Thursday 27 July 2023
ESMA32-380-267
EBA/Rep/2023/26

ReportImplementation of SRD2 provisions on proxy advisors and the investment
chain

ESMA - 201-203 rue de Bercy - CS 80910 - 75589 Paris Cedex 12 - France - Tel. +33 (0) 1 58 36 43 21 - www.esma.europa.eu

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Table of Contents
1

Executive Summary .................................................................................................... 52

Introduction ................................................................................................................. 83

2.1

Background .......................................................................................................... 8

2.2

Mandate ............................................................................................................... 8

2.3

Methodology......................................................................................................... 9

2.4

Input received via the Call for Evidence.............................................................. 11

2.4.1

Categorisation of respondents..................................................................... 112.4.2

Main topics addressed ................................................................................ 11

Proxy advisors ........................................................................................................... 17
3.1

3.1.1

Introduction ................................................................................................. 17

3.1.2

Article 2(g) – Definition of proxy advisors .................................................... 19

3.1.3

Article 3j(1) – Application of a code of conduct ............................................ 21

3.1.4

Article 3j(2) - Disclosures ............................................................................ 24

3.1.5

Article 3j(3) - Conflicts of interests ............................................................... 28

3.1.6

Article 3j(4) - Proxy Advisors operating via establishments.......................... 30

3.2

4

Analysis.............................................................................................................. 17

Advice ................................................................................................................ 32

3.2.1

Article 2(g) – Definition of proxy advisors .................................................... 32

3.2.2

Article 3j(1) – Application of a code of conduct ............................................ 33

3.2.3

Article 3j(2) – Disclosures ............................................................................ 34

3.2.4

Article 3j(3) – Conflicts of interests .............................................................. 34

3.2.5

Article 3j(4) – Proxy advisors operating via establishments ......................... 35

Investment chain ....................................................................................................... 35
4.1

Analysis.............................................................................................................. 35

4.1.1

Introduction ................................................................................................. 352

4.1.2

Article 3a – Identification of shareholders .................................................... 36

4.1.3

Article 3b – Transmission of information ...................................................... 42

4.1.4

Article 3c – Facilitation of exercise of voting rights ...................................... 45

4.1.5

Article 3d – Non-discrimination, proportionality, and transparency of costs . 50

4.1.6

Article 3e – Third-country intermediaries ..................................................... 52

4.2

Advice ................................................................................................................ 55

4.2.1

Article 3a – Identification of shareholders .................................................... 55

4.2.2

Article 3b – Transmission of information ...................................................... 57

4.2.3

Article 3c – Facilitation of exercise of voting rights ...................................... 57

4.2.4

Article 3d – Non-discrimination, proportionality, and transparency of costs . 59

4.2.5

Article 3e – Third-country intermediaries ..................................................... 60

5Annex I : Acronyms and definitions ........................................................................... 61

6

Annex II: Call for Advice from the European Commission .......................................... 63

7

Annex III: Questions from ESMA’s Call for Evidence ................................................. 64

8Annex IV: Respondents to ESMA’s Call for Evidence ................................................ 65

9Annex V: Input received via the ESMA’s Call for Evidence ........................................ 66
9.1

Proxy advisors.................................................................................................... 66

9.1.1

General input............................................................................................... 66

9.1.2

Input from investors ..................................................................................... 85

9.1.3

Input from issuers........................................................................................ 93

9.1.4

Input from proxy advisors ............................................................................ 97

9.1.5

SMSG input ............................................................................................... 102

9.2

Investment chain .............................................................................................. 104

9.2.1

General input............................................................................................. 104

9.2.2

Input from investors ................................................................................... 126

9.2.3

Input from issuers...................................................................................... 137

9.2.4

Input from intermediaries ........................................................................... 149

9.2.5

SMSG input ............................................................................................... 164

10 Annex VI: SMSG Advice.......................................................................................... 169

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11 Annex VII: SRD2 transposition ................................................................................ 172

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1 Executive Summary
Reasons for publication
On 3 October 2022, the European Commission requested ESMA and the EBA to provide
input to help it prepare a report on certain provisions of Directive (EU) 2017/828 amending
Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement(the second Shareholder Rights Directive – SRD2). It did so on the basis of Articles 3f(2)and 3k(2) of that Directive (references to the numbering of Directive 2007/36/EC, asamended). Under these provisions, the Commission is to submit a report on theimplementation of Article 3j (regarding proxy advisors) and Chapter Ia (concerning theinvestment chain) of the SRD2 to the European Parliament and the Council in close
cooperation with ESMA and, as far as Chapter Ia is concerned, the EBA. The report should
focus on the implementation of these legal provisions and their effectiveness as well as
assess the appropriateness of their scope of application while taking into account relevantmarket developments at the Union and international level.
This report represents the input that ESMA and the EBA have issued to the Commission.
Contents
Based on evidence collected from stakeholders, this report provides an analysis of theimplementation of the SRD2 and presents conclusions in its Advice section. ESMA launcheda public Call for Evidence on 11 October 2022, to collect information from market
participants and the general public at large. 73 respondents provided evidence within the 7week consultation period. ESMA also reached out to stakeholders and took the advice of its
Securities and Markets Stakeholders Group (SMSG) into account. The EBA participated insome of ESMA’s initiatives and conducted its own consultations with stakeholders and its
Banking Stakeholders Group (BSG) as well. ESMA focused on the SRD2 provisions on
proxy advisors (Article 3j), shareholder identification (Article 3a), transmission of information(Article 3b) and facilitation of the exercise of shareholder rights (Article 3c). The EBA
focused on the SRD2 provisions on costs and charges applied by intermediaries (Article 3d)and on the practices implemented by third-country intermediaries (Article 3e).
In the Advice section on Article 3j (concerning proxy advisors), the report finds that while thecurrent framework has proved robust overall, certain improvements could be put in place.
Firstly, the report suggests that the Commission should consider clarifying the definition of
the term “proxy advisor” (as laid down in Article 2(g) of the SRD2). In light of the evolutionof market practice in this area, it also calls on the Commission to consider defining minimum
standards for codes of conduct for proxy advisors (as the SRD2 currently only refers to these5without requiring any specifications). As conflicts of interest are a particularly important issue
in the eyes of market participants, the report addresses some of the specific concerns whichhave been raised in this context, for instance by suggesting that disclosure obligations by
proxy advisors, especially vis-à-vis their clients, could be enhanced in cases where proxyadvisors render consultancy services to issuers and advise investors on those same entities.
Furthermore, taking into account the global nature of the proxy advisory market and thelimits of local approaches as highlighted by stakeholders, the report suggests that a basic
registration mechanism for proxy advisors should be introduced at the EU level, coupledwith the publication of an overview of proxy advisors operating in the EU and whether they
apply a code of conduct or not.
In the Advice on Chapter Ia of the SRD2 (concerning the investment chain), the report firstly
suggests that the Commission should consider the possibility of introducing a harmonised
definition of the term “shareholder” throughout the EU (in accordance with Action 12 of theCommission’s own Capital Markets Union Action Plan). At the same time, the report is awarethat such a definition would have an impact on company, securities, and tax law acrossMember States (MSs) and it points out various ways of addressing those issues. In addition,
the report advises the Commission to evaluate if a clearer indication can be given as towhich securities fall under the scope of the SRD2. Moreover, it finds that an effort would be
warranted to determine if more flexibility could be given to issuers, so they could better
customise shareholder identification requests in accordance with their individual needs. The
Commission should also consider amending the Directive and the Commission
Implementing Regulation 2018/1212 (the IR) by introducing a “golden operational record”
requirement on the issuer, in connection with the fulfilment of Article 3a duties regarding theshareholder identification as well as those of Article 3b regarding the transmission of
information along the chain of intermediaries. The report furthermore raises the issue ofaligning the deadlines under Article 9 of the IR with intermediaries’ compliance duties. With
respect to the exercise of voting rights, it finds that the Commission should look into
harmonising the documentation required, for example by providing that the confirmation ofentitlement be accepted as the proper form to allow shareholder participation throughout theEU, and that the use of machine-readable formats is further mandated to allow
interoperability and straight-through processing, also leveraging on European industry
standards. On non-discrimination, proportionality, and transparency of costs, the report
recommends that the Commission facilitate harmonisation of terminology, both for the typesof services rendered and on corresponding charges. It finds that a common format should
be defined for the purposes of disclosing charges and draws attention to the issue ofincreasing transparency with respect to these.

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Next Steps
This report feeds into the Commission’s obligation to issue a report to the European
Parliament and the Council. ESMA and the EBA will continue to monitor the process andconsider any proposed changes to legislation going forward. They will also continue to play
an active part in the discussion on the topics concerned, including by providing advice as
required.

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2

Introduction

2.1 Background
1. The original Shareholder Rights Directive (Directive 2007/36/EC – SRD1) established rules

promoting the exercise of shareholder rights at general meetings (GMs) of companies withregistered offices in the EU and whose shares were admitted to trading on a regulated
market within the EU.
2. The SRD1 was reviewed in 2017 with a general deadline for transposition set to June 2019.

The Shareholder Rights Directive II (Directive 2017/828 – SRD2) amended the contents of
the original SRD1 by imposing certain minimum standards to further facilitate the exerciseof shareholder rights and to encourage long-term shareholder engagement to support
companies’ long-term strategy and performance. In 2018, the Commission adopted an
Implementing Regulation (Commission Implementing Regulation 2018/1212 – IR) to
further clarify certain minimum practical application requirements of the revised Directive.
3. As shares of listed companies are often held through complex ownership structuresencompassing many intermediaries, particularly in a cross-border context, effective
engagement and exercise of shareholder rights depend to a large extent on the efficiencyof the investment chain in channelling information between companies and shareholders.
The SRD2 facilitates shareholder identification and the transmission of information
between investors, issuers, and intermediaries. Further to that, the SRD2 introducestransparency requirements on the proxy advisory industry and also addresses other areas,
namely institutional investors and asset managers’ transparency, as well as transparency
and approval of directors’ remuneration and related party transactions. The SRD2 enteredinto force in 2017 and MSs subsequently set themselves to transpose it into national law.
The full regulatory framework, including the IR, entered into application in September 2020.

2.2 Mandate
4. On 3 October 2022, the Commission asked ESMA and the EBA for assistance in the

preparation of a report on the implementation of the SRD2 that the Commission is required
to submit to the European Parliament and the Council, according to the review clauses
included in Articles 3f(2) and 3k(2).
5. The Commission requested that both ESMA and the EBA be involved in the preparation of

the input to be provided regarding Chapter Ia of the SRD2, in particular Articles 3a-3e,
which regulate companies’ and intermediaries’ rights and obligations regarding

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shareholder identification, transmission of information and the facilitation of the exercise ofshareholder rights.
6. In addition, ESMA was also asked to provide input on the implementation of Article 3j of

the SRD2, which regulates the transparency of the proxy advisory industry. In that regard,
ESMA was explicitly asked to assess whether the establishment of regulatory requirementsfor proxy advisors would be deemed necessary.
7. For the purpose of producing their report, the two European Supervisory Authorities (ESAs)

were requested to gather input from stakeholders via stock-taking and consultation, e.g. in
the form of a targeted survey or a call for evidence. The stakeholder outreach was to beaddressed to the different types of stakeholders involved, namely investors, issuers,intermediaries and proxy advisors.
8. Furthermore, both ESAs were requested to make use of information derived fromexperience of their respective National Competent Authorities (NCAs), in particular thosetasked with supervising market participants’ compliance with the relevant SRD2 provisions.
The NCA input was expected to be particularly helpful in connection with any practicaldifficulties arising with respect to the enforcement of SRD2 provisions.
9. Lastly, the Commission in its mandate emphasised that Action 12 of the Commission’s

2020 Capital Markets Union (CMU) Action Plan addresses the facilitation of shareholder
engagement, in particular by harmonising the definition of shareholder across EU
jurisdictions. Therefore, ESMA and the EBA were specifically asked to include
recommendations in connection with that Action.
10. The Commission requested to receive the contribution of the two ESAs in July 2023.

2.3 Methodology
11. Taking into account the mandate given by the Commission, requiring close coordination,

ESMA and the EBA decided to issue a joint report. ESMA focused on the SRD2 provisions
on proxy advisors (Article 3j), shareholder identification (Article 3a), transmission of
information (Article 3b) and facilitation of the exercise of shareholder rights (Article 3c). The
EBA focused on costs and charges applied by intermediaries (Article 3d) and on thepractices implemented by third-country intermediaries (Article 3e).
12. To collect input from stakeholders, a Call for Evidence was launched on 11 October 2022,

which included 78 questions. The questions were divided into two sections tackling topics
related to the investment chain (i.e., Articles 3a-3e), as well as to proxy advisors9(i.e., Article 3j), and further broken down by type of respondents (i.e., investors, issuers,intermediaries and proxy advisors).
13. 73 market participants provided responses to the Call for Evidence, representing all of theaforementioned groups, including respective industry associations. Responses were also
received from other categories of respondents. These include service providers such as
issuer agents that assist issuers with tasks such as shareholder identification or providersof platforms that enable electronic voting. A few responses were also received from otherentities, such as law firms and NGOs. It should be noted that some respondents opted toprovide input related to the general questions, but not to their respective section, whileother entities have responded in more than one capacity, due to the multifaceted nature of
their business (e.g. one firm provided answers to the issuer, the intermediary and the proxyadvisor sections, as it is also the controlling shareholder of a proxy advisory firm).
A detailed categorisation of the respondents to the Call for Evidence is presented in
section 2.4.1.
14. Further to the input received via the Call for Evidence, the report takes into account bilateraland multilateral discussions organised between the two ESAs and stakeholders, especially
respondents to the Call for Evidence itself in case some clarification was needed. In
addition, the two ESAs also sought the input of their respective NCAs on the challenges
they encountered in the enforcement of SRD2 provisions. While the experience is still
limited in time and NCAs’ roles vary widely across MSs (for further information, please see
Annex VII: SRD2 transposition), any specific challenges encountered are referred to, whenapplicable, in the section “Analysis”. Finally, ESMA sought the advice of the Securities andMarkets Stakeholders Group (SMSG).
15. The report is divided into three main sections, entitled “Analysis”, “Advice” and “Evidence”,

respectively. The “Analysis” section elaborates on the input collected through the Call for
Evidence and highlights red lines and key messages coming from stakeholders withrespect to the implementation of the SRD2, drawing certain conclusions on key areas for
improvement. In the “Advice” section, ESMA and the EBA, taking into consideration the
input received and the key areas identified, make recommendations on potential
improvements where practical implementation and enforcement difficulties areencountered. The advice prioritises areas where policy recommendations are likely to havethe strongest impact. Lastly, the “Evidence” section summarises the input gathered directlyfrom the public consultation and is found in Annex V: Input received via the ESMA’s Callfor Evidence of the report. The advice provided by the SMSG is summarised in this annex
and presented in Annex VI: SMSG Advice.

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2.4 Input received via the Call for Evidence
2.4.1 Categorisation of respondents
16. The graph below outlines the main categories of respondents who replied to theconsultation. It is notable that intermediaries constitute the largest share of respondents(44%) with investors accounting for 21%, followed by issuers (12%) and proxy advisors(6%). The percentages in this chart reflect the classification in types of respondents
according to the respondents themselves. As mentioned earlier, several entities are
therefore presented here in more than one capacity.

Graph 1: Categorisation of respondents

2.4.2 Main topics addressed
17. The SRD2 encompasses different topical areas that cover multiple facets of corporate

governance. As noted above, some of these areas will be addressed in the following in11

accordance with their corresponding provisions within the SRD2. The table below aims tolink these provisions with the areas they refer to.
Table 1: Topical areas of the SRD2 tackled in the report
SRD2 provision
Chapter Ia
Article 3a – e

Topical Area
Identification of shareholders, transmission of information and facilitation of
exercise of shareholder rights
Investment Chain

Article 3a

Identification of shareholders

Article 3b

Transmission of information

Article 3c

Facilitation of exercise of voting rights

Article 3d

Non-discrimination, proportionality, and transparency of costs

Article 3e

Third-country intermediaries

Article 3j

Transparency of proxy advisors

Paragraph 1

Application of a code of conduct

Paragraph 2

Disclosures

Paragraph 3

Conflicts of interests

Paragraph 4

Proxy advisors operating via establishments

18. By way of introduction, graphs 2 and 3 below provide a helicopter view of the input gathered

via the Call for Evidence, which is presented in the “Evidence” section (Annex V: Input
received via the ESMA’s Call for Evidence). The graphs highlight the most important issues
raised by stakeholders in the “Proxy Advisors” and “Investment Chain” sections,
respectively.
19. In the area of proxy advisors, the following main takeaways can be highlighted, also basedon the relevant qualitative comments provided by respondents to each respective question:i.

Overall, based on reported evidence, there is general support for the SRD2
regulatory framework, although respondents see room for improvement incertain areas;ii.

Regarding the definition of proxy advisors, respondents seek further clarity on
which players are captured;iii.

With regard to disclosures, respondents seem to be overall positive
concerning the accuracy and reliability of proxy advice and proxy advisors’
disclosure of voting policies and methodologies, while they are less positiveon their dialogue with issuers, conflicts of interest and their taking into accountof local market conditions;

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iv.

Respondents are generally positive on the use of ESG criteria by proxyadvisors, although transparency on the sources of ESG data and the relevant
methodology are deemed as in need of improvement andv.

Respondents consider that the scope of application of the SRD2 could be
improved also by taking into account the implications of further services being
provided by proxy advisors on conflicts of interest.

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Graph 2: Main takeaways from the Call for Evidence (proxy advisors)

Proxy Advisors

Not at all/ No

To a limited extent

Topic
SRD2 effectiveness(Q22): Do you consider the level of harmonisationachieved under the SRD2 sufficient to ensure thatinvestors are adequately and evenly informed about
the accuracy and reliability of the activities of proxyadvisors?
Definitions(Q16): Is the definition of proxy advisors in the
SRD2 able to identify the relevant players in theshareholder voting research and advisory industry?

To a large extent

Fully/ Yes

No opinion

Emerging views

Disclosures(Q20): Do you consider that the disclosuresprovided by proxy advisors have reached anadequate level following the entry into application of
SRD II? Please specify in relation to the below:a) Fostering transparency to ensure the accuracy
and reliability of the advice;b) Disclosing general voting policies andmethodologies;c) Considering local market and regulatory
conditions;d) Providing information on dialogue with issuers;e) Identifying, disclosing and managing conflicts ofinterest.
ESG and new trends(Q21): Based on your experience, have you noticed
improvements in the way that the proxy advisoryindustry is taking into account relevant ESG criteria
in the preparation of their research, advice andvoting recommendations or in the preparation ofcustomised policies?
(Q24): Having in mind the ESG and technologicalchanges in progress as well as investors’ tendency
to internalise voting research and/or to provide
clients with voting options, do you consider that thescope of application taken by the SRD2 is stilladequate to cover all market players and services?
1420. In the area of investment chain, the following main takeaways can be highlighted, also

based on the relevant qualitative comments provided by respondents to each respective
question:i.

Overall, the processes put in place by intermediaries are considered broadly
in line with the legislative framework. However, comments raised suggest
further steps towards harmonisation;ii.

Respondents generally see some improvements in the shareholder
identification process, especially in those countries where the previously
applicable regimes appeared to be more cumbersome in allowing issuers to
identify their shareholders;iii.

Respondents find there is a need for a harmonised shareholder definition in
the EU to ensure full effectiveness of shareholder identification rules, althoughcertain concerns were also raised in connection with compatibility with thedifferent national company, securities, and tax laws;

iv.

Respondents generally have seen some improvements in the transmission of
information, while a less positive view is expressed in connection with the
SRD2’s ability to facilitate the exercise of voting rights. The need for further
harmonisation in both areas is frequently highlighted;v.

Very limited satisfaction is expressed by respondents in connection withproportionality, transparency and non-discrimination of the charges applied byintermediaries for voting purposes andvi.

Respondents also identified a few issues regarding the practices of thirdcountry intermediaries, mainly in relation to certain non-EU intermediaries
rather than large global players.

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Graph 3: Main takeaways from the Call for Evidence (investment chain)

Investment chain
Not at all/ No

To a limited extent

Topic
SRD2 effectiveness(Q10): Do you consider that the processes put inplace by intermediaries for the purpose of
implementing Chapter Ia are working in line with therelevant provisions of the SRD2 and the IR?
Shareholder identification(Q3): Do you consider that shareholder
identification, within the meaning of Article 3)(a),has improved following the entry into application ofthis provision and the IR?
(Q4): Do you consider that harmonising thedefinition of shareholder across the EU is anecessary step to ensure the full effectiveness of
Article 3)(a) provisions?
Transmission of information(Q6): Do you consider that the transmission of
information along the chain of intermediaries has
improved following the entry into application of
Article 3)(b) and the IR?
Exercise of shareholder rights(Q7): Do you consider that the facilitation of theexercise of shareholder rights by intermediaries has
improved following the entry into application of
Article 3)(c) and the IR?
Charges applied(Q8): Do you consider that transparency, nondiscrimination and proportionality of charges forservices provided by intermediaries in connection
with shareholder identification, transmission of
information and exercise of shareholder rights have
improved following the entry into application of thisprovision?
Third-country intermediaries' practices(Q9): Do you consider that the practices of thirdcountry intermediaries (i.e., intermediaries whichhave neither their registered office nor their head
office in the EU but provide services with respect toshares of EU listed companies) are in line with theprovisions of Chapter Ia and the IR?

To a large extent

Fully/ Yes

No opinion

Emerging views16

3 Proxy advisors
3.1 Analysis
3.1.1 Introduction
21. Proxy advisors provide services to shareholders by analysing corporate information andissuing voting research and recommendations to their clients. They may also assist themin their participation and voting in GMs. Certain proxy advisors have expanded to providing
additional services including e.g. ESG-related services and services within the spectrumof data analytics. Overall, proxy advisors have gained prominence over time as they areseen as able to exercise considerable influence on corporate decision-making across theglobe1.
22. It is widely recognised that the services provided by proxy advisors are valued by investors,

in particular asset managers, with highly diversified portfolios, that benefit from proxyadvisors’ ability to provide analysis and research on single companies in their portfolio,
regardless of the country of incorporation and/or listing and of the markets in which suchcompanies operate2.
23. Although proxy advisors are seen as highly influential, it should be noted that the exercise

of voting rights and the relevant decision-making process remain within investors’
prerogatives: it is their role to analyse proxy advisors’ recommendations and use them as
input for their analyses and voting3. Investors have increasingly been called upon to adopt
voting policies and held accountable for their application. Accordingly, some investors alsoseek the assistance of proxy advisors to define and implement their own voting guidelines.
24. The two major international proxy advisors, ISS and Glass Lewis, are US-based and havea combined global market share that exceeds 90%4. New entrants to the market haveemerged and the industry has also been reshaped by merger & acquisition activity, suchas the acquisition by Glass Lewis of the German-based proxy advisor IVOX in 2015 and of

1

ESMA acknowledges a wide, although not fully conclusive, literature on this topic.
As indicated in recital 25 of SRD2, “many institutional investors and asset managers use the services of proxy advisors who
provide research, advice, and recommendations on how to vote in general meetings of listed companies. While proxy advisorsplay an important role in corporate governance by contributing to reducing the costs of the analysis related to company information,
they may also have an important influence on the voting behaviour of investors. In particular, investors with highly diversified
portfolios and many foreign shareholdings rely more on proxy recommendations”.
3
A recent study has suggested that proxy advisors’ influence may be overestimated sometimes – see Morrow Sodali, Durham
University Business School and Financial Reporting Council (FRC), ”The Analytical report on the influence of proxy advisors and
ESG rating agencies on the actions and reporting of FTSE 350 companies and investor voting” (2023), page 5.
4
Research suggests that their share may have decreased slightly in recent years, see Chong, S., “The Proxy Advisory Industry:
Influencing and Being Influenced”, USC Marshall School of Business Research Paper (2022), page 10.
217the French-based proxy advisor Proxinvest in 2022. The two leading global market players
also changed their ownership structure in recent years, as a stock exchange grouppurchased a majority stake in ISS in 2020, while Glass Lewis was acquired by a private
equity firm and an individual entrepreneur in 2021. Other firms that recognise themselves
as providers of voting research (and as such joined the Best Practice Principles Group –BPPG) include EOS at Federated Hermes (UK-based), PIRC (UK-based) and Minerva
Analytics (UK-based). It should be noted that, in line with the input received via the Call for
Evidence, there are a few additional proxy advisors headquartered in EU countries, witha main focus on domestic markets (hereinafter also referred to as “local” proxy advisors),
and that have not signed up to the Best Practice Principles (BPP).
25. Around a decade ago, ESMA performed an analysis of the proxy advisory market, carryingout a targeted fact-finding exercise. ESMA then published a paper to assess the proxyadvisory market and found no clear evidence of market failures that would justify regulatoryintervention. On this basis, in its 2013 report5, ESMA recommended the industry develop
a code of conduct to improve investors and issuers’ understanding of what they can expectfrom proxy advisors. ESMA complemented its report with a number of specific expectations
on how to bring about the necessary improvements, both in some key areas such asconflicts of interest and transparency and on the governance criteria for developing,
maintaining, and updating the code of conduct. Following up on the ESMA 2013 report, the
BPP were established by the BPPG. ESMA subsequently published a follow-up report in2015, which concluded that the drafting of the principles was overall in line with its
expectations, but the governance structure of the group showed room for improvement,
particularly with respect to ensuring a robust monitoring mechanism of the principles6.
26. Further to ESMA’s 2015 report and a public stakeholder consultation launched in 2017, theBPPG performed a review7 of the BPP in 2019, with the purpose of developing an amended
version of the original principles, to also factor in the SRD2 provisions. After the review, an
ad-hoc oversight committee named the BPP Oversight Committee (IOC) was established.
This Committee is composed of representatives of investors, issuers and academics andhas an independent Chair. Moreover, to improve the quality of disclosures, the BPP notably
embedded an “apply and explain” approach, whereby signatories are asked to disclose
how they apply the recommendations in their specific circumstances and business models8.

