The European Commission’s department of justice has surprised no one by rejecting calls for a 12-month delay to the Shareholders Rights Directive II Act (SRD II) proposed in a letter to the commission by 11 trade associations in April.
SRD II will require asset managers to disclose their policy on securities lending to institutional investors and how it is applied to fulfil its engagement activities, particularly at the time of the general meeting of the investee company.
Among SRD II’s primary aims is to crack down on the misuse of voting rights, which have in the past been abused in several ways including via the borrowing of shares ahead of key corporate action dates to influence a company’s voting results.
In their April letter, the trade bodies’, including the International Securities Lending Association and the Association for Financial Markets in Europe, outlined that prior concerns around their members’ ability to meet the September deadline have been compounded by the widespread disruption caused by the COVID-19 pandemic.
Consequently, they argued it will be “difficult, or nearly impossible, to meet the implementation deadline of 3 September”.
In its responding letter, seen by SLT, the commission stressed that one of the main objectives of the directive is to improve the communication flow between companies and shareholders and that in this lockdown-period it is becoming even more important for shareholders to be able to efficiently communicate electronically and participate in voting remotely at general meetings.
Moreover, the commission outlined that industry stakeholders have had several years to prepare for this deadline and therefore, the disruption seen in the early months of the year should not have been a major factor in being ready for September.
With these factors in mind, the commission used its reply letter to acknowledge the “challenging times” facing market participants but expressed faith that they would be able to achieve compliance in time for the original 3 Septemeber deadline “synchronously throughout the EU and the European Economic Area”.
Line Vesth, a senior regulatory specialist at Nykredit, a Danish financial services provider, tells SLT that among industry participants, the European Commission was not expected to allow the 12-month delay.
“We are struggling to meet our deadlines as it is, with the regulatory tsunami hitting us all this year, and with the added workload and fine-tuning of systems, it will be a tight squeeze to get ready for 3 September. But as ever, we will just have to find a way,” she says.
SRD II poses different legal challenges to other rules frameworks due to impact the securities finance market this year by virtue of being a directive amendment and not a regulation.
Primarily, this means it must be transposed into national law for each EU member, preferably in a way that creates harmonised shareholders’ rights across the EU, which is practically impossible, seeing as different member states have different interpretations of the directive.
Currently, the financial industry does not have guidelines from the EU authorities and are being left to their own devices to come up with harmonised and standardised practices such as general meetings and corporate actions messages, shareholder identification, as well as interpreting the many legal definitions of ‘end beneficiaries’ and ‘legal entitlements’, among others.
Most national regulators have already incorporated the SRD II into national law, but many industry stakeholders still have a mountain to climb to get the legal and technical work done in time for September’s deadline.
Elsewhere, the commission has been reluctant to cede ground on its regulatory implementation timetable and has only done so when faced with the rampant business disruption seen in Q1 when the novel coronavirus was first spreading across the continent. Even then, as with the Securities Financing Transactions Regulation, it only offered the shortest grace period possible.
The request for a further delay of Central Securities Depositories Regulation was also rejected.