Though a European regulation, SRD II will directly impact Asian intermediaries and hundreds of billions of euros in assets held by APAC investors, says Demi Derem at Broadridge.
While much of the financial world remains distracted by the events of Brexit, trade disputes and interest rate policies, the European Union (EU) reached its first deadline for member states to implement components of Shareholder Rights Directive II (SRD II) into national laws on 10 June.
How much does this matter for financial intermediaries based in APAC? Far more than most might think. SRD II has been driven by global regulatory bodies strengthening standards for corporate governance and investor transparency. By the time it is fully implemented in September 2020, there is significant potential for assets involving hundreds of billions of euros held by APAC-based investors, or via Asian intermediaries, to be directly impacted by this globally-relevant regulation.
While SRD II is seemingly a continent away, the European Commission found in March 2019 that between 2007 and 2017 investors across China, Hong Kong and Macao have come to control 1.6% (over EUR 280 billion) of EU company assets. An even larger increase has been seen in the same period between Australia and New Zealand, where investors now control 3% (over half a trillion) of all EU company assets. This comes on top of the already significant holdings that the European Commission has determined are held by investors across other Asian jurisdictions.
The countdown has thus begun for APAC intermediaries and asset owners who either serve EU shareholders or hold shares in EU equities to know exactly how the world of shareholder rights is set to change from September 2020.
SRD II & the APAC financial community
Among the diverse segments of the regional financial industry, there will be two core groups within the APAC financial community that will be most affected, namely: intermediaries and asset owners. Consisting of a diverse range of securities services providers, intermediaries are comprised of global and regional sell-side brokers, agent banks, central security depositories (CSDs), custodian and commercial banks, retail stockbrokers and other wealth service providers.
SRD II will introduce three critical regulatory concepts around shareholder communications, some or all of which may be new to APAC firms and investors:
1) Shareholder identification: EU-based issuers will be entitled to obtain the identity of their shareholders, requiring APAC intermediaries holding shares in them to provide shareholder disclosure within 24 hours of receiving a disclosure request. This means new processes not only to collect investor information but also to transmit the data to issuers and issuer agents – in many cases through a chain of other intermediaries – “without delay”.
2) Agenda distribution and voting: APAC intermediaries must support the distribution of meeting agendas within stricter timeframes, reconcile votes on a daily basis, and process votes “without delay”, or face penalties. To facilitate the shareholder voting process, intermediaries will need to comply with the definitions, standardised communication formats, minimum data requirements and deadlines.
3) Vote confirmation: While the core responsibility for vote confirmation lies with the issuer, APAC intermediaries will need to support all aspects of vote confirmation throughout the chain, including timely electronic confirmation of receipt and dissemination of post-meeting recording and counting of votes. Shareholder votes will need to be transmitted to issuer or issuer agents “without delay” in machine-readable standards.
Key focus for APAC intermediaries – shareholder rights
SRD II’s impact in these areas will be felt in many quarters, and especially by intermediaries – the providers of securities services – who must respond to significant new requirements on how data and information are passed along the investor communications chain.
Some firms, such as the leading global custodians and CSDs, already have a strong track-record for service provision throughout the proxy lifecycle, but some will face a requirement to enhance and extend their existing operating model to achieve SRD II compliance.
Under the directive, all intermediaries – irrespective of their role in the chain – are required to facilitate shareholder rights. It also mandates the provision of proxy voting and related services. To achieve this, the fundamental requirement to introduce an electronic proxy voting service will be an increasingly urgent need for such APAC intermediaries.
Key focus for APAC asset owners – shareholder voting & identification
On the upside for many investors across Asia holding European assets, SRD II has created the potential for this group of shareholders to be much more involved in corporate governance and proxy affairs in EU markets than ever before.
At the same time, European-listed companies will have the ability to now identify its APAC shareholder base.
One directive, 28 interpretations
The biggest challenge for APAC-based members of the financial community in ensuring compliance with SRD II will likely be a fragmented implementation landscape across Europe. The European Commission has left it to each country to determine their own individual best practices and policies as SRD II is adopted into national law.
This additional complexity is encouraging those with exposure to the different European markets to partner with an investor communications specialist with extensive experience across Europe to ensure compliance.
Time to act in APAC
With a runway of just over a year until full SRD II adoption across the EU, now is the time for impacted APAC intermediaries to clearly understand how they are affected and how they can become compliant.
New requirements, including significantly more stringent processing deadlines and new processes such as shareholder disclosure, must be factored into securities servicing product development plans.
Demi Derem is General Manager, Investor Communication Solutions International, Broadridge Financial Solutions.