May 5, 1995
TO: TRANSFER AGENT ADVISORY COMMITTEE No. 30-95
RE: SUMMARY OF APRIL 28,1995 MEETING
______________________________________________________________________________
The following is a summary of the Transfer Agent Advisory Committee meeting on April 28,
1994 at the Investment Company Institute. Cynthia Jones, Chair of the Committee commenced the
meeting with introductions of attendees. A list of the attendees is attached.
1. TAX DEVELOPMENTS
a. Expanded IRAs
Joe Canary, ICI Assistant Counsel-Pension, updated the committee on the status of proposed
IRA legislation. The House of Representatives has approved the "Contract with America Tax Relief Act
of 1995" (H.R. 1215) which incorporates the IRA provisions originally introduced in H.R. 6 and H.R. 8.
H.R. 1215 incorporates two new IRA provisions not part of the original bills. One new provision allows
non-wage-earning spouses to make a full $2000 deductible contribution to a front-end IRA. The other
change clarifies that the non-deductible tax-free IRA (or back-end IRA) replaces the current law
provisions on nondeductible contributions to front-end IRAs.
In response to a question from a committee member, Canary commented on the "Baker bill"
proposal which will allow participants to take a loan from their IRA as opposed to taking pre-retirement
withdrawals for home purchase, education, etc. Canary stated that the Institute's general position is that
retirement savings should be the main objective for IRAs and the loan withdrawal provision of an IRA
may be better than withdrawals but would create serious administrative problems. The ICI, however,
has not take a public position on that issue. Some discussion took place regarding the various proposals
currently under consideration. In general, the Institute has taken an aggressive approach to IRA
legislation. Canary responded to a question from Cynthia Jones by stating that at this time it is difficult
to determine which direction the Senate will take in considering this legislation.
b. Source State Taxation
Source state taxation is a concern because of the possibility that state taxing authorities could
require third party payors, such as mutual funds, to withhold and report on pension distributions for
individuals residing in a different state than the one in which they "earned" their pension prior to
retirement. The Institute's position is that third-party payors typically do not have access to the
information that would be needed to comply with source state withholding and reporting laws, and that
to create a system to comply with would be very costly and burdensome.
Currently, representatives from Nevada (Senator Harry Reid and Congresswoman Barbara
Vucanovich) have introduced companion bills in the House and the Senate to end source state taxation.
An alternative measure has been offered by a Virginia Congressman which would place a complicated
2cap on the first $30,000 of retirement income received in a calendar year that would be exempt from
source state taxation. The Institute is supporting the bills that would ban source state taxation as the
surest solution to our concerns about withholding and reporting. Alternatively, we are urging that any
measure in this area contain a provision protecting third party payors from source state withholding and
reporting obligations. The Institute believes if there is a source state tax, the tax compliance duty should
clearly be that of the taxpayer.
c. IRS Levies on Retirement Accounts.
This issue was originally raised in the ICI's Pension Committee. In response to an IRS levy, a
mutual fund company redeemed shares in a shareholder's IRA and sent the proceeds to the IRS. The
shareholder sued the mutual fnd company stating that a certificate should have been issued rather than a
check to allow the IRS to auction the certificate. Joan Dowd of BFDS noted that a recent IRS levy
specifically requested a certificate rather than cash. Also discussed was the fact that certificate issuance
may be a taxable event and could generate a 1099R if issued.
Committee members discussed current procedures with respect to IRS levies. It was generally
agreed that certificate issuance to the IRS for levies is burdensome. The committee agreed to form a
joint subcommittee with the Pension Committee to develop guidelines and recommendations which will
be submitted to the IRS. Representatives from the Transfer Agent Advisory Committee on this joint-
subcommittee are Wayne O'Melia, T. Rowe Price; Joan Dowd, Boston Financial Services and Peggy
Schooley, American Funds Services.
d. Capital Gains Indexing
As a follow-up to our last meeting, Keith Lawson-ICI Associate Counsel - Tax - discussed the
current status of capital gains indexing. The House of Representatives approved tax legislation
(H.R.1215) that incorporates two capital gains provisions from the "Contract With America."(See memo
to TAAC 20-95.) One important difference between H.R. 1215 and the Contract is that indexing would
apply only for purposes of calculating gains. Also, indexing would apply only to assets held for more
than three years. Additionally, indexing would apply only to assets acquired after December 31, 1994.
e. NRA Withholding
Last year, the IRS announced that it was issuing a proposal to require that non-resident alien
investors acquire United States tax identification numbers. The Institute strongly opposed such a
measure as it posed unduly burdensome procedures for mutual funds to track and verify these TINs. To
date, the IRS has not issued such a proposal.
