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ISLA responds as EU shareholder rights bill touches on sec lending

23 January 2017


ISLA says perception issues still exist around securities lending in light of recent rules

Read more: securities lending ISLA

Asset managers should report their securities lending policy to institutional investors on an annual basis as part of a bundle of revised European initiatives designed to strengthen shareholder engagement and boost transparency.

At the end of 2016 the EU’s three main institutions – the Council, Parliament and Commission – agreed the final text of the revised Shareholder Rights Directive (SRD) after years of wrangling.

Votes on executive pay, transparency obligations for proxy advisors and shareholder identification are all part of the directive which applies to listed companies in the EU and European Economic Area.

More specifically, the final text states that securities lending can "cause controversy in the area of shareholder engagement." 

As a result, asset managers should disclose their stock loan policy to institutional investors annually.  Officials are also considering whether such information may even need to be disclosed publicly further down the line.  

Outlining the impacts of SRD to its members, securities lending trade body ISLA said the final text reflects that there are still "perception issues" around securities lending in areas where it is not the primary focus.

ISLA has previously challenged the idea that securities lending poses a threat to good corporate governance and has stated that other factors are more significant than securities lending when influencing voting behaviour.

SRD critics and Brexit

Since the SRD’s revision was initiated two years ago, there have been significant changes to the proposed text.

Better Finance, a body that represents individual investors across the EU, said the final version provides "limited improvements" in shareholders rights, particularly in the critical areas of shareholder identification and of the exercise of cross-border voting rights.

Roger Lawson, deputy chairman at ShareSoc which represents of individual investors in the UK stock market, described the final text as a "typical example of EU bureaucracy as applied to financial services".

"After years of work on this directive (and more to come), it is a very unsatisfactory outcome."

"The political process and democratic input to EU decision making is also grossly deficient, resulting in a half-baked compromise which satisfies nobody."

The final SRD deal is still subject to legal-linguistic revisions and a final vote in the European Parliament before entering into force, likely within this quarter.

By that time Britain may have left the EU, meaning the updated SRD might be the first EU legislation to be ignored by the UK following the vote for the Brexit.

UK Prime Minister Theresa May has stated she intends to trigger Article 50 by the end of March.

Many of the SRD provisions, for example on remuneration votes, are already present in UK Stewardship Code, law although it would require some changes to comply with it.


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