FIRMA National ConferenceFIRMA National ConferenceNew OrleansNew OrleansApril 2009April 2009

Corporate Actions & Corporate Actions & Class ActionsClass Actions

Track IIITrack III

1:15 p.m. – 2:15 p.m.1:15 p.m. – 2:15 p.m.

Satish Pattegar, CTCP,CIA

April 29, 2009

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Why Corporate Actions Are Why Corporate Actions Are ImportantImportant

Integral feature of Capital MarketsIntegral feature of Capital Markets

Takes place whenever changes are made to the capital structure or financial Takes place whenever changes are made to the capital structure or financial position of an issuer of a security that affects any of the securities it has issuedposition of an issuer of a security that affects any of the securities it has issued

Not including fixed interest payments and scheduled maturities, approximately Not including fixed interest payments and scheduled maturities, approximately 1 million Corporate Actions take place every year.1 million Corporate Actions take place every year.

Single Corporate Action may involve hundreds of different market participants.Single Corporate Action may involve hundreds of different market participants.

High Risk because Corporate Action processing is complicated, deadline driven, High Risk because Corporate Action processing is complicated, deadline driven, not standardized, and to a large extent still manual.not standardized, and to a large extent still manual.

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Market Participants in a Corporate Market Participants in a Corporate ActionAction

CustodiansCustodians

Broker/DealersBroker/Dealers

Fund ManagersFund Managers

Portfolio ManagersPortfolio Managers

DepositoriesDepositories

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Types Of Corporate ActionTypes Of Corporate Action

Mandatory: No action required by investor or agent (cash dividend, interest Mandatory: No action required by investor or agent (cash dividend, interest payment, etc)payment, etc)

Mandatory with Options: Investors given option to receive in-kind or cashMandatory with Options: Investors given option to receive in-kind or cash

Voluntary: Investor has to make a decision (subscriptions, takeovers, tenders, Voluntary: Investor has to make a decision (subscriptions, takeovers, tenders, etc.)etc.)

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Common Corporate Action EventsCommon Corporate Action Events

Dividend PaymentDividend Payment

Interest PaymentInterest Payment

RedemptionRedemption

Rights IssueRights Issue

Take OverTake Over

ConversionsConversions

Proxy VotingProxy Voting

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Participants In A Corporate Action Participants In A Corporate Action ChainChain

Issuer

Registrar/AgentCustodian’s Nominee

Depository

Custodian

Investor

Investment Manager

Broker/Dealer

SLA

Regulations

as Shareholder

Shareholder

Account

Account

Ownership

SLA

SLASLA

SLA

If the Corporate Action involves Cross-border Security Holdings, the number of intermediaries and level of complexities is greater

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Risks in Corporate Action ProcessingRisks in Corporate Action Processing

To mitigate the risks of delivering incorrect and untimely information. The To mitigate the risks of delivering incorrect and untimely information. The securities industry continue to invest in Corporate Actions information capture securities industry continue to invest in Corporate Actions information capture and processing solutions.and processing solutions.

Due to lack of global standards, error prone ,manual processes, diverse Due to lack of global standards, error prone ,manual processes, diverse communication protocols and increasing volumes, the risks can be significant.communication protocols and increasing volumes, the risks can be significant.

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Primary RisksPrimary Risks

Risk of Processing Failures:Risk of Processing Failures:-Relevant in Voluntary and Mandatory with options-Relevant in Voluntary and Mandatory with options-Error in the information flow from Issuer to Investor-Error in the information flow from Issuer to Investor-Error in the return flow of instructions from investor to issuer-Error in the return flow of instructions from investor to issuer

Cost of Late Payment:Cost of Late Payment:-Primary in Cross-Border Securities (cost of interest XXX, -Primary in Cross-Border Securities (cost of interest XXX,

currency, costs, zero sum)currency, costs, zero sum)-Cash-flow problems-Cash-flow problems

Risk of Inappropriate Investment DecisionRisk of Inappropriate Investment Decision-Failure to correctly understand the Corporate Action can result in a -Failure to correctly understand the Corporate Action can result in a misevaluation of the Security Causing Transaction Cost Risk and the misevaluation of the Security Causing Transaction Cost Risk and the -Market Movement Risk -Market Movement Risk

Risk of Ineffective GovernanceRisk of Ineffective Governance

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Common ErrorsCommon Errors Aged BalancesAged Balances

Disputes with Counter Parties and Agent BanksDisputes with Counter Parties and Agent Banks

Calculation ErrorsCalculation Errors

Communication ErrorsCommunication Errors

Manual ProcessingManual Processing

Missed Faxed Counterparty ElectionsMissed Faxed Counterparty Elections

Un-reconciled Entitlement PositionsUn-reconciled Entitlement Positions

Lack of Documented ProcedureLack of Documented Procedure

Late Booked PositionsLate Booked Positions

Exceptions to Standardized ProcedureExceptions to Standardized Procedure

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Class ActionsClass Actions

““Provides a means whereby large numbers of claimants may have their causes Provides a means whereby large numbers of claimants may have their causes involving common questions of fact or law adjudicated in a unitary proceeding”involving common questions of fact or law adjudicated in a unitary proceeding”

The goal of Class Action Litigation (from the perspective of the judicial system) is to The goal of Class Action Litigation (from the perspective of the judicial system) is to achieve economics of time, effort, expense and uniformity of judicial decisions achieve economics of time, effort, expense and uniformity of judicial decisions without sacrificing procedural fairness.without sacrificing procedural fairness.

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Risks in Class Action ProgramRisks in Class Action Program Lack of InformationLack of Information

Legal ResponsibilitiesLegal Responsibilities

Proper Identification of Decision MakerProper Identification of Decision Maker

Proper Review of EligibilityProper Review of Eligibility

Timely CommunicationTimely Communication

Notification vs. FilingNotification vs. Filing

Timely Processing of Receipts Timely Processing of Receipts

Unclaimed FundsUnclaimed Funds

Lack of AutomationLack of Automation

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Impact of Financial CrisisImpact of Financial Crisis

Prompted a surge in Class Action Securities LawsuitsPrompted a surge in Class Action Securities Lawsuits

Primarily confined to businesses in the Financial Services sectorPrimarily confined to businesses in the Financial Services sector

Lawsuits up 37% in 2008Lawsuits up 37% in 2008

Roughly 2/3 of the Financial Sector were subject of a Class Action Lawsuit by Roughly 2/3 of the Financial Sector were subject of a Class Action Lawsuit by 12/31/200812/31/2008

Higher premiums for D & O InsuranceHigher premiums for D & O Insurance

Greater litigation risksGreater litigation risks

Primary Lawsuits Related to:Primary Lawsuits Related to: Auction Rate SecuritiesAuction Rate Securities AccountingAccounting Product and Operational defectsProduct and Operational defects

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TrendsTrends

Drop in Rule 10b-5 ClaimsDrop in Rule 10b-5 Claims

Section 11 Lawsuits SurgedSection 11 Lawsuits Surged

More NYSE and AMEX listed companies sued than those companies listed on the More NYSE and AMEX listed companies sued than those companies listed on the NASDAQNASDAQ

Unknown how the historical relation between stock market volatility and Unknown how the historical relation between stock market volatility and Securities Class Actions filings will behave in 2009Securities Class Actions filings will behave in 2009

Disclosed dollar claims continue to increaseDisclosed dollar claims continue to increase

Shift from income statement line items to balance sheet componentsShift from income statement line items to balance sheet components

Source – Cornerstone Research ReportSource – Cornerstone Research Report

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Q & AQ & A