Keith Lawson also asked Committee members about their experiences with the TIN matching
program. Some members expressed disinterest with this program when they learned that the IRS would
require disclosure at the time of the new account establishment stating that the mutual fund company
would be matching the investor's tax identification number with IRS records.
2. CURRENT SEC MATTERS
a. Status of 10b-10 Proposed No-Action Letter Withdrawal
Last year the Division of Market Regulation sought comment from the Institute on a proposal
to withdraw the Institute's 1979 no-action letter under Rule 10b-10. Withdrawal of the no-action letter
3would require disclosure of mutual fund sales charges on confirmations. Funds and brokers opposed
withdrawal of the no-action letter and the Institute submitted comment letters to the SEC staff stating
its opposition. While final decision on withdrawal of the no-action letter has effectively been delayed,
the staff still feels that some form of disclosure is required. The Institute is currently involved in
preparing information for the staff on the operational costs, impact and problems which will occur if
mutual funds are required to disclose sales charges on confirms. Several members of the Transfer Agent
Advisory Committee have been working with the Institute in providing this information.
b. Non-SIPC Disclosure
Last year, the SEC amended Rule 10b-10 to require a broker or dealer that is not a member of
Securities Investor Protection Corporation (SIPC) to disclose its non-SIPC status on confirmations. The
ICI objected strenuously to the proposal as it related to fund and unit investment trust underwriters.
Since the adoption of the rule, the ICI has maintained a continuing dialogue with the Commission staff
urging reconsideration of the rule. At the Institute's recommendation, the SEC has delayed the effective
date of the amendment from April 3, 1995 to October 3, 1995, and is expected to eliminate the
disclosure requirement for mutual fund and unit investment trust underwriters.
c. Rule 19a-1 Disclosure
Section 19(a) of the Investment Company Act provides that: "it shall be unlawful for any
registered investment company to pay any dividend, or to make any distribution in the nature of a
dividend payment, wholly or partly from any source other than (1) such company's accumulated
undistributed net income, determined in accordance with good accounting practice and not including
profits or losses realized upon the sale of securities or other properties; or such company's net income so
determined for the current year; unless such payment is accompanied by a written statement which
adequately discloses the source or sources of such payment."
Rule 19a-1 provides that every written statement made pursuant to Section 19 by or on behalf
of a management company shall be made on a separate paper and shall clearly indicate what portion of the
payment per share is made from net income for the current or preceding fiscal year, or accumulated
undistributed net profits from the sale of securities, or paid in capital.
The SEC recently received a request for exemption from the requirements of Section of 19(a)
and Rule 19a-1 from a member of the Investment Company Institute that would permit the applicant to
include the information concerning the source of such dividends in the quarterly statement provided to
shareholders instead of when paid and in lieu of providing a separate written statement. As your know,
funds are permitted under the terms of an ICI no-action letter, to send quarterly confirmations for
reinvested dividends in satisfying the requirements of Rule 10b-10 of the Exchange Act. The SEC staff
contacted the ICI and suggested that the ICI consider submitting an industry no-action letter. The staff
noted that it would likely be inclined to grant the relief for reinvested dividends but not cash dividends.
The ICI expects to have further discussion with the SEC staff regarding questions about cash
distributions.
The Committee discussed current procedures with respect to this requirement. Jan Clifford of
MFS indicated that this request had been made previously by MFS, however the SEC declined their
request. MFS noted its support for any efforts by the ICI to submit a no-action letter for the ICI's
members.
