Asset Managers and the Shareholders Rights Directive
The Shareholders Rights Directive 2017/828, which amends the Shareholders Rights Directive 2007/36, (collectively, the “SRD”) imposes a number of transparency obligations on asset managers that invest in shares traded on a regulated market on behalf of investors. In particular, an asset manager must: a) put in place a shareholder engagement policy and make disclosures relating to that policy; and b) make disclosures to an institutional investor with which it has entered into an investment arrangement relating to that arrangement. This briefing sets out a number of Q&A on the nature and extent of the transparency obligations set out in the SRD as they apply to asset managers.
What is the Shareholders Rights Directive?
The Shareholders Rights Directive 2007/36 established requirements in relation to the exercise of certain shareholder rights attached to voting shares in relation to general meetings of companies which have their registered office in a Member State and the shares of which are admitted to trading on a regulated market situated or operating within a Member State.
In 2017, the EU adopted the Shareholders Rights Directive 2017/828 which amends the Shareholders Rights Directive 2007/36 in several respects and which Member States were required to transpose into domestic law by 10 June 2019. We expect the Directive to be transposed into Irish law over the coming weeks.
Which asset managers are subject to obligations under the SRD?
The SRD defines the term “asset manager” to include MiFID firms providing portfolio management services, certain AIFMs (including non-EU AIFMs), UCITS ManCos and self-managed UCITS.
The SRD defines the term “institutional investor” to mean an undertaking carrying out certain activities of life assurance and reassurance and institutions for occupational retirement provisions.
What transparency obligations does the SRD impose on asset managers?
The SRD imposes a number of obligations on asset managers (and institutional investors). Specifically each inscope asset manager:
- must develop an engagement policy that describes how it integrates shareholder engagement in its investment strategy and publicly disclose both that policy and how it has implemented it - this requirement applies on a “comply or explain” basis.
- that invests on behalf of an institutional investor must disclose to the institutional investor details of the investment arrangement in place between it and the institutional investor.
These obligations apply to the asset manager to the extent that it invests in shares traded on a regulated market (as defined under the Markets in Financial Instruments Directive 2014/65) on behalf of investors. According to the UK’s Financial Conduct Authority (“FCA”), this includes at a minimum, any share that has a primary or secondary listing on an EEA market.
There is significant overlap between the transparency obligations imposed on funds and fund managers under the SRD and obligations applicable under the regulatory regimes governing UCITS and AIFs.
What must an engagement policy contain?
In its engagement policy, an asset manager must describe how it integrates shareholder engagement in its investment strategy, which different engagement activities it carries out and how it does so. Specifically, the asset manager must describe how it:
- monitors investee companies on relevant matters, including strategy, financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance;
- conducts dialogues with investee companies;
- exercises voting rights and other rights attached to shares;
- cooperates with other shareholders;
- communicates with relevant stakeholders of the investee companies; and
- manages actual and potential conflicts of interests in relation to their engagement – this should particularly cover situations in which the relevant asset manager/institutional investor or its affiliated undertakings have significant business relationships with the investee company.
What information must an asset manager disclose regarding the implementation of its engagement policy?
An asset manager (and institutional investor) must, on an annual basis, publicly disclose information about how it implements its engagement policy and, in particular, how it has exercised its voting rights. More specifically, an asset manager’s disclosure about the implementation of its engagement policy and the exercise of its voting rights, should:
- include a general description of voting behaviour, an explanation of the most significant votes and the use of the services of proxy advisors; and
- show how it casts votes in the general meetings of companies in which it holds shares.
When disclosing voting information, an asset manager may exclude votes that are insignificant due to the subject matter of the vote or the size of the holding in the company. Such insignificant votes may include votes cast on purely procedural matters or votes cast in companies where the investor has a very minor stake compared to the investor’s holdings in other investee companies. According to recital 18, investors should set their own criteria regarding which votes are insignificant on the basis of the subject matter of the vote or the size of the holding in the company, and apply them consistently.
What must an asset manager do to disclose its engagement policy and how it has implemented that policy?
An asset manager must make information about its engagement policy and the implementation of that policy available on its website, free of charge.
Does every inscope asset manager need to put in place an engagement policy and disclose information about how it has implemented that policy?
No. Each of these requirements applies on a “comply or explain” basis, meaning that if an asset manager does not comply with one or more of these requirements, it must give a clear and reasoned explanation as to why this is the case. However, the SRD does not provide guidance on what could constitute a reasoned explanation for determining not to adopt an engagement policy and this will need to be determined on a case-by-case basis.
According to advice published by the UK’s FCA, for an initial period, a firm can comply with the relevant rule by explaining what it is doing to develop an engagement policy. This may include, for example, simply explaining that it is developing one, or considering whether or not to have one.
What information must an asset manager disclose about its investment arrangements with an institutional investor?
Where an investment arrangement is in place between an asset manager and an institutional investor, the asset manager must disclose annually to the institutional investor how its investment strategy and implementation complies with that arrangement and contributes to the medium to long-term performance of the assets of the institutional investor or of the fund.
Such disclosure must include reporting on:
- the key material medium to long-term risks associated with the investments;
- portfolio composition, turnover and turnover costs;
- the use of proxy advisors for the purpose of engagement activities; and
- their policy on securities lending and how it is applied to fulfil its engagement activities if applicable, particularly at the time of the general meeting of the investee companies.
It must also include information on whether and, if so, how, the asset manager makes investment decisions based on evaluation of medium to long-term performance of the investee company, including non-financial performance, and on whether and, if so, which conflicts of interests have arisen in connection with engagement activities and how the asset managers have dealt with them.
Where this information is already publicly available, the asset manager is not required to provide it to the institutional investor directly.
What information must an institutional investor disclose about its investment strategy and its arrangements with asset managers?
An institutional investor must publicly disclose how the main elements of its equity investment strategy is consistent with the profile and the duration of its liability and how it contributes to the medium to long-term performance of its assets.
Where an asset manager invests on behalf of an institutional investor, whether on a discretionary basis or through a collective investment undertaking, the institutional investor must also disclose certain information regarding its arrangement with the asset manager. This is intended to contribute to a proper alignment of interests between the final beneficiaries of institutional investors, the asset managers and the investee companies and potentially to the development of longer-term investment strategies and longer-term relationships with investee companies involving shareholder engagement.
An institutional investor must make the above information available on its website free of charge and update it annually, unless there is no material change.
What should an asset manager do by way of next steps?
Fund managers will need to consider the overlap between the new requirements imposed by SRD and the existing conduct requirements imposed on fund managers pursuant to the UCITS and AIFMD regimes, in particular with regard to transparency, voting, conflicts, reporting and shareholder engagement.
More generally, to comply with the SRD, asset managers may need to:
- update their shareholder engagement policies.
- make any consequential changes to their shareholder engagement practices.
- make arrangements to collate and publish the information needed for annual reporting requirements.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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