European Commission pushes ahead with SRD II

The European Commission will proceed with the implementation of the second Shareholder Rights Directive (SRD II), defying protests from some post-trade groups.

As a result, the second phase of SRD II will come into force on 3 September 2020, as originally scheduled.

The first phase of implementation saw the initial transposition of SRD II into Member State laws on 10 June 2019. The core operational changes from this are also scheduled to take place in September.

SRD II heralds a significant upgrade to investor rights from the current position under SRD I, in force since 2007. The new rules aim to further improve corporate governance while discouraging excessive short-term risk-taking by companies whose securities are traded in the EU.

SRD II was initially drafted after the financial crisis exposed widespread poor standards of corporate governance across multiple sectors.

Policymakers noted that complex chains of intermediaries made shareholder rights difficult to exercise and created an obstacle to constructive engagement.

The upcoming changes under SRD II include requirements for institutional investors to publish an engagement policy, the introduction of a code of conduct and new disclosure rules for proxy advisors and intermediaries.

Intermediaries will now have to publicly disclose what they charge for their services. Crucially, costs must be non-discriminatory and proportionate.

Shareholders will be given the right to vote on remuneration (by way of a binding or advisory vote on remuneration policies).

Efforts had been made to force a delay in the implementation of SRD II. In April, 11 trade associations submitted a jointly written letter to the European Commission requesting a 12-month delay.

These association said prior concerns about meeting the deadline had been compounded by the widespread disruption caused by Covid-19.

Claiming it was “difficult or nearly impossible” to meet the September deadline, the letter was signed by associations including the International Securities Lending Association and the Association for Financial Markets in Europe.

Acknowledging a delay would require lengthy legislative work, the group wrote that they would welcome ‘alternative equivalent measures’ that would amount to an unofficial delay (already seen with the Securities Financing Transaction Regulation being pushed back three months due to Covid-19).

However, the European Commission has dismissed this concern to the relief of consumer groups, including Better Finance who argued any delay would “deteriorate the current situation for individual shareholders”.

Consumer groups dismissed claims from protestors that more time was needed, arguing that intermediaries had not been proactive enough in the first place in supporting better voting and communicating with shareholders.

This call was supported by Minerva with the proxy advisor’s CEO, Sarah Wilson, saying she found lobbyists’ attempts to stall implementation “extremely disappointing”.