The second Shareholders’ Rights Directive (“SRD II”) is due to be transposed into the national law of all EU member states by 10 June 2019. SRD II seeks to ensure increased transparency and accountability and encourage long-term shareholder engagement between companies and investors. From an investment funds perspective, it introduces an obligation to put in place a shareholder engagement policy and new transparency obligations that will apply to all AIFMs, UCITS management companies and self-managed UCITS.
Shareholder Engagement Policy
Asset managers and institutional investors must develop and publicly disclose (on their website or by other means accessible online, free of charge) an engagement policy or provide a reasoned explanation outlining why they have not done so.
The shareholder engagement policy must include information on how the institutional investor / asset manager:
- integrates shareholder engagement in their investment strategy;
- monitors the investee company on relevant matters, including strategy, financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance;
- engages with investee companies;
- cooperates with other shareholders;
- manages conflicts of interests; and
- exercises voting rights and other rights attached to shares.
On an annual basis, the institutional investor / asset manager must publicly disclose (on their website or by other means accessible online, free of charge) how their engagement policy has been implemented, including a general description of voting behaviour, an explanation of the most significant votes and the use of the services of proxy advisors. They must disclose how they have cast votes in the general meetings of companies in which they hold shares.
As noted above, the shareholder engagement policy and information on how it has been implemented must be available freely on the asset manager’s / institutional investor’s website or by other means accessible online and must be updated annually.
Reporting Obligations for Asset Managers
Asset managers must disclose on an annual basis, to institutional investors with which they have entered into arrangements (whereby the asset manager invests on behalf of an institutional investor, whether on a discretionary client-by-client basis or through a collective investment undertaking), information on:
- how the investment strategy and its implementation complies with arrangements with the institutional investor and contributes to the medium to long-term performance of the assets of the institutional investor or of the fund;
- the key material medium to long-term risks associated with investments made;
- portfolio composition, turnover and turnover costs;
- the use of proxy advisors for the purposes of engagement activities;
- securities lending policy and its impact on engagement with investee companies;
- whether investment decisions are made on the basis of evaluation of the medium to long-term performance of the investee company; and
- whether conflicts of interest have arisen, the nature of those conflicts and the manner of dealing with them.
Under SRD II, member states have the discretion to require the above information to be included in the annual report or made available by way of periodic communications to investors.
Disclosure of Arrangements with Asset Managers
The requirements relating to the disclosure of arrangements with asset managers apply to institutional investors but mean that, where an asset manager invests on behalf of an institutional investor, whether on a discretionary client-by-client basis or through a collective investment undertaking, information regarding that arrangement will be in the public domain.
The information to be contained in the disclosures by institutional investors includes:
- how the arrangement incentivises the asset manager to align its investment strategy and decisions with the profile and duration of the liabilities of the institutional investor, in particular long-term liabilities;
- how the arrangement incentivises the asset manager to make investment decisions based on medium to long-term financial and non-financial performance of investee companies and to engage with investee companies in order to improve their performance in the medium to long-term;
- how the method and time horizon of the evaluation of the asset manager’s performance and the remuneration for asset management services are in line with the profile and duration of the liabilities of the institutional investor;
- how the institutional investor monitors turnover costs; and
- duration of the arrangement.
If the arrangement with the asset manager does not include one or more of the elements above, the institutional investor must publicly disclose a clear and reasoned explanation as to why this is the case. The information above must be made available on the institutional investor’s website and must be updated annually, unless there is no material change.
Next Steps
As noted above, EU member states must transpose SRD II by 10 June 2019. The domestic regulations necessary to transpose the directive into Irish law have yet to be published.
It should be noted that, under SRD II, member states have the discretion to exempt certain types of companies, including UCITS and AIFs, from many of the SRD II provisions including requirements relating to the disclosure of remuneration of directors, identification of shareholders, and the facilitation of the exercise of shareholders’ rights. However, member states cannot exempt UCITS management companies and AIFMs from the transparency obligations set out above.
Although it is expected that Ireland will exercise its discretion to exempt UCITS management companies and AIFMs from many of the requirements in SRD II, as it did with the first directive, this expectation cannot be considered definitive until the implementing regulations are published.