4After discussion, members expressed the general opinion that in preparing a no-action letter the
ICI should include in the request both cash and reinvested dividends and not just reinvested dividends.
Some committee members expressed concern that cash and reinvested dividends would be treated
differently and cause further investor confusion. Also, it was noted that not all cash dividends would
receive a check; cash distributions are also made by electronic funds transfer and dividends payable to
another individual or institution. Committee members suggested that information for these forms of
dividend payments should be provided on a quarterly statement as well and should be included for
consideration as part of the no-action request.
d. Multiple Class/CDSC Rule Adopted
The SEC has recently amended its rules to permit mutual funds to create multiple class
structures without an SEC exemptive order. The Commission also adopted Rule 6c-10 to permit mutual
funds to impose contingent deferred sales charges without the need for an exemptive order. The
Institute has since received comments from some of its members expressing concern with the wording
of Rule 6c-10 and the lack of specific wording in the rule acknowledging tue acceptability of both
current methods used to calculate CDSC - either by share (share lot) or by dollars (purchase
accumulation method). During the Commission's rulemaking period, however, the Institute held
discussions with the staff and provided documentation to them outlining these two methodologies. The
information provided to the SEC was submitted to the ICI by members of the Transfer Agent Advisory
Committee. In response to members' concerns, the ICI has contacted SEC staff members involved in
drafting the rule proposal. They responded that the SEC did in fact consider both methods in the rule
proposal and have agreed that either is acceptable.
e. Proposed Amendments to Transfer Agent Rules
The Institute determined that it would not respond to SEC proposed amendment to transfer
agent rules as the release was more specifically related to the practice of corporate stock transfer agents
and not mutual fund transfer agents.
3. TRANSFER AGENT ADVISORY COMMITTEE INITIATIVES
Prior to the meeting, Cynthia Jones asked committee members to provide some ideas for
initiatives which were of broad interest and would impact either the mutual fund industry in general,
mutual fund operations or improve shareholder services. Based upon the discussions of the Committee
at the meeting, task forces were formed for the following:
Market Closings
A task force will be formed to review current practices with respect to days in which the markets
or banks close due to a government declared holiday that is not a scheduled holiday or state-specific
holiday. Linda Gunn stated that inconsistencies in which markets and banks close during these holidays
and the manner in which mutual funds adjust their business may cause confusion and have an impact on
operations and shareholder services. This group will study current industry practices for those
occurrences. Practices with respect to pricing and processing will be studied and a review of
prospectuses will be made. Members of the task force include:
Linda Gunn, SunGard - Chair
Kevin Maloney - NSCC
5Mike DeNofrio - TSSG
Jan Clifford - MFS
Telephone Redemptions for IRAs
In response to increasing efforts to provide ease of doing business for shareholders, some fund
companies are considering allowing shareholders the capability to redeem IRA accounts over the
telephone. Others are also considering offering the capability to allow checkwriting on an IRA account.
This task force has been formed to consider these initiatives and determine the best methods and
procedures to handle them. The following committee members volunteered for this task force or will
assign a designee. They include:
Jim Nugent, Vanguard - Chair
Cynthia Jones - Colonial
Mary Crooks - Oppenheimer
Wayne O'Melia - T. Rowe Price
Jan Clifford - MFS
Roger Rainville - Pioneer
Joe Pollaro - Prudential
Conversion from B shares to A shares
This task force will study current industry practices with respect to the conversion from B to A
shares. The task force will develop a "best practices" white paper for use by the industry. Task force
members or their designees include the following:
Mary Crooks - Oppenheimer - Chair
Cynthia Jones - Colonial
Ed Falvey - Keystone
Tom Lanio - Van Kampen American Capital
Michael Collins - Rochester Funds
Charles Hawkins - PNC Financial Services
Jan Clifford - MFS
Some discussion on the part of members took place regarding an issue raised by Charles
Hawkins of PNC Financial Services. He stated that there are a number of state tax reporting
requirements which should be standardized in one format. He suggested that the ICI pursue this issue
with the states. Don Boteler stated that various committee of the North American Securities
Administration Association (NASAA) routinely pursue the development of unified procedures for the
states. He agreed to invite either one of the Institute's attorneys that specializes in state legislation
and/or an ICI tax attorney to the next meeting to discuss these issues with the group.
