Conversion process, trades and overdrafts

[MoJo]

Just trying to get a sense of what is industry practice here...

I work for a bundled service provider (both DC and DB), and our typical process on placing trades for new plans to us who's assets are transitioning to us is to have the prior service provider place "sell" trades on day one, wire us the proceeds of those trades on day two, and (provided the wire "hits" in time), for us to place "buy" trades the afternoon of day two, settling those trades the following morning. Essentially, the plan is "out of market" for the one day (selling out at the close on day one, and buying back in at the close on day two).

A new client wants us to place the "buy" trades simultaneously with the sell trades that the prior provider is making (on day one) and settling those buy trades on day two with the proceeds that the prior provider will be wiring to us that same day. At issue are 1) the fact that we won't know what the proceeds of the sale trades are until after the market close (they are daily valued funds, traded at the closing NAV), and hence we won't know the amount to place the buy trades for (unless we would engage in after hours trading - WHICH WE WON'T!) - so we'd have to do an estimate on the buy trades (90% or so) with a true-up on day two; 2) by placing the buy trades prior to receipt of assets, are we extending credit to the plan (even though we theoretically don't have to settle those trades until after we're expecting to receive the proceeds from the sell trades), and if so, is this "incidental" such that it isn't a PT under various DOL guidance, including Advisory Opinion 2003-02A; and 3) what happens if for some reason: a) the sell trades don't settle on day two; b) the sell trades don't settle early enough on day two for us to wire those funds out in settlement of the buy trades; or c) the wire to us just doesn't happen on day two.

The new client (a money manager, by the way) and their consultant (a rather well respected regional player) both "insist"" that "everybody" does same day trades on conversions and we should as well. Interesting that the three service providers I've spent my career with thus far have never done same day trades on conversion. Of course, in the day today operation of a plan, we routinely place sell orders and buy orders for plans simultaneously (per participant direction), but in those cases, we typically are functioning as sub-transfer agent for each side of that transaction, and have a process in place for routine settlements. In the conversion in scenario, we're somewhat at the mercy of the prior to do that which they say they will do (and I have no reason to doubt them).

Any viewpoints?

[Alan Simpson]

What about the possibility that the funds are wired but incorrect information is on the wiring instructions. When would the money be in the plan account? Would the wiring bank/asset holder hold off wiring the money to you until they get the incorrectly wired money back?

If you did not receive the wired funds by the time that you have to have the cash for the settlement of the buys that you had ordered – would they then have to be reversed and maybe at a loss necessitating a loss in the account before there is even any money in the account.

We NEVER HAVE perform buys until we know the results of the sells. We will not take that financial liability. Perhaps if those individuals that are saying that “everybody” is doing it would sign a binding agreement that they are financial responsible for any deficit in the account caused by the funds not being received when expected I might consider doing this but otherwise I would not.

[MoJo]

I agree completely, Alan. My thought was that if the wire was wrong/not received, then yes, you'd have to sell the recently purchased funds, possibly at a loss. This happens to be a DB plan, so there wouldn't be a participant account issue, but.... I don't think any sort of agreement or indemnification would be worth the paper it was written on. This is a very very small risk, but potentially a huge issue if it goes wrong.