ESMA, “Final Report: Feedback statement on the consultation regarding the role of the proxy advisory industry” (2013).
ESMA, “Follow-up on the development of the Best Practice Principles for Providers of Shareholder Voting Research andAnalysis” (2015), page 39, paragraph 118.
7
Melis, D. A.M., “Report of the Independent Review Chair of the 2019 Best Practice Principles for Providers of Shareholder Voting
Research & Analysis” (2019).
8
Deviations from the principles are still possible, provided they are adequately explained, see Melis, D. A.M. (2019), page 9.
5618

27. Input received via the Call for Evidence indicates that stewardship codes, notably the UK

Stewardship Code and the Japanese Stewardship Code, have also been applied by certain
proxy advisors. The UK Stewardship Code, although primarily addressed to asset
managers, grants the possibility for proxy advisors to opt in. It was first released in 2010by the FRC and revised in 2019 and is based on a similar “apply and explain” principle.
The Japanese Stewardship Code, published in 2014 by the Japanese Financial Services
Authority, is also open to proxy advisors while it is based on the “comply or explain”
principle. Lastly, as regards other major jurisdictions, the debate about the role of proxyadvisors and whether they should be regulated that took place in recent years in the US is
worth mentioning. In 2020, the SEC issued rules on proxy advisors, however many of thesewere amended or repealed in 2022, also in light of the increasing role of self-regulation inthis area9.

3.1.2 Article 2(g) – Definition of proxy advisors
28. Recital 26 of the SRD2 states that:“in view of their importance, proxy advisors should be
subject to transparency requirements”,
those requirements being detailed in Article 3j. It is necessary to refer to the definition of“proxy advisor” provided in Article 2(g) to understand their scope of application:“[…] a legal person that analyses, on a professional andcommercial basis, the corporate disclosure and, where
relevant, other information of listed companies with a view
to informing investors’ voting decisions by providing
research, advice or voting recommendations that relate to
the exercise of voting rights”.
29. The majority of respondents to the Call for Evidence consider that the definition of proxyadvisors set out by the SRD2 has been able to identify the relevant players in the industry.
Nonetheless, some respondents suggest that this definition might be improved. In theirview, the framework resulting from the SRD2 still leaves room for confusion on who actuallyis a proxy advisor, and further clarity is needed on whether certain players should beconsidered as proxy advisors.
30. In addition, some respondents expressed limited satisfaction with the current scope of theSRD2, in light of evolving market practice and new services and players emerging,

9

SEC, “Amendments to the Proxy Rules for Proxy Voting Advice” (2021), page 14.
19

especially when it comes to the provision of ESG-related services. Local proxy advisors
highlight the need for ensuring consistent transparency requirements for all entities
providing voting advisory services in a broad sense, including providers of ESG data andservices10.
31. Certain participants to the consultation, particularly from the issuer community, highlighted

in turn the need for regulating ESG rating providers, due to potential overlaps of theirbusiness with that of proxy advisors11.
32. On the basis of the above, some respondents to the consultation, primarily local proxyadvisors and issuers, suggested that in order to avoid the offering of proxy advisory
services that are not subject to any transparency requirements, the SRD2 definition should:i.

Clarify whether certain players should fall under the scope of the Directive,
such as any professionals offering similar services (and not necessarily
operating only as legal entities) or non-profit organisations providing
recommendations, while still reflecting the differences among the various
types of service providers;ii.

Confirm that the SRD2 definition of proxy advisors is technology-neutral andapplies regardless of the specific tools and techniques used, such as mobile
apps, artificial intelligence tools, etc andiii.

Clarify whether an entity is to be considered a proxy advisor as defined under
the SRD2 if the research and advice are provided only as ancillary services tothe provision of ESG and/ or corporate governance-related advisory services
and of services for the actual exercise of voting rights (e.g. voting platforms
with pre-tabulated votes in accordance with proxy advisors’
recommendations).

33. ESMA understands the merits of encompassing professionals not operating as legal

entities but providing services on a commercial basis, in order to focus on economic
substance over legal form. Regarding non-profit organisations, it notes that only providing
recommendations on a professional and commercial basis may capture thoseorganisations in the definition of proxy advisors.

10

In their view, this should also encompass disclosure and management of potential conflicts of interest, and transparency on
how specific clients’ guidelines in the analyses of agendas and voting execution are applied.
11
In particular, they call for regulation of such activities, e.g. by addressing i. Conflicts of interest, notably in terms of ownershipand services offered; ii. Quality of ratings and iii. Transparency of rating methodologies.
20

34. In addition, ESMA agrees that the SRD2 definition should be able to cater for evolving

market practices and remain technology-neutral.
35. Regarding entities offering services such as ESG-related services, voting execution

services, engagement services, or other advisory services to investors and/ or issuers, aslong as such services are related to the provision of voting research or advice, ESMA findsthat these should be captured by the SRD2 to reflect current market practices. This may
also mean that research and advice are provided as ancillary services.
36. According to a few NCAs providing input to ESMA, the lack of clarity surrounding thedefinition of “proxy advisor” may make monitoring more difficult. In this regard, ESMA
observes that a basic registration mechanism, namely one in which proxy advisors are
required to notify their presence in the EU (as further explained below under paragraph75), would improve clarity on market players subject to Article 3j of the SRD2 and their
specific business model and type of services offered.
37. Finally, it should be highlighted that the European Commission has recently proposeda regulatory framework for ESG ratings activities12. ESMA notes that while this regulatory
initiative has been set up as a standalone proposal, based on ESG rating agencies’ specificbusiness model and market structure, potential overlaps and/ or conflicts with theregulatory framework on proxy advisors should be avoided13.

3.1.3 Article 3j(1) – Application of a code of conduct
38. According to the comply or explain approach provided in Article 3j(1) of the SRD2:“Member States shall ensure that proxy advisors publicly
disclose reference to a code of conduct which they apply
and report on the application of that code of conduct.
Where proxy advisors do not apply a code of conduct, theyshall provide a clear and reasoned explanation why this is
the case. Where proxy advisors apply a code of conduct
but depart from any of its recommendations, they shalldeclare from which parts they depart, provide explanations
for doing so and indicate, where appropriate, any
alternative measures adopted. Information referred to inthis paragraph shall be made publicly available, free ofEuropean Commission, “Proposal for a regulation on the transparency and integrity of Environmental, Social and Governance(ESG) rating activities” (2023).
13
In addition, it should be noted that similar issues may arise in connection with the role of external verifiers under the European
Green Bond Standard proposal. Please see European Commission, “Proposal for a regulation on European green bonds” (2021).
12

21

charge, on the websites of proxy advisors and shall be
updated on an annual basis.”
39. Input collected through the Call for Evidence confirms that the adoption of a code of

conduct is widespread among proxy advisors. However, not all of them are signatories tothe BPP and references to the UK Stewardship Code and the Japanese Stewardship Codeare also made14. For example, one respondent mentioned that it adheres to more than one
code, and another indicated that, while being compliant with the BPP, it has decided not tobecome a signatory, due to the costs involved and the overlaps between the BPP and theSRD2. One additional respondent reported to have developed its own code of conduct15.
40. Overall, while it seems confirmed that the BPP remain the source of self-discipline

specifically addressing the proxy advisory industry, it is worth noting that other codes, ofdifferent types, are being developed around the world and can serve as such a source as
well. This may have an impact on how effective the current reference in the SRD2 to“a” code of conduct really is, without providing any indication on the required features,content, or the existence of a monitoring mechanism.
41. Consistently with the previous picture, only a small number of respondents provide

evidence on the existence of proxy advisors that did not fully apply and/ or fully report on
the application of such a code of conduct. A few asset managers paint a positive picture ofsuch cases referring to proxy advisors that, even if they are not (or not fully) applying a codeof conduct, still adequately disclose the reasons why and, where appropriate, alternative
measures adopted (in line with Article 3j(1)). However, other respondents, including
a proxy advisor and issuer associations, report that appropriate disclosure on the reasonsfor departing from a code of conduct and/ or on alternative safeguards in place was notprovided by some proxy advisors, especially new entities offering advisory services andthat are not signatories to the BPP.
42. Generally, respondents to the Call for Evidence, mainly representatives of investors,

consider that market practice has improved and welcome the monitoring by the IOC. Most
investors see the current legal framework developed by the SRD2 and the role of the BPP
and the IOC as enablers of a robust self-regulation system. Annual review by the IOC of
the statements published by proxy advisors (featuring detailed information on how they14

According to the input received, two respondents are founding signatories of the BPP, two are signatories to the UK Stewardship
Code (one also being signatory to the BPP and one also a signatory to the Japanese Stewardship Code). However, ESMA’s desk
research indicates that at the time of the consultation, three of the respondents were in fact signatories to the UK StewardshipCode.
15
It should be noted that ESMA’s desk research identified that the latter respondent has also become a signatory to the newly
published Spanish Code of Good Practice for Investors. This code makes use of the “comply or explain” principle for a transitional
period of three years after its adoption by asset managers and proxy advisors, after which all signatories are mandated to an“apply and explain” principle. The code can be found here.
22comply with the BPP) is seen by global proxy advisors as able to generate improvements
in disclosure practice and provide assurance and transparency as to whether and how
signatories are complying with the BPP. Global proxy advisors also emphasise theimportance of the BPP in driving harmonisation of market practice. According to them, theself-regulatory system is able to ensure proportionality and flexibility (in terms ofadaptability to different situations and proxy advisors’ different features), while at the sametime avoiding the fixed costs and potential anti-competitive effects of prescriptive conduct
regulation, namely in terms of increasing barriers to entry16.
43. In addition, a few responses stress that asset managers increasingly have custom policies

and rely on proxy advisors more for their data and analyses rather than for their voting
recommendations, which may reduce the risk of overreliance on the latter. According tothem, some asset managers are exploring ways to give their investor-clients the option to
cast their vote themselves, which in perspective may facilitate more diversified voting. In
their view, these aspects suggest retaining the SRD2 current approach, mainly based ontransparency and self-regulation, which may better fit proxy advisors’ evolving practices
and different business models than prescriptive conduct regulation.
44. Global proxy advisors and investors also argue that consistent with ESMA’s findings in

201317, there is still no evidence of significant market failure that could require a regulatoryintervention. They recall that more prescriptive regulatory approaches in other jurisdictions(notably in the US and in Australia) have been reconsidered in favour of monitored selfregulation of the kind embodied in the BPP initiative. Moreover, some investor
representatives warn about the risks of further regulating the proxy advisory industry, again
based on the argument that this may lead to additional barriers to entry in that market. This,in turn, may affect the competitiveness of this industry and ultimately negatively impact
investors’ ability to fully exercise their stewardship activities, for example resulting in fewer
or less informed voting.
45. Still, certain stakeholders see room for improvement and suggest a number of steps that

could be taken to address current weaknesses. In particular, local proxy advisors andissuers tend to be less optimistic about the effectiveness of the current framework andsuggest further regulatory steps. These respondents consider that the national dimensionof supervision envisaged by the SRD2 is not fully satisfactory and that further
harmonisation and common supervision are needed. As such, local proxy advisors suggestthat ESMA keep a register of the proxy advisors subject to the SRD2 and develop
a European code of conduct, acting as common EU supervisor. In addition, certain issuers

16

Incidentally, ESMA recalls that competition matters on a European scale fall within the remit of the European Commission andthat ESMA does not have specific enforcement powers in this area.
17
ESMA (2013).
23

would consider it helpful to entrust NCAs with the task of monitoring developments at thedomestic level, including as regards the impact of proxy advisors’ activity on GM outcomes.
In their view, NCA monitoring could take the form of an annual report, which could beaccompanied by a reporting mechanism to ESMA, which would also manage a complaint
mechanism. Issuers also flag the need to increase their representation in the IOC.
46. ESMA generally notes from the Call for Evidence that the design of the current regulatory

framework is considered overall robust, and its application is seen to be gradually
improving. Therefore, the present approach of “monitored self-regulation” should bemaintained. Nonetheless, further improvements could be foreseen in this context. For
example, a basic registration mechanism, as referred to in paragraph 75 could be also
helpful in improving the functioning of the SRD2 framework (e.g. by providing clarity on
which MS is the competent MS). In addition, a reference within the Directive to a code of
conduct that entails certain minimum features, including on its monitoring, may be helpful
in further improving market practice.
47. ESMA also understands that while the IOC is independently chaired and diverselycomposed and this has provided some level of comfort to stakeholders, the governance of
the BPPG, as recommended by ESMA in 2015, would still benefit from a clearer and morerobust structure, including via the appointment of an ad-hoc Chair18 that is separate fromthat of the IOC. This may, in turn, facilitate regular updates of the self-regulatory principles
going forward, to meet evolving market expectations.

3.1.4 Article 3j(2) - Disclosures
48. According to Article 3j(2) of the SRD2:”Member States shall ensure that, in order to adequately
inform their clients about the accuracy and reliability of theiractivities, proxy advisors publicly disclose on an annual
basis certain information in relation to the preparation of
their research, advice and voting recommendations […19].
The information referred to in this paragraph shall be madepublicly available on the websites of proxy advisors andshall remain available free of charge for at least three years

In line with recommendations set forth in ESMA’s previous analysis: ESMA (2015), page 34, paragraph 107.
(a) the essential features of the methodologies and models they apply; (b) the main information sources they use; (c) theprocedures put in place to ensure quality of the research, advice and voting recommendations and qualifications of the staff
involved; (d) whether and, if so, how they take national market, legal, regulatory and company-specific conditions into account;(e) the essential features of the voting policies they apply for each market; (f) whether they have dialogues with the companies
which are the object of their research, advice or voting recommendations and with the stakeholders of the company, and, if so,
the extent and nature thereof; (g) the policy regarding the prevention and management of potential conflicts of interest.
18
19

24

from the date of publication. The information may beprovided together with disclosure on the adoption of a codeof conduct under paragraph 1.”20
49. The Call for Evidence looks into the disclosures provided by proxy advisors according to

Article 3j(2), and whether they have reached an adequate level following the entry into
application of the SRD2.
50. An overall positive picture of market practice was drawn by all types of respondents. Thisis true especially as to the transparency provided by proxy advisors to ensure the accuracy
and reliability of the advice, the disclosure on their voting policies and methodologies and,to a lesser extent, on how they consider local market and regulatory conditions. Reflectionof local market conditions seems to vary depending on the specific market under scrutiny
and on the breadth of the geographical area for which voting policies are designed by
global proxy advisors. While some calls for improvements have been made on these topics,
as mentioned earlier, several market participants acknowledge the key role of IOC
monitoring in fostering adherence to best practices, also in this area.
51. Coming to whether the above improvements can be attributed to the entry into applicationof the SRD2, proxy advisors tend to emphasise that the Directive did not have a major
effect on current practices and only required partial changes because disclosure policies
were already quite advanced before its application. However, other respondents noted thatproxy advisors’ practice has in fact been adapted since the SRD2 has come into force.
Although not attributable to the SRD2, stakeholders noted that since its entry into
application, the IOC has begun overseeing the BPP reporting process, providing reviewsof the signatories’ reports on an annual basis.
52. A few NCAs providing input to ESMA have also observed a gradual improvement on proxyadvisors’ practices over the years. However, they often stress that it is difficult for them toidentify specific shortcomings when carrying out their supervisory duties. In particular,
NCAs find it difficult to draw conclusions on proxy advisors’ activities based on theinformation they publish, especially when they lack specific powers to be able to request
more granular information from proxy advisors regarding their activities, and even more soin the case of proxy advisors operating in the EU via an establishment placed in a differentMS.
53. The assessment by respondents concerning the disclosure provided by proxy advisors on

dialogue with issuers is less positive, and improvements in this area have been suggested,

20

i.e., those under a self-regulatory code.
25especially by the issuer community. As a background, it should be recalled that, according
to Article 3j(2)(f) of the SRD2:“proxy advisors publicly disclose on an annual basis […]whether they have dialogues with the companies which are
the object of their research, advice or voting
recommendations and with the stakeholders of thecompany, and, if so, the extent and nature thereof”.
It is worth noting that while the SRD2 provides for such disclosure by proxy advisors, itdoes not provide any prescriptive conduct requirement concerning dialogue with issuers,
including requiring proxy advisors to enter into such dialogue and give a minimum amountof time to issuers to review the draft report and flag possible errors.
54. On this matter, issuer representatives especially call for more transparency on how proxyadvisors engage with them and whether they consider their views and comments in an
efficient and timely manner, asking that either the BPP or the SRD address this. In theirview, it should be ensured that issuers can submit a request for receiving the draft report
before its publication, can correct factual errors and provide comments on reports. In
addition, such interaction should be disclosed to the recipients of the report. In this respect,
one frequent comment made by the issuer community is that, where allowed by proxyadvisors, the time granted to issuers for feedback and review of data shared prior to theGM (e.g. on board composition, compensation practices and equity plans) is too short andthat comments provided are not always incorporated. On the other hand, while the timeline
for dialogue is admittedly tight, it is also noted by proxy advisors that the quality of issuer
responses to their remarks is not always satisfactory. Generally, a framework for morestructured dialogue, especially in the case of negative recommendations issued by proxyadvisors, would be seen as a welcome step, particularly by issuers.
55. It should be noted that the IOC seems aware of some of these shortcomings as it devotes

a number of recommendations to improving disclosure on dialogue between proxy advisors
and issuers. In particular, the IOC encourages proxy advisors to adequately disclose:i.

The process for issuer feedback and its features (whether it varies by market,
company size or other factors) or, conversely, why the process is not in place;ii.

What document is provided to the issuer (full report, research only, etc.);

iii.

Whether the issuer is provided with any advance notice as to when the reportwill be sent for review;iv.

The time given to the issuer to respond and26

v.

Whether the issuer has to pay any fees to have access to the report before its
publication.

56. Generally, respondents agree that the accuracy and quality of research by proxy advisors

as well as dialogue with issuers would benefit from timelier disclosure of corporate
documents by companies (and – as far as needed – an increase in the minimum period forconvening GMs according to the SRD – i.e., 21 days 21 ). Timelier disclosure of GM
documents would in fact grant proxy advisors more time to perform their analyses before
the cut-off date for submitting votes actually set by custodians in some EU markets(reportedly between 10 and 15 days prior to the GM date).
57. Also according to investors, transparency on the dialogue with issuers and on consequentchanges on research is identified as an area for improvement. In this respect, investors
suggest that accuracy of research might benefit from envisaging that all issuers are given
standard time to signal possible errors to ensure that investors receive accurate andreliable information. Ultimately, this would allow proxy advisors to correct any erroneous
data in due course and at the latest before releasing their voting recommendations to theirclients.
58. As regards the dialogue between proxy advisors and issuers, a few NCAs providing input

to ESMA are also aware of the difficulties affecting such interaction and generally concurwith the stakeholders’ view that there may still be room for improvement and that an
extended timeline would facilitate dialogue. In addition, a few NCAs also highlight thediversity in practice observed in proxy advisors’ policies with respect to dialogue22. Here,
ESMA notes that while this aspect is currently left to proxy advisors’ own policies, it would
be helpful if specific best practices could be developed in this area by codes of conduct,
also leveraging on potentially longer timelines for the publication of meeting documents assuggested in letter (n) of the advice on the investment chain section.

On this point, please see also Article 5(1) of the SRD1: “[…] Member States shall ensure that the company issues the
convocation of the GM in one of the manners specified in paragraph 2 of this Article not later than on the 21st day before the dayof the meeting. […]” and Article 5(4): “Member States shall ensure that, for a continuous period beginning no later than on the
21st day before the day of the general meeting and including the day of the meeting, the company shall make available to its
shareholders on its Internet site at least the following information: […] c) the documents to be submitted to the general meeting[…]”.
22
A few examples raised by these NCAs are provided in the following: One proxy advisor was reported to have sent the draft
report to issuers giving them 24-48 hours to correct any factual error, and, in case of a negative recommendation, to submit theirobservations that are included as quotes in the report. Another one was reported to have uploaded the data deemed as relevantto the voting recommendations on an online platform and have given the issuer the opportunity to notify the proxy of any factual
error or possible omission. However, the issuer reportedly only had access to the proxy’s voting recommendations (and was able
to share its positions on those) if it purchased the report. Lastly, another proxy advisor was reported to not have provided accessto the report to issuers before it was sent to the client, arguing that such an approach would undermine their intellectual property
rights and independence and would reduce the incentive for issuers to provide complete public information.
21

27

59. Finally, some criticism was expressed by respondents on the management of complaints

by proxy advisors. Certain respondents from the issuer community and also the SMSG flag
poor transparency on the complaint procedures, arguing that this ultimately discourages
issuers from launching such complaints. Standardisation and improvement of complaints
handling are therefore recommended, together with the possibility that the procedure be
initiated with the national regulator. These respondents also argue for a complaint systemthat could be either complementary or alternative to that currently performed by the BPPG/
IOC. It is interesting to note that none of the respondents to the Call for Evidence haveinitiated a complaint procedure under the BPP framework as regards research reports,
although ESMA understands that one complaint has actually been escalated to the IOC’s
attention23.
60. On this topic, the IOC points out that the BPP call for effective procedures by theirsignatories for handling the complaints in a responsive and timely manner, aiming at
increasing the accountability of the whole process. The IOC also notes that the process ofmonitored self-regulation has begun to bear fruit with the 2022 statements, when
signatories included reactions to IOC recommendations in the first cycle of reviews (2021).
61. Nonetheless, based on the input received in the consultation, ESMA would find it beneficial

if some additional reassurance was provided at the EU level on the ability of the complaint
mechanism to address stakeholders’ expectations and thereby improve public trust in
proxy advisors’ practices.

3.1.5 Article 3j(3) - Conflicts of interests
62. Coming to conflicts of interest, it is worth recalling that according to Article 3j(2)(g) of the

SRD2:“proxy advisors publicly disclose on an annual basis […]the policy regarding the prevention and management ofpotential conflicts of interests”.
In addition, Article 3j(3) states that:“Member States shall ensure that proxy advisors identify
and disclose without delay to their clients any actual or
potential conflicts of interests or business relationships that
may influence the preparation of their research, advice orvoting recommendations and the actions they have

23

BPPG Oversight Committee, “2022 BPPG Oversight Committee Annual Report”, page 56.
28

undertaken to eliminate, mitigate or manage the actual or
potential conflicts of interests”.
63. It is worth noting that, in contrast to Article 3j(2), Article3j(3) cannot be addressed by simply

complying with a code of conduct or by explaining the reasons for not doing so but
constitutes a mandatory disclosure requirement on proxy advisors towards their clients.
64. Conflicts of interest is the area in which disclosure by proxy advisors has overall been

considered less satisfactory by all types of respondents to the consultation, including someof the proxy advisors themselves. Most concerns have been expressed about situations inwhich proxy advisors release research about issuers to investors and serve at the sametime as consultants to the same listed companies, e.g. to suggest improvements to theircorporate governance practices. It has been reported that the increasing provision of suchservices by certain proxy advisors is a source of concern and that potential conflicts ofinterest are more frequently observed than in the past, also in the perspective of issuersthat may feel pressured (e.g. through marketing campaigns) to buy such services in order
to avoid negative recommendations24.
65. Both issuers and investors emphasise the importance of disclosure by proxy advisors on

the comparative size and nature of their revenue sources (as recommended by the IOC in
its monitoring) and on the structure of fees charged, so that it can be assessed how muchis earned through additional services such as consultancy, ESG data provision and voting
execution services. Issuers’ representatives also emphasise that, according to the SRD2,
proxy advisors should inform their clients about individual conflicts that have emerged in
the preparation of their research and advice. In addition, they request that such piece of
information be presented on the front-page of the same report, in line with the practice on
investment services.
66. Evidence on practices actually adopted by proxy advisors on conflicts of interest and on

relevant disclosure varies. Some market players accompany the research with a conflictof-interest statement, indicating whether they have a relationship with the company onwhich they are offering voting advice and describing this relationship. Others make thispiece of information available to their investor clients, even if it is not displayed in the same
report as the advice itself. Interestingly, some local proxy advisors call for a stricter
approach on the provision of consultancy services to issuers that are the object of researchand voting advice, suggesting that such activity should be forbidden (in line with their own

24

In that regard, issuer representatives warned about the risk that a proxy advisor might use its market power to create the needfor issuers to be advised in order for them to obtain more favourable voting recommendations, as the aforementioned marketingof consultancy services could possibly be targeted to issuers receiving negative recommendations.
29

reported practice) or, alternatively, accompanied by full transparency (to the public) on
issuers that purchased consultancy services and on the related fees charged.
67. According to some respondents, including certain proxy advisors, more granular SRD2

provisions on identification of potential conflicts of interest (coming from ancillary andoverlay services such as corporate governance and/ or ESG advice and voting services)would be welcome. While some proxy advisors highlight that considerable efforts havebeen made in this regard, other market participants, and also the SMSG, are somewhat
critical and maintain that neither the SRD2 nor the updated BPP have been fully successful
on this matter.
68. Moreover, input received through the consultation confirms that evolving market practiceshows increasing consideration of ESG issues in the preparation of voting research andadvice according to proxy advisors’ own policies or to client-customised policies. Thischange was not only reported by proxy advisors but also acknowledged by several
investors, some of which also noted that the integration of ESG issues in voting research
and advice is still in progress and shows different levels of maturity. While the provision of
additional ESG-related services to issuers raises some concerns amongst them, as they
consider it may increase the likelihood of potential conflicts of interest, investors seem not
too concerned at this stage.
69. Finally, based on NCAs’ supervisory experience on proxy advisors, there is limited

evidence of specific instances in which major conflicts of interest have surfaced and havebecome an issue for market players. This may also indicate that it is not always easy forthem to access information on this matter.
70. Overall, based on stakeholders’ feedback, ESMA considers that conflicts of interest remaina source of concern for the market and a reinforcement of the SRD2 provisions in this area
would be helpful both in terms of disclosures to the public and to investors-clients.

