It’s been five years since the European Council adopted the Shareholder Rights Directive II (SRD II), which aimed to enhance the investor experience by increasing transparency, improve shareholder engagement, streamline shareholder communications, and strengthen corporate governance across Europe.
While the directive has been sweeping in scope, details about implementation have been minimal, which has led to problems since it was enacted in September 2020.
Those problems took center stage at the Association for Financial Markets in Europe’s Operations, Post-Trade, Technology & Innovation Conference (OPTIC), recently held in London. During a session called “Using Technology to Connect Issuers and Investors,” panelists highlighted three key issues the directive has created and explored what needs to be done to make things fairer for retail investors and brokers.
1. A lack of compliance
One key shortcoming of the directive is the lack of compliance the industry has seen across intermediaries, custodians and issuers, many of which have taken inconsistent approaches to the way they’ve adopted SRD II.
To unlock the full promise of the directive, intermediaries need to interpret and implement the new guidelines with much greater consistency.
2. Inconsistent definitions
Since European countries have yet to adopt a consistent definition of the word “shareholder,” it’s been much more difficult to support cross-border voting or implement a shared general meeting process.
As it stands today, each member state can define “end shareholder” however they’d like — at the retail holder level or the nominee level. Even so, in cases where the end shareholder is defined as the nominee, custodians sometimes still require the disclosure details of the underlying retail shareholder.
Until definitions are unified across the continent, it will be that much harder to achieve the goals of the directive.
3. Disparity for retail investors
While institutional investors have seen more efficient shareholder communication under SRD II, retail investors are not enjoying a similar experience. In large part, this is because a lot of clean-up has yet to be done on processing and when custodians have not adopted ISO 20022, the standard for messaging, brokers must undertake a tedious manual process to send back votes.
What’s more, since print is not enforced with SRD II, the number of retail investors who stand to be notified of meetings, proxy votes and other events decreases. They might miss an important email, for example.
Finally, the directive does not define who is footing the bill for the distribution of materials. In the U.S., the Securities and Exchange Commission (SEC) requires issuers to pay to distribute materials and collect votes. Unfortunately, SRD II does not offer the same clarity for the now-required distribution of material to all retail investors. As a result, brokers end up paying for the process in many cases even though it’s beneficial to issuers.
While the industry is experiencing growing pains since SRD II went into effect, the directive is a step in the right direction. To resolve these issues, decision makers are likely going to come back together soon for a discussion that may lead to SRD III.
In the meantime, Mediant can take on the entire technological burden of SRD II. We have expertise in the EU marketplace as well as the regulations and how different member nations address compliance mandates, which can help brokers stay ahead of the regulatory curve.
For more information about the regulation, read our whitepaper.