Getting it right
08 Feb 2023
Proxymity’s Jonathan Smalley, Broadridge’s Demi Derem and Confluence’s Greg Hotaling share their thoughts on all the recent developments in the shareholder rights sphere
Image: bonikart/stock.adobe.com
Demi Derem
General manager international investor communication solutions
Broadridge
Jonathan Smalley
Chief operations officer and co-founder
Proxymity
Greg Hotaling
Regulatory content manager, compliance solutions strategies
Confluence
Do you think that shareholder rights should be classified as a regulation, rather than a directive?
Jonathan Smalley: I don’t think this will move the dial, especially when you consider an implementing regulation was issued by the European Commission alongside the Level 1 text. Do I think the participants in the ecosystem should take the directive and the implementing regulation more seriously? Yes. There are still multiple factors of the directive that are intended to benefit the ecosystem and lead to a more efficient, engaged and transparent process which are not being adhered to. It’s time for stronger commitment from everyone. The technology exists to solve many of these problems and it should be leveraged.
Demi Derem: The short answer is yes. As a directive, Shareholder Rights Directive II (SRD II) had to be transposed into local law by all the various national authorities across Europe — a process that involved local market interpretation, which ultimately led to divergences in the transposition. For example: the definition of a shareholder, disclosure thresholds for shareholder identification, regulatory reporting requirements and non-compliance penalties.
This divergence, combined with significant latency in the transposition process and pre-existing, national-level differences in corporate law — impacting shareholder entitlements and shareholder rights — has resulted in considerable challenges and delays in market adoption. This has negatively impacted the principles and objectives that SRD II aimed to achieve.
Broadridge has been proactive in pushing for harmonisation and the adoption of Securities Market Practice Group (SMPG) standards as, like many others, we recognise the efficiencies it will bring to the industry. To drive the interoperability agenda, we have shared our analysis detailing the challenges to market adoption with appropriate industry bodies.
We have also provided our market analysis to the European Securities and Markets Authority (ESMA) as part of the recent ‘Call for Evidence’, which is the initial stage of the scheduled SRD II post-implementation review. From our vantage point, to remediate the current issues the next phase of legislation in this space will need to be introduced as a regulation.
Greg Hotaling: There have been concerns about the lack of SRD II’s effectiveness to facilitate cross-border identification and voting by shareholders. Even the very definition of a ‘shareholder’ is not consistent across the EU (with some Member States claiming it can mean a nominee account holder, rather than an end investor).
While an EU Directive such as SRD II requires implementation by Member States through their national laws, which may differ, an EU regulation applies across the entire Union. In that sense, a hypothetical ‘Shareholder Rights Regulation’ could have made for a more effective regime, but it may have faced political and implementation challenges that could have conflicted with the domestic securities laws of each EU country.
In light of social media making it easier for individuals to voice their concerns about a company’s operations, how does the industry need to change its approach to shareholder communications?
Derem: Social media and new platforms have played a significant role in giving retail investors a platform to express a view on companies in which they have invested, or plan to invest in.
In the first half of 2021, Broadridge observed the power of social media. The online forum Reddit helped drive a reaction from retail investors to engage and influence markets via their trading activities on stocks like Gamestop.
ESG themes have also been a global catalyst. The younger and more vocal generation of investors are ‘online savvy’ and their willingness to express their views publicly, inviting others to join the cause around matters such as diversity and sustainability, has never been so easy.
These market developments have influenced the way the industry, politicians and the public view the importance of social media.
Public relationship teams are slowly understanding that one tweet from the right person can have a significant impact upon their company’s reputation, sales and share price.
In response to this, companies are interested to understand who their investors — both institutional and retail — are and what they are thinking.
As a result, many have implemented programmes to proactively manage communications and mitigate any activist activity that could lead to potential issues.
Therefore, shareholder disclosure and engagement is fast becoming a critical activity for many.
Smalley: Accessibility is a big issue. The systems in use today were not designed for individuals. We need to think about engaging with this audience, giving them bespoke tools designed just for them, not built for institutions.
