Wolters Kluwer Financial Services will be spending a large part of 2010 focused on dealing with the complexities involved in the area of American Depositary Receipts (ADRs), explains Richard Ryndak, senior product manager for Capital Changes at the compliance solution provider. Accommodating changes to withholding tax regimes, work on the XBRL corporate actions project and increasing global coverage, along with a major system redesign, are also on the cards for the vendor this year.
Current and upcoming changes to cost basis reporting legislation, section 302 of the US Internal Revenue Code as it applies to withholding tax on non-resident aliens and ISO standards are all priorities in 2010, says Ryndak. Section 302 in particular will impact cash distributions from the US to non-residents of the US and will mean a judgement call will be required for whether payments are defined as capital gains or dividends, which in turn will have withholding tax implications. The vendor is therefore working to help firms determine whether they are subject to 302 or not.
Capital Changes pitches itself as a corporate actions solution vendor with a difference in that as well as offering the basics of corporate actions data aggregation and cleansing, the vendor therefore provides analysis of the tax impacts of these events. To this end, its GainsKeeper solution offers automated tax-based financial tools and services for corporate actions data that, among other things, tracks cost basis reporting requirements and the necessary adjustments.
One area of particular complexity and growing importance for the US market as the world becomes more globalised is therefore ADRs, which represent ownership in the shares of non-US companies that trades in US financial markets. “This is an area that is very complicated and requires a set of data that is potentially much harder to get hold of, depending on the country involved. Changes to cost basis reporting for US equities that are due next year will have a significant impact on this area and analysis of this data in order to track cost basis adjustments will be important,” explains Ryndak.
Investors are becoming increasingly interested in farther flung markets and this has meant Wolters Kluwer has been compelled to invest in sourcing this data, much the same as the other vendors on the corporate actions block (see the DTCC’s recent work to this end for example). This entails the addition of new rules and frameworks to deal with this new data and the addition of new third party relationships to source the data, says Ryndak.
Wolters Kluwer has also been involved in a lot of the work that has been going on around planning for the XBRL tagging of corporate actions documents, he continues. “We are currently working on helping the group determine the business case for XBRL,” he says. “It has been challenging to get consensus across issuers on the subject.” The first significant milestone of the project, which is being led by DTCC, Swift and XBRL US, was reached last week.
In the meantime, the vendor is using the expertise of its ex-attorney staff, who Ryndak says “live and breathe” the US Internal Revenue Code, to analyse the relevant corporate actions data, once it has been collected from vendor feeds and source documents. It is the level of tax analysis that the vendor provides that Ryndak believes sets it apart from the other vendors in this space, such as data aggregation and cleansing providers DTCC and Fidelity ActionsXchange. The focus is on converting this data into a format that customers can understand, he adds.
The members of the financial services community that are likely to be interested in a solution such as that offered by Capital Changes range from banks and asset managers to smaller investment advisors, but Ryndak notes that the smaller end of the scale tend to do a lot of this work in-house. The tax compliance and portfolio manager contingent within these institutions are the largest users of the solution, however, the risk function is taking more of an active interest, he adds.
Against the background of all work, Capital Changes is undergoing technology changes of its own. The vendor is in the midst of a system redesign in order to improve its internal and external efficiency, explains Ryndak. “We have updated our web interface and improved our tagging of corporate actions data, among other things,” he elaborates.