3.1.6 Article 3j(4) - Proxy Advisors operating via establishments
71. Article 1(6)(c) sets out that Chapter Ib, which includes Article 3j(4), applies to:“proxy advisors, to the extent that they provide services toshareholders with respect to shares of companies whichhave their registered office in a Member State and theshares of which are admitted to trading on a regulated
market situated or operating within a Member State”.

30According to its paragraph 4, Article 3j also applies to proxy advisors that have neither theirregistered office nor their head office in the EU, which carry out their activities through anestablishment located in the Union. For that purpose, the SRD2 identifies the competent
MS as that:“in which the proxy advisor has its registered office, or,where the proxy advisor does not have its registered office
in a Member State, the Member State in which the proxyadvisor has its head office, or, where the proxy advisor has
neither its registered office nor its head office in a Member
State, the Member State in which the proxy advisor has anestablishment”25.
Additionally, recital 27 of the SRD2 sets out in relation to third-country proxy advisors that:“In order to ensure a level playing field between Union andthird-country proxy advisors, this Directive should also
apply to third-country proxy advisors which carry out theiractivities through an establishment in the Union, regardlessof the form of that establishment”.
72. Input collected on the effectiveness of such provisions to ensure a harmonised framework

for all proxy advisors covering EU listed companies varies and includes a number of
responses by proxy advisors, investors and issuer representatives generally emphasising
the cross-border nature of proxy advisors’ activities and the limits of a national-levelsupervision framework as provided by the SRD2. It should be noted that most proxyadvisors responding to the consultation have asserted that their registered office is in the
EU and only one has maintained that its headquarters are in the US, but it hasestablishments in the EU26.
73. According to two local proxy advisors, the implementation of the SRD2 differs widely across

EU jurisdictions, making each player subject to different supervisory rules. In this respect,
an asset managers’ representative points to the importance of the BPP and of thecentralised IOC monitoring (rather than local monitoring where the proxy advisors are25

Article 1(2)(b) of the SRD2
ESMA’s desk research indicates that certain players that have not responded to the ESMA consultation provide services inrelation to European companies, but they do not have a registered office, nor a head office, nor even an establishment in the EU.
Although compatible with the SRD2, having third-country proxy advisors operating without an establishment may create room forregulatory arbitrage risks.
26

31

incorporated or based). Certain issuer representatives further suggest that common
supervision by ESMA be established, in line with what local proxy advisors also argue.
74. When it comes to the perspective of NCA supervision, it should be noted that supervisionby specific NCAs applies to the very few players that operate via a registered office, a head
office, or an establishment in the respective MS. Therefore, not every NCA supervises
a proxy advisor, even if it requires proxy advisors operating locally to register with it. Further
to that, ESMA understands that not all MSs entrusted an NCA with supervising domestic
proxy advisors27.
75. In this regard, ESMA notes that a registration system as reported earlier in paragraph 36

may also be helpful in providing further clarity on entities operating in Europe and fallingunder the scope of the SRD2. Given the global nature of the proxy advisory market, andthe limits of local approaches as highlighted above by stakeholders, ESMA notes that sucha registration mechanism should be placed at the EU level 28. The global nature of themarket and the ease of moving an establishment out of the EU should also be taken into
account when evaluating the existent and prospective regulatory strategies (namely in lightof the risk that a very prescriptive regulatory approach may provide incentives for thirdcountry proxy advisors to operate in EU markets without either an establishment or a head
office/registered office).

3.2 Advice
76. On the basis of the above considerations, ESMA presents its advice to the Commission

below.

3.2.1 Article 2(g) – Definition of proxy advisors
Regarding the definition of proxy advisors, ESMA recommends that:(a) The Commission should consider further clarifying the SRD2 definition of proxyadvisors to improve market certainty and ensure that all market players exercisinga similar economic function on a professional and commercial basis are captured.
This could encompass:27

For a detailed analysis of MSs’ status, reference is made to Table 4 included in Annex VII: SRD2 transposition .
For a publication in the UK, which lists proxy advisors and whether they have subscribed to the UK Stewardship Code, seeMorrow Sodali, Durham University Business School and Financial Reporting Council (2023), page 12.
28

32

i.

Clarifying the role of professionals that are not established as legal persons
and provide advice on a commercial basis;ii.

Clarifying the role of any non-profit organisations in case they provide advice
on a professional and commercial basis;iii.

Clarifying that the provision of (ESG) data services, governance and/ or
ESG analysis and rating services (on a professional and commercial basis),when related to advice on the exercise of voting rights (including when thelatter is provided as an ancillary service), is included in the definition of proxyadvisors.

In connection with point iii), potential overlaps and/ or conflicts between theregulatory framework on proxy advisors and that applicable in other bordering areas
such as on ESG rating activities should be avoided.
(b) The Commission should also consider whether a basic registration mechanism at
EU level may help to provide better clarity to market participants and NCAs on theplayers operating under the SRD2 framework, as also proposed below under letters(h) and (i).

3.2.2 Article 3j(1) – Application of a code of conduct
Regarding the application of a code of conduct, ESMA recommends that:(c) Taking into account that the current framework, mainly based on self-regulation andinherent disclosures, has contributed to reducing the risk of further raising barriers toentry in an industry that is already highly concentrated, the Commission should
consider whether the general reference included in Article 3j(1)(2) to “a code of
conduct” still serves the purpose of ensuring adequate transparency. In this regard,
more specific qualifications of what features such a code should have, in particular
an independent monitoring mechanism, may be helpful in providing further clarity to
the market.

33

3.2.3 Article 3j(2) – Disclosures
Regarding proxy advisors’ disclosures, ESMA recommends that:(d) Given that Article 3j(2) endorses the application of codes of conduct by proxyadvisors as a tool to comply with the regulatory framework and considering a specificproposal in this direction provided via the Call for Evidence, the Commission should
consider whether issuers and investor-clients should be allowed to resort to ESMAin exceptional cases of critical issues or alleged violations of a code of conduct (forexample those that could not be addressed in a satisfactory way either bilaterallywith the interested proxy advisors or by resorting to other mechanisms put in placeby the proxy advisory industry). In those cases, ESMA could attempt to facilitate
dialogue between the issuers/ investors and the proxy advisors involved, taking into
consideration the account provided by the entities as well as proxy advisors’ policies
and statements as published. Any ESMA recommendations would not be binding on
the parties, who would still be able to seek judicial remedies.
(e) Taking into account the limited disclosure of data sources highlighted via the Call for
Evidence, the Commission could consider requesting more specific disclosure of
information sources, including ESG data, under Article 3j(2)(b) of the SRD2.

3.2.4 Article 3j(3) – Conflicts of interests
Regarding conflicts of interest, ESMA recommends that:(f) The Commission should consider whether more detailed disclosure obligations on
conflicts of interest by proxy advisors vis-à-vis their clients, as currently included in
Article 3j(3), might improve investors’ understanding of possible conflicts of interest.
This could be in the form of annotations on the first page of the voting advice,
showing individual conflicts that have emerged and their nature, such as consultancy
services provided to issuers or other interested parties, staff members who
previously worked for or had other types of relations with one of the clients, etc.,
provided of course that the disclosure does not breach legal provisions on
confidentiality.
(g) Building on what is already recommended as best practice, the Commission should
consider improving the list of public disclosures under Article 3j(2) of the SRD2, bymandating transparency on the type of revenues a proxy advisor has generated byproviding services to different types of clients, and their relative weight.

34

3.2.5 Article 3j(4) – Proxy advisors operating via establishments
Regarding proxy advisors operating via establishments, ESMA recommends that:(h) Taking into account the global nature of the proxy advisory market, in order to obtainclarity on the players operating under the SRD2 framework and where they place
their establishments across different MSs, the Commission should consider the
introduction of a basic registration mechanism at EU level (i.e., one where proxyadvisors with at least an establishment in the EU would need to notify their activities
on EU listed companies).
(i) In order to provide better visibility and comparability to market participants overpractices adopted by proxy advisors subject to the SRD2, the Commission should
consider whether the registration mechanism proposed under letter (h) could be
associated with the publication of a list of such proxy advisors, specifying whether or
not they apply a code of conduct and, in the latter case, providing the link to theirreport published under Article 3j(2) of the SRD2.

4 Investment chain
4.1 Analysis
4.1.1 Introduction
77. Shares of listed companies are often held through complex chains of intermediaries andthe effective exercise of shareholder rights depends to a large extent on the efficiency of
the investment chain, especially at cross-border level. In this context, the SRD2 (and theIR) introduced rules on shareholder identification, transmission of information, facilitationof shareholder rights and transparency and non-discrimination of costs, with the aim offacilitating the exercise of shareholder rights and of removing existing obstacles to longterm shareholder engagement in EU listed companies.
78. Input received via the Call for Evidence confirmed that the SRD2 and the IR are recognised

as key steps that have strengthened the legal framework by setting out a number ofoperational requirements to improve the flow of information throughout the investment
chain. Nevertheless, input to the Call for Evidence also indicated an uneven level of
effectiveness of the SRD2 rules across the EU. While the functioning of the investment
chain is recognised as relatively smooth as regards the exercise of dividends rights,
practices regarding shareholder voting still do not appear completely satisfactory. In
35particular, difficulties arise from the unharmonised practices in the flow of information
related to shareholder identification, the notice for corporate events and the entitlement ofshareholders.
79. In the following, the main points raised by stakeholders are analysed according to the orderof the legislative text.

4.1.2 Article 3a – Identification of shareholders
80. The SRD2 provides for the right of issuers to identify their shareholders. According to

Article 3a(1):“Member States shall ensure that companies have the rightto identify their shareholders. Member States may provide
for companies having a registered office on their territory to
be only allowed to request the identification of shareholders
holding more than a certain percentage of shares or voting
rights. Such a percentage shall not exceed 0,5 %.”81. With regard to the effectiveness of the new shareholder identification provisions, the mostrecurrent concerns that respondents raised, stem from the minimum harmonisation natureof the SRD2 provisions themselves and certain gaps in the IR. Differences observed
among national jurisdictions as well as among practices of market players within the same
MS are reported to create obstacles to the processing of shareholder identification requests
in a timely and consistent manner across the EU29. Those differences are considered to bemainly related to the following issues:a) The lack of a common definition of shareholder and the lack of certainty on
securities falling under the scope of the SRD2;b) The lack of sufficiently strict and harmonised requirements for the communication
between issuers, Central Securities Depositories (CSDs) and intermediaries
across the investment chain and29

Please note that the Corporate Events Group (CEG) of the Advisory group on Market Infrastructure for Securities and Collateral(AMI-SeCo) conducts a compliance monitoring exercise to assess current levels of compliance with corporate event standards in
Europe. As per the SRD2, this group is in charge of monitoring compliance with shareholder identification market standards
elaborated by the industry after the adoption of the IR (so it does not cover GMs). Regular reports are issued by the CEG.
Reference is made to the last one issued: “Corporate Events Compliance Report 2022 Monitoring exercise – December 2022”.
36c) The possibility for MSs to opt for the introduction of a minimum threshold to identify
shareholders.
a) Lack of a common definition of shareholder and lack of certainty on the securities fallingunder the scope of SRD2
82. In relation to the lack of a definition of the term “shareholder”, preliminarily, it is worth

recalling that the SRD2 did not harmonise this definition across Europe. As mentioned inrecital 13, the SRD2 is:“without prejudice to national law regulating the holding andownership of securities and arrangements maintaining the
integrity of securities and does not affect the beneficial
owners or other persons who are not shareholders under
the applicable national law”.
At the same time, it should be noted that Action 12 of the Commission’s 2020 Action Plan
on CMU provided that the Commission will need to assess:“the possibility of introducing an EU-wide harmonised
definition of shareholder”.
83. Almost all participants in the survey highlight that a harmonised definition would be helpful

in reducing divergent practices and increasing alignment of processes and efficiency
throughout the custody chain30. To this end, the majority of the respondents considered thatthe beneficial owner should be identified as the shareholder. However, it is generally
acknowledged that the harmonisation of the shareholder definition might entail certain
implications on national law (in particular securities law, company law and tax law),
including the regulation on rights attached to the securities, as well as on market practices.
Besides the shareholder notion, it was often argued by different types of respondents that,to ensure the effectiveness of shareholder identification, issuers should be able to identify
both beneficial shareholders and nominee shareholders, so as to be able to understandwho exercises the shareholder rights as well as on whose behalf.
84. Even some of those who do not agree with the need for a harmonised shareholder

definition suggested alternative tools to overcome some of the difficulties encountered in
the identification process. For example, one respondent suggested that an alternative andIn this area, please also see the conclusions drawn in the following reports: European Commission, “Commission Staff Working
Document on possible national regulatory barriers to the use of new digital technologies in the interaction between investors,
intermediaries and issuers (Action 12 of 2020 Capital Markets Union Action Plan)” (2022), page 6 and Informal Company Law
Expert Group (ICLEG), “Report on virtual shareholder meetings and efficient shareholder communication” (2022), page 20.
30

37

more pragmatic strategy could be to focus on determining who in the custody chain should
be identified according to the relevant provisions, without the need to define that person as“the shareholder”. That would entail introducing a specific definition for the sole purpose ofshareholder identification, in order to clearly specify whose identity data must be disclosed
to the issuer to comply with the SRD2 obligations31. Another respondent suggested thateach MS report its definition of shareholder to an EU body and that those national
definitions should then be publicly disclosed at the EU level. This was presented and canbe seen as a potential quick fix that could be put in place to improve certainty on the
different legal frameworks, while addressing the broader discussion on the shareholder
definition.
85. In ESMA’s view, there is no doubt that a common definition of the term “shareholder” would

have a significant impact on MSs’ legal systems and that MSs will need to examine thisvery thoroughly. At the same time however, the discussion does seem to be necessary, as
confirmed by the CMU Action Plan.
86. Uncertainty on the categories of securities eligible for the identification process under the

SRD2 has also been reported by many respondents, often from the intermediaries’ side.
Such uncertainty reportedly generates inconsistencies and difficulties in verifying whether
a disclosure request is valid or not and what the applicable law is, especially for CSDs andintermediaries operating in a cross-border context 32. Moreover, some respondents also
stated that it would be helpful if investor identification were not merely limited to owners oflisted shares, in line with what certain MSs have provided for when transposing the SRD2.
In particular, according to some of those respondents (mainly CSDs), issuers should beallowed to identify all holders of securities registered on a CSD account (e.g. units of funds
and debt securities) on the basis of the identification processes provided by the SRD2,
across all EU jurisdictions.
87. In this regard, ESMA considers that a clearer and more EU-harmonised scope of eligible

securities may represent a valuable step towards the harmonisation of practices among
MSs, avoiding uncertainty on the applicable law pertaining to identification requests
regarding securities other than listed shares of EU companies.

31

An alternative approach, suggested by ICLEG, refers to the possibility of addressing the issue of identifying the particular rights
attached to the shares rather than attempting to harmonise the definition of shareholder overall. In this regard, reference is madeto ICLEG (2022), pages 20-21.
32
It should be noted that NCAs also received a few requests by market participants seeking to confirm whether specific cases ofshareholder identification processes were captured by the provisions of the SRD2 and the IR.
38b) Lack of sufficiently strict and harmonised requirements in the communication between
issuers, CSDs and other intermediaries in the chain
88. A second point raised by stakeholders relates to the communication among all the entities

involved in the identification process (issuers, CSDs and other intermediaries). Almost all
the respondents underlined the opportunity to further mandate the use of a unique standard
format – such as ISO20022 – for both flows of information, i.e., the identification request
sent by issuers and the response on shareholder identity sent by intermediaries to issuers.
This would ensure an automated flow of information with no manual intervention (which isdefined as straight-through processing or STP) along the custody chain and reduce therisk of delay and the provision of non-standardised information.
89. In particular, many respondents on the intermediaries’ side insisted on imposing a fully

harmonised obligation on the issuers to initiate a shareholder identification process bysending the CSD a "golden operational record"33 in electronic and machine-readable format
with all the necessary information. It is worth noting that such an obligation would alsoentail that shareholder identity data cannot be requested by issuers (or issuer agents)
directly from intermediaries outside the intermediaries’ chain 34 , as currently allowed
according to the option provided to MSs in Article 3a(3).
90. ESMA also observes that, as a side effect, the use of mandatory ISO formats by issuers

could reduce the need for intermediaries, including CSDs, to require additional
documentation and connected processes, for instance to verify that shareholder
identification requests are valid and within the scope of the SRD2. Further harmonisationof formats could also cover issues such as the use of the Legal Entity Identifier (LEI),
disclosures received that are not always compliant with mandatory identificationthresholds, the usage of optional fields, differences in the identification data required byissuers (e.g.: tax residence, citizenship, date of birth)35.

33

The golden operational record, as referred to commonly by market participants, is a single record of operational information,
sent by the issuer to initiate a corporate action or a GM event, transmitted in STP and in a machine-readable format that allows
all parties in the intermediary chain to process the event in exactly the same manner. In the above context, it refers to the initiationof the shareholder identification process, but the golden operational record can also serve to initiate any kind of corporate event.
34
According to Article 3a(3) of the SRD2, “Member States may additionally provide that, at the request of the company, or ofa third party nominated by the company, the intermediary is to communicate to the company without delay the details of the next
intermediary in the chain of intermediaries.”
35
One connected challenge relates to the transmission of shareholder identity data without delay. In fact, a certain number ofintermediaries reportedly either do not respond to the shareholder identification request at all or respond after the deadline andoften need a dedicated follow-up to provide the answer. In particular, one respondent to the consultation flagged that between 510% of intermediaries do not respond to shareholder identification requests, and more than 20% respond after the deadline andoften need a dedicated follow-up.
A specific example of a national practice that, although compliant with the SRD2, one respondent finds sub-optimal, regards thosecases where shareholder identification responses must be routed by intermediaries via their CSD system, which may result in
unnecessary transmission delays and additional costs to all affected parties. Incidentally, ESMA notes that the Corporate Events39

91. As for the flow of information related to the responses to shareholder identification

requests, input collected by ESMA from a few NCAs point out the importance of complying
with the specific industry market standard36 providing that each intermediary in the chain
must respond to a such requests (in line with Article 3a(3) of the SRD237). This is seen asa crucial step to facilitate the functioning of shareholder identification and its supervision
since it allows issuers (and NCAs) to have a better view of the entire chain.
92. Furthermore, it has been shared by a few NCAs that intermediaries do not always follow

the market standard developed by market participants. These circumstances among othertechnical details make it difficult to monitor the shareholder disclosure process for both theissuer and the NCAs. It should also be noted that service providers are reported to furnish
issuers with information that is partly collected from other sources (e.g. additional queries
to intermediaries and investors) which may lead service providers to sometimes show theissuers identification results that are higher than what they can effectively identify via the
SRD2 mechanism.
93. With regard to the communication between issuers and CSDs, one more element ofcomplexity raised by certain respondents, including intermediaries, refers to situations inwhich issuers rely on third parties designated to transmit the identification request and toreceive identification data. It should be recalled that especially in these cases, according
to Article 10(2) of the IR, CSDs and intermediaries must verify “that the request or
information transmitted originates from the issuer”. In practice, it has been reported thatthe verification process needs to be performed manually based on authorisation
documents, signature checks and other documents. Moreover, when the issuer is notregistered in the home market of the CSD, the information and legal details are often
provided in a foreign language or are not available. Even on this point, many respondents
such as CSDs and issuer agents would welcome further harmonisation on the
documentation to be provided by the issuers or the third party in order to reduce as far as
possible the differences among CSDs’ practices. This last proposal was also raised by theNCAs providing input on this point.

Compliance Report published in December 2022 by the ECB’s AMI-SeCo also concluded that leaving the option for issuers torequire intermediaries to channel the shareholder identification responses through the intermediary chain is not fully in line withthe shareholder identification market standards elaborated by the industry.
36
ECSDA, “Market Standards for Shareholder Identification” (2020).
37“Member States shall ensure that the company is able to obtain information regarding shareholder identity from any intermediaryin the chain that holds the information” (i.e., information regarding shareholder identity data).
40c) Possibility for the MSs to opt for the introduction of a minimum threshold to identify
shareholders
94. A third issue that was raised in the consultation relates to the possibility for the MSs to opt

for the introduction of a minimum shareholding threshold (not above 0.5% of the voting
share capital) to identify shareholders38. Especially in the answers provided by issuers andtheir service providers, this option is often seen as an obstacle to dialogue between issuersand shareholders. As represented in the Evidence section, this is particularly the case forcompanies based in MSs opting for the threshold and that have a dispersed investor base,since the application of the threshold prevents issuers from obtaining a full picture of theirshareholder base, often allowing them to receive only shareholder data already at theirdisposal. Moreover, one respondent also noted that the threshold reduces the possibilityof identifying shareholders who may hold more shares than the threshold but still staybeneath it by distributing them onto several accounts.
95. On the other hand, input coming from investors indicates that the threshold is notconsidered an obstacle to the dialogue with issuers, with one respondent suggesting thatsuch dialogue rather depends on the corporate governance practices followed by issuers.
It is also interesting to observe that even in those MSs that did not opt for the applicationof any threshold, the Call for Evidence did not provide evidence of an increased frequencyof shareholder identification processes, apart from the exceptional increase of such
requests observed in Germany. In the few cases where respondents reported thata shareholder identification process was initiated, they indicated that they were able toidentify shareholders representing less than 90% of their share capital (which was thelowest option available in the questionnaire)39. In this regard, a few NCAs providing input
to ESMA observe that the frequency of use of shareholder identification processes may
also be impacted by the availability of other tools to identify shareholders (see for example
paragraph 117 and the related footnote, in connection to the use of GM minutes).
96. NCAs providing input to ESMA also confirmed that issuers face uncertainty regarding thetotal cost of a shareholder identification process, which reduces their incentive to initiate
such a process. One issuer representative suggested that not only a “full disclosure” butalso a so-called “selective disclosure” may be beneficial to improve shareholder
identification, mainly for cost reasons. To this end, it has been suggested that setting

38

This issue was also raised in European Commission (2022), page 6.
An NCA reported to ESMA that it analysed two cases in detail and found that the shareholder identification process under the
SRD2 led to only 20% and 27% additionally identified shares. In the first case 31% had already been disclosed under the major
shareholdings regime (Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about
issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC - Transparency
Directive). As a result, in the first case 49% and in the second case 73% of the remaining shares were not identified. This NCA
deems these numbers to be representative for the whole functioning of the shareholder identification regime at least in its MS,
where an 0.5% threshold is also in place, and questions the current effectiveness of the shareholder identification process.
39

41

a threshold for shareholder identification should be entirely left to issuers, not to legislators
or regulators. Along these lines, issuers would be able to decide how to customise theidentification request to their specific needs, even with other characteristics (e.g. requests
to identify shareholders holding shares registered in certain countries or by certain
intermediaries above specific thresholds, or shareholders that are not yet recorded in theshare register). One NCA reported on issuers voluntarily setting a threshold in thedisclosure process to save costs, due to intermediaries charging them for each shareholder
identified.

4.1.3 Article 3b – Transmission of information
97. According to Article 3b(1), (2) of the SRD2:“Member States shall ensure that the intermediaries are
required to transmit the following information, without
delay, from the company to the shareholder or to a third
party nominated by the shareholder: (a) the information
which the company is required to provide to theshareholder, to enable the shareholder to exercise rights
flowing from its shares, and which is directed to allshareholders in shares of that class; or (b) where theinformation referred to in point (a) is available toshareholders on the website of the company, a noticeindicating where on the website that information can befound.
Member States shall require companies to provide
intermediaries in a standardised and timely manner with
the information referred to in point (a) of paragraph 1 or thenotice referred to in point (b) of that paragraph […]”.
98. Overall, input received on the implementation of Article 3b shows general improvements inthe transmission of information to clients in a timely and standardised manner. Thisappears to be the case as regards shareholder identification and GMs, due to the minimum
harmonised requirements and STP flow of information, as introduced by the SRD2.
Nevertheless, almost all respondents indicate certain shortcomings in the communication
between issuers and intermediaries/ CSDs and suggest further harmonising the use of ISO
formats in this area.
99. In many countries, issuers are reportedly still not releasing corporate event information ina standardised and timely manner, reducing the benefits of the actual adoption of the ISO
42

format by intermediaries in the chain, as required by Article 2(3) of the IR. In addition, thepossibility for issuers to fill in Tables 3 and 8 only partially (respectively, meeting notice andnotification of corporate events other than GMs) is reported to significantly affect theefficiency of the STP flow of information, as it implies that intermediaries may be obliged
to resort to different sources of information to be compliant with any further legal obligations
towards their clients, in their respective jurisdictions.
Issuers note that they did not put in place many changes in the way they provide theindicated information to shareholders for the exercise of their rights, although they assertthat information necessary to the exercise of shareholder rights is transmitted in a format
which allows STP. Overall, input provided by issuers might suggest that communication
practices between issuers and CSDs were already somewhat in line with the SRD2 before
its entry into application and that SRD2 provisions have not been able to significantly
reduce the variety of practices across issuers or majorly improve the use of ISO formats
among them40.

