funds are managed to a specific year in the future. Underlying investments are adjusted over time, shifting from an aggressive allocation of assets to a more conservative model based on income and protection against market volatility.
Citing the Investment Company Institute, Morningstar Advisor reported in June 2008 that the number of target-date funds had reached more than 250, a ten-fold increase from five years ago. Assets under management are now over $180 billion, versus $50 billion during the same time period. And five years from now, the Financial Research Corp. predicts that assets could approach $700 billion. In some part, the growth that has occurred is the result of the Pension Protection Act of 2006, which removed barriers that prevented companies from automatically enrolling their employees in defined contribution plans.
Fund Transfers
For fund and firm participants who use NSCC’s fund transfer – or re-registration – services, the process occurs in a standardized and predictable way. Fund share transfers between firms are handled through ACATS-Fund/SERV; and transfers of retirement assets between funds are completed through the Transfer of Retirement Accounts (ToRA) service.
However, transfers between funds and firms, currently achieved using multiple processing methods, continue to be inefficient and costly.
“The limitations of these methods don’t allow for all products or account types to be included, and so the industry has been dealing with delays, incomplete customer statements, and high labor and processing costs,” said Louis Lepore, product manager, DTCC Equity Clearance and Settlement.
These issues led DTCC to collaborate with the Investment Company Institute’s Transfers Working Group to develop solutions that would improve dependability and control over the process of transfers. The group originally identified seven different transfer scenarios and flagged three in-kind transfers as high-priority operational issues.
“The ideal solution is to have all transfers centralized within the standardized, centralized services that were built for them,” explained Barbara Simon, vice president, Product Management, DTCC Wealth Management Services. Such a solution would lower processing costs, reduce the risk associated with unaccounted shares being left behind at the delivering fund or firm, and shorten the time for completing transfers, she added.
Kristie Thompson, Group Leader, Customer Account Transfer, Edward Jones
Three-step strategy
Discussions culminated in a three-step strategy that will leverage the technology of both ACATS-Fund/SERV and ToRA. “By using existing files, we can minimize programming costs and implement faster, which means we can deliver better service to our clients much more quickly than if we had to create an entirely new solution,” said Kristie Thompson, group leader, Customer Account Transfer, Edward Jones.
The first step will address transfers from a fund to a firm, where a client owning shares in a fund prototype retirement or non-retirement account wants to transfer those positions to a broker/dealer or a bank. The second will address transfers from a firm to a fund. In both cases, the transfer will be initiated by the firm and supported through ACATS-Fund/SERV.
The third in-kind service – using a combination of technology from ACATS-Fund/SERV and ToRA – will automate transfers from a firm to a fund; in this instance, the fund will request the transfer.
In 2007, DTCC recorded growing volumes for both services: a 7% increase in ACATS-Fund/SERV activity to 390,000; and a 5% upward movement of transfer requests through ToRA to 186,500.
Standardized Data Reporting and Share Aging
On October 18, DTCC will debut new edits to its Standardized Data Reporting (SDR) feature of Networking, NSCC’s centralized record-keeping and account-reconciliation service for the fund industry. Launched to support the SEC’s Rule 22c-2 (redemption fee ruling), Networking for SDR streamlines the request-and-response for information required by funds to track activities in omnibus accounts.
In this new round of upgrades, the system will immediately alert a fund if one of its requests has been addressed to an intermediary not participating in Networking for SDR, rather than issuing a straight “reject.” Other changes will enhance usage of the underlying firm symbol and the way information is passed to the fund.
Close to 350 funds and firms are using Networking for SDR. On average, the service is processing 7,500 requests and transmitting 2.7 million responses monthly.When share-lot history information passes through Networking, share-aging short-term redemption lot dates must be provided to help funds and firms identify those lots that are subject to a short-term redemption fee. Over time, different interpretations of the actual date that needs to be entered emerged. To correct this, DTCC will change the field requirement to lot date optional. “It’s a relatively minor systems change, but it’s an important one for the industry, as it will increase clarity and make the entire procedure more efficient,” Simon said. Testing will begin October 1. 