The European Parliament adopted amendments to the European Commission’s proposal to revise the Shareholders’ Rights Directive. While new measures to be introduced in the revised Directive are aimed at encouraging long-term investment and shareholder engagement, certain controversial transparency requirements are likely to be a cause for concern for asset managers.
The 2007 Shareholders’ Rights Directive was implemented in Ireland in August 2009 and currently applies to companies listed or traded on a regulated market in the EU. The Directive’s aim was to strengthen shareholder’s rights by imposing certain minimum standards applying to the exercise of voting rights attaching to shares.
The revised Directive will have a broader scope than the 2007 Directive. One of the objectives of the revised Directive is to encourage long-term shareholder engagement including engagement of asset managers with the companies in which they invest. To this end, certain provisions of the revised Directive will apply to MiFID firms, AIFMs, UCITS management companies and UCITS investment companies that have not designated a management company.
The revised Directive introduces new disclosure requirements for the categories of asset managers mentioned above. As part of the new requirements, asset managers and institutional investors (life assurance and pension schemes) will be required to develop and disclose, on a “comply or explain” basis, a policy on how they exercise voting rights and engage as shareholders in companies they invest in.
Most controversially perhaps, institutional investors will be required to publicly disclose certain aspects of their arrangements with asset managers.
New transparency requirements
The amendment Directive contains certain public disclosure requirements to be complied with by asset managers and institutional investors.
Asset managers will be required to disclose their portfolio turnover levels and whether their investment strategy is based on medium-to-long term performance of the companies invested in.
Institutional investors will be required to disclose certain elements of their arrangements with asset managers (be they discretionary client-by-client arrangements or investments through a collective investment scheme) including:
- The extent to which an asset manager is incentivised to align its investment strategy with the profile and duration of institutional investor’s liabilities
- The extent to which an asset manager is incentivised to make investment decisions based on medium to long-term company performance, including non-financial performance, and to engage with companies as a means of improving company performance
- The method and time horizon of the evaluation of the asset manager's performance
- The targeted portfolio turnover and whether any procedure is established when this is exceeded by the asset manager
The emphasis of the new requirements on a particular style of investment to the exclusion of all others arguably goes too far in the pursuit of the objective of the revised Directive to encourage long-term investment and shareholder engagement. Given the vast diversity of asset management styles and asset managers available to institutional investors, this aspect of the revised Directive might prove to be an example of where the “one size fits all” approach does not work.
The progress of the trilogue negotiations on the revised Directive and, in particular, the fate of the proposed transparency provisions are certain to be closely watched by the asset management industry. An 18-month period for transposition into national law is currently envisaged following the adoption of the Directive.