Shareholder Rights Directive II: SRDII

The Shareholder Rights Directive II (SRD II) is a set of measures aimed at improving transparency and shareholder engagement in occupational pension schemes and listed companies.

Key Points about SRD II

Purpose: SRD II aims to enhance transparency and stewardship of occupational pension schemes, allowing for better comparison between schemes.
Transparency: It requires occupational pension schemes to publish information about their shareholder engagement policy, investment strategy, and arrangements with asset managers.
Long-term Focus: Encourages investors to adopt a long-term focus in their investment strategies, considering social and environmental issues.
Shareholder Engagement: Promotes responsible behavior by companies due to greater shareholder involvement.
Implementation: Entities have until September 2020 to comply with the requirements of SRD II, including shareholder identification and transmission of information.

ISO 20022 Impact on SRD II:

Standardization: ISO 20022 introduces a standardized messaging format for financial transactions, which enhances transparency and efficiency in communication between issuers, intermediaries, and investors.
Improved Data Quality: The adoption of ISO 20022 ensures that data exchanged between entities is more accurate and consistent, reducing errors and improving the overall quality of information.
Enhanced Reporting: With standardized messages, reporting processes become more streamlined, allowing for better compliance with SRD II requirements.
Interoperability: ISO 20022 facilitates cross-border transactions and interoperability between different financial systems, making it easier for entities to comply with SRD II across the European Economic Area (EEA).

Deadlines and Changes Required for SRD II:

Shareholder Identification: Entities must identify shareholders and store their information, including full name, address, email address, legal entity identifier (LEI), volume of shares, ownership start date, and share category. This information must be stored for at least 12 months after the shareholder ceases to be one2.
Transmission of Information: Entities must transmit information enabling shareholders to exercise their rights, such as details about general meetings and voting processes.
Transparency Requirements: Issuers must be transparent about directors' remuneration, voting processes, and other relevant information.
Implementation Timeline: The SRD II directive came into effect in June 2017, with entities required to comply with the requirements by September 2020. This includes the implementation of shareholder identification, transmission of information, and voting processes2.
REf: https://www.swift.com/securities/srd-ii

Overview
SRD was introduced in 2007 to improve shareholder engagement and transparency, specifically in relation to the exercising of shareholder rights. Updates to SRD were initially proposed by the European Commission (EC) in 2014 and came into effect by mid-2017 adding requirements related to the identity of shareholders, transmission of information, remuneration of directors and increase of transparency for investors, asset managers and advisors. Entities have until September 2020 to come to grips with the requirements of SRD II.

Capital Markets Union
SRD II is a part of the Capital Markets Union (CMU), an initiative championed by the EC to regulate the financing of European infrastructure and further develop the capital markets across the 27 EU member states. SRD II strengthens the CMU’s mandate by fostering an increase in shareholder activity and clear and transparent communication between companies and their respective shareholders in regulated markets across the EU. SRD II is applicable to the EEA countries, meaning it applies to the 27 EU countries and Iceland, Liechtenstein, and Norway. Under SRD II, increased transparency refers to the identification of shareholding entities. This in turn leads to higher quality dialogue between shareholders and issuers. While SRD II promotes responsible behaviour by companies due to greater shareholder involvement, putting it into practise will have its pitfalls specifically when considering the implication on client data privacy.
Another consideration is the manner in which local regulators interpret SRD II. Tailoring the regulation on a national level would prove complex and costly, specifically for firms operating across markets. Given the intricacies of the catalogue of regulations involved with adhering to SRD II, meeting deadlines imposed ought to be a priority to entities. This is especially true for the aforementioned September 2020 deadline for the implementation of shareholder identification, transmission of information and voting. By keeping up with deadlines, entities will avoid becoming overwhelmed by this multi-tiered regulation.

Highlights of the new amendment:
1. Know your shareholder
  SRD II dictates shareholder information be stored for at least 12 months after a shareholder ceases to be one. Fields required include the shareholder’s full name, address, email address, legal entity identifier (LEI), volume of shares, ownership start date and share category.
  The purpose of this activity is to foster engagement between companies and their investors and to ensure all parties are communicating transparently.
2. Transparency for proxy advisors
  SRD II requires proxy advisors take on new obligations with regards to transparency. In addition to disclosing details about their procedures, methodology and sources of information, they also must annually report on their policies to prevent conflicts of interest and how they approach market discrepancies in regulation.
3. Transparency and reporting on the buy-side
  SRD II indicates asset managers must report annually on their shareholder engagement and investment strategy, making these details available on the buy-side firms’ websites. Voting behaviour must also be disclosed in addition to their use of proxy advisor services.
  Executive remuneration and related party transaction information must also be made available.
4. Public record of meeting announcements and voting
  Intermediaries will be required to share general meeting agendas and voting information with shareholders in a standardised format under SRD II. Clarity must be provided from the EC on format and how these counterparties are to divvy up the cost of this reporting, but ultimately it will lead to greater transparency across the capital markets.
5. Pricing and cost transparency
  Currently service providers bundle proxy and custody fees for clients. Under SRD II, “non-discriminatory and proportionate fees” will be emphasised and no fees for disclosure will be allowed. Intermediaries must therefore accept all compliance costs as opposed to passing them along to the client.
SRD II and beyond
SRD II has come into play to strengthen the rights of shareholders and reduce risk-taking across the capital markets. It also fosters companies’ ability to identify shareholders. Ultimately its objective is to improve corporate governance in companies with securities traded across regulated markets in the EU. To support the industry with directive compliance, the ISO 20022 Securities Standards Evaluation Group is endorsing the use of the new standard for shareholder identification and the maintenance of proxy voting.

Because SRD II an amendment on SRD, it will require transposition into each Member State’s national law. While this process may come with costs, the pay-off for shareholders and the wider capital markets community is evident.

Comply with the Shareholder Rights Directive II (SRD II)
In order to support these obligations in terms of transmission of information, Swift and the Securities Market Practice Group (SMPG) have worked together to provide to the financial industry various appropriate ISO messaging solutions covering all IR minimum requirements.

FINplus InterAct Service
In order to support these obligations in terms of information transmission, Swift and the Securities Market Practice Group (SMPG) have worked together to provide the industry with various ISO 20022 messaging solutions covering all minimum requirements around IR. The messages are available on the ISO website and on the Swift MyStandards platform.
They include the following:
- Updates to eight existing messages relating to General Meetings (formally known as Proxy Voting)
- Creation of five new messages relating to Shareholder Identification Disclosure
- Additional securities messages available from 21 November 2021. These include ISO 20022 Corporate Actions messages. More information is available in the Swift knowledge centre.
References
- GOV.UK Fact Sheet: Shareholder Rights Directive II Fact Sheet:
  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/858427/SRDII_fact_sheet.pdf
- Swift: SRD II Overview:
  https://www.swift.com/securities/srd-ii
- Tata Consultancy Services: ISO 20022 Standard: Impact and Benefits
  https://www.tcs.com/content/dam/global-tcs/en/pdfs/insights/whitepapers/ISO-20022-standard-impact-benefits.pdf
- Simmons & Simmons: Final SRD II Measures:
  https://www.simmons-simmons.com/en/publications/ckdh6g5cqagl20900z5jyuzfi/final-srd-ii-measures-what-do-uk-companies-need-to-do
- SRD II overview:
  https://www.simmons-simmons.com/en/publications/ck0agijsc6pvf0b94rrhhkh3w/260418-shareholder-rights-directive-ii-overview