This involves thinking about how they consume the information, but more importantly, how they actively participate in a meaningful but not time-consuming or laborious way. Social media allows them to express an opinion.
The work Proxymity is doing with BlackRock — to build new solutions that are tailor-made for individual investors — is proof this change is already taking place.
Some members of the financial services industry are concerned about a lack of clarity regarding the roles of each participant in the chain. How can this be resolved, and the directive harmonised across countries?
Smalley: Antiquated processes at national levels need to be examined carefully. If they add value or security to the process, then great. If they only exist through habit or tradition, they need to be abolished or redesigned for the digital age. This will simplify the ecosystem for everyone and drive efficiency, creating a better process.
We saw what could be achieved through necessity during the COVID-19 pandemic with new solutions. New processes were established almost overnight. It represents a missed opportunity that some of these processes around such factors as mandatory physical representation and paper powers of attorneys have slipped back in a number of European markets.
Derem: In the midst of the COVID-19 pandemic, it is fair to say that the EU and local regulators needed to strike the balance between forcing SRD II through the door and not being too heavy-handed with policing compliance. Two years on, reviewing what worked and what didn’t is a useful exercise to undertake.
Providing clarity around the roles and responsibilities of each intermediary is essential to achieve market harmonisation and interoperability. Relevant industry bodies, such as the Association for Financial Markets in Europe, have helped regulators understand implementation issues that exist. They give an insight into the impact they are having on real and meaningful progress.
What technology changes need to come about for SRD II to be truly successful?
Derem: The primary technology changes that are required to make SRD more successful relate to electronic machine-readable transmissions between intermediaries, in ISO or methodology compatible with ISO, which would allow for interoperability and straight-through processing.
In response to the new regulation, the SMPG recommended the adoption of the MX ISO 20022 message format, as it was a clearly defined standard that complied with all aspects of the implementing directive and was designed with all specific aspects of proxy voting in mind. Despite the requirements, there remains much latency within the industry. There are a number of intermediaries who are still dependent upon legacy channels of communication to relay SRD II common data points. These legacy communication methods lack the capability to include many SRD II details in standard machine-readable fields, without enhanced manual intervention models.
Smalley: None. The technology and solutions to solve all the problems of the directive already exist. The challenge is the willingness to act. The pace of adoption has been slow, but it is ramping up. Now is the time for those across the ecosystem — issuers, agents, banks and brokers — to make up their minds and commit. The risks of non-adoption are not limited to regulatory compliance, but range from increased operational cost to poor customer experience.
Do you think that a potential SRD III will improve the situation, or does the industry need to take a new approach?
Smalley: I’ve said previously that no one should be waiting around for SRD III for change. It will take years, based upon the timings for the prequel directives.
While others disagree, I think looking and waiting for SRD III to improve the situation suits those not wanting change and those with something to lose. However, the case for immediate change is clear.
With an ever-increasing ESG focus, especially on climate change, there is a strong appetite from individuals to engage with and have an impact on the process. Those waiting around for SRD III, or betting on nothing happening without it, will regret it.
Hotaling: A possible SRD III should benefit the marketplace, for two reasons. First, it would build upon SRD II, a regime underpinned by a rationale that continues to make sense, perhaps even more now than previously. SRD II was meant to address concerns about ‘short-termism’ in shareholder behaviour — concerns not only expressed by the EU, but also reflected in various debates and national legislation in some of its Member States and other countries. Those concerns have not gone away, and you could argue they have increased with the prevalence of ESG investing (as SRD II addresses the ‘governance’ in ESG). So in that context, a possible SRD III is set up for relevancy and value as a piece of legislation.
Second, the problems with SRD II are clear, and are being heard by EU authorities. Many shareholders remain unidentified, and can’t get the information they need about the issuer. Intermediaries remain hampered by technical challenges surrounding automation and rapid transmission of information.
SRD II transpositions into national laws have hampered its practical application across custody chains, from the issuer to the end investor. In October, the European Securities and Markets Authority’s (ESMA’s) ‘Call for Evidence’ solicited industry input on this matter, and should generate important feedback for the European Commission, and ultimately the European Parliament and Council, to consider at a legislative level.
