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Eliminating Operational Risk at a Transfer Agency
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A DAY IN THE BACK OFFICE:
Eliminating Operational Risk at a Transfer Agency

May 4, 2011
By Chris Kentouris

CANTON, Mass. -- Transfer agents service the accounts of registered shareholders – investors known to corporations by their actual names. Among their duties: to issue stock certificates to new investors, send out dividend checks and administer dividend reinvestment programs.

Of course, transfer agents must also respond to written, emailed or telephone inquiries from shareholders who don’t understand their statements, cannot find their checks and want to change their address.

This sounds like a dull administrative job. But that’s not the case, in reality. Just spend several hours in the 185,000-square-foot processing and data hub of one of the U.S. largest transfer agents—Computershare – in Canton and it quickly becomes apparent that a combination of technology and clear business procedures are required to ensure accuracy. And satisfy both corporations and their investors with the results.

Nonstop Operations--And Glitches

For starters, there is the nonstop nature of the task. Computershare, true to its name, has to keep the mega-facility for storing and sharing information via computer running at all times, without any interruption. That means redundant data servers, data providers and backup generators. There also is a backup site at an undisclosed location in Massachusetts. This operates on a separate power grid from the Canton facility. Data is downloaded on a synchronous basis, through out the day. Not batch or end-of-day.

Next up: Preventing processing glitches. “Our goal is to exceed the Securities and Exchange Commission’s minimum requirements and ensure the highest level of service for shareholders and corporations,” says Jay McHale, president of Computershare’s equity services unit.

The potential errors include not fulfilling a investor’s request on time or doing so incorrectly by, say, updating an account with the wrong address or name. Even more serious would be giving confidential information on a shareholder account to an unauthorized individual.

The SEC mandates that a transfer agent must complete 90 percent of so-called routine transfers– changes in the name on an account for which all of the paperwork is in order – within three days after the request is made. While the regulator does not give transfer agents a specific timetable when to buy or sell shares in a dividend reinvestment or direct purchase or sale program, the industry standard is within 24 hours at most, to avoid minimize the risk of market fluctuation.

Eliminating mistakes naturally prevents Computershare from being hit with regulatory fines, compensating investors for any financial losses or just a loss of reputation, which could cost it a corporate account.

Computershare doesn’t disclose what it charges corporations, but transfer agents typically earn basic annual administrative fee and additional fees for responding to shareholder calls and tabulating investor votes to name a few. The more registered shareholder accounts a transfer agent services, the more it earns.

Although Computershare won’t say how many shareholder accounts it services it vies with Bank of New York Mellon as the U.S. top transfer agent; it says it has nabbed about 36 percent of the companies represented in Standard & Poor’s 500 Index.

Handling "Old-Fashioned" Correspondence

The Melbourne, Australia headquartered global transfer agent, entered the U.S. market through its acquisition of Harris Bank’s transfer agency business in 2000. Since then the acquisitions of transfer agents EquiServe and US Stock Transfer and the transfer agent units of Fifth Third Bank, Sun Trust Bank; National City and UMB have helped Computershare grow its North American operation – including shareholder services –to account for about half of Computershare’s overall revenues of $1.6 billion in fiscal 2010.

Despite the popularity of emails and other social networking tools, most registered shareholders are communicating with Computershare not only via the Internet but also via “old fashioned” handwritten or typed letters as well as phone calls. Computershare must respond to 10,000 to 15,000 calls a day using about 450 call center executives in Canton, Edison, N.J. and Chicago; of those 225 are in Canton. Other representatives must open and often interpret thousands of letters daily, some of which are handwritten. It can’t all be done by machine.

Three dozen Computershare specialists working on the first floor of the three-story facility in Canton open and scan the letters each day. The day starts at 5 a.m. and ends at 11 p.m. Each specialist works eight hours.

“Some of the so called “white mail” requests can be processed without manual intervention because shareholders have checked a box on a predesigned form that calls for Computershare to sell shares, change their address, or enroll in a dividend plan,” says Charles Rossi, executive vice president of U.S. client services at Computershare.

That’s pretty straightforward. But any handwritten letters must be read to determine just what the shareholder wants and to ensure that the investor is actually authorized to make the request.

“For transfer requests, Computershare, like all transfer agents, requires a specific type of signature guarantee,” says Rossi. “Once scanned, the requests are electronically routed to the appropriate operations agent for processing. Computershare will also monitor just when the request was sent and how quickly it was fulfilled.”

A 'Penny' for Their Thoughts

For customer inquiries received electronically, Computershare has created “Penny,” a virtual agent that appears only online. This digital service representative is designed to put a human face on simple Internet inquiries about accounts and notices. In just three months after it was installed, Penny has gone from handling 12,000 inquiries per month to more than 42,000 inquiries.

Here is how Penny works: Computershare fed Penny questions and answers into a single database, which is combed any time a question comes through online. Shareholders can type in their questions and have them analyzed and responded. The most asked questions: how do I sell shares? how do I change my address? how do I transfer shares to another name and person?, and how do I purchase shares? Penny responds, drawing answers from a database of frequently asked and answered questions, as well as account records.

