The updated Shareholder Rights Directive (SRD II) has recently commemorated its first anniversary. Can you remind us of its rationale and core obligations for intermediaries?

The revised Shareholder Rights Directive (SRD II), in effect since September 2020, significantly impacts financial intermediaries who deal in European equities. It was introduced with a view to increasing transparency and accountability between issuers and their shareholders and encouraging investor participation in shareholder voting activities. The new compliance obligations have made the provision of proxy voting services a fundamental requirement for intermediaries, irrespective of whether they are focused on retail or institutional investors, or both. As a reminder, the core SRD II obligations in force for intermediaries – including banks, brokers, wealth managers and CSDs – are as follows:

• Intermediaries must transmit meeting information “without delay” between company and shareholder via the relevant intermediary chain.
• Intermediaries must facilitate the exercise of shareholder rights, including voting rights.
• Intermediaries must fulfil shareholder disclosure requests from issuers, enabling the issuing company to identify its shareholders.

How have the intermediaries managed the regulatory impact of SRD II?

Based on the complexity of the task at hand, and against the backdrop of a global pandemic, I believe the industry has done tremendously well so far to embrace SRD II.  There are however a number of post-implementation loose ends that need to be sorted out by the industry, many of which are a result of late local market transpositions, delayed solution implementations, and variances in interpretations and legal definitions – such as the definition of “Shareholder” which varies between nations. Based on our observations, a number of firms still remain out of compliance, and it is important that they firm up their plans and make tangible progress in order to prevent penalties or reputational issues.

Yet there have been many success stories, and since SRD II go-live I’m pleased to report that Broadridge has conducted 300 client implementations involving institutional and retail firms spanning Europe, North America and Asia Pacific, as well as local infrastructure providers. Through these implementations we have learnt, modified, and innovated our processes to cater for individual client and market needs, because one size does not fit all. In our business, success and credibility depends on flexibility, providing scale and complete coverage, and to this end we recently announced the significant expansion of our Direct Market Solutions – a complementary solution focused on sub custody managed services that provide local market “golden copy” event sourcing and vote execution services.

What are the obligations of firms outside the European Union? Are these “third country” intermediaries faced with added complexity?

The scope of the regulation is global, impacting any financial intermediary holding or servicing European equities, wherever it is located. One of the most challenging aspects for third country firms is that their local regulatory compliance requirements related to data privacy can conflict with those of SRD II. Third country regulators are unlikely to allow firms to report data that is under data privacy restrictions to EU issuers or national competent authorities. These firms could therefore fall foul of one regulator or the other through no fault of their own.

How does SRD II impact the retail investor, and just how significant is this?

SRD II required firms, for the first time, to offer retail investors a voice. This voice came via a requirement to offer retail investors an electronic voting platform. This is a big deal as in some member states certain retail banks and their client base hold significant positions in local issuers. If retail investors chose to do so, and social media can create unpredictable reactions these days, we may suddenly see an outcome of a meeting being turned by a large number of small investors all working together to drive a certain outcome at a meeting.

Looking more to the future, can you share your thoughts with our readers in terms of what lies ahead?

The upcoming European Commission review and next iteration of the directive will likely seek to close interpretation and legal definition differences between member states. After a period of time, we can expect to see national regulators address noncompliance within their jurisdictions. Wider retail investor engagement is an integral part of Europe’s future, and the European Commission’s Capital Markets Union (CMU) plan includes this. Environmental, social and governance (ESG) investing will also compel more activity from the retail investor community, and issues such as board diversity and sustainability are a driving force for further investor engagement in the form of shareholder voting on these topics.

Based on the continued overall focus on ESG-related themes driven by investors, governments and regulators, all participants should be planning for more change down the road.

This article was first published by Bobsguide in October 2021.