Derem:We believe the principal objectives and spirit of SRD II remain very relevant and on point with current market sentiment. The challenge around local market implementation remains. Directives are not law; they are a series of requirements. How a Member State meets those requirements is really up to its discretion, and this is where the level playing field goes out the window. For a global market participant, this is where all the problems begin. Therefore, if we are looking for a meaningful change in approach, perhaps we should be talking about moving away from a directive to something more precise.
What are you hoping will result from ESMA’s SRD II ‘Call for Evidence?’
Hotaling: ESMA’s ‘Call for Evidence’ will hopefully represent an important step in the EU’s goal of facilitating shareholder engagement. Achieving this goal successfully will mean leveraging technology efficiently to provide shareholders with the information they need. In other words: harnessing data efficiently and transforming it into meaningful knowledge. At Confluence, the importance of that transformation is clear to our investment management clients, who we help comply with a number of EU frameworks as well as national requirements. The more variation they must contend with to satisfy their informational needs and obligations as shareholders, the more taxing these operations will become for them. To the extent SRD II may have missed the mark in this respect, it’s vital that ESMA, through its ‘Call for Evidence’, properly considers the industry’s views on how to fix it.
Smalley: I hope it highlights how many participants and markets have yet to truly adapt to the directive. I also hope that it becomes clear that something like post-meeting vote confirmation still has poor coverage, and that intermediaries and certain providers are still reliant on exchanging confidential shareholder data via email, spreadsheet or other outdated modes of communication. By highlighting these factors, I hope it further creates the business and industry case for adoption of the technologies which can truly solve the problems that many end users experience with the current ecosystem.
Derem: We expect that the ESMA ‘Call for Evidence’ will identify the key challenges that have negatively impacted the consistent adoption and implementation of SRD II. These challenges have been documented in detail in our whitepaper, entitled ‘SRD II and Beyond,’ released in October 2022. Due to its wide client base, and links with local infrastructure providers, Broadridge holds a unique position in the market in respect to understanding the challenges of intermediaries in the issuer investor value chain. As such, we have shared our observations and conclusions with ESMA and continue to work with them and key industry bodies to ensure that interoperability and market harmonisation are achieved.
General manager international investor communication solutions
Broadridge
Jonathan Smalley
Chief operations officer and co-founder
Proxymity
Greg Hotaling
Regulatory content manager, compliance solutions strategies
Confluence
Do you think that shareholder rights should be classified as a regulation, rather than a directive?
Jonathan Smalley: I don’t think this will move the dial, especially when you consider an implementing regulation was issued by the European Commission alongside the Level 1 text. Do I think the participants in the ecosystem should take the directive and the implementing regulation more seriously? Yes. There are still multiple factors of the directive that are intended to benefit the ecosystem and lead to a more efficient, engaged and transparent process which are not being adhered to. It’s time for stronger commitment from everyone. The technology exists to solve many of these problems and it should be leveraged.
Demi Derem: The short answer is yes. As a directive, Shareholder Rights Directive II (SRD II) had to be transposed into local law by all the various national authorities across Europe — a process that involved local market interpretation, which ultimately led to divergences in the transposition. For example: the definition of a shareholder, disclosure thresholds for shareholder identification, regulatory reporting requirements and non-compliance penalties.
This divergence, combined with significant latency in the transposition process and pre-existing, national-level differences in corporate law — impacting shareholder entitlements and shareholder rights — has resulted in considerable challenges and delays in market adoption. This has negatively impacted the principles and objectives that SRD II aimed to achieve.
Broadridge has been proactive in pushing for harmonisation and the adoption of Securities Market Practice Group (SMPG) standards as, like many others, we recognise the efficiencies it will bring to the industry. To drive the interoperability agenda, we have shared our analysis detailing the challenges to market adoption with appropriate industry bodies.
We have also provided our market analysis to the European Securities and Markets Authority (ESMA) as part of the recent ‘Call for Evidence’, which is the initial stage of the scheduled SRD II post-implementation review. From our vantage point, to remediate the current issues the next phase of legislation in this space will need to be introduced as a regulation.