100.

Also, intermediaries and issuer agents argue for clearer rules on issuer communicationand further steps to encourage standardisation of data to be transmitted as both are
deemed essential to achieve full and effective communication across the custody chain,from the issuer to the end investor. To this end, the introduction of a fully harmonised
obligation on the issuer to provide its CSD with a "golden operational record" in machinereadable format with all the information necessary to initiate any corporate event (“event
notice”) is largely indicated as the first measure to adopt. As noted for the shareholder
identification requests in paragraph 89, such an obligation would reduce manualintervention by intermediaries in transmitting information and increase the completenessof the information available to investors.

101.

Even from the perspective of investors, the transmission of information still shows room
for improvement, despite the fact that they recognise the SRD2 has been able to impact
this area in a positive way. In particular, investors indicate that they still experience issues
in receiving information via the intermediary chain. This is due to several factors, such as:lack of digitalisation, uneven formatting, failures in the transmission of information,
divergent national requirements, and separation between the legal title holder of the sharesand the beneficial owner. At times shareholders either do not receive information in relation
to corporate actions or GMs or receive it too late for it to be actionable. This situation isexacerbated in a cross-border context where the chain of intermediaries tends to be longer
and information from a non-local issuer must be processed by the last intermediary (often

102.

40

ESMA also received input from NCAs that, as part of market practice developed in line with the SRD2 goals, custodians have
set up platforms allowing issuers to enter the required information to launch a shareholder identification request or initiate a GM
in ISO standards. Once this step has been completed by issuers, the platforms are reported to automatically send the information
to intermediaries in the investment chain using the relevant ISO format, catering for interoperability and STP.
43

involving a translation of the information or a transposition into paper form) before its
transmission to shareholders.
Furthermore, according to a few respondents from different groups, someintermediaries seem to not be passing on all the meeting announcement information to
downstream clients. For example, it was reported that they have in certain cases removed
resolution data and replaced it with hyperlinks to the relevant information. It was also
reported that the flow of information between the issuer and investors gets blocked in the
chain at times, preventing information from flowing down to the shareholder or up to theissuer, especially in instances where the record date (which must be set between 1 and
30 days before the GM, as provided for in the SRD1) is too close to the meeting date.

103.

One further point raised by many respondents – mainly intermediaries and asset
managers – concerns the implementation of the deadlines included in the IR. Morespecifically, intermediaries highlighted that the interplay with shareholders, especiallyretail, can cause delays and discontinuity of format because they often cannot receive
information routed via electronic ISO formats.

104.

It should be borne in mind that intermediaries are legally required under MiFID241 toprovide (retail) shareholders with easily understandable information, which often meansthat documents are sent to them by post (MiFID2 Article 24(5)). Accordingly, it has been
widely recognised by respondents that the IR should take into account that different tools(paper, email, etc.) may be used by the last intermediary at the end of the chain to transmit
the required information to the (retail) shareholder. This may have an impact in particular
on intermediaries’ ability to comply with the deadlines set out in Article 9 of the IR.

105.

Additionally, it has been observed that Article 9 deadlines themselves may not always
be in line with national company law, leading to inefficiencies in the transmission processitself. As a result, intermediaries often suggested reviewing these deadlines to provide
them with more flexibility to deal with each step of the transmission of information along
the investment chain, both downwards and upwards.

106.

It is also notable that a few NCAs providing input to ESMA reportedly receive requests
from market participants to play a role in ensuring that information is always transmitted inaccordance with the rules provided for by the SRD2 and the IR. In this context, NCAs flagthat when trying to address these issues, they are bound by the fact that the different

107.

41

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments andamending Directive 2002/92/EC and Directive 2011/61/EU.
44

systems in place for transmitting information often remain incompatible, especially ata cross-border level.
Finally, the SMSG highlighted the critical role of omnibus accounts in creating obstacles
in identifying proprietary interests of beneficial owners, in processing the information
between issuer and shareholder and for the exercise of voting rights, as well as inconnection with voting confirmation. While ESMA understands the concerns raised, it also
observes that the use of omnibus accounts is a current structural market feature that,
according to several market participants, responds to efficiency considerations. The SMSG
has also referred to whether the CSDR42 framework may need to be reassessed when it
comes to the use of omnibus accounts. ESMA would like to point out that the CSDR isneutral regarding the use of omnibus accounts. According to its Article 38, CSDs should
enable the use of both ”individual client segregation” and ”omnibus client segregation”.
According to the same Article, a CSD participant shall offer its clients at least the choice
between omnibus client segregation and individual client segregation and inform them of
the costs and risks associated with each option. As such, ESMA does not find that the
CSDR framework is necessarily the right place to address the issues mentioned by the
SMSG. ESMA considers that, as also raised by several participants to the consultation,
existing obstacles to shareholder identification, transmission of information and exercise of
voting rights, as also identified by the SMSG, may ultimately be the result of an uneven
application of the SRD2 and related IR requirements, that is the focus of this report.

108.

4.1.4 Article 3c – Facilitation of exercise of voting rights
109.

According to Article 3c(1) of the SRD2:“Member States shall ensure that the intermediaries
facilitate the exercise of the rights by the shareholder,
including the right to participate and vote in general
meetings, which shall comprise at least one of thefollowing: (a) the intermediary makes the necessary
arrangements for the shareholder or a third party
nominated by the shareholder to be able to exercise
themselves the rights; (b) the intermediary exercises therights flowing from the shares upon the explicit
authorisation and instruction of the shareholder and for theshareholder’s benefit. Member States shall ensure thatwhen votes are cast electronically an electronic

42

Regulation (EU) 909/2014 on improving securities settlement in the European Union and on central securities depositories andamending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012.
45

confirmation of receipt of the votes is sent to the personthat casts the vote. Member States shall ensure that after
the general meeting the shareholder or a third party
nominated by the shareholder can obtain, at least uponrequest, confirmation that their votes have been validly
recorded and counted by the company, unless that
information is already available to them [...]”.
Overall, most respondents confirmed that there have been improvements following theentry into application of the SRD2 with respect to the facilitation of the exercise of rights,
especially in relation to GMs. However, when looking more in detail, stakeholders flag
a number of issues still hampering the level of effectiveness of the SRD2 provisions in this
area.

110.

Input provided by investors and intermediaries indicates that the exercise ofshareholder rights at GMs in a cross-border context is still associated with complex manual
processes and divergent practices across jurisdictions. For instance, there are differencesin how the proof of entitlement, or the notice of participation is released which still hinder
communication with issuers. In addition, custodians/ sub-custodians reportedly ask fora number of different documents that are required by national law (e.g. Power of Attorney– PoA; certificate of holdings, etc.).

111.

On this point, a general consensus emerged that one of the main obstacles is the lackof harmonisation in the documentation required by last intermediaries and custodians toprove the shareholders’ entitlement to exercise the rights attached to their shares.
Therefore, further harmonisation is considered necessary by most respondents, mainly
investors and intermediaries. This could entail, for example, mandating the use of ISO
formats to communicate the proof of entitlement, the notice of participation in GMs andpossibly voting instructions.

112.

National requirements related to granting PoAs have been indicated by many
respondents as largely unharmonised as well – not being in the scope of the SRD2 – andhampering the seamless exercise of voting rights. However, harmonising the provisions on
PoAs appears particularly complex as it is strictly related to the national company and civil
law of the different MSs 43.

113.

Another general concern affecting the exercise of voting rights is the fact that cut-off
dates vary by custodians and are sometimes set very early for shareholders to engage with

114.

43

It should be noted that in case of electronic voting and holding virtual meetings the issue of PoAs could prove less problematic.
For an analysis of this tool and any potential drawbacks, please see ICLEG (2022).
46

the company on specific voting resolutions and to take informed voting decisions. In
particular, some asset managers refer that they often must vote 10 to 15 days before theGM due to intermediaries’ cut-off dates along the chain. In addition, it is worth highlighting
that, according to the SRD1, the deadline for calling the meeting and publishing themeeting documentation is 21 days before the GM44, which together with custodians’ cut-off
dates reduces time available to shareholders to properly engage and vote on the GM’s
resolutions. Also, intermediaries claim that communication of votes often takes place at thedeadline, making it difficult to comply with the obligation for the entire chain to forward
votes/instructions ”without delay”45.
As regards the aforementioned concerns, further harmonisation of the deadlines
provided for the publication of meeting materials and of the record date to the entitlementof shareholder rights has been largely indicated as a first positive measure to facilitate theexercise of shareholder rights 46 . On this point, ESMA notes that the harmonisation oftimelines does not require major changes in the SRD and can therefore be seen as a quick
fix.

115.

Furthermore, responses – in particular those by investors – have focused on potential
shortcomings in the receipt of vote confirmation. However, the issue seems to be more
related to the different practices in the market than to specific issues resulting from theapplicable regulatory framework.

116.

Vote confirmations from issuers are essential to asset managers in order to record theirvote, prove their compliance with their policies and show their engagement on ESG.
Nonetheless, confirmations are still not being provided for a large number of markets, andsometimes they are provided only in paper-based form. In certain cases, vote confirmation
is in practice currently being transmitted by means of market solutions such as platforms
provided by proxy advisors or service providers other than intermediaries. Moreover, input
collected by ESMA shows that MSs may use different models, i.e., by providing fordisclosure regimes as an alternative to vote confirmation, as allowed by Article 3c(2)(2)47,

117.

According to Article 5(1) of the SRD1: “[…] Member States shall ensure that the company issues the convocation of the GM in
one of the manners specified in paragraph 2 of this Article not later than on the 21st day before the day of the meeting. […]”
45
As a side note, it is worth noting that the issues raised by respondents can affect the ability of shareholders to fully exercise
their rights, a topic that is also illustrated in paragraph 56 in the section on proxy advisors.
46
Incidentally, the Commission may wish to consider providing more clarity regarding timelines under Article 5 of the SRD2 in thecontext of salvaging financial institutions in distress (e.g. when that leads to a GM being called at very short notice). While this is
not part of the mandate for this report strictly speaking, it may be worth clarifying some of the rules here.
47“[… ] Member States shall ensure that after the GM the shareholder or a third party nominated by the shareholder can obtain,
at least upon request, confirmation that their votes have been validly recorded and counted by the company, unless that
information is already available to them […]”. In Italy, for example, there is no obligation for issuers to send vote confirmations,since all the votes cast are completely disclosed in the meeting minutes published on the issuer website.
44

47

which can in such cases explain the lack of a specific obligation on the issuer to send sucha confirmation.
Some NCAs reported a lack of due diligence by intermediaries in how they process
voting instructions, which has an impact on the GM quorum and on the voting decisions
themselves. These NCAs consider that a lack of such obligations in the SRD2 framework
makes it unlikely that intermediaries perform due diligence checks and at the same time
may hinder NCAs’ effectiveness in protecting shareholder rights.

118.

Overall, it emerges that even after the entry into application of the SRD2, mostshareholders are still not able to automatically verify whether their votes have beencorrectly registered at the GM. There is however a lack of clarity in relation to how toaddress this issue. Generally, ESMA observes that further automation of the process would
be helpful, both at institutional and retail level, with the aim of simplifying the process andharmonising regulatory oversight.

119.

Transversal considerations in relation to shareholder identification, transmission of
information and facilitation of the exercise of voting rights
A few transversal considerations have surfaced in connection with Articles 3a-3c in the
consultation and are summarised below:

120.

a) Use of a Regulation and NCA identification
One transversal point that has been raised in response to different questions includedin the Call for Evidence regards the legislative tool used by the co-legislators to harmonise
the area of shareholder rights. It has often been argued that the implementation of the
SRD2 provisions may be hindered by the fact that the SRD2 is a Directive, thereby allowing
for different transpositions at the MS level, while a Regulation would be more effective inprompting harmonised practices. Of course, there are different aspects to take into
consideration, when deciding whether to use a Directive or a Regulation. That said, it
seems quite clear that a Regulation is more likely to reduce divergences between MSs
effectively, especially in connection with the most technical aspects. Moreover, ESMA
observes that with the SRD2 and the IR, there is already a combination of different
legislative tools being used.

121.

Further to that, the NCAs that provided insights into the practical implementation as
well as into the supervision of SRD2 provisions in their respective jurisdictions noted that
the SRD2 very recently entered into application after its transposition into national
legislation, leading to limited visibility on potential issues that may have arisen. In addition,
they stressed that monitoring the flow of information across the investment chain as well

122.

48

as compliance with communication standards is difficult, unless EU or national legislation
provides the NCA with specific powers to scrutinise SRD-based processes. At any rate, itremains difficult for NCAs to monitor cross-border processes in practice, even within theEU.
Moreover, respondents call for improved clarity on the institutional framework
surrounding the SRD2, arguing that the supervision of different SRD2 provisions is notalways allocated to a specific NCA. At a cross-border level, this problem is reportedly
exacerbated by the lack of clarity on how competence is allocated between the NCAs
responsible for issuers and the ones in charge of intermediaries, welcoming guidance by
the Commission on the matter. ESMA can only support this line of argument.

123.

b) Use of new technologies in the investment chain
Another transversal point that has surfaced in the consultation is whether new
technologies could help in overcoming any persisting obstacles along the investment chain.
Most respondents concurred with the view that new technologies can indeed be of help
and can facilitate engagement between issuers and shareholders. In particular, distributed
ledger technology is referred to as a possible solution to bring clarity to the share ownershipsystem reducing the need for intermediary services between investors and issuers.
However, in ESMA’s understanding, to date there has been very limited evidence in terms
of practical application of such new technologies48.

124.

In this regard, ESMA considers that it can be useful to see if the applications under
Regulation (EU) 2022/858 (Distributed Ledger Technology Regulation – DLTR) on a pilot
regime for market infrastructures based on distributed ledger technology may bring any
innovative solutions regarding securities holding structures. These applications may in turnsimplify current processes and facilitate the exchange of information between issuers andshareholders and the exercise of shareholder rights. As things stand, for the purposes ofthis report, ESMA considers that a technologically neutral approach remains the mostsuitable regulatory strategy to preserve flexibility and innovation.

125.

c) Neo-brokers
Finally, it should be noted that a few stakeholders, including the SMSG, raised the issueof whether services provided by online brokerage platforms (“neo-brokers”) fully comply

126.

48

ESMA takes note of the SMSG suggestion to investigate whether the use of new technologies could facilitate direct dialogue
between issuers and investors while taking into account risks in relation to investor protection. In this context, ESMA notes thatsuch an investigation is not covered by the current mandate (and would not be feasible in the envisaged timeframe) as provided
by the Commission to ESMA and the EBA. At the same time, ESMA observes that a related workstream was undertaken by theCommission (please see European Commission, 2022), investigating the national barriers to the use of digital technology in theinteraction between intermediaries, investors and issuers. This paper also confirms that there has been limited use of DLT.
49

with the SRD2 provisions, particularly in connection with the transmission of informationand the exercise of voting rights. The input gathered in this regard was, however, limited.
Most respondents indicated that they have not used such services, while the few who did
provide input highlighted that due to a lack of internal resources, these platforms are more
prone to the risk of unsatisfactory compliance with the provisions of the SRD2. As such,they suggest that neo-broker services related to the transmission of information and theexercise of voting rights should be monitored more closely by NCAs. ESMA generally
agrees that it would be important for NCAs to keep this issue in view and continue
monitoring the compliance of neo-brokers also in connection with the effective provision of
voting services to their clients.

4.1.5 Article 3d – Non-discrimination, proportionality, and transparency of costs
127.

Article 3d of the SDR2 provides that MSs:
“shall require intermediaries to disclose publicly any
applicable charges for services provided for under this
Chapter separately for each service”.

The article also provides that MSs:
“shall ensure that any charges levied by an intermediary on
shareholders, companies and other intermediaries shall be
non-discriminatory and proportionate in relation to theactual costs incurred for delivering the services”
and that:“any differences between the charges levied between
domestic and cross-border exercise of rights shall bepermitted only where duly justified and where they reflect
the variation in actual costs incurred for delivering theservices.”
Finally, Article 3d allows MSs to:“prohibit intermediaries from charging fees for the services
provided for under [Chapter Ia]”.
Respondents to the Call for Evidence were of the view that the Directive has not brought
many improvements in these areas. In particular, the nature, terminology and level of fees
is reported to be highly divergent across EU MSs; the level of the charges is said to be

128.

50

untransparent; the information often difficult to find, the structure of the charges is toocomplex to understand; and charges for cross-border holdings of shares are at times higher
than at the domestic level, a difference that is then often also not explained.
Respondents’ views were complemented by views expressed in discussions with theindustry, where participants explained that charges are often negotiated individually withclients, with some big clients benefitting from better rates than the figures published on theissuer’s website.

129.

Participants also explained the different types of costs that may accrue, such as thecost for participating in a shareholder meeting. Reference was also made to the recovery
cost for shareholder identification along the chain. The views expressed by investor
associations, in turn, confirmed that cross-border voting incurs very high costs that are
discouraging the shareholder to vote and that these costs are often not explained.

130.

131.

Retail investors raised two suggestions in the area of enforcement:i.

Firstly, enforcing intermediaries’ compliance with the provisions and spirit ofboth the Treaty of Rome (consolidated version TFEU 2016/C 202/01) and of
the SRD2; in particular by not charging shareholders more fees for crossborder voting than for national voting within the EU, unless duly justified.

ii.

Secondly, enforcing compliance by entrants (i.e. FinTech), such as neo
brokers, and address the implications of their business model on shareholders'
rights.

The EBA also acknowledges the SMSG’s proposal to review the regulatory oversightof costs and charges connected to GM-related processes and harmonise it. As a first step,a central database of intermediaries’ custody service fee structures, that could beestablished at the European level, is suggested by the SMSG. Should such a database be
established, the allocation as to which entity should oversee such a database is best
decided by the co-legislators. As shares are financial instruments and therefore do not fallwithin the EBA's consumer protection remit, the EBA is prima facie not a suitable place forsuch a database. Also, any such central database would need to be accompanied withcommensurate financial resources to carry out the IT development. Regarding the merit ofsuch a database, the EBA notes that the vast majority of share transactions are done byresidents of the same country where the entity is authorised. Akin to the provisions in other
Level 1 texts (such as Article 7 of Directive 2014/92/EU – Payment Accounts Directive or
PAD on payment accounts, which required individual MSs to develop databases of all
payment accounts for their respective jurisdiction, and not at EU level, so that consumers
can compare costs), it should be considered that the SRD, too, foresees the development

132.

51

of national databases, as a possible precursor to a single EU database to be developed at
a later stage, which should fall under the remit of the appropriate body concerned.
On aggregate, the views summarised above suggest that the disclosure andcomparability of costs remain limited across the EU MSs, which may also reduce thecompetitiveness among players. A lack of harmonisation of the types of fees or services
that can be charged and a lack of detailed disclosure requirements regarding costs areoften indicated as the main obstacles to a better comparability and transparency of costs.
The EBA notes that on these aspects there is room for improvement to reduce the negative
impact of costs on investors’ engagement.

133.

4.1.6 Article 3e – Third-country intermediaries
134.

According to Article 3e of the SRD2:“This Chapter also applies to intermediaries which haveneither their registered office nor their head office in theUnion when they provide services referred to in
Article 1(5).”Article 1(5) of the SRD2 states:“Chapter Ia shall apply to intermediaries in so far they
provide services to shareholders or other intermediaries
with respect to shares of companies which have theirregistered office in a Member State and the shares of which
are admitted to trading on a regulated market situated or
operating within a Member State.”
Overall, respondents to the Call for Evidence were of the view that it was only toa limited extent that the practices of third-country intermediaries are in line with theprovisions of Chapter Ia and the IR. In particular, the relationship with intermediaries from
non-EU countries is complicated by the fact that these intermediaries often do not consider
themselves obliged to comply with the SRD2 and its IR. However, while larger
intermediaries seem to already be in line with the SRD2 provisions, smaller entities outside
the EU seem to be gradually adjusting.

135.

In general, third-country intermediaries either do not adhere to, or have limited
capability to, leverage recommended ISO messaging under the SRD2 / IR due to the crossborder nature of the investment chain involving EU and non-EU players. For shareholder
identification, third-country intermediaries are often not using SRD2 compliant formats and

136.

52

request responses in non-ISO formats. Some third-country intermediaries still reply via
email and do not accept to use or do not have access to the ISO messages or web-based
solutions and are also not using STP communication methods.
Third-country intermediaries have yet to build a standardised process for responses,
but they also have to build a separate process to handle SRD2 responses for the custody
chain. Confidentiality rules may also impact the efficiency of the process, as when data are
deemed confidential, it may be difficult to convey them through the custody chain without
using a standardised process.

137.

With regards to the question on the general application of Chapter Ia provisions by
third-country intermediaries, more than half of respondents did not have an opinion, while
the majority of the remaining respondents who expressed an opinion (mainlyintermediaries), were of the view that practices of third-country intermediaries are in linewith the relevant provisions only to a limited extent. A few respondents affirmed that thirdcountry intermediaries’ practices are “not at all aligned” with the SRD2 provisions.

138.

Practically all respondents noted differences in the practices followed by third-country
intermediaries compared to European intermediaries, albeit to a limited extent. A few ofthem noted that the misalignment occurs with small local third country intermediaries, while
the operators of a more global nature seem more in line with the European requirements.
A few others mentioned the issue of non-usage of ISO20022 formats; a couple of asset
managers said that third-country intermediaries often impose shorter cut-off dates oninvestors, limiting their ability to exercise their rights as shareholders.

139.

A few intermediary associations asserted that third-country intermediaries do notconsider themselves as being in the scope of the SRD2. Global operators, mostly central
security depositories and other global custodians, stated that an improvement occurred in
the non-EU intermediaries’ practices and that misalignments are mainly due to the lack ofstandardised processes among European MSs, contending a higher standardisation would
benefit non-EU and EU entities alike.

140.

A few respondents commented on issuers’ ability to identify third country shareholders
when compared to the regime in place prior to the SRD2. One respondent did not identify
any meaningful improvement compared to the framework prior to the SRD2, the other did.

141.

A concern raised was that regarding meetings and voting, a portion of third-country
intermediaries do not use the appropriate format and fields to communicate their voting
instructions to issuers. Responses are not always accurate as details shared are more on
intermediaries’ level than on end investor’s level. A couple of issuers stated that most third-

142.

53

country intermediaries providing services within the EU do not appear to comply with the
SRD2 rules, including the obligation to pass on information to the end-investor.
Another concern raised was that there is confusion driven by the varying applicationsof the SRD2 by MSs, particularly based on who is the “shareholder”, which complicatesefforts to standardise compliance. The view of one intermediary was that stakeholders are
increasingly dealing with the SRD2 requirements, and this will continue to progressively
improve. However, third-country intermediaries would benefit from resolution of theuncertainties to allow further standardisation, similar to EU counterparts.

143.

One industry organisation representing CSDs stated that some of its members note
50% of requests sent by central securities depositories to third-country intermediaries do
not receive a response. A request was made by an industry organisation for regulatory
guidance in respect to the method in dealing with third-country intermediaryunresponsiveness. Individual private shareholders still do not receive any GM information
cross-border and voting is not facilitated through the chain of intermediaries cross-borderwhich also applies to shareholders in a third country.

144.

A CSD noted a high interest from bank customers from outside of Europe to receive
shareholder identification disclosure messages from them as their depository in order tocomply with European regulation and the national transposition. It stated that even preSRD2, bank customers acting as a global custodian have received all GM messages; theyalso noted that several European banks extended their reporting to receive meeting
information from additional markets. Furthermore, they noted less interest fromintermediaries outside of Europe to receive GM information from European issuers.

145.

Retail investor representatives claim there is a monopoly in the market by one entity forproxy voting services via its institutional investor’s platform 49 . Shares of major EU
companies are often voted by international custody banks operating “a blanket proxy” fromEU-banking institutions that hold securities on account of their client.

146.

A few industry respondents stated that all valid identification requests submitted using
ISO20022 format concerning securities covered by the scope of the SRD2 are processedin the same way. Requests not covered by the SRD2, i.e., requests for securities following
national rules or requests from third-countries, are processed manually.

147.

To sum up it seems that practices of third-country intermediaries are in line with therelevant provisions, but only to a limited extent, with the view of a few being that third-

148.

49

Incidentally, the EBA recalls that competition matters on a European scale fall within the remit of the European Commission
and that the EBA does not have specific enforcement powers in this area.
54

country intermediaries’ practices are “not at all aligned” with the SRD2 provisions. There isconsensus that there are differences in the practices followed by third-country
intermediaries compared to European intermediaries: this mainly applies to small local third
country intermediaries, whilst larger more international entities seem to be more in line.
The (non) use of ISO20022 formats is an issue, whilst third-country intermediaries often
impose shorter cut-off dates on investors, limiting their ability to exercise their rights asshareholders. Some third-country intermediaries seem not to consider themselves as
falling within the scope of the SRD2. An improvement seems to have taken place in the
non-EU intermediaries’ practices and differences may be due to the lack of standardised
processes among European MSs; a higher standardisation would benefit non-EU and EU
entities alike.