Roger Rainville noted that when compiling information and conducting surveys, task forces
should consider going beyond their own group and develop a matrix of information for all funds. The
Transfer Agent Advisory Committee could keep an ongoing and updated record of "best practices"
which summarizes the practices of all fund groups and which will be of interest and value throughout
the industry. Committee members agreed with this idea.
Cynthia Jones requested that all task force chairs be prepared to provide a presentation at the
next Transfer Agent Advisory Committee meeting on July 27.
64. ABANDONED PROPERTY/LOST SHAREHOLDER LOCATION EFFORTS
Last year, a Transfer Agent Advisory Committee task force chaired by Cynthia Jones, developed
a study of lost shareholder location efforts in response to a concern raised by Rep. Ron Wyden on the
lack of transfer agents efforts to proactively search for shareholders. The study determined that mutual
fund transfer agents are in fact aggressive and proactive in their search for lost shareholders.
Concurrently, the STA was preparing guidelines for lost shareholder location efforts and the Institute
contacted the STA by letter to indicate its willingness to participate in the development of such
guidelines. The STA has never responded to its request.
Additionally, one committee member noted that the SEC had contacted them with respect to
their lost shareholder location efforts, in particular with regard to the payment of interest for uncashed
checks. This was prompted by a visit to the SEC by former Congressmen Robert N. Shamansky who
has targeted transfer agents and their efforts to notify shareholders of outstanding uncashed checks. Mr.
Shamansky was a shareholder in one of their funds and stated that he did not receive a dividend check
and was never notified until the check was going to be escheated. He requested interest compensation
for the time in which the check remained uncashed. Most mutual funds do not compensate
shareholders for interest for the time period in which checks remained uncashed unless there was an
error on the part of the transfer agent. While the SEC has not taken any position on the issue, one
member commented that it was their understanding the SEC was considering issuing a directive in the
area of lost shareholder location efforts.
In response to these issues, the Committee decided to form a task force to study the industry's
current practices with respect to lost shareholder location efforts and accounts which have been
determined to be "abandoned". The task force may as a result prepare guidelines for ICI members and
their mutual fund transfer agents. Task force members include the following (or their designee):
Joan Dowd, BFDS - Chair
Angela Mitchell - American Funds Services
Joanna Johnson - MFS
Dave Rainville - Federated
Mary Crooks - Oppenheimer
Joe Pollaro - Prudential
Charles Hawkins - PNC
5. GIFTS OF SHARES
At the last Committee meeting, a task force was formed to review current industry practices with
respect to the gifting of shares from individuals to charitable institutions. Marjorie Houston of Brown
University addressed the committee at the last meeting and expressed some of the frustrations that
charitable institutions encounter with these transactions and the hope that the industry could work with
her organization, the National Committee on Planned Giving, in developing standardized procedures.
Roger Rainville, task force chairman, reviewed the matrix compiled by the task force which listed each
firm's current procedures.
One step which would significantly reduce the timing of this transaction would be to automate
the process. Roger Rainville had discussed this proposal with the DTC who were reluctant to get
involved with mutual fund trades. Kevin Maloney of the NSCC stated that this type of project is one in
which the NSCC would be interested in reviewing. He offered to provide a presentation to the
Committee on the feasibility of this proposal at the next committee meeting.
7The next step for the task force is to develop a form which could be used by transfer agents for
these transactions. Wayne O'Melia discussed a generic form he and his staff at T. Rowe Price have
developed for industry-wide use. The form would provide shareholder and account information as well
as address two important pieces of information that must be included; what is being transferred and who is
transferring the shares. The form would be filled out by the donor and sent to the university first, not
the mutual fund first. The university would complete the form, include the W-9 and a corporate
resolution and then forward the form and documentation to the transfer agent. The transfer agent
would then transfer the shares from the donor's account to the new account in the name of the
university, and redeem the shares on the same day. One question raised by Jan Clifford was whether a
corporate resolution would really be necessary if all the transactions took place in one day. The task
force agreed to address this issue for the next meeting. Also, the form developed by Wayne O'Melia will
be presented to the task force for review and presented to the Committee at its next meeting.
