The Shareholder Rights Directive II (SRD II) is a European Union (EU) regulation intended to strengthen the position of shareholders, reduce short termism, and curb excessive risk-taking with companies traded on EU regulated markets.
In the next entry in our Q&A Blog Series in which we explore how the investment industry can navigate the digital world, Laura Franconi, Mediant’s Director of Global Services, provides a progress update on SRD II, which went live in September 2020.
Q: How are EU states doing on implementing SRD II?
Laura: Twenty-two member states have completed their transposition, with a remaining nine still in process, including European Economic Area (EEA) states. The number of countries still in process has not changed since the directive went live last September. So I would say, we aren’t seeing a lot of progress from the remaining group.
Q: How do definitions of a shareholder differ between EU states?
Laura: The shareholder can be defined at the nominee level, the broker level, or even in some cases, the custodial level. Ultimately, it’s up to the intermediary to know how each member state defines the shareholder.
Q: What was the impact on SRD II from the United Kingdom (UK) leaving the EU (Brexit)?
Laura: From a shareholder disclosure perspective, the impact was minimal. The authorities of each member state have different definitions of a shareholder. In the UK, the shareholder is defined at the nominee level, which means there was never a need to disclose the underlying retail holders in that market. This left only meeting notifications and vote capture to be covered by SRD II. The UK interpreted the obligation as UK companies must give notice of general meetings to the shareholders registered in the issuer’s register of members, which in most cases is the custodian. So, there is no requirement to notify the end beneficial holder of UK general meetings and support vote capture unless noted in client contracts.
Q: What's your prediction for better consistency on shareholder definitions?
Laura: I think the industry is aware of the problems. Conversations have been going on about having a regroup with the European Commission in 2022 or 2023 to reevaluate, possibly leading to an SRD III. The nature of SRD II being a directive vs. a regulation is what has allowed the various interpretations of SRD II across member states. It seems that to mitigate this, having the next iteration come out as a directive may help streamline the requirements across Europe.
Q: You mentioned ISO 20022, a standard for communicating shareholder disclosures. How widely is the adoption of this standard?
Laura: The adoption is progressing slowly. Some countries still haven't implemented it at the CSD level and large intermediaries haven’t implemented it. This means more manual work for the next chain in the intermediary to digest both the old SWIFT messaging, ISO15022, and the new messaging, ISO20022, and, in some cases, email requests and XML response files for disclosure requests.
Q: What is in scope for American depository receipt (ADR) and depository trust company (DTC) positions in SRD II?
Laura: For ADRs, there's still an open question on whether they're in scope. If they are, it will require ADR holder information to be disclosed. Presently, it’s handled at the depository level, so it would be more complex if a country was to require information at the shareholder level. However, that is not unheard of—for example, Russian ADRs typically require underlying shareholder details to be disclosed.
For DTC, it has been confirmed that European Ordinary Shares held through DTC are in scope for SRD II, so there is work to be done around passing on disclosure requests for those holders as well.
Q: To what extent do you think SRD II is achieving its goals?
Laura: I believe SRD II has helped to ensure shareholders are more informed on general meetings in Europe; however, one of the key goals of the regulation is shareholder disclosure, when brokers are requested to provide issuers with shareholder details. There is still a lack of clarity about how to get the information to an issuer since only some have adopted ISO20022, exactly what information to send due to member states’ differing regulations, and who pays for it. The intention is there, and SRD II is the start to creating a structure, but work to enact and enforce it is not complete.
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