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Shareholder Rights Directive – Your Questions Answered
Demi Derem, General Manager for Broadridge’s International Investor Communication Solutions business, explores all the questions you need answered about the revised Shareholder Rights Directive (SRD II), but haven’t yet thought to ask.
Although some compliance deadlines have been pushed back or softened to accommodate for the significant impact of Covid-19 around the globe, no announcements have been made about a delay to SRD II, which is due to come into force on 3rd September 2020.
SRD II reflects the current regulatory focus on improving transparency and corporate governance in the European Union (EU) by updating a 2007 Directive that relates to shareholder voting and disclosure. It contains new requirements related to the remuneration of directors, identification of shareholders, facilitation of exercising shareholder rights, transmission of information and transparency for institutional investors, asset managers, and proxy advisors.
As it is a directive rather than a regulation, each EU member state must transpose the requirements into national law, which may involve some degree of disparity across the region’s markets. To help the industry prepare for the changes, Broadridge is conducting a series of webinars that address the Directive’s details and impacts and below we summarise the main takeaways and poll findings that relate to intermediaries.
Who Does it Apply to?
SRD II impacts the market practices of issuers, asset managers, custodians, central securities depositories (CSDs), and a range of other intermediaries and service providers. The firms that face the greatest number of requirements are intermediaries providing services to shareholders of EU stocks, including those outside of the EU with third country status, and institutional investors and asset managers that invest in in-scope shares. The sometimes-long chain of intermediaries between shareholder and issuer will face the most pressure when it comes to some of the more operational changes. Such intermediaries include banks, brokerage firms, wealth managers and, sometimes, market infrastructure providers if their services include the safekeeping and administration of shares or the maintenance of securities accounts on behalf of shareholders or other persons.
Importantly, it is the local law of the issuer that applies to intermediaries irrespective of their geographical location; however, attention should also be paid to the intermediaries’ local market requirements in case of significant divergence. Moreover, neither SRD II nor the implementing regulation take into account data privacy laws other than those of the EU, which means third-country firms may be caught between their local privacy restrictions and the obligations of the issuer’s local regime.
What Should Intermediary Firms be Thinking About in Terms of Compliance?
There are several key sections for intermediaries to focus on when preparing for compliance with SRD II.
Under the requirements of SRD II, issuers will be granted the right to obtain shareholder identification with the objective of engaging directly with the investor. This means intermediaries must provide “without delay” to the issuer information regarding shareholder identity. As for what “without delay” actually means in practice, intermediary firms are required to process these requests within 24 hours, while at the same time verifying the legitimacy of the requests. Each intermediary is required to reply to the response address provided by the issuer in the original request to the first intermediary. The first intermediary in the chain, when forwarding the issuer request, must confirm the response address to which disclosures should be sent.
Unfortunately, the process is further complicated by the lack of a universal definition of a shareholder across EU member states, so intermediaries will have to determine the correct procedure as per the requirements of the country in which the issuer is registered. Intermediaries must also store shareholder information for at least 12 months after they become aware someone ceases to be a shareholder. Although this shareholder identification requirement is primarily related to equities, member states are at liberty to go beyond this minimum standard by potentially extending the shareholder disclosure requirement to bonds and other instruments.
General Meeting Information and Voting
The “without delay” requirement is also incurred for intermediary transmission of general meeting agenda and voting information to shareholders in the facilitation of an end investor’s voting for the general meeting in a “standardised format”. In this context, some intermediaries have interpreted “without delay” to mean that votes should be sent without delay once the record date has been reached. Additionally, a voting receipt must be provided by the issuer to the party or person that cast the electronic vote, immediately after it has been cast, which entails passing the information through the chain of intermediaries to the end investor. The vote confirmation is specific to the shareholder that requested it and relates only to their vote.
The standardised messaging aspect means that intermediaries should immediately prepare for the ability to receive, process and send electronic machine-readable messages in order to comply with the strict deadlines. To this end, the ISO 20022 message format is a clearly defined standard that complies with all aspects of the implementing regulation and is designed with all specific aspects of proxy voting in mind. In terms of the impact on message traffic, the industry can expect increases both in the size of messages and in overall traffic.
How Ready is the Industry?
Poll results from recent Broadridge webinars confirm that while there is growing awareness of the regulation’s impact, there is a lot of preparatory work still to be done. At last month’s ‘SRD II: What Does SRD II Compliance Look Like?’ event, 67% of participants indicated that they understood their obligations but did not have a concrete plan for compliance by the deadline. Only 22% felt they were in a position to implement a devised plan and would be ready to meet the requirements in September. Given this fast-approaching deadline and the resource-challenged state of the industry, this lack of preparedness is concerning.
What Are Intermediaries’ Principal Concerns?
The European Commission has delegated the responsibility to member states to set out enforcement measures and penalties, so these may differ from country to country. Fines are currently less of a concern for the industry than the tight timeframe for compliance, according to the poll results from Broadridge’s recent webinar —where 17% of participants indicated they are concerned about fines, whereas 64% indicated that they are concerned about the imminent deadline.
Time is running out
There is very little time left for impacted firms to implement a robust solution to meet the SRD II requirements, and intermediaries especially need to be updating their operating model and workflows now to ensure they meet the September 3rd compliance deadline.