Mutual Fund Security Description Conflicts

February 8, 2002 Conference Call

Participants

Brian McNelis (Reuters), Megan Sommerfeld (Reuters), Sara Banerjee (Telekurs), Karina Primavera (Telekurs), Gavin Draper (Thomson), Steven Nolan (Thomson), Russ Brown (Bloomberg), Peter Warms (Bloomberg), Mike Nugent (Bloomberg), Doug Kenney (Bloomberg), John Scheirer (Bloomberg), Peter Haecker (S&P Comstock), John Magrone (Nasdaq), Elaine Ryan (Nasdaq), Paul Zaremba (Nasdaq), Michael Atkin (FISD)

Definition of Issue

Timely, accurate and consistent communication about mutual fund information is hampered by problems resulting from discrepancies in fund family names/descriptions between the funds (description of fund), the Nasdaq Daily List and Standard & Poor’s/CUSIP Service Bureau (number assignment). The essence of this problem is that market data vendors manage fund data (for security file set-up) based on CUSIP number. Information from Nasdaq is organized by symbol/description. This difference results in a manual process to match the CUSIP against the symbol/security description data from the Nasdaq daily list.

To put this problem into perspective, there are over 50,000 funds listed in vendor systems. Notification problems and the lack of a standard for identifying funds cause delays and require extensive manual research on behalf of vendors. User firms are required to process multiple formats and descriptions from vendors, transfer agents, depositories and custodian banks.

This manual process results in conflicts and data quality errors. Vendors conservatively estimate that somewhere between 15-20 percent of funds are assigned a CUSIP (by the vendor) based on “best guess”. In short, inaccurate reporting and delays in processing corporate actions create downstream maintenance problems, inhibit front/back-office communication and is an obstacle to trading and the automation of securities processing. This manual process is due to:

• Inconsistencies in fund names resulting in differences in the description between what appears in the daily list versus what is received by CUSIP.
   
• A very close resemblance between fund family names. The lack of linkages between fund family names makes it difficult to distinguish one fund from another.
   
• The lack of formal (regulated) communication on name changes. CUSIP numbers are based on the funds alpha identifier. If a fund changes its name it needs a new number. The communication between funds and CUSIP is incomplete, often resulting in the creation of multiple identifiers for a fund.
   
• System limitations (i.e. truncation in Nasdaq Daily List) that prevent the provision of the full legal name of the fund in communications. This creates tracking problems for fund names that only slightly differ. The problem is compounded when funds use a marketing name rather than the full legal name in their communication.

Daily List and CUSIP

As stated, market data vendors use the CUSIP number as the primary database key in master files. One obvious short-term solution would be to allow Nasdaq to display the number in the daily list. Nasdaq does require a CUSIP for all listed funds (captured in the Nasdaq system) and systematically researches CUSIP-related linkages associated with corporate actions.

The problem seems to be a lack of clarity on whether there are any licensing restrictions that would prevent Nasdaq from displaying the CUSIP. Nasdaq is under the impression that they are prevented from displaying the CUSIP because they cannot guarantee that the receiver has a redistribution license. Vendors do not believe there is a licensing issue and seek an interpretation of the data usage rules from S&P.

• Clarification is needed from CUSIP on the existence of licensing restrictions. If restrictions exist, what is the potential for policy adjustments to enable the industry to mitigate this data quality problem?
   
• If adjustment to policy is not an option, is it possible to create a password controlled web site allowing Nasdaq to display the CUSIP and restricting access to vendors that have a CUSIP redistribution license?

Compliance Options

Market data vendors are also interested in exploring systemic (either business or regulatory) solutions to the communications problems between the funds and CUSIP/Nasdaq. For the moment, these two issues fall into the realm of “exploration:”

1. Rules associated with name changes. The first order of business is for the industry to work together to ensure that the CUSIP/ISIN policies related to name changes are known and understood by all parties involved in fund data quality. Market data vendors want to continue discussions with the Investment Company Institute (ICI) to ensure that the funds are aware of the requirements and have internal procedures in place to improve communication.
    
2. Make CUSIP maintenance a requirement. Nasdaq requires a CSUIP for listing, but there is no regulatory requirement associated with maintenance. The lack of a maintenance regulatory requirement means that there are little (if any) repercussions associated with poor corporate action communication. Market data vendors are interested in exploring the potential for implementing a compliance solution to these problems.

Global Problem

The challenges of fund identification and communication are not limited to the U.S. fund industry. Some funds are registered offshore and many others are marketed around the world. The challenges of reconciling name conflicts globally is compounded by multiple codes and the lack of cross-references between the various codes used to identify funds.

Market data vendors are interested in opening up a dialogue with the ANNA Service Bureau (ASB) to examine the potential for creating linkages between global fund identification codes.