Greg Hotaling: There have been concerns about the lack of SRD II’s effectiveness to facilitate cross-border identification and voting by shareholders. Even the very definition of a ‘shareholder’ is not consistent across the EU (with some Member States claiming it can mean a nominee account holder, rather than an end investor).
While an EU Directive such as SRD II requires implementation by Member States through their national laws, which may differ, an EU regulation applies across the entire Union. In that sense, a hypothetical ‘Shareholder Rights Regulation’ could have made for a more effective regime, but it may have faced political and implementation challenges that could have conflicted with the domestic securities laws of each EU country.
In light of social media making it easier for individuals to voice their concerns about a company’s operations, how does the industry need to change its approach to shareholder communications?
Derem: Social media and new platforms have played a significant role in giving retail investors a platform to express a view on companies in which they have invested, or plan to invest in.
In the first half of 2021, Broadridge observed the power of social media. The online forum Reddit helped drive a reaction from retail investors to engage and influence markets via their trading activities on stocks like Gamestop.
ESG themes have also been a global catalyst. The younger and more vocal generation of investors are ‘online savvy’ and their willingness to express their views publicly, inviting others to join the cause around matters such as diversity and sustainability, has never been so easy.
These market developments have influenced the way the industry, politicians and the public view the importance of social media.
Public relationship teams are slowly understanding that one tweet from the right person can have a significant impact upon their company’s reputation, sales and share price.
In response to this, companies are interested to understand who their investors — both institutional and retail — are and what they are thinking.
As a result, many have implemented programmes to proactively manage communications and mitigate any activist activity that could lead to potential issues.
Therefore, shareholder disclosure and engagement is fast becoming a critical activity for many.
Smalley: Accessibility is a big issue. The systems in use today were not designed for individuals. We need to think about engaging with this audience, giving them bespoke tools designed just for them, not built for institutions.
This involves thinking about how they consume the information, but more importantly, how they actively participate in a meaningful but not time-consuming or laborious way. Social media allows them to express an opinion.
The work Proxymity is doing with BlackRock — to build new solutions that are tailor-made for individual investors — is proof this change is already taking place.
Some members of the financial services industry are concerned about a lack of clarity regarding the roles of each participant in the chain. How can this be resolved, and the directive harmonised across countries?
Smalley: Antiquated processes at national levels need to be examined carefully. If they add value or security to the process, then great. If they only exist through habit or tradition, they need to be abolished or redesigned for the digital age. This will simplify the ecosystem for everyone and drive efficiency, creating a better process.
We saw what could be achieved through necessity during the COVID-19 pandemic with new solutions. New processes were established almost overnight. It represents a missed opportunity that some of these processes around such factors as mandatory physical representation and paper powers of attorneys have slipped back in a number of European markets.
Derem: In the midst of the COVID-19 pandemic, it is fair to say that the EU and local regulators needed to strike the balance between forcing SRD II through the door and not being too heavy-handed with policing compliance. Two years on, reviewing what worked and what didn’t is a useful exercise to undertake.
Providing clarity around the roles and responsibilities of each intermediary is essential to achieve market harmonisation and interoperability. Relevant industry bodies, such as the Association for Financial Markets in Europe, have helped regulators understand implementation issues that exist. They give an insight into the impact they are having on real and meaningful progress.
What technology changes need to come about for SRD II to be truly successful?
Derem: The primary technology changes that are required to make SRD more successful relate to electronic machine-readable transmissions between intermediaries, in ISO or methodology compatible with ISO, which would allow for interoperability and straight-through processing.
In response to the new regulation, the SMPG recommended the adoption of the MX ISO 20022 message format, as it was a clearly defined standard that complied with all aspects of the implementing directive and was designed with all specific aspects of proxy voting in mind. Despite the requirements, there remains much latency within the industry. There are a number of intermediaries who are still dependent upon legacy channels of communication to relay SRD II common data points. These legacy communication methods lack the capability to include many SRD II details in standard machine-readable fields, without enhanced manual intervention models.
