On July 27, 2023, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published a report on implementation and effectiveness of Shareholder Rights Directive SRDII provisions under Article 3j (regarding proxy advisors) and Chapter Ia (regarding the investment chain). This report has been prepared based on evidence collected from stakeholders after ESMA and EBA consultations and the feedback gathered from market participants and the public.

Regarding proxy advisors, the report suggests clarifying the definition of "proxy advisor" and setting minimum standards for their codes of conduct. The report addresses conflicts of interest and proposes specific disclosure obligations of information sources, including Environmental, Social, & Governance (ESG) data, for proxy advisors offering consultancy services to issuers and investors.

For Chapter Ia, the findings related to five different articles have been provided. For Article 3a of SRDII (shareholder identification), the report highlights that lack of a common definition of "shareholder" causes inconsistencies and difficulties in shareholder identification requests and advises introducing a harmonized definition across the EU. It recommends evaluating the scope of securities covered and providing flexibility for issuers in customizing shareholder identification requests e.g., percentage of shares held.

Interestingly, the report proposes introducing a "golden operational record" requirement for issuers to address lack of standardization against both Article 3a (shareholder identification) and Article 3b (transmission of information). It also proposes to transmit information in machine-readable format to ensure interoperability and straight-through processing (STP). It also proposes to align deadlines under Article 9 of the Implementing Regulation 2018/1212 with national company laws.

On Article 3c (Facilitation of the exercise of the shareholder rights), the report highlights the lack of harmonization in the documentation required by last intermediaries and custodians to prove shareholder entitlement to exercise their rights. Additionally, it notes that divergent practices across jurisdictions create complex manual processes e.g., Power of Attorney (PoA) requirements. The report advises the Commission to harmonize documentation needs and mandate the use of machine-readable formats for the confirmation of entitlement and voting instructions.

For Article 3d (Non-discrimination, proportionality, and transparency of costs), the report says that it should be facilitated by harmonizing terminology and defining a common format for disclosing charges, enhancing transparency.

On Article 3e (Third country intermediaries), the report urges the commission to address the uncertainty caused by varying applications of SRDII, particularly in defining "shareholder" to facilitate standardization and third-country intermediaries' compliance.

Additionally, the report also mentions transversal considerations in relation to Articles 3a-3c. The first is to use a regulation (not directive) to drive more harmonized practices. The second is the use of new technologies like distributed ledger technology (DLT); however, notices that the practical applications are still limited. The third is the concerns about SRDII compliance of the services provided by online brokerage platforms (neo-brokers), particularly in transmitting information and facilitating the exercise of voting rights. The report suggests monitoring the compliance of neo-brokers by National Competent Authorities (NCAs).

Overall, the report offers recommendations to improve the SRDII's implementation and enhance shareholder engagement and transparency throughout the EU. Potential solutions to the problems identified in the implementation of SRDII revolve around the adoption of technology solutions that can streamline and automate the processing of machine-readable formats based on ISO standards. Without technology intervention, the burden on financial intermediaries' operations can become unmanageable.

S&P Global Market Intelligence offers a suite of applications called IMProxy, specifically designed to address the challenges posed by SRDII for financial intermediary firms. IMProxy standardizes and automates the processing of meetings, proxy voting, and shareholding identification disclosure procedures. This technology solution helps financial institutions providing proxy services to their clients comply with the European Commission's regulations and facilitates smoother communication between issuers, shareholders, and intermediaries.

By leveraging technology solutions like IMProxy, financial intermediaries can improve data management, support shareholder identification and transmission of corporate events information, enhance workflow for shareholder rights, and enable electronic information exchange and voting. This technological advancement raises the bar for financial intermediaries, allowing them to better handle SRDII obligations and meet the demands of European markets more effectively. Implementing such technology solutions can lead to enhanced shareholder engagement, transparency, and compliance with SRDII provisions across the EU.

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