Best Practice for Tackling Shareholder Disclosure Rules

As regulators seek ways to protect domestic assets during this economic downturn, experts from Deloitte, BlackRock and AxiomSL outlined common-sense advice on how to handle rapid regulatory change.

If you’ve been working in the area of disclosure compliance in the last six months, you’ve undoubtedly been earning your pay. The slew of protectionist regulations emerging in Asia has caught many compliance departments by surprise.

Governments have sought to protect their markets from predatory investors looking to capitalise on uncertainty, amid forecasts of huge dips in economic activity, and stock market volatility remains part of daily life as the fear of a second wave of Covid-19 looms.

In Australia, the government recently tightened its foreign investment rules for such reasons, while India introduced a pre-approval requirement for all foreign investment from seven countries it shares a land border with, and just recently laid out even stricter guidelines for China and Hong Kong.

There has also been a notable shift towards greater oversight of investment activity in general. In more than 90 jurisdictions, relevant institutions are required to make more onerous disclosures when they accumulate a substantial shareholding in issuer or security, invest in a sensitive industry, become involved in a takeover bid, or engage in short selling.

The penalties for failing to comply are not insignificant. Beyond financial penalties, non-compliance with disclosure requirements can lead to reputational and legal risks, financial constraints and other regulatory actions, even criminal consequences in some cases. As reported in May, until markets return to normal, continue to expect to see a greater regulatory emphasis on foreign investment activity and disclosure requirements.

Up to speed

In a recent Regulation Asia webinar focused on operational best practice for compliance with shareholder disclosure rules, a panel of experts outlined some of the major challenges the industry faces when it comes to managing multi-jurisdictional disclosure requirements and, more importantly, how to overcome them.

One consistent theme that was raised in the panel discussion was around the ability to rapidly respond to the high volume of regulatory updates emerging in response to worsening economic conditions and the increased threat of overseas corporate raiders.

“One of the big challenges is simply being able to keep track of all of the rule changes to keep the reporting systems aligned with new requirements as they change,” said Gaurav Chandra, a product manager at AxiomSL. “We have a team of regulatory analysts globally who ensure that we are always up to date with the countless regulations.”

In BlackRock’s case, the asset manager “constantly” scrapes for publicly available information to ensure it is abreast of pertinent developments or amendments to the reporting requirements or investment limits. This occurs in each of the jurisdictions where the firm has a presence or invests.

“We have recourse to sources of legal information, which are available online from well-known law firms,” said Maureen Gleeson, a director of legal and compliance at BlackRock. “We also take advice from external counsel to complement that… and we also participate in all the relevant industry bodies, like ASIFMA, as well as the local trade associations. We then dissect all that information and advice and we convey it to the operations team in a very structured manner.”

But legal interpretation can be more art than science; there are always grey areas – where a rule change or announcement simply isn’t clear, or where a definition changes from jurisdiction to jurisdiction, for example. Although it is important to gain clarity, it might not always be possible to do so in a short period of time.

In which case, the panel highlighted the importance of taking a conservative approach to implementing regulatory changes. If, for example, you’re unsure how much exposure to a listed company could push you over a regulatory limit, then set your calculations in such a way that you know well in advance of reaching that particular threshold.

“When you come close to it then you have to look at it again more carefully, sometimes refine the analysis further, have some regulatory engagement, and hopefully obtain some clarification,” said Gleeson.

Aggregation vs disaggregation

On the theme of aggregation and disaggregation of shareholder positions, AxiomSL’s Chandra said he typically sees clients take two distinct approaches, which are largely dependent on how firms wish to establish a consistent monitoring process across multiple jurisdictions.

If the rules allow, some will keep their exposures disaggregated at the entity level, and then monitor and report their positions to regulators on their own behalf. Others will monitor at the entity level, but roll up the data for aggregation at the group level – where the reporting processes are then performed.

“This is one of our biggest challenges right off the bat,” remarks Taylor Munson, Head of APAC Disclosures at BlackRock, who says positions are typically aggregated up to the BlackRock, Inc. level for reporting. A key ingredient of this is to ensure the critical data is input into BlackRock’s systems early on – including information on who has investment discretion or voting authority, for example. This information drives, in reporting terms, what’s included in the aggregation process.

“We have a robust system of controls in place to make sure that we get that right,” said Munson. “There are exceptions where positions are not aggregated at the BlackRock, Inc. level; it could be at the investment manager level, meaning at each investment management entity within the BlackRock group; or it could be at the legal owner or beneficial owner level, for example. So, again, the data needs to be accurate in that regard.”

On a broader operational level, and as a final note, the panellists note that there are a host of ways to ensure firms are reporting correctly and are not in breach of local laws. Methods vary, but according to Wilson Cheung, a director for conduct and regulations at Deloitte, sometimes it’s just best to work with third-party experts and pay the fees.

“In my experience I’ve utilised, international firms who have either a home office in the relevant jurisdictions, or they have a strong affinity across the globe. So, in case you need an immediate answer, you’re able to get that in a timely manner. There really is no shortcut sometimes – otherwise, you may get it wrong.”

Don’t be too downbeat, though. As much as there is a broad expectation that governments will continue to seek ways to protect domestic business from what they perceive as attacks, it is equally possible they will find ways to encourage outside investment – something, at least, an asset manager’s front office will be pleased to hear.

“Foreign investment will be welcome in the long run,” said Cheung. “I’m confident of that.”

To learn more about managing multi-jurisdictional shareholder disclosure requirements, access the webinar on-demand here.


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