4.2 Advice
On the basis of the above considerations, ESMA and the EBA present their advice to
the Commission below.

149.

4.2.1 Article 3a – Identification of shareholders
In the area of shareholder identification, ESMA recommends that:(a) In line with Action 12 of the CMU Action Plan, while being mindful of the potential
interaction with national law, the Commission should consider the possibility of
introducing an EU-wide harmonised definition of shareholder, encompassing
beneficial owners, in order to ensure full effectiveness of shareholder identification
rules (as well as to improve the exercise of shareholder rights) especially at crossborder level.
(b) At this juncture, as a more pragmatic solution to a fully-fledged harmonised definition,
the Commission could consider providing issuers with the right to identify beneficial
owners in addition to nominee shareholders and/ or providing an ad-hoc definition of
the term “shareholder” only for the purpose of identification.
(c) Given the time constraints pertaining to the above actions under (a) and (b), asa temporary measure, ESMA recommends to the Commission to publish a list ofshareholder definitions as applicable across MSs to improve market certainty.
(d) As part of an effort to facilitate cross-border identification processes, the Commission
should evaluate the opportunity of providing for a clearer and more EU-harmonised
indication of eligible securities under the scope of the SRD2. Once the current regime
has proven to be fully effective, the Commission should consider whether an
55

expansion of that scope may be beneficial to allow the identification of investors
holding securities other than shares.
(e) As a shorter-term action and in light of the different national regimes currently inplace, the Commission should publish which specific securities (at MS level) fallunder the scope of Chapter Ia of the SRD2, thereby facilitating the identification of
the issuers who can initiate an investor identification process.
(f) As a way to further harmonise the information flow related to the shareholder
identification request, the Commission should consider amending the IR by clarifying
possible requirements for issuers or third parties when launching a shareholder
identification process (also with a view to facilitating the verification process provided
for under Article 10(2) of the IR). For example, this could entail a modification of
Article 3 and Table 1 by mandating issuers to launch a shareholder identification
process by sending a “golden operational record” to the relevant CSD (or the firstintermediary).
(g) As a way to further harmonise the information flow related to intermediaries’
responses, the Commission should consider improving the rules on shareholder
identification (such as by modifying Table 2 of the IR) to make sure that any
intermediaries in the chain provide such responses in a standardised manner andwith all information necessary for issuers to easily track the chain of intermediaries.
In connection with this, the Commission could consider clarifying that every
intermediary should indicate whether the shares are held in its own account or on
behalf of a third party (e.g. as custodian or sub-custodian).
(h) With a view to improving the interest and cost effectiveness for issuers of launchinga shareholder identification process, the Commission should consider providing themwith the right to make identification requests limited to their specific informationneeds (e.g. in terms of percentage of shares held) by sending customised requests
for shareholder identity data. However, such customised requests, whose cost is inany case borne by the requester, should not come at the detriment of a machinereadable format that allows interoperability and STP.
(i) Considering the limited input received, the Commission should further investigate theimpact of MSs’ optional shareholder identification thresholds, as allowed by
Article 3a(1) of the SRD2, on issuers’ actual ability to engage with their investors andon NCAs’ ability to effectively monitor the full shareholder identification processes,
especially in a cross-border context, before any review of the current regulatory
approach.

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4.2.2

Article 3b – Transmission of information

In the area of transmission of information, ESMA recommends that:(j) The Commission should consider amending the IR by introducing a “golden
operational record” requirement on the issuer, also in connection with the fulfilmentof Article 3b duties regarding the transmission of information along the chain. Thisshould encompass the duty to transmit to the CSD (or to the first intermediary) all theinformation necessary to initiate any corporate event in machine-readable format(that allows interoperability and STP) and would entail further harmonising andremoving existing optional fields of the relevant tables, especially Tables 3 and 8(respectively, meeting notice and notification of corporate events other than GMs).
This transmission protocol should be in line with internationally applied industry
standards.
(k) The Commission should consider the need to amend the deadlines under Article 9of the IR to ensure the compatibility of the envisaged timeline for the transmission of
information along the chain with intermediaries’ compliance duties (such as thoseunder MiFiD), while taking into account both investors’ ability to scrutinise meeting
materials and exercise their rights and the issuers’ need for time to draw up therelevant information, as seen below under point (n).

4.2.3 Article 3c – Facilitation of exercise of voting rights
In the area of facilitation of exercise of voting rights, ESMA recommends that:(l) Based on the clear input collected, the Commission should evaluate the possibility
to better harmonise the documentation required for the entitlement of shareholders
to exercise their rights, for example by providing that the confirmation of entitlement(also as included in the notice of participation) is accepted as the EU-wide form toallow shareholder participation in GMs.
(m) Regardless of what is provided for in connection with the previous point (l), theCommission should in any case consider to further mandate the use of machinereadable formats that allow interoperability and STP to communicate theconfirmation of entitlement, the notice of participation in GMs and, as applicable,
voting instructions (also leveraging on European industry standards).
(n) The Commission should consider carrying out a detailed investigation to map
national rules and practices, and on this basis, further harmonise and potentially57extend across the EU the timeline provided for the publication of meeting materials
to provide shareholders with more time to perform their analysis and exercise theirrights, while taking into consideration the issuers’ need to draw up the relevant
information.
(o) The Commission should consider shortening the time lag in which record dates are
currently allowed across MSs by the SRD1 to improve harmonisation of theentitlement process in the EU. In doing so, it could explore gradually harmonising
record dates, taking into consideration the concurrent interests of avoiding major
empty voting phenomena50 vis-à-vis the need for a technically feasible timeframe forissuers and intermediaries.
(p) Taking into consideration the mixed evidence on the effectiveness of the current
voting confirmation framework, coupled with little indications of potential fixes, theCommission should consider improving regulatory mechanisms for voting
confirmation, including by explicitly recognising different strategies such as the
publication of voting records.

Transversal considerations in relation to shareholder identification, transmission of
information and facilitation of the exercise of voting rights
In terms of the transversal considerations in relation to shareholder identification,transmission of information and facilitation of the exercise of voting rights, ESMA
recommends that:(q) When reviewing the SRD2, the Commission should consider whether the more direct
nature of a Regulation could justify its use for harmonising some of the more
technical aspects, pertaining specifically to shareholder identification, transmissionof information and exercise of shareholder rights. This would complement both the
Directive itself and the IR.
(r) In the context of the broader SRD2 review, the Commission should also consider
whether NCAs have been always identified in national legislation and whether theirpowers and responsibilities on Chapter Ia are clear, especially in the context of crossborder shareholder identification and voting.

50

It should be noted that, when a record date is set well in advance of the GM, it may be more frequent that shareholders vote formore shares than those they actually own at the time of the GM.
58

4.2.4 Article 3d – Non-discrimination, proportionality, and transparency of costs
In the area of non-discrimination, proportionality and transparency of costs, the EBA
recommends that:(s) The Commission should consider enhancing the transparency and comparability ofcharges by bringing about a harmonised terminology of the types of charges,a harmonised terminology of the services for which such charges are levied (e.g. forthe identification of the investor, the transmission of information between
intermediary and issuer, the exercising of the investor’s voting right, the attendance
at a GM), and a harmonised format through which this information is required to bedisclosed to prospective investors and other relevant actors.
(t) The Commission should consider introducing such harmonisation in a way that
explicitly distinguishes between different variants of charges and underlying services.
The requirements should also clearly state that, in cases where cross-border anddomestic shareholdings deviate from one another, charges should be explicitly
disclosed.
(u) The Commission should consider introducing a harmonised format for the disclosureof such charges in a way that accommodates different media through which suchdisclosures might be made, e.g. website, mobile app, hardcopy.
(v) When doing this, the Commission should consider taking inspiration from theapproach chosen in the PAD, through which a standardised disclosure of charges
for payment accounts was successfully implemented across the EU. Applying the
PAD approach to shareholdings by analogy, the Commission should consider thefollowing three sequential steps:i.

ESMA and the EBA could be mandated to issue Guidelines that require
NCAs to develop provisional lists of the most representative services
connected with the SRD2 that are subject to a charge and offered by at least
one legal entity in their respective jurisdiction. The Guidelines could
describe the procedures as well as factors to be taken into consideration byNCAs when drawing up their lists. These factors would include the services
that are most commonly used by investors in relation to their shareholding
and that generate the highest cost for consumers.

59

ii.

The lists established by NCAs could then assist ESMA/EBA in developing
technical standards containing a standardised terminology that will beapplicable across the EU single market

iii.

Finally, the standardised terminology could be the basis for a disclosure
document in which intermediaries have to use said terminology. The
disclosure document could be defined in a second set of TechnicalStandards. To ensure that intermediaries make this information available toclients (i.e., shareholders, issuers, other intermediaries) in a clear, easy-tounderstand, and standardised way across the EU, the Technical Standards
should prescribe a standardised presentation format and template.

4.2.5 Article 3e – Third-country intermediaries
In the area of third-country intermediaries, the EBA recommends that:(w) The Commission should consider addressing the uncertainty due to varying
applications of the SRD2 across MSs, particularly based on the lack of a definitionof the term who is the “shareholder”, as proposed under point (a) of the Advice, as
this would be beneficial also as regards third-country intermediaries’ conduct,
facilitating their work and allowing for further standardisation.
(x) Taking into account the potential scope of the SRD2 regarding intermediaries on

a global scale, the Commission should consider the opportunity to publish guidanceor to undertake other informative initiatives to better highlight and explain the scopeof the SRD2 and requirements applicable to third-country intermediaries.

60

5 Annex I : Acronyms and definitions
AMI-SeCo

Advisory Group on Market Infrastructures for Securities and Collateral

BPP

Best Practice Principles for Providers of Shareholder Voting & Research
Analysis

BPPG

Best Practices Principles Group

CEG

Corporate Events Group

CMU

Capital Markets’ Union

Commission

European Commission

CSD

Central Securities Depository

CSDR

Regulation (EU) 909/2014 of the European Parliament and of the Council
on improving securities settlement in the European Union and on central
securities depositories and amending Directives 98/26/EC and2014/65/EU and Regulation (EU) No 236/2012

EBA

European Banking Authority

EEA

European Economic Area

ESA

European Supervisory Authority

ESG

Environmental, Social, Governance

ESMA

European Securities and Markets Authority

EU

European Union

FCA

Financial Conduct Authority (UK)FRC

Financial Reporting Council (UK)GM

Shareholder General MeetingIOC

Independent Oversight Committee (Best Practice Principles for Providersof Shareholder Voting & Research Analysis Oversight Committee)

IR

Commission Implementing Regulation 2018/1212, laying down minimum
requirements implementing the provisions of Directive 2007/36/EC of theEuropean Parliament and of the Council as regards shareholder
identification, the transmission of information and the facilitation of theexercise of shareholders rights

ISS

Institutional Shareholder Services

KPI

Key Performance Indicator

L1/L2

Level 1/ Level 2 on the scale of the European Union legislative framework

LEI

Legal Entity Identifier
61

MiFID 2

Directive 2014/65/EU of the European Parliament and of the Council of
15 May 2014 on markets in financial instruments and amending Directive
2002/92/EC and Directive 2011/61/EU.

MS

Member-StateNCA

National Competent Authority

PAD

Directive 2014/92/EU of the European Parliament and of the Council of
23 July 2014 on the comparability of fees related to payment accounts,
payment account switching and access to payment accounts with basic
features.

PoA

Power of Attorney

SMSG

ESMA’s Securities and Markets Stakeholders GroupSRD / SRD1

Directive 2007/36/EC of the European Parliament and of the Council of
11 July 2007 on the exercise of certain rights of shareholders in listedcompanies.

SRD2

Directive (EU) 2017/828 of the European Parliament and of the Councilof 17 May 2017 amending Directive 2007/36/EC as regards theencouragement of long-term shareholder engagement

STP

Straight-through processing

UK

United Kingdom

US

United States62

6 Annex II: Call for Advice from the European Commission
Please find the link to the Call for Advice here.

63

7 Annex III: Questions from ESMA’s Call for Evidence
Please find the link to the questions here.

648 Annex IV: Respondents to ESMA’s Call for Evidence
Please find the link to the list of respondents who agreed to have their answers made public
here

65

9 Annex V: Input received via the ESMA’s Call for Evidence
9.1 Proxy advisors
9.1.1 General input
The Call for Evidence includes a set of general questions addressing the market ofproxy advisory services, especially in connection with the application of the SRD2 and therelevant trends that have emerged in recent years. Evidence on these matters wascollected from 40 respondents, though some of them did not respond to all questions51.
Most proxy advisors operating in Europe provided their input (15% of the total respondents,or 6). Nearly one out of four responses (23% or 9) came from asset managers and – toa minor extent – from retail investors (5% or 2). Issuers also provided their input (12% or 5)
as well as other market participants (CSD/ intermediaries and credit institutions accounting
for 8% or 3 and 5% or 2 of answers, respectively). The largest group of respondents (33%or 13), not classifiable within a specific category, included a variety of industry associations
as well as the IOC.

150.

It should be noted that, while in the section 2.4.1“Categorisation of respondents”, the respondents are classified according totheir own chosen classifications, i.e., reflecting that several entities selected more than one category, in this section, a single
classification was attributed to each respondent, based on their main characteristics and on the capacity in which their input wasprovided.
51

66

151.

Question 16

In question 16, the Call for Evidence examines whether the definition of proxy advisors
set out by the SRD2 has enabled the identification of the relevant players of the industry52.
Most respondents (64% or 21) considered the SRD2 definition of proxy advisors effectivein identifying the relevant players who provide voting research and voting advice. On theother hand, a few respondents (15% or 5), especially among issuers’ representatives,found the definition not effective, while 21% of respondents (7) did not take a view.

152.

Overall, several respondents, especially issuers representatives and local proxyadvisors (including some of those who consider the definition effective), reported the needfor the definition to be clarified or broadened to make sure it fully considers evolving market
practice. First of all, it is argued that the provision of ESG or governance-related advisory
services and of services for the actual exercise of voting rights (voting platforms with pretabulated votes in accordance with proxy advisors’ recommendations) should be included
among the activities of proxy advisors; such services should also be addressed by the BPP
and monitored by the IOC. Moreover, it is highlighted that new participants have entered
the market, such as those making use of new technologies to issue their advice(e.g. artificial intelligence tools), or any professionals (not only “legal persons”) offering

153.

Under this definition a proxy advisor is “a legal person that analyses, on a professional and commercial basis, the corporate
disclosure and, where relevant, other information of listed companies with a view to informing investors’ voting decisions byproviding research, advice or voting recommendations that relate to the exercise of voting rights”. See Article 2(g) of the SRD2.
52

67

similar services or non-profit organisations providing recommendations that are not made“on a commercial basis”. On the basis of the above, a few respondents asked for a finetuning of the definition to clarify whether such market players are “proxy advisors” (although
it is notable that a local proxy advisor highlighted the risk that too broad a definition may
not reflect the differences among service providers and might raise barriers to newentrants). In addition, they argued in favour of clarifying whether an entity is to beconsidered a proxy advisor if the research and advice are provided only as ancillary
services.
Calls for proper registration mechanisms of proxy advisors were made by some
respondents (namely local proxy advisors and issuers’ representatives). The need fora level playing field between proxy advisors and ESG data and ratings providers was also
pointed out by some proxy advisors, together with a request to take this into account for
regulatory purposes.

154.

155.

Question 17

A more fragmented picture emerged from question 17 which investigates theeffectiveness of the definition of competent Member State (MS) under the SRD2 in

156.

68

providing a common framework for all proxy advisors covering EU listed companies 53.
While half of the respondents (16) did not express any opinion on this, most of the others(34% or 11) considered the framework adequate overall, while an opposite view was heldby a smaller group of respondents (16% or 5).
Some respondents, including proxy advisors and investors and issuers’
representatives, emphasised the cross-border nature of proxy advisors’ activities and thelimits of a national-level supervision framework as provided by the SRD2. In this respect,
an asset managers’ association pointed out the importance of the BPP and of centralised
IOC monitoring, rather than local monitoring depending on where the proxy advisors areincorporated or based.

157.

Further to that, two local proxy advisors highlighted that the implementation of the
SRD2 differs across EU jurisdictions, making each player subject to different supervisory
rules (e.g. in terms of powers of control or sanctions). In their view, further harmonisation
could be achieved through common supervision by ESMA of all proxy advisors operatingin the EU (including entities having no establishment in the Union). A few other respondents(namely issuers’ representatives) also suggested that common supervision be establishedby ESMA or, as a second-best option, that ESMA be empowered to manage a complaint
mechanism. This would be either complementary or alternative to that currently performedby the IOC, and EU issuers could use it in case of critical matters or alleged violations by
proxy advisors, while NCAs should be expressly entrusted with the task of monitoringmarket practices at the national level and reporting their findings to ESMA.

158.

Under such definition, for proxy advisors the competent Member State is: “[…] that in which the proxy advisor has its registeredoffice, or, where the proxy advisor does not have its registered office in a Member State, the Member State in which the proxyadvisor has its head office, or, where the proxy advisor has neither its registered office nor its head office in a Member State, theMember State in which the proxy advisor has an establishment.[…]”. See Article 1(2)(b) of the SRD.
53

69

Question 18

159.

54

Question 18 looks into the existence of proxy advisors that have neither their registeredoffice nor their head office in the EU and which carry out their activities throughestablishments located in the Union. The question asks whether such proxy advisors are
subject to two or more MSs’ legislation or to no legislation at all. Most respondents were
unaware of proxy advisors falling into the described categories (63% or 16 and 28% or 5
flagging “don’t know” and “no”, respectively), while the very few answering “yes” provided
examples of market players based in the UK and were unsure about the nature of theirpresence in the EU.

160.

54

[that have neither their registered office nor their head office in the EU]
70

161.

Question 19

Question 19 explores the existence of entities providing proxy advice or voting researchon EU listed companies that do not fully apply and/ or fully report on the application ofa code of conduct. Only a few market participants answered positively to the question (18%or 6, while 56% or 20 and 24% or 8 answered “don’t know” and “no”, respectively).
2 respondents, both asset managers, reported that the proxy advisors that do not (or not
fully) apply a code of conduct, provide adequate disclosure on the reasons they choose to
do so and, where appropriate, on alternative measures in place. On the other hand,according to 4 respondents (a proxy advisor, two issuers’ associations and the IOC),

162.

71

appropriate disclosures on the reasons for departing from a code of conduct and/ or on
alternative safeguards in place were not provided by some proxy advisors, especially newentities offering advisory services or proxy advisors that are not subject to any monitoringby the IOC (i.e., since they are not signatories to the BPP).
163.

Question 20

Question 20 investigates whether the disclosures provided by proxy advisors hasreached an adequate level following the entry into application of the SRD2 in various areas.

164.

Most respondents provided a positive picture of market practice in terms of increasedtransparency to ensure the accuracy and reliability of the advice. 54% of respondents(18) and 6% of respondents (2) reported, respectively, adequacy to a large extent, and fulladequacy. At the same time, only 11% of respondents (4) reported adequacy to a limited
extent and the remaining 29% of respondents (10) had no opinion. A similarly positive
picture was provided in terms of proxy advisors’ adequate disclosure of voting policies
and methodologies. More specifically, 41% or 14 and 18% or 6 of respondents reported,
respectively, adequacy to a large extent, and full adequacy. At the same time, 15% of
respondents (5) acknowledged improvements only to a limited extent, and the remaining
26% of respondents (9) had no opinion. This improvement is acknowledged by several
respondents coming from multiple categories (investors, proxy advisors, issuers), and therole of IOC monitoring is recognised as key by most respondents in fostering adherence to

165.

72

best practice55, including proxy advisors themselves. Certain calls for improvement havenonetheless been made, including by the IOC that encourages robust disclosure on
internal controls over research (fact-checking, error-tracking, remediation practices,sources used in research) and further progress on service quality, integrity andaccountability.
Evidence was more split on the adequacy of disclosure by proxy advisors
regarding how they consider local market and regulatory conditions. In detail, almost
the majority of respondents expressed a positive assessment of market practice (38%or 13 and 6% or 2 of answers reporting adequacy to a large extent and full adequacy,
respectively), while over a quarter of respondents considered disclosure on such matters
limited or not adequate (24% or 8 and 3% or 1, respectively). 29% of respondents (10) had
no opinion. A few respondents (namely asset managers and proxy advisors) observed thatreflection of market conditions varies depending on the market and the width of thegeographical area for which voting policies are designed by global proxy advisors.
Interestingly, this is an area where the IOC explicitly encourages further disclosure on how
the proxy advisor’s work is organised to address local, sectoral, or company-specificissues.

166.

A less positive picture was drawn by respondents on the disclosure provided byproxy advisors on dialogue with issuers. Disclosure on dialogue with issuers was
flagged by less than half of respondents as adequate (38% or 13 and 6% or 2 of answers
reporting adequacy to a large extent and full adequacy, respectively) and a significant
percentage of respondents (29% or 10) pointed out that the quality of such disclosure islimited. The remaining 26% of respondents (9) expressed no opinion. Although recognisingthat dialogue has improved over the years, especially issuers’ representatives call for moretransparency on how proxy advisors engage with them and take into account their views
and comments in a timely manner. In light of the variety of practices on if, how and whenproxy advisors engage in such a dialogue with issuers, representatives of the latter also
propose that either the BPP or the SRD2 provide a harmonised model for dialogue which
ensures that issuers can correct factual errors, comment on reports, and submit a request
for receiving the draft report before its publication and that such interaction is disclosed to
the recipients of the report56. Transparency on the dialogue with issuers and on consequentchanges in research and advice has also been identified as an area of improvement by

167.

55

The IOC provides an annual assessment of the statements of the signatories to the BPP and sends confidential, signatoryspecific comments and recommendations to each of them.
56
Similar issues were found in the report published by (inter alia) the FRC in the UK – Morrow Sodali, Durham University Business
School and Financial Reporting Council (2023), page 36.
73some asset managers. Notably, the IOC highlights its encouragement to proxy advisors to
explain:i.

If they have a process for issuer feedback and its features (whether it varies
by market, company size or other factors), or, if not, why such a process is notin place;ii.

What document is provided to the issuer (full report, research only, etc.);

iii.

Whether the issuer is provided with any advance notice as to when the reportwill be sent for review;iv.

The time given to the issuer to respond andv.

Whether the issuer has to pay any fees to have access to the report before its
publication.

On the management of complaints by proxy advisors57, the IOC points out that the
principles call for effective procedures by their signatories for handling complaints ina responsive and timely manner. However, more detailed disclosure on procedures forhandling complaints, as recommended by the IOC in recent monitoring, would be beneficial
to increase the accountability of the whole process58.

168.

Identification, management, and disclosure on conflicts of interest wasconsidered adequate only to a limited extent by several respondents (31% or 10, while
34% or 11 and 9% or 3 of answers, respectively, still reported full adequacy or adequacy
to a large extent and 25% or 8 provided no opinion). Most concerns were expressed about
the situations in which proxy advisors analysing issuers serve at the same time as
consultants of the same listed companies. One issuer association warned about the riskthat a proxy advisor might use its market power to create the need for issuers to be advised
to obtain more favourable voting recommendations (and make reference to possible
marketing of consultancy services targeted to issuers receiving negative
recommendations). They also argued that, in addition to the publication of a conflict ofinterest policy, proxy advisors should adequately inform their clients about individual
conflicts that have emerged in the preparation of the research and advice, and that thisinformation should be presented in the same report. Some respondents (an issuer

169.

57

Under the BPPG procedures, complaints should first be filed with the relevant proxy advisor, then, as a second step, byaddressing the BPPG and thirdly, if the previous steps have not been dealt with by proxy advisors in due time or in all material
respects, complaints can be escalated to the IOC.
58
In particular, the IOC encourages each signatory to detail whether it offers one or more channels for complaints (and if theydiffer depending on the complainant or the market), how it manages such complaints and the timing it commits to respond, andwhether and how it offers an appeal process.
74

association, an asset manager association and a couple of local proxy advisors)emphasised the importance of disclosure by proxy advisors, as recommended by the IOC
in its monitoring, on the comparative size and nature of revenue sources, so that investors
can assess how much is earned through additional services such as consultancy, ESG
data provision and voting services (i.e., platforms to cast votes for the meetings).
A couple of local proxy advisors called for a stricter approach on the provision of
consultancy services to the same issuers that are the object of research and voting advice,suggesting that such an activity should be forbidden or, alternatively, accompanied by fulltransparency on issuers that purchased consultancy services and on the fees charged.
Finally, according to one issuer association, provisions aiming at a more granular
identification of potential conflicts of interest, including the ancillary services provided suchas governance or ESG advice and voting services, would be welcome additions to the
SRD2 framework.

170.

It is noted that similar questions are addressed specifically to investors, issuers andproxy advisors themselves, in the sections were they provide their own input (i.e., Question
37, Question 55 and Question 75, respectively).

171.

75

172.

Question 21

59

This question investigates whether improvements have been made by proxy advisors
in the way they take ESG criteria into account in the preparation of their research andadvice or customised policies. 65% of respondents (22) reported that improvements havebeen made (29% or 10 did not express an opinion while only 6% or 2 flagged “no”).

