With Europe’s second incarnation of the Shareholder Rights Directive (SRD II) less than four months away, the securities industry can easily rely on automated communication channels to ease the compliance burden, but using disparate message standards to transmit data and various methodologies for calculating fees will still make the administrative work challenging.
The European Commission has refused industry requests to delay the September 3 timetable leaving operations and technology managers at custodian banks and other financial institutions with little time left to figure out how to transmit all the details of annual meetings and corporate actions to investors, retrieve their decisions and send their votes to issuers or their registrars. SRD II applies to financial intermediaries, such as global custodians, local custodians, national securities depositories and broker-dealers, holding the assets of investors who have purchased shares in companies headquartered in Europe and listed on an exchange in a European Union country. It doesn’t matter where the financial intermediary or investor is located.
One of the key differences between SRD II and its predecessor is that the communications on annual meeting agendas to investors must be done on either the same day they are received from the issuers or others or by 10AM the next day at the latest if received after 4PM. The fees levied to investors must also be “non-discriminatory” and “transparent” or the financial intermediary cannot charge the fees. Issuers can ask financial intermediaries for the names of investors. yet depending on the country involved an investor may need to own more than 0.5 percent of its shares for the bank or broker-dealer to share its identity. Depending on the country implementing SRD II, issuers may also not be told exactly who the end investors are. “In some markets, we expect to receive details of the custodian, the investment manager, the names of the fund and positions,” says Paul Conn, the New York City-based president of the global markets unit for Computershare, the world’s largest registrar. “In others, we may only be able to require disclosure based on the local definition of shareholder.” That means that the issuer might be informed about only the fund manager or another financial intermediary.
Proxy distribution and vote capture is typically a labor-intensive job with global custodians needing to first find the information on corporate agendas from issuers, their registrars, national securities depositories or local agent banks. The data must then pass down to local agent banks or other intermediaries to investors or their proxy agents with votes and elections retrieved for the ultimate transmittal to issuers or their registrars. Given the SRD II’s quick timetable for transmission, global custodians will have to reconcile shareholder positions daily with local agent banks rather than every few days as is currently the case.
Registrars, acting on behalf of corporate issuers, must ask national securities depositories and other financial intermediaries such as custodian banks for the list of investors in an ISO 20022-compatible format. However, since many issuers are unlikely to have adopted ISO-compatible formats, financial intermediaries are stuck reinterpreting any information on annual general meetings and reformatting any data down the pipeline to investors. “As the issuer’s agent we capture the information from our issuer clients in a number of ways,” says Conn. “We don’t require our clients to supply us with information in ISO formats as our primary focus is on the accuracy, timeliness and transmission of the information.
The SRD II stipulates that any information transmitted by financial intermediaries on corporate agendas, should be “machine-readable,” leaving it up to financial intermediaries to come up with the specific formats and mechanisms. Based on the requirements, the ISO 20022-compliant message formats which run through the SWIFT network or any other network appear to be the safest choice to comply with the “machine-readable” requirement. “While ISO 15022 messages do have some key data fields such as dates, times and options, the data points have evolved and thus a lot of the information pertaining to meetings is added into free-text boxes,” explains a spokesman for custodian bank BNY Mellon in New York. “This means that while a system can be used to automatically communicate, the key fields, a person still has to review the free text before it can be sent to clients.” The result: the communications process is slowed down and does not comply with the SRD II’s stipulation for a “machine-readable” format. By contrast, the ISO 20022-compliant messages contain all the key data feeds allowing for quicker turnaround to clients.
SWIFT, the La Hulpe, Belgium-headquartered global messaging network provider, did release ISO 20022- compliant messages for proxy distribution and voting as early as 2008, one year after the first version of the SRD was adopted. However, SWIFT has recently developed new ISO 20022-compliant messages for annual meeting notification and voting specifically tailored for SRD II. The messages were published on SWIFT’s website in January and will be available for use on the SWIFT network as of August 16.
