How long can a fund take to distribute assets of funds to members?

Question

If I am entitled to a distribution of assets, such as a fixed number of shares in a public company, or distribution of payments received from that company, either of which first received by a fund in which my membership entitles me to these distributions (and assuming that that entitlement has been confirmed by the fund on the record, including the relevant numbers of shares) how long (absent specific provisions on timing on my contracts) can the fund take to distribute to me? Clearly it can't take forever, but there must be some limit, especially in the case of shares, whose value will fluctuate.

Answer 1

Clearly it can't take forever, but there must be some limit, especially in the case of shares, whose value will fluctuate.

When a publicly held company declares a dividend or distribution, it does so with an effective date and the owner of shares on the effective date receives the dividend.

When shares are transferred at a later date by person who owned the shares on the effective of the dividend, those shares are call "ex dividend" and the sale does not include a right to receive that distribution which is paid to the owner as of the effective date of the dividend.

Distributions on account of shares of stock are also always denominated on a "per share" basis, not as a percentage of value, so the fluctuating value of shares is irrelevant.

When the distribution has to be distributed after the effective date of the dividend is a matter of state law and of the governing documents of the corporation. In the absence of an express direction, the distribution must be made within a "reasonable time". If it is not, the shareholder could sue to corporation to compel it to make the dividend declared and could also be awarded interest at a statutory rate or a rate set forth in the governing documents of the corporation from the effective date of the dividend, and court costs (but in all likelihood not attorney fees).

In practice, the mechanics is distributing dividends from publicly held companies is a bit more involved than this simple scenario, however. Ownership of the vast majority of publicly held stock is not held in the name of the true owner in the books and records of the corporation.

Instead, most shares are held by an intermediary institution in the institution's name called a "street name" and then the intermediary institution handles ownership registration of the shares either to the true owners, or to brokerage firms or mutual funds, which in turn hold the shares for the benefit of their customers.

Typically, the publicly held corporation will wire transfer the total amount of the dividend payable to the 90%-99% of the corporation held in a street name to the street name intermediary firm on the effective date of the dividend. Then, the task of breaking up that sum of money to particular registered owners of the shares as of the effective date of the dividend, and of issuing 1099s to the recipients of the dividends, is handled by the intermediary firm.

In a worst case scenario, like a power grid failure affecting the relevant banks, or a natural disaster, or "bank holiday", the dividend is wired to the intermediary and a handful of direct owners of the shares in the company listed on the books and records of the company, typically within a few business days and as soon as is reasonably practicable. There is almost never a hitch in the distribution timing at this level in a publicly held corporation.

The intermediary firm's duties to distribute the dividends received from the corporation itself to the registered owners (some of whom may be brokerage firms holding shares for their customers) is governed by a contract of adhesion entered into between the corporation that hires the intermediary firm to handle this for it on an outsourced basis, and the intermediary firm, which binds the shareholders of the corporation.

In cases where the street name intermediary lists the owner of the shares as a brokerage account or mutual fund, the obligations of the brokerage account or mutual fund once the dividend of shares or money is received by it from the intermediary is governed by a contract of adhesion between the brokerage company and the customer in the case of shares held in a brokerage account, and between the fund and the members of the fund in a mutual fund.

In these cases, dividends are credited to the beneficial owner's account nunc pro tunc the date that the stock is received by the brokerage company or fund (or even to the effective date of the dividend in some cases), and the transfer from a brokerage account or fund to the actual customer, for example, in a check or wire transfer of a cash dividend, is sometimes only actually executed upon the request of the customer and is otherwise held in a money market account created for the customer until that transfer is effected in accordance with the contract between the customer and the brokerage or fund.

The default in all of these cases (distributions from intermediaries, from brokerages, and from funds) is "reasonable time", but the contracts with the customers are generally much more specific.

Also, while, in theory, this issue can be litigated in court, in practices, all "back office" functions involved in administering securities of publicly held companies are subject to securities industry arbitration agreements and so the disputes are actually handled in a specialized securities industry arbitration forum that is for all practical purposes, impossible to appeal and based upon an arbitrator's analysis that is not necessarily publicly disclosed to anyone but the parties to the dispute.