May 22, 1995
TO: BROKER/DEALER ADVISORY COMMITTEE No. 20-95
BANK BROKER/DEALER ADVISORY COMMITTEE No. 15-95
TRANSFER AGENT ADVISORY COMMITTEE No. 32-95
OPERATIONS MEMBERS No. 25-95
RE: ICI BROKER/DEALER ADVISORY COMMITTEE UPDATE
______________________________________________________________________________
In an effort to better inform interested parties regarding the activities of the Investment
Company Institute's Broker/Dealer Advisory Committee, an ICI Broker/Dealer Advisory Committee
Update will be published and circulated as indicated above following each meeting of the Broker/Dealer
Advisory Committee. This, then, is the first ICI Broker/ Dealer Advisory Committee Update, and it
follows the Broker/Dealer Advisory Committee's spring meeting, held May 3rd & 4th, 1995 in Boston
MA. The highlights of the meeting were as follows:
Harris Succeeds Hernandez as Chairman of Committee
Effective April 30, 1995, Manuel R. Hernandez retired from his role as President of Colonial's
Investor Service Center. At such time, his role as Chairman of the ICI's Broker/ Dealer Advisory
Committee passed to Mark Harris, Executive Vice-President and Chief Operating Officer of Van
Kampen American Capital's ACCESS Investor Services, Inc. Mr. Harris thus chaired the May meeting
in Boston.
NSCC Update
At the May meeting, the National Securities Clearing Corporation provided updates on
numerous mutual fund related issues. A listing of these issues runs as follows:
Expanded Mutual Fund Profile
Development of the Expanded Mutual Fund Profile continues apace. Currently, this service is
conceived of as having four modules which are: 1.) Member profile - describes characteristics of and
contacts at fund complexes, brokerage or other participant institution, 2.) Securities profile - describes
key characteristics of individual securities (i.e. fund investment objective, load schedule, number and type
of classes of shares, etc.), 3.) Daily Price/Rate Module - input and dissemination mechanism for daily
fund prices and daily dividend factors, 4.) Distribution Declaration Module - provides notification on all
non-daily distributions including cap gains. Of the four components, interest and attention are most
clearly focused on the Daily Price/Rate piece. Additionally, the NSCC has indicated that it will look into
the possibility of providing PC-lookup access to various modules for those users not interested in full
file transfer capabilities.
Retirement Plan Indicator
With funds seeking enhanced retirement plan reporting, two values will be added to the
Fund/SERV transaction record under IRA Indicator. These values are Non-Fund Prototype IRA and
Non-Fund Prototype 401k Plan. This feature should be available by late 3rd or early 4th quarter of
1995.
CDSC Waiver Indicator
A CDSC Waiver Indicator will be added to the Fund/SERV transaction record to allow brokers
to indicate a sales charge waiver on given redemptions. Use of this indicator and the back up
documentation that may need to accompany its use will be worked out on a fund-by-fund, broker-by-
broker basis. Implementation of this feature will accompany implementation of the Retirement Plan
Indicator feature.
Networking Record Type 20 Use
Concern was expressed regarding significant use on the part of funds of Networking Record
Type 20 ("Other" Activity). This use is occurring for 2 reasons. The first reason is because valid activity
codes aren't being used. The second reason is because appropriate activity codes do not exist to cover
the activity takng place. As a remedy for the first reason, it was decided that brokers will bring valid
codes to offending fund companies' attention where correct valid codes are not being used. As a remedy
for the second reason, the NSCC will seek to establish and define codes that are descriptive of the
activity taking place and then add them to the system.
Networking Trust Indicator
As the result of work done by the Bank Broker/Dealer Advisory Committee, a Trust Indicator
field will be added to Networking Records. This will allow trusts to participate in Networking and
receive records on their accounts. This processing will be transparent to any broker/dealer activity
related to a given account.
Net Settlement
The NSCC will be moving to same day funds settlement somewhere between November, 1995
and February, 1996. The NSCC also indicated that it is intending to migrate to full net settlement,
wherein all activities of all CUSIPS within a fund family will net to a single daily net settlement total.
The NSCC was asked by the committee to provide documentation on procedures attending full net
settlement at least 90 days prior to implementation.
Underutilization of Commission Settlement Service
The NSCC's Commission Settlement Service, which is 2 years old, currently has only 39 mutual
fund company users and 30 broker/dealer users. The Commission Settlement Service nets out and
settles non-Fund/SERV related commissions between funds and broker/ dealers. Funds and brokers
currently using Commission Settlement have expressed considerable satisfaction with the service, which
eliminates manual reconciliation work and standardizes the layouts of commission files exchanged
between funds and broker/dealers. Additionally, users do not have to use Fund/SERV or other NSCC
system services to use Commission Settlement. For more information about the NSCC's Commission
Settlement Service, contact your NSCC account manager or John Vrettos at 212/412-8453.
