The second Shareholders Rights Directive (SRD II) is now live, but a plucky band of associations this week launched a last-ditch bid to gain clarity on lingering ambiguities and save their members from non-compliance penalties.
Eleven trade bodies including the International Securities Lending Association (ISLA), the European Banking Federation, and the Association for Financial Markets in Europe, sent a joint letter to the European Commission and the European Securities and Markets Authority on 1 September outlining three “major areas of concern”, two “misunderstandings” and a plea for clemency.
When we last met our heroes in April the same group, which also comprises of the Association of Global Custodians, the European Central Securities Depositories Association, and the Securities Market Practice Group, had just their request for a one-year delay to the implementation of SRD II rejected by EU rule-makers.
At the time, the associations argued that the business and economic disruption wrought by the COVID-19 pandemic meant it would be “difficult, or nearly impossible, to meet the implementation deadline of 3 September”.
EU regulators, however, countered that the directive had been in the diary for long enough that in-scope firms should be able to achieve compliance despite the upheaval.
Two misunderstandings
In a fresh letter sent two days prior to go-live, the group reiterated their concerns that confusion in key areas would likely cause many of their members to fall foul of the rules despite their best efforts.
Moreover, the letter highlights the risk that a compliant firm will be penalised for exchanging information in a non-compliant manner because one or more of their clients, counterparties or service providers will not be able to issue or to accept fully SRD II-compliant messaging.
The misunderstandings underpinning this problem are two-fold.
Firstly, the differences in national transposition and national applicability of SRD II rules. This comes by virtue of it being a directive, instead of a regulation. A directive must be interpreted by each EU member state and this opens the door to inconsistencies its application.
An example raised in the letter of where this can cause friction is in how each member state has chosen to determine which entity is considered to be the ‘shareholder’.
Second, the different timing of national transpositions means that market infrastructure entities and market participants had insufficient time to build fully SRD II-compliant processes.
On this point, the letter fundamentally disagrees with regulators’ point of view on what SRD II represents. In previous correspondence, the associations note that regulators describe SRD II as a “regulatory compliance project”. They, in contrast, see it as a “market infrastructure project”.
This is because successful implementation of the SRD II processes, and full compliance by any individual entity, are dependent on full compliance by all market entities, the associations say.
Both these challenges have been further exacerbated by the effects of the COVID-19 pandemic, the letter further notes.
Three major concerns
Given the above issues, non-compliance events are all but certain. But, even here there appears to be a lack of clear infrastructure to lean upon. The letter outlines the associations’ three main concerns when it comes to non-compliance.
First, in cases of non-compliance, firms must report to the relevant regulator. However, even on go-live day, who that regulator is or how reports should be filed, remains unknown.
Second, a complete lack of uniformity exists between member states when it comes to the severity of potential sanction in cases on non-compliance across member states.
Third, the drawbacks of a directive mean the market is effectively dealing with up to 27 separate versions of SRD II. “This is a major source of complexity, and creates barriers to market access, to the capital markets of each member state, and to EU-wide capital markets,” the letter notes.
Clemecy
As a result of the myriad pitfalls and inconsistencies, the associations are requesting reassurance from regulators that “sanctions, penalties and fines will not apply, at least until 3 September 2021”.
The full letter is available on ISLA’s website.
SRD II and securities lending
SRD II will require asset managers to disclose their policy on securities lending to institutional investors and how it is applied to fulfil its engagement activities, particularly ahead of the general meeting of the investee company.
Among SRD II’s primary aims is to crack down on the misuse of voting rights, which were previously abused in several ways including via the borrowing of shares ahead of key corporate action dates to influence the result of company votes.