173.

Looking at the qualitative feedback received, all proxy advisors acknowledged that they
have been increasingly including ESG considerations in the preparation of their research
and advice. In detail, while the analysis of meeting agendas has by its nature concentrated
on governance aspects, environmental and social issues have progressively become thefocus of research and voting advice. These issues have become part of proxy advisors
and/ or asset managers’ voting policies and in some cases of the meeting agendas(e.g. say on climate, ESG-related KPIs in remuneration policies, etc.) as well. Suchprogress has also been recognised by several asset managers and their representatives,
who noted that proxy advisors’ research now includes more information on E and S issues
and ratings, as well as more detailed analysis on shareholder proposals on non-financial
issues. According to an asset manager, however, the integration of ESG issues in voting

174.

59

[in the preparation of their research, advice and voting recommendations or in the preparation of customized policies]
76research and advice is still in progress and shows different levels of maturity. Somecriticism has also been expressed by an issuers’ representative and a service provider on
the transparency of the sources of ESG-related data and of relevant assessments.
Lastly, it is noted that a similar question is addressed specifically to proxy advisors
themselves, in the section where they provide their own input (i.e., Question 77).

175.

176.

Question 22

Question 22 asks respondents whether they consider the level of harmonisationachieved under the SRD2 sufficient to ensure that investors are adequately and evenly
informed about the accuracy and reliability of the activities of proxy advisors.

177.

31% of respondents (10), mainly investors and proxy advisors, considered that
harmonisation is sufficient “to a large extent”. 22% of respondents (7), mainly issuers’
representatives and local proxy advisors, considered that it is sufficient “to a limited extent”.
A smaller proportion of the respondents considered that harmonisation is “fully” sufficient(13% or 4 – 2 investors and 2 proxy advisors), while 3% (1 investor) rather considered that
it is “not at all” sufficient. The remaining 31% of respondents (10) expressed no opinion on
the subject.

178.

Among asset managers, some respondents acknowledged that the accuracy andreliability of the activities of proxy advisors have improved, while others encouraged further

179.

77

transparency on this issue (e.g. a mandatory reporting of factors negatively affecting
accuracy). For the purpose of increasing the quality of research, some investors alsosuggested other improvements. In particular, they called for the timelier disclosure ofGeneral Meeting (GM) documents, that would grant proxy advisors more time to performtheir analyses before the cut-off date for submitting votes actually set by custodians insome EU markets (between 10 and 15 days prior to the GM date). In addition, they
requested more transparency by issuers on the GM’s items. Moreover, conflicts of interest,
especially those stemming from the provision of consultancy services to companies, areflagged by some investors as an area where there is still room for improvement.
Several respondents (notably issuers’ associations and an asset manager association),
having also answered “to a limited extent” to this question, highlighted that to ensure thatinvestors receive accurate and reliable information, proxy advisors should correct any
erroneous data in due course and at the latest before releasing their voting
recommendations to their clients and should also make reference to any existing conflictsof interest and interaction with the issuer in their draft reports.

180.

The assessment of proxy advisors themselves is differentiated according to their sizeand scale. On the one hand, large international players emphasised the importance of the
BPP in driving harmonisation of market practice and of the oversight by the IOC in providing
assurance and transparency as to whether and how signatories are complying with the
BPP. On the other hand, following-up on what was argued in previous questions, local
proxy advisors pointed out the limits of the framework resulting from the SRD2 in terms oflack of harmonised supervision and limited handling of conflicts of interest60.

181.

Lastly, it is noted that a similar question is addressed specifically to investors, in thesection where they provide their own input (i.e. Question 38).

182.

60

In particular, reiterating some of the points raised elsewhere in their response to the consultation, they flagged the following
issues: i. It lacks harmonised supervision, a unified register of market players and a public European code of conduct (i.e., that
does not come from the industry itself), ii. It leaves room for confusion on who actually is a proxy advisor and on whether entities
offering voting research as ancillary services are subject to the SRD2 and iii. It is weak on the matter of conflicts of interest.
78

183.

Question 23

Question 23, which asks respondents whether, in their experience and in light ofdevelopments affecting the proxy advisory market, they consider that the EU approach toregulation of proxy advisors, currently based on the “comply or explain” principle,
sufficiently addresses any market failures existing in this area. A majority of respondents(52% or 18), consisting primarily of investors and proxy advisors (and notably including theIOC), considered that the EU approach has addressed market failures either fully or toa large extent. 11% of the respondents (3 issuers’ associations and 1 proxy advisor) heldthat it addresses market failures “to a limited extent”. The remaining 35% of respondents(12) expressed no opinion on this question.

184.

Respondents that are overall satisfied (i.e., responding either “fully” or “to a large
extent” to the question) with the EU approach to regulation of proxy advisors consideredthat the SRD2 “comply or explain” framework and the BPP, combined with the oversight
now in place, constitute the appropriate mechanism to promote accountability in the proxyadvisory industry.

185.

In particular, most investors considered the current legal framework developed by the
SRD2 and the role of the BPPG and IOC as enablers of a robust self-regulation andmonitoring system. In fact, all main proxy advisors publish annual publicly available
statements featuring detailed information on how they comply with the BPP, and thisreporting is overseen by the IOC (comprised of both investor and issuer representatives,

186.

79

as well as of academics and the independent Chair). The IOC publishes its findings on anannual basis to hold all signatories accountable and foster improvements. Overall, the selfregulatory system currently in place is deemed by these respondents as credible andeffective. It is also seen as able to ensure proportionality and flexibility, particularly in termsof adaptability to different situations and features.
The IOC considered that the process of monitored self-regulation has begun to bear
fruit as demonstrated by the 2022 statements, when signatories included reactions to IOC
recommendations in the first cycle of reviews (2021), and that further time is needed before
policy makers can determine if signatories continue to sufficiently meet market
expectations. The IOC also highlighted that greater market awareness will be the focus of
its activity, after work done in the last two years for strengthening its independence andimplementing work protocols. Progress along these lines is seen as able to increase its
capacity to respond to market concerns.

187.

Global proxy advisors echoed the benefit of the self-regulation framework thatcombines a principles-based approach seen as better suited to adapt to evolving practice,different business models and the global nature of proxy advisors’ work, with ongoingoversight. In their view, the “comply or explain” framework avoids the fixed costs andpotential anti-competitive effects of prescriptive conduct regulation. In this respect, some
respondents (again proxy advisors and investors) also recalled that, consistently with
ESMA’s findings in 2013 61 , no evidence of market failures has emerged, which would
require a regulatory intervention. They also highlighted that more prescriptive regulatory
approaches in other jurisdictions (US and Australia) have been reconsidered in favour of(monitored) self-regulation as embodied in the BPP initiative.

188.

Local proxy advisors again raised the point that clarification of proxy advisors’ definition
and registration through ESMA, which would also be acting as the common EU supervisor,would avoid the offering of proxy advisory services that are not subject to any transparency
requirements. One of them envisaged another solution, i.e. for ESMA to keep a registerand initiate a new code of conduct, once the definition of proxy advisors is clarified.

189.

From the issuers’ side (as noted in responses to previous questions), certain industry
associations suggested some improvements to the current framework based on the comply
or explain principle, by:

190.

i.

61

Providing for a complaint system managed by ESMA;

ESMA (2013), page 6.
80

191.

ii.

Entrusting NCAs with the task of monitoring developments at the domestic
level and the impact on GMs and reporting to ESMA and/ or issuing an annual
report;iii.

Clarifying and strengthening some SRD2 principles by clearly stating the rightfor issuers to be heard and get mistakes corrected and by further improving
conflicts of interest prevention and management andiv.

Increasing issuers’ representation on the IOC.

Question 23.1.

Question 23.1 looks into further measures needed according to respondents who are
not fully satisfied with the current EU “comply or explain” approach to the regulation ofproxy advisors (i.e., those ticking the answers “not at all”, “to a limited extent” or “to a large
extent” on this question). Feedback was provided by only 13 respondents, some of whichechoed the comments already made in the previous question. Additional measures needed
according to respondents are mostly “further mandatory disclosures”, flagged by 38% of
respondents (5), “more structured disclosures, including in terms of harmonised
presentation” (15% or 2), “monitoring and complaints system and/ or supervisory
framework on disclosures” (15% or 2), “registration/authorisation and related supervision”(7% or 1). 23% of respondents (3) argued that “other” further measures should be taken.

192.

81

Among those calling for further mandatory disclosures, local proxy advisors flagged theneed for full transparency on potential conflicts of interest incurred by proxy advisors,namely the advisory services provided to listed companies and the structure of related
fees. Certain investors also suggested that the accuracy of research might benefit fromenvisaging that all issuers are given a standard time (for example a full day to avoid any
delays in the release of the proxy report) to flag possible errors in the draft research (where
source documents should also be referenced).

193.

On the other side of the spectrum, other investor representatives generally warned
about the risks of further regulating the proxy advisory industry which may lead to additional
barriers to entry in this market. This, in turn, may affect the competitiveness of the industry
and ultimately negatively impact investors’ ability to fully exercise their stewardship
activities, for example in the form of fewer or less informed voting.

194.

Calls for registration of EU proxy advisors, harmonised ESMA supervision andimprovements in the framework have been reiterated by local proxy advisors and issuers’
representatives (see above Question 17).

195.

82

196.

Question 24

62

Question 24 asks respondents whether they consider that the scope of application
taken by the SRD2 is still adequate to cover the full relevant set of market players andservices provided (having in mind the ESG and technological changes in progress in thevoting services market as well as certain investors’ tendency to internalise voting researchand/ or provide clients with voting options). Several respondents provided a positive
assessment, as 25% of them (including 2 proxy advisors) considered that the scope of the
SRD2 is adequate "‘to a large extent” and an additional 13% (mainly from the investor
community) that it is “fully” adequate. 19% of respondents (namely proxy advisors andissuers’ representatives) stated that it is adequate “to a limited extent” and 3% (1)considered that it is “not at all” adequate. The remaining 40% (13) expressed no opinion
on this question.

197.

As regards evolving practice, a global proxy advisor noted that stewardshipprogrammes adopted by asset managers have become increasingly sophisticated (also interms of using technology and ESG considerations to exercise shareholder voting rights)
and a custom policy or a custom process for making voting decisions have become the

198.

62

[as well as certain investors’ tendency to internalise voting research and/ or to provide clients with voting options]83standard practice among asset managers. Accordingly, investors demanding custom
policies increasingly rely on the proxy advisor for data and analyses rather than for mere
voting recommendations. In addition, a few asset managers are exploring ways to give
their institutional investor-clients the option to vote their shares themselves. In this proxyadvisor’s view, these elements do not call into question the scope of the SRD2 but insteadsuggest retaining its approach, which better fits proxy advisors’ evolving practices anddifferent business models than prescriptive conduct regulation.
Local proxy advisors and an asset manager association highlighted the need for
ensuring consistent transparency requirements for all entities providing voting-related
services, including ESG data and service providers, asset managers and other entities
offering proxy advisory or engagement services. In their view, this should also encompass
disclosure and management of potential conflicts of interest, as well as description of how
they apply specific clients’ guidelines in the analysis of agendas and voting execution.

199.

Moreover, issuers pointed out that there are other market participants who should beconsidered, such as ESG rating providers. Considering the importance of ESG ratings andof the market shortcomings in terms of reliability, comparability and transparency of rating
methodologies, issuers asked for regulation of these activities. In their view, rules should
address:

200.

201.

i.

Conflicts of interest, notably in terms of ownership and services offered;ii.

Quality of ratings andiii.

Transparency of rating methodologies.

Question 25

Question 25 of the Call for Evidence asks respondents whether they have any otherissues that they want to raise. Here, it is reiterated that proxy advisors’ analyses are seen
as a useful tool for asset managers to elaborate their voting decisions, given that theygenerally invest in hundreds or thousands of listed companies, and are called upon to
exercise the rights arising from the shares (including voting rights) in each of these.
However, respondents stressed that the exercise of these rights and the decision-making
process remain within asset managers’ prerogatives and the use of a proxy advisor cannot
substitute the investors’ own responsibility to ensure that votes are cast in an informed andresponsible manner and in accordance with their own publicly disclosed voting policies. It
is also highlighted that if an investor is not satisfied that proxy advisors’ standards andpractices are met, it is in any case free to change to another proxy advisor. Finally, it isnoted that the accuracy and quality of research conducted by proxy advisors would benefit

202.

84

from timelier disclosure of corporate documents by issuers and from an increase in theminimum period for convening GMs according to the SRD (21 days).

9.1.2 Input from investors
13 respondents answered the section on investors relating to Article 3j for Proxy
Advisors. The breakdown of the respondents by category is the following: 71% (10) are
asset managers, 4% (2) are individual retail investors, and the remaining 14% (1) fall under
the category “other”.

203.

204.

Question 36:

As shown in the graph, 46% of the respondents (6), all investors, indicated that they
were not notified of possible conflicts by proxy advisors following the introduction of the
SRD2. 38% (5) shared that they were, and 15% (2) did not express an opinion.

205.

Qualitative comments indicate that respondents who answered the question negatively
considered that the current legal framework set by the SRD2 regarding proxy advisors is
sufficient. One asset manager shared that proxy advisors are generally transparent in
disclosing their conflicts and that the IOC is an adequate mechanism to monitor a systemof self-regulation. Another one said that their proxy advisor was transparent and that they

206.

85

believe the disclosures they implement existed before the entry into application of the
SRD2.
Respondents who answered “yes” to the question explained that conflicts of interest
are generally disclosed by proxy advisors but that they are not always mentioned in therecommendations themselves. One asset manager association highlighted that some ofits members can see whether issuers subscribe to their proxy advisor’s products.
Moreover, one asset manager added that within its proxy advisor’s voting platform, it ispossible to also see whether an issuer subscribes to any products and services of the proxyadvisor and, if so, the value of those services.

207.

208.

Question 37

Question 37 asks whether respondents consider that the introduction of the SRD2 hasresulted in greater transparency from proxy advisors, as well as whether it has improved
the respondents’ ability to assess the quality of proxy advisors’ services in several areas.

209.

A majority of the respondents (55% or 6) considered that the introduction of the SRD2
resulted in greater transparency from proxy advisors in terms of improving investors’ ability
to assess the accuracy and reliability of proxy advisors’ advice. 9% of the respondents (1)shared that they believe the introduction of the SRD2 resulted in greater transparency inthat regard only to a limited extent, and another 9% (1) considered that it had not resulted
in greater transparency at all. 27% of the respondents (3) expressed no opinion.

210.

86

Regarding disclosure of general voting policies and methodologies, 64% of the
respondents (7) considered that the introduction of the SRD2 resulted in better disclosure,either fully or to a large extent. 9% of the respondents (1) believed that the introduction of
the SRD2 resulted in better disclosure only to a limited extent. 27% of the respondents (3)expressed no opinion.

211.

As for consideration by proxy advisors of the differences in local market andregulatory conditions, 60% of the respondents (6) were of the view that the introductionof the SRD2 resulted either fully or to a large extent in greater transparency and improved
investors’ ability to assess proxy advisors’ efforts in that regard. 20% of the respondents (2)shared that the introduction of the SRD2 resulted in better transparency and considerationof local market and regulatory conditions only to a limited extent. 20% of the
respondents (2) provided no opinion.

212.

With reference to disclosure on dialogue with issuers, 70% of the respondents (7)considered that the introduction of the SRD2 resulted, either fully or to a large extent, ingreater transparency on proxy advisors’ dialogue with issuers. 10% of the respondents (1)believed this was the case only to a limited extent. 22% of the respondents (2) expressedno opinion on this point.

213.

As for conflicts of interest, 56% of the respondents (5) considered that the
introduction of the SRD2 resulted in greater transparency from proxy advisors on conflictsof interest, either fully or to a large extent. 33% of the respondents (3) shared that they
believed so to a limited extent. 11% of the respondents (1) provided no opinion.

214.

The qualitative comments referring to Question 37 as a whole indicated that two
respondents, both asset managers, considered the BPP provides for a robust level of
disclosure. One of them also highlighted the role of the IOC in that regard. Another also
explained that the provisions on transparency of the SRD2 have not increased theirreliance on the advice of proxy advisors, due to their own internal voting procedures63.
Moreover, a third asset manager shared that, due to their longstanding relationship withthe proxy advisors they are employing, they were experiencing a strong level of disclosure
even prior to the implementation of the SRD2.

215.

63

In particular, this asset manager noted that it implemented a four-step voting process which incorporates the fundamental
research that is central to its investment process as an active manager. It also indicated that votes are cast solely in the interestof clients and a member of the governance team reviews every vote.
87

216.

Question 38

As shown in the graph, two respondents were of the view that the introduction of the
SRD2 resulted in a large improvement in the accuracy of research and the way errors arehandled by proxy advisors. 42% of the respondents (5) considered that this was the caseonly to a limited extent. Another 42% of the respondents (5) expressed no opinion on thesubject.

217.

The qualitative comments coming from respondents choosing “to a limited extent”
indicated that it is not fully clear whether improvements took place due to the entry into
application of the SRD2 or for other reasons.

218.

The qualitative comments provided by respondents choosing “to a large extent”
indicated that the accuracy of proxy advisors’ research and the level of errors may also
depend on the cut-off date required by custodians and that the implementation of the SRD2
has not changed the fact that these dates are still very early in some markets. This was
also highlighted in the responses to Question 22.

219.

88

220.

Question 39

Question 39 asks whether respondents have changed the way they use services
provided by proxy advisors for the purposes of GM voting, in terms of research, advice orrecommendations, after the SRD2’s entry into application.

221.

As shown in the graph, only two respondents indicated that, following the entry into
application of the SRD2, they did change to a large extent the way they made use of thetype of services provided by proxy advisors for the purpose of GM voting. 67% of
the respondents (8) shared that they did not change this at all or changed it only to a limited
extent. Two respondents did not express an opinion. Most qualitative comments indicatedthat the respondents had already established voting policies and processes which did notchange after the entry into application of the SRD264.

222.

As also shown in the graph, 83% of the respondents (10) considered that, following theentry into application of the SRD2, they did not change (or changed only to a limited extent)
the number of proxy advisors contracted. None of the respondents chose to answer

223.

64

Notably, one asset manager said that it had a custom policy in use before the SRD2 entered into application. A second one
shared that it has their own in-house voting guidelines but uses its proxy advisor’s voting platform to cast its votes. A third one
indicated that it has maintained a custom set of voting guidelines, administered with the assistance of a proxy advisor, for a numberof years, and that the custom policy is underpinned by the expectations from local corporate governance codes and other market
norms. As many of these expectations are widely held, its annual voting outcomes are typically about 90% aligned with both theboard’s recommendations and the proxy advisor’s benchmark recommendations.
89this part of the question by “fully” or by “to a large extent”, and 17% of the respondents (2)expressed no opinion.
With reference to the qualitative comments, those who answered “to a limited extent”
shared that they had:

224.

i.

Hired a new proxy advisor offering a dedicated service to design custom
policies, orii.

Subscribed to research from other providers from time to time, often on
a market-specific basis, oriii.

Used additional advisors to get in depth-analysis.

As shown in the graph, 75% of the respondents (9) considered that, following the entry
into application of the SRD2, they did not change (or changed only to a limited extent) the
frequency of following recommendations made by proxy advisors. None of the
respondents chose to answer this part of the question by “fully” or “to a large extent” and25% of the respondents (3) provided no opinion.

225.

Among those who answered “to a limited extent” or “not at all”, most (5) indicated intheir qualitative comments that they already had their own policies or voting guidelines inplace before the entry into application of the SRD2 and have continued to follow themsince.

226.

90

227.

Question 40

As shown in the graph, 67% of the respondents (8) considered that the increasing offer
of ESG-related services by proxy advisors and other players cannot lead to new conflictsof interest that may have an impact on the reliability of their advice or can do so only toa limited extent. 33% of the respondents (4) expressed no opinion and none of the
respondents chose to answer “fully” or “to a large extent”.

228.

In their qualitative comments, respondents explained that while the ESG services
provided by proxy advisors may in principle lead to increased potential conflicts of interest,
they trust their proxy advisors to be transparent on this topic and that investors are able toidentify and handle issues. In addition, one respondent sees a potential issue in that proxyadvisors still need to fully develop their ESG capabilities.

229.

91

Question 41

230.

65

As shown in the graph, 67% (8) of the respondents (8) answered that, having in mind
the ESG and technological changes in progress in the voting services industry as well as
certain investors’ tendencies to internalise voting research and/ or provide clients withvoting options, they were not planning, or were planning to change only to a limited extent,
the degree to which they used the services of proxy advisors, the type of services theyused or their reliance on their advice. 33% of the respondents (4) did not provide an
opinion. None of the respondents opted to respond either “to a large extent” or “fully”.

231.

In their qualitative comments, most respondents reiterated that their voting process is
not outsourced or that they have the final say on the voting decision even if they use a proxyadvisor’s services.

232.

[in the voting services industry as well as certain investors’ tendencies to internalise voting research and/or to provide clientswith voting options]6592

9.1.3 Input from issuersThis section was answered by 7 respondents, comprising 4 industry associations66 and3 listed companies.

233.

234.

Question 54

When asked to indicate whether proxy advisors have provided research advice and/ or
recommendations on their company, 100% of the respondents (6) to this question
answered affirmatively. Only two answers (one positive and one negative) were received
in connection with the second part of the question asking issuers whether they havepurchased services, such as consultancy or research, from proxy advisors.

235.

In terms of the qualitative comments received, two respondents, both industry
associations, reported that, prior to the GM, proxy advisors share with issuers data ofcentral importance to the analysis of their remuneration and corporate governance, suchas board composition, compensation practices, compensation data and equity plans. Whilethese data do not contain any analysis or voting recommendations, it is reported thatissuers are given limited time to review them and provide feedback.

236.

66

Two of them represent financial firms, several of which are listed.
93

237.

Question 55

Question 55 asks if issuers consider that the entry into application of the SRD2 has
improved several aspects of proxy advisors’ disclosures and conduct. 5 respondents
answered this specific question. With reference to “Fostering transparency to ensure theaccuracy and reliability of the advice”, 60% of them (3) considered that this area has
improved to a limited extent while the remaining respondents were split between “Noopinion” (20% or 1) and “Not at all” (20% or 1). Regarding the second area “Disclosing
general voting policies and methodologies”, most of the respondents replied that
improvements were limited (60% or 3), while one argued that there were improvements toa large extent and the remaining respondent did not express an opinion. The same rangeof answers was identified for the third area “Considering local market and regulatory
conditions”, as well as the fourth, “Providing information on dialogue with issuers”, and thefifth, “Identifying, disclosing and managing conflicts of interest”. Most issuers consideredthat the improvements in these areas were limited too.

238.

Looking at the qualitative comments, one respondent referred to the points brought up
in response to Question 20.

239.

94

Question 56

240.

67

This question evaluates to what extent issuers think that the entry into application of
SRD2 transparency requirements on proxy advisors has improved their ability to assess
the accuracy and reliability of proxy advisors’ research, advice and/ or recommendations
as regards their company. 4 entities answered this question. Half of the respondents (50%or 2) replied that they had no opinion. The remaining answers were split between “Not atall” (25% or 1) and “To a limited extent” (25% or 1).

241.

One respondent, an association representing issuers, explained that these aspects had
already been partially addressed before the SRD2, although recognising that the SRD2
has brought some improvement.

242.

67

[the accuracy and reliability of]
95

243.

Question 57

In this question the issuers are asked if, in their experience, the dialogue between proxyadvisors and issuers on the analysis and recommendations in research reports ahead of
their distribution to investors has improved. 5 respondents replied to this question. Most ofthem selected “To a limited extent” (60% or 3). The other selected options include “Not atall” and “To a large extent”, both accounting for one respondent each.

244.

Two respondents noted that indeed some of the proxy advisors contact issuers inadvance of the GM and issuers can then provide comments. However, it is underlined that
although dialogue with proxy advisors has improved, the time frame given to issuers tomake comments is too short while issuers’ comments are not always incorporated by proxyadvisors.

245.

246.

Question 58

Question 58 asks whether issuers have filed a complaint under the BPP framework as
regards research reports. Here, all respondents (5) reported not to have done so.

247.

96

9.1.4 Input from proxy advisors
A total of 6 participants, who identify as proxy advisors, responded to this section. Oneof those is not a proxy advisor itself, but an entity that holds a majority stake in one of theproxy advisors.

248.

249.

Question 72

All 6 respondents answered to question 72, on whether they are a signatory to a codeof conduct for proxy advisors. All but one indicated that they are signatories to a code.

250.

According to the comments provided, two respondents are founding signatories of the
BPP, two are signatories to the UK Stewardship Code (one also being a signatory to the
BPP and one also to the Japanese Stewardship Code). One participant indicated it is fullycompliant with the BPP but has decided not to become a signatory, inter alia because its
structure as a sole owner firm would make it expensive and ineffective. This participantalso pointed to overlaps between the BPP and SRD2-requirements. Finally, one
respondent reported that it has issued and published its own code of conduct68.

251.

68

ESMA understands that this proxy advisor has later joined a local Stewardship Code.
97

One of the aforementioned respondents added that it publishes annual reports on its
compliance with the BPP, which are reviewed and publicly analysed by the IOC. Along thesame lines, another respondent highlighted that it reports on the fulfilment of its code
annually. Finally, one respondent explained that the annual BPP compliance statements
reflect the changes adopted in response to the introduction of Article 3j of the SRD269.

252.

253.