Enhancement Request Submissions
3To bring your enhancement requests to the NSCC, contact your NSCC account manager or
Chris Hayes at 212/412-8679.
Following the NSCC update, other issues were presented to the committee. Those issues not
presented and/or reported elsewhere are as follows:
Effect of T+3 on W9 Presentment
It was brought to the group's attention that, in a T+3 environment, there will be an increase in
the likelihood of the absence of account registration instructions and TINs at settlement. It was further
pointed out that the Internal Revenue Code provides a 30-day grace period between new account set up
and the point where backup withholding must begin. The point was also made that systematic enabling
of the 30-day grace period with respect to cash dividends would be a service to shareholders and would
save funds the difficulty of having to attempt to recover such backup withholdings from the IRS.
Same Day Confirms
The point was made that orders received by funds prior to 6:00pm Eastern Time stood a
significantly greater chance of being confirmed back to the broker same day. As a result, the NSCC
volunteered to kick off an additional batch cycle at 5:30pm Eastern Time to facilitate delivery of a
greater number of orders to funds by 6:00pm. A task force of the Broker/Dealer Advisory Committee
was assigned to examine the same day confirmation issue and make recommendations toward practices
that would further facilitate same day confirms. If you have questions or concerns regarding same day
confirms, you are invited to contact the task force members. They are: Nino Palermo of DST (816/435-
4960); Frank Koudelka of TSSG (617/573-1147); and George Christ of Paine Webber (212/902-5573).
Legislative/Regulatory Issues
The ICI has been apprised by SIPC that there is the possibility of a proposal being presented to
SIPC's board with respect to assessing premiums against revenues derived from mutual fund share sales.
Such a proposal would impact upon brokers' and mutual fund underwriters' fund share sales activities.
These measures were considered in 1970 when SIPC came into being, and again in the mid 1970s, for
reasons that remain valid. As a result, the ICI has directed a comment letter to SIPC's President
opposing the very notion of assessing premiums against revenues derived from fund sales.
Additionally, an update was offered on Capital Gains Indexing and other tax bills currently
before Congress. ICI tax counsel gives indexing only a slim chance of being written into law this year.
Possible revisions to the current structure of income tax are numerous, but there is presently no clear
front runner. There is also a proposal to lower the cap gains tax. These proposals all currently appear to
depend on efforts afoot within Congress to address the budget deficit.
Third Party Check Processing
It was brought to the committee's attention that care must be given to the processing of second
and third party checks presented for investment in mutual funds since an elaborate, sophisticated fraud
network is currently operating in the U.S. Their practices include stealing corporate checks, the
subsequent endorsement of these checks to a third party, and their deposit into a dummy corporate
account, against which checks are then written to draw down the account. In many instances, the
dummy corporations have left significant dollar amounts on deposit at other institutions to establish the
appearance of validity, and the tendency amongst the perpetrators of this type of fraud is to work
without a broker associated with their accounts. They tend also to prey upon health insurance
4companies, where checks are typically drawn up well before being issued, and where the period between
issuance and presentment can be significant as well. To combat the potential for fraud, measures have
been taken to suspend privileges to orphan accounts, and to refuse third and even second party checks
in some instances in order to ensure that bad money is not accepted for investment.
The ICI will be sponsoring a series of Fraud and Loss Control Workshops in Boston, New
York, Chicago and San Francisco during June, 1995. For further information as to dates, times, program
and space availability, contact the ICI's Conference Division at 202/326-5968.
ICI Update
Updates were delivered on the ICI's Transfer of Retirement Assets and 401k Processing
Clearinghouse initiatives. On the Transfer of Assets front, a vendor should be in place by mid-to-late
summer to begin building the Clearinghouse, and an advisory group has been convened to: a.)
recommend a vendor from among a pool of finalists, b.) work with and oversee the vendor in the
development of the Clearinghouse, and c.) serve as a pilot group for the Clearinghouse once its
automated services become available. On the 401k Processing front, review of the vendor proposals
with respect to the development of the Clearinghouse is underway.
Other
It was brought to the group's attention that, in 1996, the U.S. Postal Service would discontinue
using apartment numbers in Manhattan and replace them with key numbers. Funds and firms are thus
advised to prepare for this in order to avoid significant volumes of return mail.
Questions, Comments, Suggestions...
If you have questions or comments regarding ICI Broker/Dealer Advisory Committee issues, or
if you have suggestions for future ICI Broker/Dealer Advisory Committee Agenda items, please contact
the undersigned at 202/326-5848.
Kevin Farragher
Director of Operations
Distribution & Service