Written by Bob Schneider Posted on June 26, 2010
In a recent interview with this blog, Max Mansur, Global Market Manager in Securities Markets at SWIFT, defined a corporate action as:
…Any activity that impacts a security that has been traded, cleared, and settled on behalf of the investor. Typically initiated by the public company issuing an equity or offering a bond, the action needs to be described and communicated to all investors and holders of the security as well as the public. The announcement of the action can include dates, rates, periods, prices, options, conditions, terms, exclusions, identifiers, and other characteristics.
Recognizing the significant shortcomings in paper-based corporate actions communications and the positive impact XBRL could bring to the process, the Depository Trust & Clearing Corporation (DTCC), SWIFT, and XBRL US joined together in May 2009 to create the Issuer to Investor: Corporate Actions Initiative. In September 2009, they announced the creation of a Stakeholder Group comprising three subgroups -- issuers, intermediaries, and investors -- to provide input and make recommendations for the Initiative. Work is now proceeding on building an XBRL corporate actions taxonomy, expected to be completed in the third quarter, that is aligned with ISO 20022 repository elements.
A week ago, the three organizations published A Business Case to Improve Corporate Actions Communications. Making use of a case study of Pfizer’s acquisition of Wyeth in 2009, the Document analyzes the corporate actions environment, presents the various risks in the current procedures, and makes three recommendations which can be summarized as follows:
(a) Adopt a single set of global information and technology standards for corporate action announcements;
(b) Tag corporate action documents in XBRL based on the global ISO data standard; and
(c) Have intermediaries consume and “seamlessly disseminate” the XBRL data as close to real-time as possible or within a timeframe as requested by investors.
As the Document describes, disclosures of corporate actions are made in “free text” documents – press releases, regulatory filings, prospectuses, and letters of transmittal – issued in PDF, HTML, and ASCII formats, which must be read from start to finish to gather all the information needed by shareholders. In some cases, there is no clear guidance on which regulatory forms must be used and, furthermore, “the issuer’s message follows no standard on what information to include and how it should be structured beyond general filing requirements that are focused on content.”
Moreover, as the Rube Goldberg-like flow chart on page 6 of the Document amply demonstrates, the corporate actions announcement process is enormously complex, with information flowing in many directions from and to many parties, including issuers, wire services, transfer agents, information agents, stock exchanges, securities depositories, brokers, custodial banks, and, not least, investors.
The upshot is that the same corporate action can be communicated several times from various parties, causing investment managers to review multiple sources of the same information. This task is made still more complicated by the lack of a single ID for each corporate action event. And, as the case study beginning on page 24 notes, the dates of information dissemination can vary widely:
One mutual fund company that received information about the Pfizer acquisition from more than one custodial bank noted that the timing of information received differed from bank to bank. Some custodial banks sent information as early as January 28, while others sent their first notification as late as June or early July.
All these factors taken together indicate that corporate actions are unusually well suited for the rationalization and normalization benefits that XBRL can bring.
As I read over the well-crafted and convincing Business Case, I did have a few concerns. Currently “the issuer bears the liability for accuracy in the source document and the intermediary bears the liability for data extracted from those documents and presented to the investor. By tagging the data, the issuer will be responsible for both the accuracy of the source document and accuracy of the tagging.” On page 19, the Document discusses the ways in which liability might be shifted from downstream consumer to the issuer.
Will issuers balk at the increase in both their costs (as the Document predicts) and their liability burden? Even if their new responsibilities are mandated, are their sufficient incentives and tangible benefits to make them more than reluctant participants in the process?
The Document further states:
The business case does not propose replacing the traditional issuer documents with XBRL, merely supplementing them. Issuers have stated that they would feel comfortable with the process as long as the traditional document is seen as the final word from the issuer, as concerns have been expressed that the “nuances” of the originating document might be lost in the tagged items.
I wonder about the utility of XBRL data if the traditional documents are still to be the “final word.” The situations are not strictly analogous, but it is worthwhile to note that the accuracy of corporate XBRL filings under the mandate appears to be significantly greater than those made under the VFP program. And unlike a 10-Q, corporate actions often require shareholder action. Will fiduciaries be willing to put their trust in an XBRL communication that is anything less than the “final word”? On the other hand, Business Case does recommend that liability for the XBRL instance be equal to that of the traditional document (as with corporate filings, it would be phased in), which may ensure trust in the XBRL data.
Finally, the Document states “For the initial taxonomy, it is recommended that the number of elements be limited and simplified as much as possible to ensure ease of tagging for the issuer and to provide greater certainty around what needs to be tagged.”
Elegance and brevity are always preferred. But big taxonomies, like those of US GAAP, are big for a reason. The taxonomy for mutual fund risk/return summary data can be a mere few hundred tags because the information required is highly prescriptive and limited in scope. Whether or not the same can be said of corporate actions, I’m more concerned that the tagged data be useful than merely that it can be easily tagged.
Even if my concerns are wrong-minded, there’s little doubt that substantial challenges lie ahead. But it’s also obvious that corporate action announcements is a field where XBRL adoption would have enormous benefits. I would encourage you to read the highly interesting and useful A Business Case to Improve Corporate Actions Communications.
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