The clock is ticking
The clock is ticking on the EU’s Shareholder Rights Directive II (SRD II), which comes into force on 3 September 2020. It’s part of a cross-sector industry initiative to improve the existing set of standards on corporate actions and general meetings for listed equities, whilst addressing other issues for which the European Commission did not have a mandate when preparing its predecessor in 2007, SRD I. Fundamentally, SRD II will strengthen the relationship between issuers and investors, transforming a somewhat opaque, discretionary system to one that is transparent and obligatory.
The key commitments under SRD II include: the provision of a golden operational record for meeting announcements and corporate actions; the introduction of machine-readable messaging; the improvement of general meeting market practice and standards; and the advancement of shareholder identification.
It’s not just issuers that fall into scope for this regulation: there are in fact three groups. The first of these are issuers with a registered office in one of the 27 EU Member States and where the shares are admitted to trading on a regulated market situated or operating within a Member State. The second group are intermediaries that provide services to European issuers (including investment firms, credit institutions or Central Securities Depositories that provide the administration of shares or maintenance of securities accounts on behalf of shareholders or other persons). The final group are third-country intermediaries that have neither their head nor registered offices in the European Union.
Here are ten issues that firms in scope need to consider regarding the obligations and operational impacts of SRD II.
i) The first requirement concerns the identification of shareholders. Issuers will have the right to request the identity of their shareholders and whilst this will not be unfamiliar for French or UK firms, for the majority of Member States this is a new condition. In order to provide this information to issuers, intermediaries are required to forward shareholder disclosure requests to the next intermediary in the chain on the same business day. They must also provide shareholder data concerning their own clients to the addressee defined by the issuer by the following business day. This data must be shared in machine readable messaging format with certain minimum datapoints.
ii) The second obligation involves the transmission of information from issuers to shareholders. The requirement is for the intermediary to forward any meeting notice or corporate action as sent by the issuer on the same day. Electronic machine readable messaging must be used for this, again with minimum datapoints. Information from the last intermediary to the shareholder can be provided electronically if that shareholder is in a position to receive machine readable messaging (i.e. if they use a third-party platform or are sophisticated investors). If not then the last intermediary has to decide how to inform their shareholders, whether via traditional paper or other means.
iii) Electronic machine-readable messaging is key to the entire process, including the transmission of information from the issuer (which will include meeting information and announcements, plus other corporate actions). There are some very strict deadlines that intermediaries have to comply with for transmitting information. For example, a corporate action announcement has to be transmitted to the next intermediary in the chain on the same day as that information is received. There is no obligation for intermediaries to do anything with that information (to translate it, or interpret it, for example), they just need to pass it straight through to the next intermediary. The only way that can be achieved in an automated fashion and meet the strict deadline is via STP.
iv) One problem is that electronic machine-readable messaging is not clearly defined in the regulation. Current industry thinking is that it refers to XML-based MX messaging under the ISO 20022 message format, as the current MT messages sent under the ISO 15022 standard don’t quite meet the requirements since they have a much heavier reliance on free text. There are also certain mandatory datapoints and SWIFT are not making the changes to add these datapoints to the messaging.
v) There is a heavy burden for compliance among intermediaries. Whilst a shareholder can opt to not receive corporate action information and issuers can choose to not issue a shareholder identity disclosure request, intermediaries must comply with all those obligations. If an intermediary receives a request from a shareholder client to not send it meeting information, the shareholder still has a right to participate in the meeting. The intermediary therefore has to be in a position to facilitate those rights even if the shareholder opted out.
vi) Under SRD II shareholders cannot opt out of identification, despite the fact that they can opt out of receiving the information. This is very different from the model in the US where they have the concept of ‘objecting beneficial owners.’ Intermediaries cannot use this as an excuse to not disclose their identities should they receive a request.
vii) In terms of scope concerning processes, meetings and securities, the defining factor is the location of the issuer’s registered office address. An intermediary based in Asia, for example, that operates securities accounts, performs administrative services such as custody and has clients that hold shares in European issuers in those accounts are in scope. Such firms have to comply with these obligations in the same way as an intermediary located in the EU. Whether the intermediary is a global custodian, a sub custodian, a CSD, a broker or a wealth manager – if it is performing those administrative services outside of Europe but is holding European securities on behalf of its clients then SRD II applies to them.
viii) On the shareholder disclosure side, it is anticipated that there will be an increase in the number of disclosure requests that issuers would make. More markets will be facilitating disclosure, more issuers will make the request and they will make the request more frequently (because it will be easier and cheaper to do so). Firms in scope need to able to respond to an increase in those requests within very strict timelines.
ix) In terms of proxy voting, firms need to be thinking about their capacity to send meeting or corporate action information to clients within those very strict timelines and understanding which of their shareholder clients would likely opt out of receiving that information. It’s also about the ability to expedite participation – even if the shareholder client does not want to receive the meeting information.
x) The regulation has a section under ‘Measures and Penalties’ that effectively requires Member States to set out their compliance monitoring and enforcement policy, including penalties for non-compliance. These penalties can be severe: in Italy, for example, firms might be fined up to Euros 5,000,000 for breach of the shareholder identification procedure.
To conclude, it is important to note that the regulation is a minimum set of standards for Member States and there is nothing to stop individual states from going beyond the requirements. For example, France is considering bringing bonds into scope. And unlike most other financial regulation currently in play, there appears to be little chance of this one being postponed – so firms need to upgrade their operations very rapidly, if they haven’t already begun the process.