Shareholder Rights Directive II: new rules in force on 10 June 2019
The Financial Conduct Authority (FCA) has published a policy statement (PS19/13) on implementing the Shareholder Rights Directive II (SRD II). The requirements come into force on 10 June 2019. Amongst other things, SRD II requires asset managers (MiFID firms, AIFMs (not small AIFMs) and UCITS ManCos) to either:
- develop and publicly disclose an engagement policy meeting the requirements in new COBS 2.2B.6R and publicly disclose on an annual basis how its engagement policy has been implemented in a way that meets the requirements of COBS 2.2B.7R; or
- publicly disclose a clear and reasoned explanation of why it has chosen not to comply with these requirements.
These rules will only apply in relation to asset managers who invest in shares traded on regulated markets. A "regulated market" for these purposes has an extended meaning and will include any European Economic Area (EEA) regulated market and certain markets situated outside the EEA. The FCA has gold-plated this over and above the requirements of SRD II itself. An engagement policy must describe how the firm:
- integrates shareholder engagement in its investment strategy;
- monitors investee companies on relevant matters including: strategy, financial and non-financial performance and risk, capital structure and 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 interest in relation to the firm's engagement.
The annual disclosures must include a general description of voting behaviour, an explanation of the most significant votes and reporting on the use of the services of proxy advisers. Firms are also required to disclose how it has cast votes in general meetings of companies in which it holds shares, except insignificant votes in terms of the subject matter of the vote or the size of the holding. These annual disclosures will be due for the first time on 9 June 2020.
The disclosures must be made on the firm's website. Firms may already be making disclosures pursuant to the Financial Reporting Council Stewardship Code. These new disclosures build on that requirement. As these rules come into force on 10 June 2019, all relevant managers should have a public disclosure on their website by Monday.
Principal firms and their appointed representatives: FCA’s multi-firm reviews
The FCA has published the findings from its multi-firm review into the supervision by principal firms of their appointed representatives (ARs) in the investment management sector. The FCA has identified significant shortcomings in principal firms' understanding of their regulatory obligations and their oversight of their ARs. Alongside the review findings, the FCA has also published a "Dear CEO" letter directed at CEOs of principal firms. The letter reminds principal firms of the regulatory standards and obligations they are required to meet with respect to their ARs. The FCA found that the principals they surveyed had weak or under-developed governance arrangements in place, including a lack of effective risk management, internal controls and resources.
Among other things, the FCA raised the following concerns:
- poor AR on-boarding processes and a failure to fully assess the principal firm's ability to oversee the prospective AR effectively;
- a failure to identify, record or manage conflicts of interests arising from AR arrangements (despite the existence of obvious conflicts);
- a failure by many principal firms to assess the risk to their firms (including liquidity risk and compliance with liquidity adequacy rules) arising from the activities of their ARs and to hold adequate financial resources; and
- principles failing to put in place appropriate control and risk management frameworks to prevent and detect market abuse.
As a result of its review, the FCA has intervened in relation to a number of firms in its sample. The FCA expects principals to assess how they are meeting the FCA's requirements in relation to ARs and expects principal firms to identify and address any shortcomings. The FCA states that the findings may also be applicable to principals and ARs operating in other sectors of the UK financial services industry. Please see our recent blog post for more detail on this.
Disclosure of costs and charges: FCA’s statement on CTI templates
The FCA has published a press release welcoming the Cost Transparency Initiative (CTI)’s launch of finalised and industry-ready templates for the disclosure of costs and charges to institutional investors. The CTI was a key remedy of the FCA’s asset management market study (AMMS) and is now a new industry standard for institutional investment cost data. The new templates can be used by institutional investors to access and assess critical information on costs. This gives investors clear expectations for standardised disclosure and should allow comparison of charges between providers. The templates are accompanied by guidance for both asset managers and pension schemes and their advisers. The templates and the guidance can be found on the CTI’s website.
FCA extends temporary permissions regime notification window for solo-regulated firms
The FCA has published a press release confirming that the deadline for notifications to enter the temporary permissions regime (TPR) will now be extended to the end of 30 October 2019 for firms solo-regulated by the FCA. The previous deadline for notifications to the FCA concerning the TPR was 30 May 2019. The TPR would allow EEA-based firms passporting into the UK to continue new and existing regulated business within the scope of their current permissions in the UK for a limited period, while they seek full FCA authorisation. The TPR will come into force when the UK leaves the EU, if there is no transition period.
The FCA has subsequently published amended directions relating to the TPR reflecting the extension of the notification window. The FCA has also updated its guide to making notifications to use the TPR and its webpage on the temporary regime for inbound passporting EEA firms and funds. See our update of 10 April 2019 for detail on the FCA’s final transitional directions.
Share trading obligation under MiFIR: ESMA's updated statement on impact of no-deal Brexit
In March 2019, the European Securities and Markets Authority (ESMA) had determined that, on a hard Brexit, the share trading obligation (STO) would apply to all shares with EU ISINs (EU shares) and 14 shares with GB ISINs where it deemed there was sufficient liquidity on European markets (liquid GB shares) but not to any other GB shares (non-liquid GB shares). The ESMA guidance was immediately seen as problematic for firms (see our in-depth article of 26 March 2019 for more detail on this). As a result of the significant market response to the ESMA Guidance, ESMA has now published an updated guidance stating that no liquid GB shares will be subject to the STO. However, all EU shares will still be subject to the STO and therefore execution must happen on an EU venue. As a result, a European firm can:
- trade both liquid GB shares and non-liquid shares on any venue it chooses (subject to its other regulatory obligations such as best execution); and
- only trade EU shares on an EU venue regardless of where liquidity or best price may be achieved.
While this is a positive step and reduces the chance of an overlapping UK STO and EU STO, this still leaves a number of issues for EU Shares. As the FCA notes in its response to ESMA’s updated statement that whilst this is welcome, simply because a share has an EU ISIN does not mean its main pool of liquidity is in the EU. As an example, many European companies choose to list on the London Stock Exchange but remain domiciled in the EU. These shares will still be subject to the STO and mean that EU firms will be required to execute trades on an EU venue in respect of these EU Shares. In some cases there may not be any liquidity on an EU venue thus making it essentially impossible to trade an EU Share. See our recent in-depth article for further discussion on this.
Fund relationships in GLEIS: LEI ROC final policy report
The Legal Entity Identifier (LEI) Regulatory Oversight Committee (ROC) has published a policy report in relation to fund relationships in the global legal entity identifier system (GLEIS). The report describes a limited update to the way relationships affecting investment funds are recorded in the GLEIS. The update ensures there is a consistent implementation of relationship data throughout the GLEIS. In its policy, the LEI ROC asks the Global LEI Foundation (GLEIF) to replace the current optional reporting of a single "fund family" relationship with the following relationships:
- fund management entity;
- umbrella structures; and
Among other things, to address the drawback that relationship data would not be available in all cases to improve the quality of information on funds, the LEI ROC publishes, in an annex to the policy report, guidelines for the registration of investment funds in the GLEIS. Implementation of the policy is expected within 18 months from the date of the policy. The LEI ROC published a consultation paper on fund relationships in 2018. See our update of 5 December 2018 for more detail on this.