Do you provide a discretionary management service investing in shares on a regulated market? If so, read on….

The Shareholder Rights Directive II (SRD II) is a European Union (EU) directive, the purpose of which is to strengthen the position of shareholders and to ensure that decisions are made for the long-term stability of a company. It amends the original SRD, which came into effect in 2007, with the objective of improving corporate governance in companies that have their registered office in an EU Member State and whose securities are traded on the EU’s regulated markets.

SRD II requires member states to ensure that institutional investors disclose to the public how their equity investment strategy is aligned with the profile, the duration of their liabilities, and how it contributes to the medium to long-term performance of their assets.

As such, new requirements were implemented into FCA regulations on 10^th June 2019. FCA introduced new requirements into its Conduct of Business Handbook – COBS 2.2B requiring UK MiFID investment firms that provide portfolio management services to investors to develop and disclose an ‘engagement policy’. The policy must set out how the firm:

• integrates shareholder engagement in its investment strategy  … the FCA does not define what this means so, for purposes of this newsletter, we have assumed that it is about the efforts made by companies to engage with their shareholders on a wide range of topics including executive compensation, strategy, risk management, corporate governance, and other topics falling outside of the usual financial and strategic conversations and how a discretionary manager uses this information to inform decisions to invest in the company’s shares;
• monitors investee companies on relevant matters
  … including their strategy, financial and non-financial performance and risk, capital structure, 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 interests in relation to the firm’s engagement.

This engagement policy must be made public at least annually and include:

·         a general description of voting behaviour;

·         an explanation of the most significant votes (see note 1); and 

·         the use of proxy advisers (see note 2)

Notes:

1. A firm is not required to disclose votes that are insignificant due to the subject matter of the vote or the size of the holding in the company.
2. A proxy adviser is defined by the FCA as “a legal person that analyses, on a professional and commercial basis, the corporate disclosure and, where relevant, other information of listed companies, with a view to informing investors’ voting decisions by providing research, advice or voting recommendations that relate to the exercise of voting rights”.