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Stone House Consulting, LLC 
Good article and well articulated. However, it has always bothered me when the term “three-way reconciliation” gets thrown around. It is a misnomer in that a reconciliation is a comparison of TWO sets of records. That is it. It is meaningless to throw in a third set of records and try to make sense of what is getting compared to what. In order to reconcile three sets of records you have to conduct at a minimum 2 reconciliations. First is to compare A to B, second is to compare B to C (or A to C). Two separate comparisons with one shared source between the two.
In the context that Holly uses it though, I would agree that it would be ideal to have a “three-way reconciliation” rather more accurately stated as three reconciliations. There are three sets of records in the example, Investment Manager (IM), the Safekeeper (SK) and the administrator (ADM), each getting compared to the other two.
1) IM vs SK
2) SK vs ADM
3) ADM vs IM
I guess it boils down to semantics. I have heard the term “three-way reconciliation” in this industry enough times to know that the users of this phrase usually are implying that we compare (IM vs SK vs ADM) all at the same time. The results of this comparison can get very difficult to decipher or make sense of. It is much simpler to stick to the basics and review differences between two sources, one at a time.
In regards to investment identification, we have had similar struggles. As well as the issue mentioned in Holly’s example where it was unclear which class of stock was actually owned by the IM, more often we see the situation where the safekeeper reports the US version of a foreign stock, like an ADR, in place of the actual stock the trader traded. This can be an even larger issue if the ratio of the ADR to its parent foreign security is not 1 to 1, or the fact that the foreign stock’s market closes at a different time from when the US version’s market closes which will cause pricing descrepancies beyond the effects of the fx rate.
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Will a full tax lot cost basis rec to SK be required under the new cost basis rules from Jan 1, 2011?
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Good question! We’re not, of course, qualified to offer tax advice. However, because reporting inaccurate information may lead to severe monetary penalties as well as dissatisfied clients (especially if they have invested in tax-efficient strategies), planning to reconcile the firm’s and the safekeeper’s tax lot data seems most prudent.
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