Question 7370

Question 73 deals with which MSs are competent for the respective proxy advisors’
activities and whether respondents have their offices and establishments there.
5 participants, representing 4 proxy advisors, responded that their registered office is in the
MS competent for their activities (one in Italy and one in Spain, while the others have notspecified the information). Two of these entities also reported that to their knowledge, they
are the only proxy advisors supervised by their respective NCAs, but not the only ones

254.

69

Which the respondent describes inter alia as: i. Public disclosures by each BPP signatory of its commitment to the code of
conduct as well as ii. Public disclosures relating to accuracy and reliability of research activities and iii. Identification and disclosure
to clients of actual or potential conflicts of interest, which may influence the preparation of research, advice or voting
recommendations as well as actions taken to eliminate, mitigate or manage them.
70
For the sake of clarity, it should be noted that the 3 sub-questions a), b) and c) are interconnected. More specifically, subquestion b) is to be answered on the condition that the response to question a) is negative, and question c) is to be answered
only if both a) and b) are answered negatively.
98

offering services in the Italian and Spanish markets, respectively. One respondent (which
has its head office in the US) indicated that it has establishments in Ireland and Germany.
255.

Question 74

In response to question 74, which asks if participants are required to notify being
subject to SRD2 provisions to an NCA or if they have liaised with one at all, all
6 participants, representing 5 proxy advisors, responded affirmatively. According to theiranswers, two have notified the Swedish Financial Supervisory Authority and one of themhas also notified the UK FCA, in compliance with the local laws. One respondent indicatedthat it is a global business and has informal contacts with various NCAs. Another indicatedthat it does not have formal or informal discussions with the relevant (Italian) NCA but
added that under Italian law it is required to publish reports on its transparency.

256.

257.

Question 75

Question 75 deals with whether participants’ practice has been revised in certain areas
after the SRD2 came into force.

258.

In terms of fostering transparency to ensure accuracy and reliability of advice,
one respondent reported that its practice has been fully revised, and it offers listedcompanies an opportunity to comment on its research and is prepared to incorporate suchcomments into its reports). 4 of the other 5 participants indicated that they have revised
their practices to a limited extent. One of them explained that the BPP address proxy

259.

99

advisors’ practices in all areas mentioned in Question 75. In addition to reporting under the
BPP, this proxy advisor makes information on these topics, including its methodology fora considerable number of markets, available on its website. It further pointed out that the
BPP reporting process is now overseen by the IOC, which provides reviews of thesignatories’ reports on an annual basis. One respondent said it has included additional
details on the professional profile of analysts and the analysis process in its publications
after the SRD2 was introduced, while another stated that most of its information wasdisclosed even before the SRD2, but now additional information has been included.
One participant stated that its practice has been fully revised as far as disclosing
general voting policies and methodologies is concerned. It also pointed out that thesepolicies and methodologies are reviewed and updated annually and disclosed in separate
documents on its public website. 3 other respondents indicated that they conducteda revision of their practice to a limited extent and one of those explained that it alreadyused to disclose its voting policies annually but has improved the disclosure on
methodology and other aspects after the SRD2 was implemented. Finally, one respondent
said that it did not revise its general voting policies and methodologies and that those haveall been publicly available on its website ever since it was founded.

260.

In the context of considering local market and regulatory conditions, one
respondent maintained that its practice has been fully revised, whereas in two other cases,
the answer was that this has been done to a limited extent and two participants replied thatthey have not done so at all.

261.

With reference to providing information on the dialogue with issuers, one
respondent said that its practice has been fully revised, whereas two others said this has
been done to a large extent and two more flagged that this has been done to a limited
extent. The first respondent, who reported to have fully revised its practice, also asserted
that it undertakes dialogue with issuers in 3 areas, pointing inter alia to matters such as
engaging with companies that are linked to violations of international norms and standards,
ESG risks and systemic ESG issues from climate change to modern slavery. One of the
respondents answering “to a large extent” indicated that it has adopted and publisheda policy on dialogue with issuers since 2016, but since 2019 (after the approval of theSRD2, but before its transposition into national legislation), it has annually disclosed thefull list of companies it engaged with during the previous year, including information on themain topics that were discussed in this context.

262.

Regarding changes pertaining to identifying, disclosing, and managing conflicts ofinterest, all participants said that their practice has been revised to a limited extent, with
only one indicating a revision to a large extent. One respondent added that at the productlevel, its research is accompanied by a conflict-of-interest statement, indicating whether it

263.

100

has a relationship with the company on which it is offering voting recommendations anddescribing the nature of such relationship. At firm level, the respondent said it uses
a combination of conflict management policies, procedures, and measures. Another
respondent also made reference to its policies on conflicts of interest and specificallypointed out that potential conflicts can result from activities carried out by its clients, which
it said it discloses in voting recommendation reports. Following the SRD2’s entry into
application, it also publishes a detailed annual report with all potential conflicts of interest
that arose in the course of the previous year. A third participant indicated that it doesn’t
provide any kind of consulting services to companies under its research coverage and that
other potential conflicts of interest are analysed and disclosed in its annual report.
264.

Question 76

Question 76 asks what new measures respondents have put in place since the SRD2
came into application to identify and handle conflicts of interest properly and provide
transparency towards clients.

265.

One of the respondents indicated that it continually seeks to improve and refine its
conflicts of interest policies and procedures. In 2021, it enhanced its mechanisms to keepa check on compliance by retaining a third-party service to electronically monitor over 70%
of its employee accounts across the globe. One participant asserted that no additional
measures were required, as it does not provide any advisory services to listed companies
in its sphere of analysis. It further explained that transparency towards clients has improved
thanks to the annual report on conflicts of interest, which is publicly available. Similarly,
another respondent asserted that its practices pre-SRD2 were such that no significant
changes were necessary except for annual disclosure. One of the participants pointed outthat in line with the BPP updates prompted by the SRD2, the proxy advisor, in which it
acquired a stake, put in place several non-interference policies to ensure it continues tooperate with the same editorial independence as before. These policies include one on
non-interference and potential conflicts of interest related to the acquirer, an updated policy
regarding disclosure of significant relationships and director affiliated companies as well
as a policy related to the acquirer’s affiliated companies.

266.

267.

Question 77

In response to Question 77, which asks if proxy advisors’ practice has evolved tointegrate more ESG elements, all respondents answered in the affirmative, showing theincreasing importance of ESG-related issues.

268.

Respondents held that while taking ESG factors (especially governance factors) into
account is not new, ESG-related topics (climate-related investment risk in particular) are

269.

101

becoming increasingly important. Analyses of ESG-related risks are requested by proxyadvisors’ clients more and more. As a result, the scope of analysis has been enlarged andthere has been an increase in ESG governance research. ESG criteria have been
progressively incorporated into research and voting recommendations.
270.

Question 78

In the case of Question 78, which asks if respondents’ practice has evolved to provide
new services, particularly in the ESG sphere, all responses were affirmative. Someparticipants provided that they have started coupling services pertaining to ESG voting withalready existing services, thereby offering new ESG packages. Others maintained that they
do not provide any ESG advisory service as such but include the respective factors in theiranalyses. One proxy advisor specifically pointed out that it produces periodic reports on its
engagement activities, so investor participants can track progress on ESG and other topics.
Some of the topics at issue include climate change, sustainability reporting on social issues
and executive pay. Overall, respondents indicated that they are mindful of the fact that
introducing new products and services can create new issues with respect to conflicts ofinterest.

271.

9.1.5 SMSG input
Overall, the SMSG finds that the SRD2 has not been fully able to achieve moretransparency when it comes to proxy advisors, or at least has been able to do so only
marginally. The SMSG advice recognises the progress that has been made since the
BPP’s update in 2019 and its monitoring by the IOC, though the picture on theimplementation of the three principles of the BPP, addressing service quality, conflicts ofinterest and communication with issuers, respectively, still appears unsatisfactory to them.

272.

On service quality, adequate disclosure of methodologies and policies is acknowledgedby the SMSG, though it sees room for improvement on the process for their development
and review (consultation with stakeholders, phases of the process) as well as ontransparency on the application of the procedures in place to ensure that voting
recommendations are of appropriate quality and not deviated from in case services arebeing provided to both issuers and investors. Furthermore, it is emphasised that disclosure
on how proxy advisors consider local and legal regulatory conditions should be improved(and also on how the same practice may lead to diverging recommendations in Europe
and the US).

273.

On the dialogue with issuers, the SMSG considers it important to ensure thata structured dialogue procedure is put in place by proxy advisors, allowing for correction ofpotential factual errors before the voting deadline. On this matter, the SMSG notes that

274.

102

actual dialogue with issuers and its extent should be mentioned in the voting reportprovided to the investor client and that when proxy advisors do not engage with issuers,
they should explain why. As improvements of the framework that could be addressed more
specifically by the BPP, the SMSG suggested that:i.

Dialogue with issuers, with adequate time for issuers themselves to provide
comments, should take place if so requested by them, especially where
contentious issues are at stake andii.

Engagement with issuers throughout the year should be encouraged.

On the handling of issuers’ complaints, the SMSG notes that they are not sufficiently
considered and examined by proxy advisory firms.

275.

Finally, the area that raises most concerns in the view of the SMSG is that of conflictsof interest. In line with the input gathered via the Call for Evidence, concerns arise in theprovision of ancillary or overlay services, such as consultancy to issuers, voting platform
services to investor clients, ESG services and ratings to investor clients and issuers.
Market practice reportedly shows that some proxy advisors actually provide consulting
services to issuers in parallel to their proxy activities and/ or offer ESG data service bothfor issuers and investors. The SMSG also points out that the BPP should better address
one of the major potential or existing conflicts of interest, i.e., that related to the provisionof consultancy on corporate governance matters (e.g. on executive remuneration policies)
to issuers that are also the object of voting advice to investors.

276.

In this respect, it is the opinion of the SMSG that “Chinese walls” between proxy voting
teams and consulting teams are not an effective response to distortions caused by conflictsof interest and that “comply or explain” is not a strong enough tool to address all the
problems generated by conflicts of interest. In light of this, the SMSG would further
strengthen the SRD2 approach on conflicts of interest. In its view, proxy advisors should
avoid offering consultancy services to issuers when they are mandated by investors tocarry out research on the same companies71, or, if not prevented, the offering of suchservices should be at least clearly identified and disclosed to clients, together with theactions undertaken to prevent, avoid, eliminate, mitigate or manage them and information
confirming the non-materiality of the revenues generated by the additional services offeredto the relevant issuers.

277.

71

According to the SMSG, as the audit framework states some incompatibilities between the provision of audit and other services,
the same should apply to proxy advisors that should not offer consulting advice to analysed companies on topics that are part of
the GM agenda.
103

Going forward, the SMSG would favour a reinforced voluntary approach, where the“comply or explain” principle is coupled with NCAs’ oversight. The SMSG would also
consider it helpful if any review of the proxy advisory market looked into the oligopolistic
nature of the market. Finally, the SMSG considers it important that any future legislative or
regulatory actions on proxy advisors are coordinated with the upcoming review on ESG
rating providers.

278.

9.2 Investment chain
9.2.1 General inputThis section aims to provide a general understanding of the practices currently put inplace and the difficulties that may arise from the practical application of Chapter Ia of the
SRD2. Evidence on these matters was collected from 72 respondents, though some ofthem did not respond to all questions72. Some responses to the questions included in thissection came from asset managers, which represented 15% (11) of the total respondents
to the section. To a minor extent, input was received from retail investors too (3% or 2 ofthe respondents). Furthermore, several responses came from intermediaries, with CSD
and credit institutions accounting for 11% (8) and 22% (16) of the total respondents to thesection, respectively. Associations representing intermediaries and investment firms, aswell as an entity classified as both, also provided their input (7% or 5 of the respondents).
Issuers accounted for 8% (6) of the total respondents to the section. Most proxy advisors
operating in Europe provided their input (7% or 5). The largest group of respondents (27%or 20) not classifiable within a specific category, included service providers, law firms,
NGOs and a variety of industry associations.

279.

It should be noted that, while in section 2.4.1“Categorisation of respondents”, the respondents are classified according to theirown chosen classifications, i.e., reflecting that several entities selected more than one category, in this section, a single
classification was attributed to each respondent, based on their main characteristics and on the capacity in which their input wasprovided.
72

104

280.

Question 3

63 respondents answered Question 3 on the improvement of shareholder identification
after the entry into application of the SRD2 and the IR. As the graph shows, 45% of
respondents (28) considered that shareholder identification has improved, either to a large
extent or fully. Another 38% of respondents (24) were of the view that shareholder
identification has improved, albeit to a limited extent. Only 3% of respondents (2 – one
issuer representative and a law firm) considered that there has been no improvement at all
due to the possibility provided to MSs to opt for a threshold for shareholder identification
capped at 0.5% (in 2020, ESMA published the list of thresholds in place above whichshareholders can be identified in the different EU MSs 73 ). This makes shareholder
identification quite difficult for highly-capitalised issuers. 14% of respondents (9) answered“no opinion”, with 44% of these respondents (4) being asset managers and arguing thatthey had no visibility on the shareholder identification processes.

281.

According to several respondents, many of them coming from the intermediaries’community, the minimum harmonisation approach of the SRD2 has led to someinconsistencies in the shareholder identification processes. Those arise mainly from boththe lack of a common definition of shareholder and the lack of a common model forshareholder identification requests resulting in differences in the required data (e.g. tax

282.

ESMA, “National thresholds for shareholder identification under the Revised Shareholder Rights Directive” (2020).

73

105

residence, citizenship, date of birth) and the use of different formats (other than ISO20022).
In fact, it is highlighted that requests sent in non-machine readable (mail, paper based,etc.) or other formats such as ISO15022 do not permit automated processing withoutmanual intervention (which is defined as straight-through processing or STP). Overall, it
has emerged that ISO20022 standards have not yet been universally embraced, and many
participants continue to use legacy communication methods in relation to shareholder
identification requests, despite the development of new messaging standards establishedto support the SRD2.
As anticipated above, another main concern from respondents in connection withshareholder identification regards the possibility left by the SRD2 for MSs to opt for setting
thresholds for identifying shareholders above 0.5%, which reduces access tocomprehensive shareholder information, inhibiting issuer engagement and complicating ID
administration.

283.

As such, it is argued that the impact of the SRD2 on shareholder identification varies
across MSs. For instance, the Dutch market is reported to have changed little withthresholds for disclosure being too high to give issuers any meaningful information as to
who their shareholders might be, whereas in France, the process seems faster than under
the previous regime.

284.

Lastly, it is noted that questions referring to the threshold for shareholder identification
are addressed specifically to investors and issuers, in the sections where they provide theirown input (i.e., Question 30 and Question 45 respectively).

285.

106

286.

Questions 4 and 5107

65 respondents answered Question 4 asking if the harmonisation of the definition ofshareholder across the EU is a necessary step to ensure the full effectiveness of Article 3a
provisions. 48% of respondents (31) fully agreed that a common definition of the term
“shareholder” would be necessary to ensure the effectiveness of the SRD2. Along thesame lines, 25% of respondents (16) considered that a common definition would beneeded to ensure the effectiveness of the SRD2 to a large extent. Just a few respondents,
around 14% (9), believed that the harmonisation of this definition is necessary only toa limited extent and around 6% (4, including 2 issuers) did not consider it a necessary step.
Finally, 8% of respondents (5) opted for “no opinion”.

287.

Although a large majority of respondents considered that the introduction ofa harmonised “shareholder” definition will help reduce differing interpretations and increasealignment and efficiency of processes throughout the custody chain74, some voices comingfrom various categories of respondents (issuers, asset managers, CSDs and the service
provider industry) highlighted that the implications of such a definition on EU laws, nationallaws (in particular securities laws and company laws but also tax law) and more generally
on security rights and market practices will have to be thoroughly analysed in order not tocreate unintended issues. In this regard, a service provider suggested an alternative
approach to reconcile these concerns by focusing on identifying which party in theownership chain should be subject to the specific shareholder identification provisions,
without the need to define that party as “the shareholder”.

288.

Coming to Question 5 about who should be regarded as shareholder, 61 respondents
provided answers. As shown in the relevant graph, 56% (34) agreed that the “shareholder”
should be the natural or legal person on whose account or behalf the shares are held, even
if it is in the name of another who acts on behalf of this person (i.e. the “beneficial
shareholder”). 11% (7) retain that the “nominee shareholder” (i.e., the natural or legal
person holding the shares in their own name, even if on behalf of another legal or natural
person) should be considered as the shareholder. 33% of respondents (20) opted for“Other”, with some among them considering none of the options provided to be able toclearly identify the person who should be entitled to exercise the rights attached to theshares, and others not deeming a harmonised definition of “shareholder" necessary.

289.

Alternative definitions have been suggested by respondents who answered “Other”.
For example, a few of them, all intermediaries, suggested defining the “shareholder” as the“ultimate account holder”75, considering this concept easily applicable and usually matchingwith the person who invested money in the shares. Another suggested leveraging on the

290.

Where the “ultimate account holder” is defined as the account holder who does not act as intermediary or on behalf of anintermediary.
75

108notion of “end investor” but specifying that it should be applied regardless of how sharesare held. With respect to investment funds, it is often argued that they (and not the ultimate
beneficiaries, i.e., the individual investors) should be regarded as shareholders.
291.

Question 6

Of the 62 respondents that answered Question 6 on the transmission of information
along the chain of intermediaries, 84% (52) considered that there has been some level of
improvement, either to a limited or to a large extent, following the entry into application of
Article 3b of the SRD2 and of the IR. Overall, it is argued that the information flow has beenenhanced thanks to the standardisation of data transmitted.

292.

In detail, 65% of the respondents (40, including 10 credit institutions and 6 CSDs)
considered that improvements have been made only to a limited extent because
information is already transmitted effectively, and most intermediaries already comply withmany of the requirements in Article 3b. It is argued that communication in the intermediarychain was already generally organised with ISO formats and SWIFT channels prior to theimplementation of the SRD2. On the other hand, 19% (12) observed an improvement toa large extent due mainly to the transmission of information related to General Meetings(GMs). Only one respondent, a law firm, did not see any improvement. 15% of
respondents (9) opted for “no opinion”, providing different reasons: no improvement orworsening observed regarding the transmission of information, a lack of visibility or
experience in order to reach a conclusion on the topic. Lastly, no respondents considered

293.

109

that the entry into application of Article 3b led to a full improvement in the transmission of
information.
Although the transmission of information between intermediaries is not seen as
particularly problematic, it is reported that the transmission of information between issuers,
CSDs and the intermediary chain remains challenging due to the fact that not all membersof the chain use the same format of messages. For instance, it is argued that issuers arestill not issuing corporate event information in a standardised and timely manner and,should therefore be legally obliged to use the same ISO formats as in the intermediarychain and to respect the same deadlines and operational requirements. Furthermore,according to few respondents, some intermediaries are not passing on all the meetingannouncement information to downstream clients (e.g. resolutions data is removed andreplaced with hyperlinks to the relevant information).

294.

Lastly, it is noted that similar questions, focusing on how investors transmit and receive
information, are addressed specifically to investors and intermediaries, in the sections
where they provide their own input (i.e., Question 26, Question 65 and Question 66,
respectively).

295.

296.

Question 7

63 respondents answered to Question 7 on whether intermediaries have facilitated theexercise of shareholder rights following the entry into application of the SRD2 and the IR.

297.

110

The majority of respondents (56% or 35, more than a third of them being credit
institutions) saw an improvement only to a limited extent since Article 3c leaves wide
discretion to MSs in the transposition of the SRD2, which results in an uneven applicationof its provisions.

298.

A few respondents (14% or 9, a third of them being issuers) observed an improvement
to a large extent due to a significant increase in the use of ISO20022 format messaging for
GMs, leading to significantly better transmission of information. One such respondent
observed that there are more intermediaries proactively offering GM notification and voting
services to their investor clients following the entry into application of the SRD2, which
results in a significant increase in the transmission of voting instructions. In addition, many
intermediaries that previously submitted votes via different processes now appear to
submit all votes in STP flow of information and in accordance with SRD2 standards.

299.

It is interesting to note a case brought up in the consultation in which the implementationof a secured electronic platform in a European country allowed for broadening the number
of issuers using this electronic facility to announce their GMs under an ISO format and insome cases to also offer electronic voting facilities. Nevertheless, in the case at hand, there
was no increase in the answer rate from shareholders, which calls into question the realeffectiveness of the tool.

300.

14% of respondents (9, several of which being asset managers), did not observe any
improvement at all, arguing that individual private shareholders still do not receive crossborder GM information and voting is not facilitated when the chain of intermediaries
includes cross-border market players. In their view, Article 3c fails to truly facilitate theexercise of shareholder rights in the EU.

301.

Moreover, as the graph shows, 16% of the respondents (10) selected “no opinion” citinglack of access to the relevant information or that further experience was needed in relation
to the implementation of SRD2 provisions in order to conclude whether it facilitates theexercise of voting rights. Finally, none of the respondents considered that the facilitation of
the exercise of shareholder rights fully improved.

302.

Looking at the comments received, one respondent made a general remark that theexercise of shareholder rights is highly dependent on the effective transmission of
information between issuers and shareholders. Shortcomings in the transmission of
information by intermediaries thus impairs the exercise of shareholder rights. Interestingly,
evidence has been raised that in certain instances voting instructions were incorrectly

303.

111

processed in the voting chain76. On the basis of the above, a few respondents call forelectronic voting to be available to investors, noting that it is not currently the case acrossseveral MSs.
One respondent added that in many instances, shareholders reportedly either do notreceive information in relation to corporate actions or GMs or receive it too late for it to beactionable. In its view, this situation is exacerbated in a cross-border context where thechain of intermediaries tends to be longer.

304.

Finally, some respondents highlighted issues in connection with direct voting
confirmations. Vote confirmations are reportedly still not being provided in many markets
and sometimes are provided in a paper-based form77. This represents an obstacle (or atleast a disincentive to vote) to shareholders and to all those institutional investors who needa clear confirmation of their votes for reporting reasons, in particular if they delegate theirvoting powers to third parties, such as asset managers.

305.

It is noted that a similar question is addressed specifically to investors, in the section
where they provide their own input (i.e., Question 27).

306.

76

To illustrate this, it was reported to ESMA that at the 2022 annual GM of a major issuer, some 13.5 million votes (almost 6.1%of the total number of votes cast at this shareholders meeting) were mistakenly counted as “against votes” on a certain subject,while the shareholder concerned intended to vote in favour.
77
For example, a major service provider requests confirmations of outgoing voting instructions from all upstream intermediaries.
However, the response rates are less than what is necessary to ensure end-to-end vote confirmation on a system-wide basis.
This is especially the case with post meeting vote confirmations from issuers which should otherwise be passed down the chainof intermediaries which shareholders require. This respondent saw 28% “Cast” and 7% “Confirmed” status responses.
112

307.

Question 878

58 respondents answered Question 8 about the improvement of transparency, nondiscrimination, and proportionality of charges for services provided by intermediaries
regarding shareholder identification, transmission of information and facilitation ofshareholder rights. None of them saw a full improvement on this topic.

308.

43% of the respondents (25, including investor associations, issuers, CSDs and otherintermediaries) considered there was no improvement at all and pointed out that there isno visibility of charges to investors and issuers, an excessive variety of costs across the
EU for similar services and no clear rules on which services can be charged and to which
entities, especially in a cross-border context79. With particular regard to the shareholder
identification process, it is highlighted that issuers cannot be fully informed of the cost of

309.

78

[In connection with shareholder identification, transmission of information and exercise of shareholder rights (i.e., in compliancewith Article 3d of the SRD2)]79
In particular, some operators have pointed out the difficulties coming from the circumstance that the SRD2 allows intermediaries
to charge issuers for services provided (to them or to investors) without having any kind of contractual relationship with the issuers
themselves. This, of course, can make it hard for issuers validating the invoices received, especially in cross-border situations,and for intermediaries being paid for the services provided.
113

a disclosure request before submission, inter alia because the layers of intermediaries
involved in the process are not known beforehand.
32% of respondents (19, several of them being intermediaries) agreed that there wasan improvement on transparency of fees to a limited extent. Only 2 respondents, anintermediary and an issuer, saw an increase to a large extent, in the transparency of
charges for services provided following the entry into application of Article 3d, but witha limited impact due to the fact that fees associated with the exercise of shareholder rights
are often complex (as the underlying processes for the exercise of such rights is also
complex). Finally, 21% of respondents (12) opted for “no opinion”.

310.

Looking at the qualitative comments, most of the respondents highlighted the great
variety of fee structures and levels across MSs raising the issue of their proportionality andcomparability. Whereas in Germany, for instance, a specific legal framework is reportedly
in place, capping the cost of services rendered by intermediaries, other MSs are notreported as providing specific requirements on caps.

311.

A lack of harmonisation with respect to rules regarding invoicing practices byintermediaries is also observed, resulting in a lack of upfront transparency for issuers on
what a shareholder identification request or other corporate events will cost and difficulties
for intermediaries when collecting fees for their services. In fact, a few respondents bothfrom the issuer and CSD communities claim that invoices can be sent to issuers byintermediaries whom the issuer has no contractual relationship with. In these cases, thepossibility for an issuer to validate if the invoice/claim is legitimate seems very limited. One
service provider argues that where charges are invoiced, intermediaries should at the very
least be obliged to provide documentary evidence to support claims that allow
reconciliation and validation by the issuer before payment. Moreover, it suggested thatintermediaries should be prohibited from charging issuers and investor-clients for the same
services.

