The revised Directive 2007/36/EC (the Shareholder Rights Directive or SRD II) introduces new requirements on life insurers and asset managers to establish a policy in relation to shareholder engagement, and to make annual disclosures in relation to compliance with it.
What are asset managers required to do under the new rules?
FCA-authorised asset managers (including MiFID portfolio management firms, full-scope AIFMs, small AIFMs with portfolio management permissions and UCITS management companies) which invest in shares traded on EEA regulated markets or equivalent third country markets will need to develop and publicly disclose a policy on shareholder engagement with respect to the issuers of those shares, or explain why they have elected not to do so. This requirement builds on the existing rules on asset managers to explain the way in which they comply with the Financial Reporting Council’s (FRC) Stewardship Code (the Code) or their alternative strategies under COBS 2.2.3R.
Timeframe to implementation?
For asset managers the implementation of the SRD II requirements is through rules published by the UK Financial Conduct Authority (FCA). The FCA published the final rules on 31 May 2019.
The rules come into effect on 10 June 2019. The immediate consequence is that firms should have published their engagement policy by that date. However, the FCA have indicated that for an initial period after 10 June firms will be considered as complying with the relevant rules by simply explaining what they are doing to develop an SRD engagement policy. This could include, for example, explaining that this is on their agenda and that the firm is in the process of developing one, or that the firm is considering whether or not to have one. Many asset managers within scope of the new rules will already have an engagement policy and will already be aware of the FRC’s Code and it may be possible to add the necessary disclosure to existing materials.
Firms will also need to begin preparing to make annual disclosures for the first full period after the rules come into effect.
The FRC have also recently published a consultation proposing significant changes to the existing Code, which would set substantially higher expectations for investor stewardship policy and practice.
Firms covered by the FCA’s COBS rule 2.2.3 will be expected to become signatories to the revised Code and adhere to its principles and provisions. Pending feedback on the revisions to the Code, the FCA does not propose to change the rule that references the Code, but this may follow once the revisions of the Code are confirmed.