After months of uncertainty as to whether the Covid-19 pandemic would cause a delay to the second phase of the Shareholder Rights Directive II (SRDII), the European Commission recently confirmed the schedule would go ahead as planned.
Ahead of the second phase coming into force, IFLR goes back to the fundamentals of the regulation, and explains what will change for market participants in September.
What is SRDII?
First introduced in 2017, SRDII succeeds SRD – effective since 2007 – and widens its scope, introducing a number of provisions affecting investment chains and other aspects of company management. The directive aims to address a perceived lack of shareholder engagement, mainly by improving corporate governance and increasing transparency on investment strategies.
As part of the new requirements, issuers and their agents have to standardise meeting announcements and voting procedures, while institutional investors and asset managers are required to have clearer engagement strategies and policies that are aligned with long-term goals. Proxy advisors, for their part, have to disclose a code of conduct, show how they arrive at voting recommendations, and explain how they prevent conflicts of interest.
In general, SRDII encourages increased dialogue within companies, particularly in cases of cross-border ownership. Company managers now have to obtain shareholder approval on elements such as directors’ remuneration and related-party transactions. As a result, custodians have also had to improve the transmission of information to shareholders in order to facilitate the exercise of their rights.
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“SRDI was born out of a need to reinforce corporate governance and participation from retail investors, but the 2008 crisis put additional pressure on company owners to be more transparent and build sustainable growth models,” Juan Prieto, founder of Spain-based proxy advisory firm Corporance Asesores de Voto, previously told IFLR. “It was also felt that shareholders weren’t sufficiently using their rights and were too short term in focus. SRDII aims to encourage their long-term engagement with investee companies.”
The implementation of SRDII is scheduled in two phases. June 2019 first marked the deadline by which all EU member states had to transpose the majority of the regulation’s requirements into national law. All outstanding measures – including implementation standards for shareholder identification, transmission of information, and facilitation of the exercise of shareholder rights within companies and across borders – are now due to be transposed by September 3, the date from which all SRDII-compliant firms will also have to apply them.
Who does it cover?
The scope of SRDII is vast as it covers any financial company holding or servicing European equities. This spans a great variety of actors in the securities market, including custodians, intermediaries, CSDs [central securities depositories], issuers and agents.
Questions around the regulation’s implementation are naturally complex due to the sheer number of parties involved: if one of them isn’t fully compliant, it won’t be effective. “Unless you’re involved in the post-trade environment, you probably don’t realise how complicated the whole plumbing is,” says Alan Cameron, head of brokers’ market strategy at BNP Paribas Securities Services. “The number of links in the chain means it’s very important to get the standards and testing right. Those who aren’t on this side of the board may not grasp this complexity.”
The directive’s scope extends to any companies that have a registered office in an EU member state, and whose shares are traded on an EU-regulated market. Companies’ custody chains, however, sometimes extend beyond the EU, which means SRDII can also affect intermediaries and shareholders based in third-country locations.
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What’s the controversy?
Earlier this year, part of the industry requested a delay to the second phase of the directive, arguing that Covid-19 had severely disrupted their planning and preparations.
On April 9, a first letter co-signed by industry bodies including the European Banking Federation (EBF), the Association for Financial Markets in Europe (Afme) and the International Securities Lending Association (Isla) demanded that the Commission apply a one-year delay on phase two, or equivalent measures. “Due to the unprecedented disruptive nature of the pandemic, the daily activities of our members are significantly impacted by the necessary emergency measures put in place to mitigate the consequences…including substantial internal reprioritisations and shifts of resources,” the industry bodies wrote. “At this stage, the associations believe it will be difficult, or nearly impossible, to meet the implementation deadline of September 3 2020.”
Others shared the view that bringing in the second part of the regulation too early could end up causing more harm than good. “SRD2 aims to achieve more clarity and transparency for shareholders, so any postponement to that isn’t good in itself,” Charlotte Rendle, of Simmons & Simmons’ financial services regulatory practice, told IFLR at the time. “However, when you weigh the two, a delay that gives people extra time to be fully ready would probably end up benefitting shareholders more than a rushed implementation.”
A second letter co-authored by shareholder rights advocate groups including ShareSoc, the UK Shareholders Association (UKSA), the European Federation of Investors, and Better Finance, countered the first one. “It is clear that the pandemic is being used as an excuse to further delay implementation,” the letter reads. “Intermediaries have not been proactive in facilitating voting and communication. At this stage, [they] should already have been prepared and ready to adapt to the new requirements [for example] by establishing task forces sufficiently early to prepare coherent implementation documentation.”
The shareholder associations also argued that a further delay would increase the misalignment with the SRDII provisions that are already in place. “The new rights and obligations around the regulation have been known for about 18 months,” says Demi Derem, general manager of investor communication services at Broadridge Financial Solutions. “Compliance and operational readiness should have been pinned down long before Covid-19 started. The banking sector is also one of the few industries that has been able to work from home successfully throughout the lockdown.”
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So will it be delayed?
Earlier this summer, the European Commission put an end to the discussion by formally rejecting the market’s request for a delay. In a letter seen by IFLR, Salla Saastamoinen, acting director-general of the Commission’s justice and consumers department, argued that although the extraordinary conditions created by the pandemic had strong consequences for both the private and public sectors, market participants had sufficient time to adapt existing practices and procedures to the new rules. “The directive was published almost three years ago, and the minimum requirements set out in the Commission Implementing Regulation have also been known for more than 18 months,” she wrote.
Plus, fostering improved communication between companies and shareholders has become more important than ever in the current context, Saastamoinen argues. “Amid the current lockdown measures, as well as in the near future, meeting objectives [such as the transmission of information through the chains of intermediaries] is particularly important, as shareholders are often able to participate and vote in general meetings only remotely,” she added.
Shareholder rights defenders applauded the decision. “This is good news for individual investors,” says Cliff Weight, director at ShareSoc. “We welcome this pragmatic approach from the European Commission, as it’s far too easy for regulators and legislators to dither and delay.”
The Commission also countered trade bodies’ argument that Covid-19 had delayed the transposition of phase two requirements into national law in some EU countries. “Information available to us suggests that the overwhelming majority of member states have already adopted their national transposition measures,” says Saastamoinen.
Ultimately, the Commission’s decision means that by September 3, all SRDII-compliant firms will have to implement all aspects of the directive. “It’s about time to foster investor participation and cross-border voting, as well as easy shareholder identification,” says Prieto. “Investor voting and shareholder engagement shouldn’t still be subject to manual and backward processes in these digital times. There are still hurdles to overcome, but the sooner the regulation is enacted and intermediaries get ready, the better communication and transparency will be.”
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