Smalley: None. The technology and solutions to solve all the problems of the directive already exist. The challenge is the willingness to act. The pace of adoption has been slow, but it is ramping up. Now is the time for those across the ecosystem — issuers, agents, banks and brokers — to make up their minds and commit. The risks of non-adoption are not limited to regulatory compliance, but range from increased operational cost to poor customer experience.
Do you think that a potential SRD III will improve the situation, or does the industry need to take a new approach?
Smalley: I’ve said previously that no one should be waiting around for SRD III for change. It will take years, based upon the timings for the prequel directives.
While others disagree, I think looking and waiting for SRD III to improve the situation suits those not wanting change and those with something to lose. However, the case for immediate change is clear.
With an ever-increasing ESG focus, especially on climate change, there is a strong appetite from individuals to engage with and have an impact on the process. Those waiting around for SRD III, or betting on nothing happening without it, will regret it.
Hotaling: A possible SRD III should benefit the marketplace, for two reasons. First, it would build upon SRD II, a regime underpinned by a rationale that continues to make sense, perhaps even more now than previously. SRD II was meant to address concerns about ‘short-termism’ in shareholder behaviour — concerns not only expressed by the EU, but also reflected in various debates and national legislation in some of its Member States and other countries. Those concerns have not gone away, and you could argue they have increased with the prevalence of ESG investing (as SRD II addresses the ‘governance’ in ESG). So in that context, a possible SRD III is set up for relevancy and value as a piece of legislation.
Second, the problems with SRD II are clear, and are being heard by EU authorities. Many shareholders remain unidentified, and can’t get the information they need about the issuer. Intermediaries remain hampered by technical challenges surrounding automation and rapid transmission of information.
SRD II transpositions into national laws have hampered its practical application across custody chains, from the issuer to the end investor. In October, the European Securities and Markets Authority’s (ESMA’s) ‘Call for Evidence’ solicited industry input on this matter, and should generate important feedback for the European Commission, and ultimately the European Parliament and Council, to consider at a legislative level.
Derem:We believe the principal objectives and spirit of SRD II remain very relevant and on point with current market sentiment. The challenge around local market implementation remains. Directives are not law; they are a series of requirements. How a Member State meets those requirements is really up to its discretion, and this is where the level playing field goes out the window. For a global market participant, this is where all the problems begin. Therefore, if we are looking for a meaningful change in approach, perhaps we should be talking about moving away from a directive to something more precise.
What are you hoping will result from ESMA’s SRD II ‘Call for Evidence?’
Hotaling: ESMA’s ‘Call for Evidence’ will hopefully represent an important step in the EU’s goal of facilitating shareholder engagement. Achieving this goal successfully will mean leveraging technology efficiently to provide shareholders with the information they need. In other words: harnessing data efficiently and transforming it into meaningful knowledge. At Confluence, the importance of that transformation is clear to our investment management clients, who we help comply with a number of EU frameworks as well as national requirements. The more variation they must contend with to satisfy their informational needs and obligations as shareholders, the more taxing these operations will become for them. To the extent SRD II may have missed the mark in this respect, it’s vital that ESMA, through its ‘Call for Evidence’, properly considers the industry’s views on how to fix it.
Smalley: I hope it highlights how many participants and markets have yet to truly adapt to the directive. I also hope that it becomes clear that something like post-meeting vote confirmation still has poor coverage, and that intermediaries and certain providers are still reliant on exchanging confidential shareholder data via email, spreadsheet or other outdated modes of communication. By highlighting these factors, I hope it further creates the business and industry case for adoption of the technologies which can truly solve the problems that many end users experience with the current ecosystem.
Derem: We expect that the ESMA ‘Call for Evidence’ will identify the key challenges that have negatively impacted the consistent adoption and implementation of SRD II. These challenges have been documented in detail in our whitepaper, entitled ‘SRD II and Beyond,’ released in October 2022. Due to its wide client base, and links with local infrastructure providers, Broadridge holds a unique position in the market in respect to understanding the challenges of intermediaries in the issuer investor value chain. As such, we have shared our observations and conclusions with ESMA and continue to work with them and key industry bodies to ensure that interoperability and market harmonisation are achieved.
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