The European Union (Shareholders’ Rights) Regulations 2020 (the Regulations) came into operation on 30 March 2020. The Regulations transpose into Irish law the Second Shareholders’ Rights Directive (Directive (EU) 2017/828) (SRD II), which amends the existing Shareholders’ Rights Directive (2007/36/EC).
The Regulations introduce a number of changes for traded public limited companies (PLCs); asset managers; and institutional investors. The impacts of SRD II on traded PLCs and asset managers are discussed in articles from our Corporate Department and Asset Management and Investment Funds Department.
An “institutional investor” is defined in SRD II as including:
- life insurers and reinsurers (provided that their activities cover life-insurance obligations) within the meaning of the Solvency II Directive (Directive 2009/138/EC); and
- institutions for occupational retirement provision (IORPs) falling within the scope of the IORP II Directive (Directive (EU) 2016/2341) (the obligations for IORPs under SRD II are discussed in an article from our Pensions Department).
The Regulations impose a number of obligations on a “relevant institutional investor” (RII) which is defined as an institutional investor that invests, whether directly or through an asset manager, in shares traded on an EEA regulated market.
Obligations for RIIs
The Regulations impose the following requirements for RIIs as defined:
- requirement to develop and publicly disclose a shareholder engagement policy;
- public disclosure requirements around the RII’s investment strategy; and
- requirement to publicly disclosure certain information regarding arrangements with asset managers.
Shareholder Engagement Policy
The Regulations require an RII to develop and publicly disclose (i.e. make available free of charge on its website) a shareholder engagement policy which describes how the RII integrates shareholder engagement into its investment strategy; monitors and conducts dialogue with investee companies; exercises voting rights and other rights attached to shares; cooperates with other shareholders; communicates with relevant stakeholders and manages actual and potential conflicts of interest. The RII must also publicly disclose on an annual basis how its engagement policy has been implemented, including providing information on voting behaviour and significant votes taken.
Where a RII does not develop and publicly disclose its engagement policy, or how its engagement policy has been implemented on an annual basis, there is a “comply or explain” obligation whereby the RII must publicly disclose a clear and reasoned explanation for its failure to do so.
Investment Strategy
The Regulations require a RII to publicly disclose how the main elements of its equity investment strategy are consistent with the profile and duration of its liabilities and how those elements contribute to the medium to long-term performance of its assets.
Arrangements with Asset Managers
Where an asset manager invests on behalf of a RII, the Regulations require the RII to publicly disclose specified information regarding its arrangement with the asset manager. This includes details on how the arrangement incentivises and evaluates the asset manager’s actions, as well as how the RII monitors portfolio turnover costs. The RII must provide a “clear and reasoned” explanation if it does not disclose all the required detail. Asset managers also have an obligation to disclose specified information on the arrangements in place with the RII.
Life (re)insurers who are RIIs may include the required information regarding investment strategy and arrangements with assets managers in their solvency and financial condition report (SFCR).
Considerations for Groups
SRD II and the Regulations do not specify the disclosure requirements applicable where an RII is part of a group of companies. In scenarios where the RII is subject to group-level shareholder engagement policies, investment strategies, or arrangements with asset managers, the RII should set out the group-level policies that are applicable to it (e.g. the RII could adopt such policies as its own (with any necessary amendments to localise them)), or alternatively should abide by the “comply or explain” requirements and provide a clear and reasoned explanation for not individually publicly disclosing such information on its website.
UK Approach
The FCA published the Shareholders Rights Directive (Asset Managers and Insurers) Instrument 2019 which came into force on 10 June 2019. The FCA’s Policy Statement PS19/13 notes that the rules in the UK are a “close copy-out of the relevant Directive requirements”, apart from one area. The UK has ‘gold-plated’ the Directive and extended the rules to apply not only to investments in shares traded on EEA markets, the minimum requirement of SRD II, but also comparable markets outside the EEA. The FCA notes that this is to better align with objectives and reflect the global nature of the UK’s asset management industry.
Actions for RIIs
The Regulations result in a number of obligations for RIIs (including life insurers and life reinsurers) which they must comply with as of 30 March 2020 (as there is no transitional period).
Life (re)insurers should review existing investments to determine whether they fall within the definition of an RII. Some other points to consider are as follows:
- RIIs must develop and publicly disclose a shareholder engagement policy. Where the RII does not wish to do so, it must publicly disclose its explanation for failure to do so.
- RIIs must public disclose the main elements of their equity investment strategies.
- RIIs should review their existing arrangements with asset managers and assess what disclosures they may need to make regarding those arrangements.
Failure to comply with the Regulations means that the person or company (including any officer in default) shall be guilty of a summary offence attracting a term of imprisonment of up to six months or a fine not exceeding €5,000 or both.
For more information on the impact for life (re)insurers and the Second Shareholders’ Rights Directive, please contact Eoin Caulfield, John Larkin, Ian Murray or your usual William Fry contact.
Contributed by Claire O’Connor