So far, SWIFT has allowed financial firms using its network to rely on both ISO 15022-compliant and ISO 20022-compliant message types for other functions to accommodate those who can’t afford the time or expense to switch to the more structured ISO 20022-compliant messages. However, when it comes to SRD II, financial firms may have to get up to speed with some ISO 20022-compliant formats faster than they anticipated. “Once the SRD II comes into effect, it will not be possible for the ISO 15022 messages to be used for AGM [annual general meeting] notification and instruction,” says Jacques Littre, a standards expert for SWIFT specializing in asset servicing standards. “Users of the SWIFT network who must comply with SRD II will be required to use the ISO 20022 messages that have been developed for this purpose.”
A spokeswoman for Clearstream says that the German and international securities depositories under its umbrella will continue to rely on both ISO 15022-compliant and ISO 20022-compliant message formats for annual meeting notification and voting with the goal of migrating entirely to the ISO 20022 format quickly. However, network operations managers at several global and local custodian banks tell FinOps Report that they are not prepared to process ISO 20022-compliant messages for annual meeting notifications and voting nor could they predict when they would be ready. Over a dozen fund management firms gave the same response, leading one to believe that most communications on annual meetings and votes will continue to occur through custodian bank portals which rely on proprietary message formats. Volante Technologies, a London-headquartered message transformation software provider, says that its Volante Designer platform can reformat messages between the ISO 15022 and ISO 20022 formats used to comply with the SRD II. At press time, it could not be determined how many firms will use the platform specifically for SRD II-specific message transformation.
Given that proxy distribution and vote collection is such an administrative burden, several dozen global custodians have already opted to outsource their global proxy operations work to Broadridge Financial which offers an automated meeting distribution and voting service. Although the platform can accommodate ISO 20022-compliant messages, most communications will be handled through ISO 2022-compliant electronic files. “We offer an efficient scaleable platform reaching over 100 markets and are fully prepared for SRD II including same-day transmission of meeting information,” says Demi Derem, general manager for Broadridge’s international communications unit in London.
Proxymity, a spinoff from Citibank, is also eager to capture market share in the outsourced global proxy operations market having signed up some big name investors to a recent US$20.5 million round of funding. In addition to Citi, they are BNY Mellon, State Street, HSBC, State Street, JP Morgan, Clearstream, and Computershare. Clearstream owns Germany’s national depository in Frankfurt and an international securities depository in Luxembourg. Euroclear, which owns a number of European national depositories in the UK, France, Belgium, the Netherlands, as well as the Brussels-based international depository rivaling Clearstream’s Luxembourg subsidiary, declined to comment for this article.
Neither Proxymity nor Broadridge would discuss each other’s offering. Based on the few details Proxymity has released about its platform, it appears that the firm’s main selling point is that it facilitates direct communications on annual meetings and votes between issuers and fund manager investors which log onto its platform. “There is no need for financial intermediaries to forward information down the chain to investors which can delay the process and add to errors in interpreting information,” says Jonathan Smalley, chief operating officer for Proxymity who helped design its platform while working at Citi. Proximity uses information obtained from global custodians to allow fund manager investors to access the platform and communicate directly with issuers through a “unique digital pathway.” Smalley would not elaborate on exactly what kind of data is received about investors other than to say it was not their identities. Proximity’s platform, he says, relies on a combination of ISO message formats, APIs, and electronic file transfers.
Since its inception in 2018 in the UK, Proximity has expanded its reach to Australia, Germany, the Netherlands, Belgium, Austria and Spain. However, it is unlikely it will achieve the same geographic coverage or client base as Broadridge, by September. Smalley says that in light of SRD II, Proximity’s immediate focus is on the European Union’s markets, but it plans to expand quickly to new markets and more clients using the recent round of funding from investors. In Proximity’s press announcement, representatives from the investor firms praised Proxymity’s innovative approach to shareholder communications but so far Citi is reportedly the only custodian bank using Proxymity’s service. Smalley would not say whether any of his firm’s other bank investors have committed. Clearstream’s spokeswoman says there are no immediate plans for the German and international securities depository under its umbrella to rely on Proxymity, but its service is being evaluated for future use.
