Will financial institutions make the SRDII deadline

With barely six months remaining before the September 2020 deadline for European Commission’s implementing regulation 2018/1212 for Shareholder Rights Directive II (SRDII), firms operating as financial intermediaries are focused on planning for compliance.

SRDII is aimed to improve corporate governance in EU member states

The European parliament published SRDII in May 2017 as an amending directive to 2007 SRDI, aimed to strengthen the position of shareholders and to improve shareholder influence on corporate governance and other factors in companies that are either traded in the EU’s regulated markets or have a registered office in any of the member states of EU.

One of the biggest challenges highlighted by the Commission was that companies were unable to identify their shareholders and therefore unable to communicate effectively and efficiently with them, especially in cases where a complex chain of financial intermediaries was involved. It was found that information intended for shareholders was often delayed or entirely undelivered.

Similarly, the upstream transmission of votes was not always correct. The exercise of shareholder rights was expensive and charges levied by financial intermediaries acted as a deterrent to vote cross-border.

SRDII addresses these challenges through regulation 2018/1212 which establishes specific requirements for financial intermediaries, such as custodians, trustees and wealth managers, for processing shareholder identification, the transmission of information and the facilitation of the exercise of shareholders rights.  These three requirements create new operational obligations for financial institutions acting as intermediaries.

Article 3a: Shareholder Identification Financial intermediaries are required to facilitate an issuer’s right to identify its shareholders. Issuers can request the shareholder identification and financial institutions will need to provide the following details:

• Name and contact details of the shareholder
• Unique identifiers for shareholders, such as passport numbers, national identification numbers, BICs, LEIs or other identifiers,
• Number of shares held
• Initial date of shareholding

Under 3a, intermediaries must also relay disclosure requests to other omnibus accounts on their books.

Article 3b: Transmission of Information Financial intermediaries must relay annual general meeting (AGM), extraordinary general meeting (EGM) and other meeting notifications to their clients who hold impacted securities in their accounts.  Intermediaries, where involved, must also distribute voting forms and instructions to their clients.  Furthermore, they must transmit votes received from their clients to either the issuer or other intermediary.  All these activities must be performed without “undue delay,” meaning the transmission should happen the same business day as it is received, unless it is received after 4 pm, in which case the transmission must occur by 10 am on the next business day.  

In addition, Article 3b stipulates that transmissions between intermediaries be made in electronic and machine-readable formats (e.g. ISO20022) to facilitate for interoperability and STP.

Article 3c: Facilitation of Shareholder Voting Financial intermediaries face multiple requirements to enable shareholders or their nominated third parties to exercise the right to participate and vote in shareholder meetings.

Under 3c, intermediaries must provide tools to their clients which facilitate access to meetings information, voting and any other modalities for shareholder actions.  Intermediaries must have capability to process votes and communicate status back to shareholders.  In addition, they must send an electronic confirmation to the person that casts the vote. The shareholder can also request and get a confirmation that their votes have been validly recorded and counted by the company at the meeting; up to three months from the date of the vote.

Imperatives for financial intermediaries

An Industry Working Group Task Force completed a gap analysis between the SRDII regulations and existing Corporate Actions and Proxy Voting ISO messages for shareholding identification and transmissions of meetings and proxy voting requirements.  The Task Force redefined the standards and the messages that should flow between issuer companies and intermediaries via new ISO20022 standards released in October 2019.

The resulting imperatives for financial institutions acting as intermediaries are

• Develop an electronic mode of communication to disseminate meeting and agenda details to their clients, capture voting preferences, confirm receipt of voting instructions and confirm status of voting instructions
• Develop capability to process newly launched ISO20022 messaging and process flow for shareholder identification requirements
• Develop capacity to process ISO20022 Proxy Voting messages for transmission of meetings information and voting instructions and corresponding status

Without technology intervention, the transition from a discretionary service using current manual processes to a mandatory service with such elaborate electronic mechanisms and ISO messaging is likely to add unmanageable burden on financial intermediaries’ operations.

The obligations under SRDII are triggers for systemic change in European markets and the financial intermediaries servicing them. The need for better technology to standardize and automate the processing of meetings, proxy voting and shareholding identification raises the bar for all financial intermediaries and these firms must carefully develop compliance programs in advance.