6. TRANSFER OF ASSETS AND 401(k) CLEARINGHOUSE
The requests for information submitted for the Transfer of Assets clearinghouse have been
reviewed and several candidates were selected to provide additional information to the Institute. A task
force has been formed to review this information and will be meeting in late June to review the
responses and make a recommendation to the Institute. Five firms responded to the 401(k)
clearinghouse request for information. These responses are currently under review.
7. NSCC UPDATE
In response to a request by several committee members, the NSCC has now been added to the
Transfer Agent Advisory Committee membership. Cynthia Jones introduced Kevin Maloney and James
Kiernan to the committee and they provided an update on NSCC activities. Over the past twelve
months, the NSCC has seen a decline in settlement dollars of about 10%. However, broker/dealer
participation is up 25%.
There was some discussion with respect to ACATS transfers and the issue some funds have with
receipt of invalid registrations from the broker dealers. Some firms are spending significant time
scrubbing this information to correct the registrations. If the invalid registrations are not changed they
result in mail returned to the complex as undeliverable.
Several committee members asked if the NSCC could possibly install some sort of filter to determine if
the registration is valid prior to its transmission to the mutual fund. Kevin Farragher of the ICI
indicated that this issue has been raised at Broker/Dealer Advisory Committee meetings before and
would ensure that it is discussed at its next meeting on May 4 in Boston.
NSCC begins its T+3 testing begin May. If any members wish to use the test system, contact
either Kevin Maloney or James Kiernan. Also, a filing with the SEC for approval of same day funds on
a next day settlement basis for no-loads and money markets has been made and NSCC is waiting for a
response from the SEC. Once the SEC approves, the NSCC expects to see an increase in the number of
no-loads using NSCC. Finally, the NSCC is developing an automated system for the processing of
annuities; anyone interested they should contact the NSCC.
Several members commented on the current process for submitting requests for system
enhancements. Some concern was expressed with communication between the NSCC and its users.
8One idea was to develop a subcommittee of the Transfer Agent Advisory Committee to discuss NSCC
enhancements. However, it was also discussed that the Broker/Dealer Advisory Committee currently
has an enhancement committee. Since not all Transfer Agent Advisory Committee members firms' have
representatives on this committee some may not be receiving updates on the requests currently under
consideration by the Broker Dealer Advisory committee. Kevin Farragher agreed to send minutes to the
Transfer Agent Advisory Committee as well as provide updates at the Transfer Agent Advisory
Committee meetings on the current issues the Broker Dealer Advisory Committee is addressing.
8. ICI OPERATIONS DEPARTMENT PROJECTS
a. Transfer Agent Trends and Billing Practices Survey
Planning for the 1995 Transfer Agent Trends and Billing Practices Survey is currently underway.
At the Operations Committee meeting in March, members agreed to consider major modifications to
the survey process. Several controls will be put in place to ensure the quality of responses and timeliness
of receipt from survey participants. In addition, the survey will be evaluated to update and delete
sections that are no longer of relevance to participants. A subcommittee was formed by the Operations
Committee which will meet with Coopers & Lybrand and the ICI sometime in July to go over proposed
changes. Solicitation for the survey participation will begin in August and survey materials will be
distributed in November.
b. Fraud and Loss Control Workshops
The Institute sponsoring a one day workshop on Fraud and Loss Control in four cities during
June. Details regarding the survey were listed in TAAC Memorandum 27-95. If there are any questions
regarding the workshop, please contact Justine Phoenix.
Please contact me at 202/326-5850 if you have any revisions to the minutes. The next meeting
of the Transfer Agent Advisory Committee will be held on Thursday, July 27 at the offices of the
Investment Company Institute. A meeting notice will be mailed in advance of the meeting.
Justine Phoenix
Director - Operations/
Transfer Agency