Neither Broadridge nor Proxymity’s proxy voting platform accommodates voluntary corporate actions, but it appears that SRD II will have far more limited impact on corporate actions than on annual meetings. ‘The SRD II only covers notification of corporate actions and corporate action notification messages in both ISO 15022 and ISO 20022 formats were already compliant with SRD II requirements so there was no need for change,” says SWIFT’s spokesman.
BNY Mellon says that it uses ISO 15022 messages and an online portal to handle corporate action announcements and decisions. “We have no intention of moving to ISO 20022 messages for corporate actions because of SRD II,” says BNY Mellon’s spokesman. The same applies to Clearstream. Unlike the case for annual meeting notifications and voting, ISO 5022 messages are perfectly fine for processing corporate actions based on the SRD’s requirements evaluated by the Securities Market Practice Group, according to the spokeswoman for Clearstream whose operations director Armin Borries chairs the SMPG. The group of market practicioners determines how SWIFT’s ISO 15022 and ISO 20022 message formats should be best applied. Broadridge says that its SRD II-compliant corporate action notification and election service for portfolio managers, investment advisors and end investors, relies on digital web/mobile, XML, ISO-compliant messages and even fax and email.
As if dealing with disparate message types weren’t hard enough for the securities industry to tackle, custodian banks and other financial intermediaries have to figure out how to calculate the fees for their clients and how to disclose them. What sounds like an easy mathematical task could become a monumental challenge for banks that have yet to unbundle fees for annual meeting notification and voting fees from fees for safekeeping. What to include in those those fees and what to tell clients will end up being a matter of interpretation.
Custodian banks could easily incorporate some margin into any fees charged by service providers, such as Broadridge or Proximity, national securities depositories, or SWIFT, on the grounds they constitute required connectivity and maintenance costs. However, it is unclear whether banks will incorporate any system upgrades to accommodate ISO 20022-compliant message formats into those fees as they could worry that doing so would violate SRD’s stipulation of “non-discriminatory” fees. Custodians could also believe the term “transparent” means nothing more than disclosing the actual fees.
Five operations managers at custodian banks who spoke with FinOps Report gave differing responses as to what costs their banks would incorporate in their fees. However, they all agreed that their banks would not explain their methodologies for calculating the fees to fund manager clients. “They won’t ask and we won’t tell,” asserts one operations manager. When questioned about what his bank would do if asked by a fund manager client to explain its methodology, his answer was a terse “we don’t have to.”
Broadridge would not elaborate on the fee model for its global proxy voting service other than to say it was “activity-based.” Proxymity also would not discuss its fees beyond claiming there are substantial cost savings to custodians who would otherwise be doing the operational work in house. In a public bulletin issued last month discussing its SRD II fee schedule, BNY Mellon indicated it would charge US$5 per meeting notification; US$10 to process each automated vote and US$75 to process each manual vote. For corporate action notifications. the fee would come to US$1.50 for each SWIFT message and US$2.00 for each fax. A notification could require several SWIFT messages. Additional fees would apply in case of security movements, according to BNY Mellon which did not explain how it calculated the fees.
In requiring EU members to adopt SRD II, the European Commission wanted to encourage investors in European companies to participate in corporate governance more frequently and understand the fees they would pay for that right. However, well-intentioned European regulators may have underestimated the operational burdens and costs on financial intermediaries. They likely also misunderstood just how much transparency investors will receive about their fees.
Hopefully, as custodian bank Brown Brothers Harriman said in a 2019 article about SRD II, financial intermediaries will be well-prepared so they don]t have to sing the tune to the song “I Got Stung” by Elvis Presley. Depending on the market and mistake involved, the regulatory sting for violating a provision of the SRD II could come to a few million Euros. In a competitive market where profit margins have become razor-thin, no one can afford the fine or the even worse the reputational risk.