With the Shareholder Rights Directive II (SRD II) implementing regulation transposition deadline now less than twelve months away, those in scope should already have an understanding of their obligations, and should already be planning how they will meet requirements.
SRD II is a revision of the original Shareholder Rights Directive (SRD I), first introduced back in 2007. It aims to improve long-term engagement between shareholders, concentrating on asset owners and asset managers and the companies in which they invest.
Dean Little, co-founder of the Proxymity Platform at Citi, suggests that there are a number of issues needed addressing from SRD I, such as “a lack of overview and influence over directors pay and there was an increasing need to reduce strategies focused on short-term investment”.
Little explains: “One big failing with the previous directive was that there were no penalties for failing to comply with the rules. These and many other issues have been addressed in SRD II.”
The regulation applies to firms across the retail and institutional securities services spectrum including retail banks, private banks, investment banks, brokers, custodians, wealth managers and equity advisors.
As part of the requirements, information must be shared more efficiently, accurately and clearly, including meeting information, vote processing and confirmation, both pre- and post-meeting.
Demi Derem, general manager, investor communications solutions international, Broadridge, suggests the updated SRD II represents “the biggest shift in European corporate governance standards and processes for many years”.
Derem says: “Throughout the investor communication chain, the directive aims to increase the transparency of communications and drive shareholder engagement levels, while also aligning to the wider trend of investors seeking to take a more active stewardship role in the companies in which they invest.”
The importance of SRD II
Since the financial crisis, the financial industry has faced a wave of regulation, but what makes SRD II so important? Why hasn’t it been talked about and why hasn’t it been given the same air time at conferences as the second Markets in Financial Instruments Directive and General Data Protection Regulation have been given in the past few years?
Mariano Giralt, global head of tax and regulatory at BNY Mellon, explains that the directive “is part of a broader regulatory agenda to improve transparency and stewardship in capital markets”.
He adds: “It is one of the first pieces of legislation that sets out detailed obligations with respect to operational processes in the custody chain.”
A key aspect of a firm’s planning is to be aware of their new rights and obligations, especially around voting and shareholder disclosure, according to Derem.
He states: “Intermediaries such as wealth managers and retail brokers that do not offer any form of proxy voting service now need to focus on this area and plan for facilitating their clients’ rights as shareholders to participate in meetings of EU-registered issuers.”
“Those already involved in voting should be looking at their client base and operating model to ensure coverage is extended to all shareholders and changes are executed before the deadline.”
Little explains that SRD II is important because the investor communications industry is “essentially in the dark ages, for example, some of the most critical votes are still cast by a paper card or reliant on in-person physical attendance at a meeting hall”.
Giralt comments that a key driver of this regulation is to standardise core custody processes for which “successful compliance depends on all impacted stakeholder communities—issuers, central securities depositories, custodians and shareholders—agreeing to and adopting new practices”.
He adds: “The scale of this task and compressed timelines for implementation present a significant challenge.”
In addition, unlike some other regulations, SRD II strongly advocates the use of technology.
Little adds the advocation of technology “suggests that new platforms and technologies may not only help upgrade existing processes to meet new SRD II demands, but could also be the most efficient and effective means of complying and avoiding penalties”.
Giralt explains that the directive “obliges custodians and all stakeholders in the custody process to invest in technology solutions that deliver the required automation and straight-through processing. SRD II mandates a new shareholder disclosure process; all intermediaries will have to build capabilities to manage this new process in an automated manner.”
SRD II also introduces a new set of obligations on institutional investors and asset managers, including requirements to produce and publicly disclose an engagement policy, as well as information as to how their investment strategy is consistent with the profile and duration of their liabilities.
According to Giralt, it is also important because it will lead to changes in operational processes relating to corporate actions and general meetings and institutional investors and asset managers will have to manage these changes.
However, Little explains that the outcomes aren’t fully known yet, but the additional administrative burden will likely have an impact on how issuers, intermediaries and investors operate.
Little says: “Institutional investors and asset managers shall comply with SRD II or publicly disclose a clear and reasoned explanation why they have chosen not to comply. If an asset manager invests on behalf of an investor, the investor publicly discloses the information regarding its arrangement with the asset manager related to the terms of engagement and outline the incentives.”
The final stretch
As the deadline for the transposition of SRD II into member state law was 10 June 2019, Giralt explains that it is urgent that institutional investors and asset managers understand the new obligations contained in SRD II.
He says: “The SRD II changes to operational processes will take effect from 3 September 2020. Several of the industry associations are working hard to develop market standards that will help market participants to adapt.”
The world has become globalised, and so have the investment portfolios of investors. Derem explains that voting is a “complex business, not by design but out of necessity”.
He comments: “With each market having its own unique set of data, legal and compliance rules, careful consideration will need to be given to all the exceptions and nuances that will continue to exist. Therefore those not experienced in proxy will need to navigate their compliance obligations carefully. Local banks have an opportunity to work with their peers and should be lobbying local legislators to understand the practical implications of how voting and shareholder disclosure processes will change following transposition and help define the most efficient processes. Global intermediaries should be working with their local agents to help facilitate this process.”
