The US Securities and Exchange Commission’s plan for how investors in Wells Fargo’s stock will be compensated a total of US$500 million for the bank’s past wrongdoing could end up marred in operational snafus making it harder for some investors to be paid and disincentivizing others from filing the paperwork to collect any compensation.
That’s what business operations outsourcing giant Broadridge financial and investment adviser Institutional Shareholder Services (ISS) say in their roles as third-party claims filing firms. In a recent letter to the SEC responding to the regulator’s request for comment on its payment plan for Wells Fargo’s investors, Broadridge cautions that the requirements for third party filers could delay payments to investors. The letter did not address the merits of the US$500 million payment which must be made to investors holding shares in Well Fargo between 2012 and 2016 when the firm violated the anti-fraud provisions of the Securities Exchange Act of 1934. Broadridge was the only respondent to the SEC’s request for feedback, but it is not the only firm worried. Rockville, Maryland-headquartered Institutional Shareholder Services also tells FinOps Report that the SEC’s guidelines might reduce the percentage of investors who decide to participate in the Wells Fargo payment plan. Broadridge declined to elaborate on its stance beyond its letter and the SEC would not comment for this article.
The $500 million to be deposited by the SEC in a “fair fund” is part of Wells Fargo’s combined US$3 billion settlement with the Department of Justice for misleading investors. Wells Fargo’s senior executives were accused of strongarming personnel to actively cross-sell products to boost revenues. More than 1.5 million checking and savings accounts were opened and 500,000 credit cards were issued without customer authorization between 2012 and 2016. When news of the wrongdoing broke in September 2016, Wells Fargo’s stock took a dive, quickly leading to the ouster of the bank’s chief executive John Stumpf who paid US$17.5 million to settle the charges against him. He also agreed to never work in the banking industry again. In addition to the US$500 million in the fair fund, investors also earned a whopping US$420 million in a fake accounts class action lawsuit with Wells Fargo in 2018.
The case involving Wells Fargo’s fair fund is the second time the SEC has placed possible restrictions on third-party filing firms, but the Wells Fargo fund is far larger, and far more investors will be affected. The SEC offered similar language with the fair fund resulting from a settlement with Longfin, a financial technology firm that bought a cryptocurrency company causing Longfin’s stock to rise. The SEC has placed $21.5 million Longfin’s fair fund and investors must prove their eligibility to collect payment by December 14, 2020. However, third-party filing firms don’t believe there will be any difficulties in handling in handling the payments from Longfin’s fair fund based on the proof of claim forms they have seen. Although the SEC did seek feedback on its plan for dispensing money from Longfin’s fair fund, no one responded. Epiq, the claims administrator for the Longfin settlement, declined to comment.
Collecting money from any kind of settlement — whether an SEC action or a securities class-action lawsuit isn’t all that easy. Investors have to prove that they owned the shares of the
affected company during the designated timeframe the compensation covers. They must then file the necessary paperwork with the claim’s administrator for the settlement who must then validate the legitimacy of the claims and calculate the amounts due before sending payments. Fund managers must review the lengthy documentation of at least 100 securities class action settlements each year and several “fair fund” payment plans implemented by the SEC to determine if they fit the criteria to participate in the settlement and collect compensation. They may not be eligible for payment in all cases, but each time they don’t participate when they miss out earning extra revenues for investors. Ultimately, fund managers have to decide whether the return is worth their effort. On average, only 34 percent of institutional investors file claims and only three percent based on a recent analysis presented by Chicago-headquartered third party filing firm Chicago Clearing Corp. to the Corporate Actions Forum of the trade group Securities Industry and Financial Markets Association.
The task of collecting the money is so time-consuming that fund managers, custodian banks and broker-dealers holding assets on behalf of investors must commit dedicated internal staff in corporate action departments or hire a third-party filer to keep track of all the settlements and file the necessary paperwork on behalf of eligible investors. Class action settlements are akin to voluntary corporate actions in that investors can decide whether or not to participate. With 700 clients, Broadridge is among a handful of third-party filers; it does the portfolio monitoring and claims management work through its class actions and corporate actions department. ISS would not specify its number of clients, but says that it has been in the securities class actions business longer than any other firm.
In its letter to the SEC, Broadridge highlighted three ways in which the SEC’s proposed settlement plan for Wells Fargo could create inefficiencies in the administrative process and make it harder for investors to win their money based on the regulatory agency’s language in paragraphs 65 and 66 of the payment plan. Broadridge’s first gripe is that the SEC is requiring hardcopy documentation for each transaction — even if there are millions of transactions — if the claims are submitted by a third-party filer than the end investor institution itself. Presumably the same principal would apply to custodian banks which do the work on behalf of fund manager and other clients. Typically, third party filers and institutional investors are allowed to send a single electronic file with the transactions and holdings of each investor and an affidavit saying the file is from records kept in the ordinary course of business. “Because these affidavits are accepted in lieu of supplying millions of pages of documents or printouts of client screen shots, the process is both accurate and efficient,” writes Stephen Cirami, head of class actions and corporate actions for Broadridge in New York. “By adding new steps for claims submitted by Third Party Filers, the Plan would make claims submissions significantly more burdensome and this could impede participation.”