Computershare also uses a telephone system with Interactive Voice Response (IVR) to give callers answers to frequently asked questions without having to connect with a representative. But in the end, when a shareholder does want to speak with a live human representative, Computershare will record both the phone call and take snapshots of the call center employee’s computer screen to monitor how well and how quickly he or she is using Computershare’s technology, says Robert Cahill, manager of quality and training at Computershare’s communications center in Canton.

A separate team of quality control coaches will take a sampling of calls for each call center representative each month.

They will monitor the length of the call as well as its effectiveness. That means whether or not a customer’s request was satisfied in the first call; the empathy and responsiveness to the needs of the customer as well as the technical skills of the representative in responding to the question.

“Representatives are evaluated based upon their quality scores, and receive additional coaching and training as necessary to ensure they deliver excellent service,” says Cahill.

By constantly reviewing interactions with shareholders, says Cahill, Computershare has raised shareholder satisfaction 10 percentage points to more than 90 percent in two years. The agency has also simultaneously blocked unauthorized access to registered shareholder accounts.

Like all transfer agents, Computershare needs to keep up with new regulations and 2011 has actually proven to be the most significant year in over a decade. For one, the Internal Revenue Service’s cost-basis reporting rules have begun to take effect. They require transfer agents and other financial intermediaries to provide investors and the IRS with the accurate cost of their accounts so that the correct amount of taxes can be paid.

That required Computershare to reprogram all of its middle and back-office operations to do the calculations and issue the reports. Not only did additional data need to be captured and stored, but all customer and employee interfaces need to be adapted to view, change and select the type of methodology the investor wants Computershare to use in calculating the cost-basis.

The Iceberg

That’s just the tip of the iceberg. “Every communication center representative and other employee interfacing with customers had to be taught the basics of cost-basis reporting,” says Jason Stout, senior manager for Computershare’s U.S. communication centers. “A separate dedicated team of phone experts also had to be trained in answering more complicated questions -- such as the types of methodologies Computershare could use to do the calculations,” But they can never cross the line to provide tax advice.

Adding to the operational strains Computershare faces is the simultaneous need to comply with the SEC’s new so-called say-when-on-pay requirement, which took effect on January 21. Corporations at their first annual meetings must allow shareholders to vote on executive compensation in their proxy statement at least once every three years and must allow them to determine whether “say-when-on-pay” votes will take place every one, two or three years or whether they will abstain.

Computershare had to change its proxy cards as well as its online and automated phone service. And it had only three months to do so, the time between the issuance of the final requirements from the SEC and when corporations needed to start mailing proxy cards with the new “say-when-on-pay” question.

The costs of adapting to cost-basis reporting and executive say when on pay?

Computershare executives wouldn’t specify a figure but its annual report provides some inkling. For fiscal 2010, Computershare spent $161 million on technology, globally. That compared to $154 million in 2009.

Computershare will have to spend a lot more on technology if the SEC approves a proposal put forth last year by transfer agents to allow U.S. corporations to send proxy materials to beneficial shareholders directly instead of having to go through banks and broker dealers.

Under the current rules, only financial intermediaries can do so and obtain voting instructions from their beneficial account holders. They have decided to outsource the labor and technology intensive process to Broadridge Financial. That firm, in turn, collects the fees the financial intermediaries are allowed to charge corporations based on rates largely set by the New York Stock Exchange.

The Risk of Going Direct

There is plenty of operational risk involved in so called “direct communications.” Computershare, like other transfer agents, would have to ensure that it could send the proxy materials to beneficial shareholders on time and calculate the votes correctly. That also means tapping into the records of banks and brokerage firms to find out who those shareholders are or getting the names from some yet-to-be-determined data aggregator.

Although the Securities Transfer Association, a group of transfer agents including Computershare, believes that direct communications is a de facto right of U.S. corporations and investors, the goal is far from altruistic. Computershare, like other transfer agents would generate additional fees from proxy mailings and tabulations and other shareholder services such as answering phone calls.

Transfer agents, which can only send out proxy mailing and tabulate votes for registered shareholders, claim they can do the same job as Broadridge for beneficial shareholders. For, they believe, a lot less money.

Here is how their argument goes; if issuers could send proxy mailings to beneficial shareholders directly and select whoever they want as their distribution agent, the market-driven competition would spur lower fees and greater innovation.

“We have done some modeling to determine just what is required and are confident we can do it,” says Rossi, without elaborating.

Just how much it will cost transfer agents, such as Computershare, to expand hardware and software capacity to handle additional mailings and votes from beneficial shareholders is unclear. And it is unclear just how quickly they can do so.

In advocating the status quo with the SEC, Broadridge has estimated it spent over $1 billion in systems, technologies and processing for its shareholder communications and proxy voting businesses over the past decade alone. Broadridge has also said that a study it commissioned, which was completed by Compass Lexecon, showed that the fee charged to deliver a proxy package to a registered shareholder is higher, on average, than the fee to deliver the same proxy package to a beneficial shareholder.

Broadridge is already becoming a formidable competitor. Last year, it did the proxy mailings for registered shareholders for about 1,500 annual meetings. That means that corporations thought that Computershare could do a better job than their transfer agents.

While Computershare awaits the SEC’s decision on proxy reform, the agent isn’t idle. Well-known for its acquisitive nature, Computershare remains on the lookout for a good takeover candidate. “We would certainly entertain a complementary business line,” says Jay McHale, president of Computershare’s equity services unit.

 

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