Yet another problem with the SEC’s proposal, according to Broadridge, is the process in which third-party filers would collect the funds to distribute to investors. The SEC is prohibiting the claims administrator from sending a wire payment to the third-party filer to then distribute the funds to investors in the manner chosen by the investors. The SEC suggests that it wants payments to be made by check or electronic payment to investors directly, thereby cutting out third-party filers as middlemen, although the language used is unclear. Broadridge’s objection: “The proven method to distribute funds is accurate and efficient. It keeps fund cost down and eliminates uncashed checks that may require escheatment and ultimately delay and deny eligible participants from receiving their funds,” writes Cirami. Escheatment refers to the process whereby unclaimed accounts, includng uncashed checks, are transmitted to the state of the last known residence of an investor or the state of incorporation of the company. “If the claims administrator relies on sending checks directly to investors, rather than making electronic payments or using a third-party filer like us, some checks might end up uncashed,” acknowledges Ivar Eilertsen, head of securities class action services for ISS. Rust Consulting, the class actions administrator for the Wells Fargo fair fund, did not respond to requests for comment.
The final way that the SEC’s proposed payment plan for Wells Fargo’s investors could end up being the most damaging to investors. The SEC says the claims administrator would be paid by Well Fargo and not investors. However, based on how some third-party filing firms are interpreting the SEC’s language, the regulatory agency could be restricting how they can be paid. The SEC says that under its payment plan for the case involving Well Fargo, third-party filing firms cannot be paid from the same pool of monies as investors. It is unclear how third-party filing firms would be compensated and some third-party filing firms are concerned they will not be able to be paid through contingency fees which are deducted from the payments to investors. By contrast, subscription fees are fixed annual fees charged by third-party filing firms to clients for the work done to participate in all class action and fair fund settlements during the year.
Eilertsen says that should the SEC decide that investors would have to pay for third-party filing services through subscription fees rather than contingency fees, some investors might not participate in the process of recovering any money from the Wells Fargo fair funds case. “Retail investors, smaller investment funds, or wealth management separately managed accounts would likely be the most seriously impacted because they typically rely on contingency fees,” he explains. The reason: larger fund managers would likely benefit from choosing a fixed annual subscription fee based on the larger number of class actions settlements for which they are eligible to participate. By contrast, contingency fees are better for fund managers and investors that only participate in a handful of class action settlements.
While Broadridge and ISS interpret the SEC’s proposal for payment on the Wells Fargo fair fund as restrictive, larger rival Chicago Clearing Corp. says that the effect on investors will all come down to how the SEC allows Rust Consulting to implement the plan. “The language is unclear. The SEC could allow Rust Consulting to place restrictions on third party filing firms, but we will know more when we see the claims packet,” says Jim Tharin, chief executive of Chicago Clearing Corp., which services over 2,000 clients including fund managers, brokers, and bank trust departments. He acknowledges that one of the most problematic aspects of the plan could be the burden of supplying supporting documentation for each transaction or position. The documentation may not always be available based on the fact the period of eligibility to file a claim goes back to 2012. It is unlikely investors or their financial intermediaries will have kept records for that long.
“Why would the SEC want to make it more difficult for investors to collect their money?,” questions Tharin. “The SEC should be increasing the level of participation rather than decreasing it.” In its explanation of its compensation plan for investors in Wells Fargo’s stock, the SEC never says why it has inserted new language affecting third-party filers, considering so many investors rely on them to help them collect their compensation. One can only presume that the US regulatory agency is concerned about potential wrongdoing or fraud by third-party filers based on allegations from claims administrators. However, its plan for Wells Fargo does address potential fraud, as Broadridge’s letter points out, saying that the claims administrator has the right to audit the books of third-party filers.
At the very least Broadridge’s letter and the concerns of other third-party filers have highlighted the possibility that the SEC’s new policies for third-party filers in the case of Wells Fargo could apply for future fund dispersions. If that occurs, third-party filing firms will have no choice but to adjust. Medford, Mass-headquartered third-party claims filing firm Financial Recovery Technologies, which services over 800 clients including some of the largest asset managers and asset owners, appears to have accepted the SEC’s intent. FRT declined to be interviewed for this article, but in a statement to FinOps Report says “The SEC and FRT share a common goal to ensure that victims of securities fraud and other violations are compensated fairly. FRT is prepared to work with the SEC in the Wells Fargo case to make this process as easy and efficient as possible for all those involved.”
Ultimately, if the concerns of third-party filing firms prove legit, investors will either have to accept they will wait a lot longer for their compensation in fair funds. Some might not even get their money at all. Given there is already a low participation rate for institutional investors and an even lower rate for retail investors in settlement plans in general, all the SEC will have accomplished is to defeat its goal. Hopefully, that won’t be the case and the industry feedback on the Wells Fargo case will prompt the SEC to issue further detailed guidance on just how third-party filers can operate more easily.