312.

Generally, some respondents found evidence in EU capital markets of higher cost of
managing cross-border shareholdings, which implies cost disincentives, for instance, tovote abroad for individual investors. Nationally, shareholders are often not required to pay
for their voting or the transmission of information by intermediaries. However, when holding
shares in a cross-border context, the cost associated with exercising shareholder rights
and even simply receiving information from issuers is increased significantly80. In view of

313.

80

According to Better Finance research, in 2021, the fees charged to investors (from the bank or broker) ranged from EUR 20 to
EUR 250. In 2022, the reported costs even exceeded EUR 250 per annual GM (the highest fees were in Luxembourg and
Denmark). Better Finance & DSW, “Barriers to Shareholder Engagement 2.0: SRDII Implementation Study” (2022), page 16.
114these responses, shareholders should not be charged higher fees in a cross-border context(unless duly justified).
Finally, a few indications were received with reference to the fees imposed byintermediaries and CSDs that ultimately bear the risk of deterring issuers from trying to
identify their shareholders. One respondent argued that some CSDs apply different fees toissuers for transmission of information to intermediaries if the issuer has appointed anotherparty as their agent rather than the CSD itself.

314.

315.

Question 981

57 respondents answered question 9 on the general application of Chapter Ia
provisions by third-country intermediaries (i.e., intermediaries which have neither theirregistered office nor their head office in the EU but provide services with respect to shares

316.

81

[Third-country intermediaries refers to intermediaries which have neither their registered office nor their head office in the EU
but provide services with respect to shares of EU listed companies].
115

of EU listed companies). 53% (30) expressed no opinion on the topic, while the majority of
the remaining respondents who expressed an opinion (54% or 15, most of them being
intermediaries), considered that the practices of third-country intermediaries are in line withthe relevant provisions only to a limited extent. 9% of the respondents (5) affirmed thatthird-country intermediaries’ practices are “not at all aligned” with the SRD2 provisions.
Looking at the comments made by respondents on the subject, the picture is lessfragmented. Almost all the respondents, including those who expressed “no opinion”,
admitted having noted or experienced differences in the practices followed by third-country
intermediaries versus European ones, albeit to a limited extent. A few of them noted thatthe misalignment occurs mainly with non-EU local intermediaries, while the operators ofa more global nature seem more in line with the European requirements. A few others
mentioned the recurring issue about the (non) use of ISO20022 formats and a couple ofasset managers said that third-country intermediaries often impose shorter cut-off dates
on investors, limiting their ability to exercise their rights as shareholders. Threeintermediary associations affirmed that third-country intermediaries do not consider
themselves as being in the scope of the SRD2. However, global operators, mainly central
security depositories and other global custodians, indicated that an improvement occurredin the non-EU intermediaries’ practices and that misalignments are mainly due to the lackof standardised processes among European MSs, suggesting that a higher level ofstandardisation would benefit both non-EU and EU operators.

317.

116

318.

Question 10

59 respondents answered Question 10 on the level of compliance with the SRD2 andthe effectiveness of processes put in place by the intermediaries since the entry into
application of the Directive, with 15% (9) of them expressing no opinion on the subject. The
majority of respondents expressed a positive view on the level of compliance with the
SRD2 provisions by the industry, since 49% (29) retained that the processes put in placeby the intermediaries are working “fully” or at least “to a large extent” in line with the SRD2
and the IR. Nevertheless, for 34% of the respondents (20), the picture is less positive, andthey maintain that intermediaries are operating in line with the SRD2 only “to a limited
extent”.

319.

Looking at the qualitative comments, asset managers, issuers’ associations and a few
CSDs are those who see more issues in the level of compliance of the intermediaries’
operations. In particular, problems raised – and room for improvement – relate to:

320.

i.

The delayed transposition by some MSs coupled with differences ininterpretation and a lack of consistency among MSs and also amongintermediaries within the same MS;ii.

The differences among CSDs’ practices, particularly as to the management ofshareholder identification requests;

117

iii.

The ability of shareholders to receive information on GMs on time and in
a consistent manner and to exercise their votes through the chain ofintermediaries, particularly in a cross-border context andiv.

The difficulties shareholders experience in receiving vote confirmations.

Intermediaries and intermediaries’ associations express a more positive view on theirlevel of compliance. Nevertheless, even those operators reported shortcomings stemmingfrom the differences still existing among national jurisdictions (e.g. the shareholder notion,
the requirements to participate in GMs, the application of market standards byintermediaries). One respondent specifically noted that in its view, the IR provided limited
support to end users.

321.

322.

Question 11

Question 11 investigates whether respondents encountered difficulties or obstacles in
the practical application of the relevant provisions in the areas regulated by Chapter Ia of
the SRD2 and the IR.

323.

118

As for shareholder identification, the majority of respondents (77% or 45) reported
having encountered practical difficulties. In their qualitative comments, respondents
indicated that these are related to the following:

324.

i.

The lack of a harmonised notion of “shareholder”;ii.

The uncertainty on categories of securities in the scope of the SRD2,
particularly in relation to units of investment funds and securities of foreignissuers listed on EU markets;iii.

The difficulties in verifying (in due time) that shareholder identification requests
are valid and made on behalf of the issuers, according to Article 10(2) of the
IR82;

iv.

The complexity added to the process by the application of the shareholding
threshold provided in some MS83;v.

Uneven use of ISO formats along the intermediary chain andvi.

The variable level of compliance by non-EU intermediaries as lastintermediaries.

All these elements reportedly still lead to a somewhat inefficient, slower, and not fully
automated flow of shareholder identity data along the chain up to the issuer.

325.

In connection with the transmission of information, the majority of respondents (72%or 41) also reported having encountered specific obstacles. In detail, a lack ofharmonisation regarding the implementation of ISO formats by either intermediaries(including non-EU operators) or issuers is a recurring claim in this area. Moreover, several
respondents noted that information sent by issuers to the CSDs to initiate a corporate event(“event notices”) are not always in line with the IR provisions and often require manualintervention by intermediaries to be transmitted. For a few respondents (coming from theintermediaries’ community), the deadlines provided in the IR for the transmission of
information obligations are not consistent with all MSs company laws, leading toinefficiencies in the transmission process itself.

326.

82

Or vice versa, difficulties arisen from the excessive documentation requested by CSDs in order to verify the validity of therequest, according to two stock exchanges.
83
Interestingly, an issuer association claimed that the possibility to apply a shareholding threshold to the shareholder identification
request should be up to the issuers, and not to MSs. Moreover, issuers should also be allowed to carry on a selective disclosure,requesting data on shareholder identity directly to the preferred intermediaries.
119

As for the application of provisions related to the facilitation of the exercise ofshareholder rights, once again a large majority of respondents (76% or 43) reported
having experienced difficulties. Some of these respondents, coming from various
categories, indicated that the lack of harmonisation on the documentation required to theentitlement to the exercise of shareholder rights by some last intermediaries andcustodians as well as across national jurisdictions was an obstacle. A few asset managers
and intermediaries also reported incorrect processing of voting instructions along thecustody chain as a major impediment encountered with respect to easily voting in GMs.
Moreover, the unharmonised deadlines provided for the publication of meeting materials
and a limited use of electronic voting in some jurisdictions are noted as further obstacles
to the facilitation of the exercise of voting rights. Again, shortcomings in the receipt of voteconfirmation are referred to as a problem by some respondents, mainly asset managers,
as in previous questions.

327.

On costs and charges applied by intermediaries, the majority of respondents (74%or 42) reported having encountered obstacles. In their qualitative comments, they refer toa general lack of transparency on costs and charges applied by intermediaries, particularly
with regard to the management of shareholder identification processes as a driver of lesscompetition and therefore increased costs. Several operators indicate also that uncertainty
on the law applicable to costs and charges in a cross-border context and the lack ofstandards for cost reimbursement to intermediaries represent a relevant problem inpractice.

328.

Interestingly, the presence of non-EU intermediaries in the investment chain
appears less problematic when it comes to the practical application of the relevant SRD2
and IR provisions, even though almost a majority of respondents (47% or 23) still reported
some difficulties or obstacles.

329.

120

330.

Question 11.1 and Question 12

Question 11.1 follows-up on Question 11, further specifying the areas in which
obstacles were encountered. Answers to this question are generally in line with thequalitative comments described in the previous question.

331.

The attribution and evidence of entitlements is referred to by 62% of
respondents (31). In their qualitative comments these respondents argued that there issome confusion – possibly generated by the IR itself – between the “confirmation ofentitlement” provided for in Article 5 of the IR and the “proof of entitlement” required byissuers to allow shareholders to participate in GMs, contributing to making practices in thisfield less harmonised and more complex.

332.

The cut-off dates and deadlines provided for corporate action processes wereconsidered less sensitive for respondents, even though 47% of them (24) pointed to themas a source of obstacles. In this context of practices related to the GMs, several
intermediaries also suggested that unharmonised record dates regarding the attribution ofentitlement, sometimes too close to the GMs, may be problematic. One respondent
retained that the minimum deadline provided by the SRD2 for the publication of GM
materials is too strict too, reducing shareholders’ ability to express a fully informed vote.

333.

Additional national requirements related to granting Powers of Attorney (PoAs)
are seen as problematic by a majority of respondents (74% or 38). Several of these

334.

121

respondents, in their qualitative comments, noted that these requirements are largely
unharmonised and are hampering the exercise of voting rights by different types of
respondents. A few respondents also criticised other requirements related to the exercise
of voting rights and the lack of a harmonised regime for GMs.
A majority of respondents (65% or 33) also identified obstacles with regard to thecommunication between issuers and CSDs. In their qualitative comments, several ofthese respondents (notably intermediaries, including CSDs) complained about the lack ofa fully harmonised obligation on the issuer to provide its CSD with a "golden operational
record" in machine-readable format containing all the information necessary to initiate any
corporate event 84 . A few respondents, mainly intermediaries, suggested that issuers
should provide the CSDs with all the documentation necessary to verify the legitimacy of
the issuer requests according to Article 10(2) of the IR, while a service provider reported
that such documentation requirements imposed by some CSDs are cumbersome and time
consuming. One respondent blamed the complex account structures of intermediaries,
suggesting that the CSDR be revised to ensure that communication between issuers andshareholders is not hindered by holding omnibus account structures.

335.

Qualitative comments provided in connection with Question 12 mirror positions
expressed under Question 11.1. Therefore, they are not summarised separately.

336.

84

Table 3 and 8 of IR would have improved the event notice communication but respondents referred to a rare and irregularapplication of such forms and of ISO formats.
122

337.

Question 13

61 respondents answered to Question 13, providing an overall assessment of theeffectiveness of Chapter Ia provisions in improving long-term shareholder engagement andthereby supporting sustainability objectives. For the majority of respondents (57% or 35),
these SRD2 provisions have been effective to a limited extent, while a third of the
respondents expressed a more positive assessment (i.e., that the provisions have beeneffective to a large extent) on this point. Only 7% of respondents (4) retained that the SRD2
provisions have not been effective at all to this end.

338.

123

339.

Question 14

Question 14 asks respondents for indications on possible improvements to Chapter Ia
provisions. In accordance with feedback provided to previous questions, almost threequarters of respondents (74% or 43 out of 58 respondents) indicated that further
clarification and harmonisation is needed with regard to national rules on PoAs. A large
majority of the respondents retained that further clarification and harmonisation would also
be needed for rules on the attribution of entitlement (64% or 38 out of 59 respondents) andon the transmission of information (65% or 33 out of 51 respondents), while the rules on
the sequence of dates for corporate actions should be improved as well, according to 53%(31 out of 59) of the respondents.

340.

Suggestions on possible further harmonised rules are provided in the qualitative
comments. Most of them are consistent with indications already provided with regard toprevious questions. Several respondents, mainly intermediaries, expressed preference fora harmonised rule on the proof of entitlement and on PoAs, being somewhat connected
topics, in particular in order to:

341.

i.

Avoid confusion between “confirmation of entitlement” and “proof ofentitlement” in the shareholding registration process andii.

Avoid the possibility for MSs or issuers to require additional documents(especially in paper form) to be submitted by investors to participate in GMs
124

and exercise their rights, based on the understanding that the proof ofentitlement is implicitly included in the voting instructions or in the notice ofparticipation in GMs85.
Equally, a more harmonised record date – not too close to the GM – for the attributionof entitlement is considered necessary by several respondents, especially by asset
managers, as well as further harmonisation on the cut-off dates applied by issuers andintermediaries within the process of corporate actions. One respondent emphasised thatthe record date should nonetheless not be too far from the GM in order to avoid empty
voting risks86.

342.

In order to improve participation in GMs, a few respondents believe that forcing
companies to have hybrid/ virtual meetings and/ or mandating the use of electronic voting
would be beneficial. Moreover, some intermediaries and custodians reiterated the need toharmonise obligations on issuers to transmit “golden operational records” to initiate any
corporate event using STP format. Finally, one respondent stigmatised the possibility for
MSs to provide a threshold on the issuers’ right to identify their shareholders, arguing thatit hampers shareholder engagement.

343.

344.

Question 15

Question 15 sought feedback from the respondents on potential further issues arisingfrom Chapter Ia or the IR, not covered explicitly in the previous questions. 40 respondents
provided comments to Question 15, even though few of them actually raised further issues
not covered in previous questions.

345.

In particular, some respondents suggested the publication of a list of securities fallingunder the SRD2 in order to clarify the scope of the European legal framework and possibly
empowering ESMA with this task.

346.

A couple of respondents also highlighted the existing differences among retailinvestors, one suggesting that most of them are not interested in receiving all theinformation required by the SRD2, thus levying unjustified costs on the industry; with theother arguing that the right to participate in GMs should be “tailored” depending on theshareholding percentage of retail investors, since not all such investors have equal
ability/interest for an engagement87.

347.

85

The recent change to the Danish Companies Act which removes the need to present PoA documents, led to an increased
participation in GMs and is mentioned as a good example in this sense.
86
When a record date is set well in advance of the GM, it is less unlikely that certain shareholders sell all or part of their shares
before the GM, thereby being able to vote for more shares than those they actually own at the time of the GM.
87
An association representing investors and other market participants expressed advice contrary to this proposal in question 13.
125A few asset managers insisted on the necessity to facilitate shareholder engagement
and voting in investee companies as much as possible, also from a corporate sustainability
perspective. To this end, an industry association and a service provider suggested
improving the deadlines provided for issuers’ disclosure before GMs, in order to ensure
fully informed shareholder voting. Finally, one asset manager and a shareholder
association also considered that further facilitating the shareholder right to propose
resolutions at GMs, allowing proposals on social or environmental matters or eliminating
thresholds, where provided, would be beneficial.

348.

9.2.2 Input from investors
Evidence on this matter was collected from 13 respondents (though some of them did
not respond to all questions). As reported in the Call for Evidence, in addition to individual(retail) investors, both asset managers and institutional investors as defined in Article 2 of
the SRD are included in the categories of respondents to this chapter. The breakdown of
the respondents by category is the following: 77% (10) are asset managers (including one
European association and one national associations of such entities), 15% (2) represent
individual retail investors and the remaining 8% (1) is an association of financial analysts.

349.

126

350.

Question 26

88

Question 26 asks investors their opinion in relation to the effectiveness of the SRD2 in
improving their ability to receive and transmit information along the intermediary chain, inorder to facilitate the exercise of their rights. It is interesting to note that 23% of
respondents (3) stated that the SRD2 did not improve this ability at all, and the exact same
number of respondents answered that it generated improvements to a large extent. At thesame time, 38% (4) thought that the SRD2 was effective only to a limited extent
and 15% (2) provided no opinion.

351.

One asset manager responding to the consultation reported, as a positive aspect, that
the SRD2 improves awareness in the market about the need to facilitate the exercise ofshareholder rights. However, most investors pointed out that, on a practical level, they do
not see real improvements and still encounter issues, such as the lack of digitalisation/technical issues about electronic communication and transmission of information along theintermediary chain, divergent national requirements, and the separation between the legal
title holder of the shares and the beneficial owner. Concerning this last aspect, two
respondents (one of which is an association of asset managers) suggested providing that

352.

88

[via the intermediary holding your securities account and other intermediaries involved in the administration and safekeepingof your shares]127the intermediaries holding shares as legal title holders on behalf of underlying beneficial
owners should be obliged to pass on information along the voting chain to these ultimate
beneficial owners, to enable the end investor to exercise a voting preference. Finally, one
investor underlined, as a positive example, certain custodians’ practice of using proxy
providers to streamline the process.
Question 27

353.
89

This question aims at investigating the investors’ opinion about the ability of the SRD2
to improve the exercise of their rights, with a specific focus on the right to participate andvote in GMs along the intermediary chain. 69% of respondents (9) thought that the SRD2
was effective only to a limited extent. One of them explained that it experiences no materialchange in the ability to participate and vote in GMs, as voting is exercised electronically
and, in many cases, this runs smoothly. However, this respondent pointed out that it
continues to have occasional issues with the provision of electronic voting ballots and votes
being transmitted to issuers incorrectly. Only one respondent thought that the SRD2 was
not effective at all. Lastly, two respondents found that the SRD2 was effective to a large
extent, while 1 of them had no opinion.

354.

89

[via the intermediary holding your securities account and other intermediaries involved in the administration and safekeeping ofyour shares]
128

In their qualitative comments, several investors pointed to some operational andadministrative impediments that shareholders are still facing, above all when they exercise
their voting rights, i.e.:

355.

i.

Custodians/ sub-custodians asking for unnecessary documents;ii.

In some markets custodians sometimes using sub-custodians that do notprocess votes;

iii.

Intermediaries not always following voting instructions given by the investors
and

iv.

Timeline obstacles to the exercise of voting rights along the chain ofintermediaries.

As far as this last aspect is concerned, a few investors noted that they often must vote 10
to 15 days before the GM due to intermediaries’ deadlines, which limits the possibility toproperly engage and vote in the GM, especially when companies must convene themeeting and publish documents 21 days before the GM. On this basis, one respondentsuggested providing for mandatory electronic votes and forbidding paper votes orintroducing a requirement for an ad-hoc representative of the absent shareholders being
present during the GM, who would cast votes received from them remotely.

129

356.

Question 28

Question 28 looks for input on requirements for investors to participate in the GM,
providing a number of alternative options.

357.

25% of respondents (3) indicated that they were requested to submit only
a confirmation of entitlement. One of those respondents pointed out the different
procedures in place (i.e., regarding how an investor has to register) and suggested thestandardisation and simplification of the procedures provided for the participation in the
GM. Furthermore, an association representing asset managers pointed out that voteentitlements for them are often generated passively, as custodian banks are obliged todetermine which investors are entitled to vote and facilitate the transmission of theelectronic vote instruction form/ ballot.

358.

17% of the respondents (2) were requested both to submit a confirmation of entitlement
and to provide a notice of participation through their closest intermediary; two other
respondents were requested to submit a confirmation of entitlement, to provide a notice ofparticipation through their closest intermediary and to provide a deposit confirmation.
8% (1) had to provide a notice of participation through its closest intermediary. Finally,

359.

130

33% (4) indicated “other” for a number of reasons, e.g. that these requirements depend on
the specificities of the respective market or that they vote electronically through specificplatforms.
Furthermore, two respondents (one of which representing asset managers) pointed outthat in a small number of instances, investors may be required to register shares or submit
a PoA to participate in the GM and they suggested addressing the issue as sucha procedure represents an impediment to voting. Lastly, they also suggested ensuring
greater interconnection between the voting platform of proxy advisors and the relevant
custodians to improve participation in GMs.

360.

361.

Question 29

Question 29 focuses on whether the provisions of Chapter Ia have effectively allowed
shareholders to receive confirmation about the recording and counting of their votes cast,after the implementation of the SRD2.

362.

Most of the investors did not seem to have a positive experience: half of the
respondents (5 asset managers and a related association) said that this happened only toa limited extent while a third of respondents (4) noted that they received no confirmation of
their votes at all (however one of them clarified that it has not attended any GMs of EU
companies). The remaining 17% of the respondents (2) did not express an opinion.

363.

131

Two respondents (one of them being an investor association) corroborated their answer“to a limited extent” by referring to the need for more transparency in all steps of the voting
chain. Furthermore, they pointed out that communication of the voting confirmation is not
an automatic step in the electronic proxy voting process and flagged the need for investors
to be notified on how to obtain such information. In this regard, a few other respondents
indicated that they are not able to receive a voting confirmation through the voting platform
and that a confirmation still needs to be requested from the custodians, as their system is
not connected with the investors’ voting platform.

364.

Lastly, a few respondents pointed out a possible role of proxy advisors in this area,
reporting that a new "voting confirmation" field has been developed by some proxy advisorson their voting platform, but this is hardly ever utilised.

365.

366.

Question 30

Question 30 aims at investigating investors’ opinion about the threshold for shareholder
identification (when put in place according to the SRD2) and if it is considered an obstacle
to dialogue with issuers (or among investors, if applicable).

367.

It is interesting to note that almost half of the respondents (46% or 6) thought that thethreshold could not be considered an obstacle at all while a majority of the respondents

368.

132

(54% or 7) expressed no opinion on the issue. No respondents to this question considered
the threshold an obstacle to dialogue.
From the few qualitative comments raised, it can be derived that investors do not
encounter obstacles to dialogue with the issuers. One respondent added that problems inestablishing dialogue with the issuers depend on their governance rather than theshareholder identification threshold.

369.

370.

Question 31

Question 31 seeks input on whether investors have experienced any issues relating to
the fees and charges applied by intermediaries for services provided in the identification ofshareholders, transmission of information and facilitation of the exercise of shareholder
rights. 13 investors provided responses.

371.

Most of the respondents were not aware of, or had not experienced, any of the specificissues relating to the fees and charges applied by intermediaries as expressly mentioned
in this question, with the respective percentage rising to 85% for issues other than thosespecifically mentioned. 38% of the respondents (5) identified issues related with thedisproportionately high charges and with discrimination, while 23% (3) flag problems withreceiving information on the charges in advance. Only 15% (2) flagged other issues, such

372.

133

as fee schedules differing from one provider to another and, in some countries, costs linked
to representation, PoA or physical attendance, which remain a strong barrier.
Overall, the main issue experienced by investors is the difference of fees and charges
when they participate and vote in GMs at a national level when compared to doing so
abroad. At the national level, participation is generally free of charge while it may become
very costly when the same rights are to be exercised abroad because complementary fees
are applied: due to higher costs of informing shareholders, legal representation and moreintermediaries are reported to be involved in a cross-border situation.

373.

374.

Question 32

In response to Question 32, 77% of respondents (10) identified persisting obstacles tothe exercise of their rights after the entry into application of the SRD2, while 7% (1) did not
identify any obstacle and 15% (2) did not provide an answer.

375.

Investors pointed out that there are still regulatory and technical barriers which limit
access to voting. The most frequent obstacles mentioned by investors are in terms of theiridentification (requirement of proof by personal ID or PoA requirements), the blocking ofshares in some markets, differences in cut-off dates, difficulties with respect to digitalisationand small companies’ documents which are still not translated into English.

376.

134

377.

Question 33

In responding to Question 33, which asked whether new digital technologies could help
in overcoming persistent obstacles along the investment chain, 69% of respondents (9)considered that they could be useful, while the remaining 31% (4) expressed no opinion
on the subject.

378.

Those that responded affirmatively often pointed to blockchain/ DLT technology as
a possible solution for monitoring the voting validation at each step and as such for tracking
potential issues along the voting chain.

379.

One respondent flagged that a major obstacle in its view is centred around the limitedcompetition in this market. In its view, a leading service provider continues to retain a verylarge market share as a ballot distribution and voting services provider for custodians andlocal intermediaries, even though another player has recently emerged as well.

380.

135

381.

Question 34

Question 34 seeks input on whether respondents have made use of the services
provided by online brokerage platforms. Only 15% (2) provided an affirmative answer, while
62% (8) indicated that they have not used these services. The remaining respondents were
not able to answer this question.

382.

Only one respondent provided further input, raising the question as to whether neobrokers fully comply with the SRD2 and if any lack of compliance is derived frominadequate implementation and supervision of the SRD2 at the national level, from noncompliance of market participants hampering the intermediation process or more directlyfrom FinTech companies (neo-brokers) that may choose not to mobilise appropriate
resources to enforce shareholder rights. This respondent considered that obstacles tovoting services are likely due to a lack of proper resources mobilised by neo-brokers andthus, more generally, to the absence of clear processes in place to enable shareholder
engagement.

383.

136

384.

Question 35

Question 35 seeks input on whether the SRD2 has improved communication andengagement between investors and issuers. According to 62% of the respondents (8), theSRD2 has improved these aspects to a large extent, while 23% of respondents (3)considered that improvement has been limited. The remaining 15% of respondents (2)expressed no opinion on the subject.

385.

Interestingly, comments received by some investors identified another SRD2 area,i.e., executive compensation, as the one with the greatest improvements, noting that there
has been a reported increase in transparency, attributable to improved disclosure under
SRD2 requirements.

386.

9.2.3 Input from issuers
Seven companies responded to this section. Respondents include four associations(3 from the issuers’ community and one mainly representing banks), two issuers anda market operator.

387.

137

388.

Question 42

Question 42 asked about the possible ambiguity faced by issuers in assessing which
MS and NCA is competent with regard to market players involved in corporate actions.
57% of the respondents (4) were not aware of any such ambiguity in securities
transactions. 14% of the respondents (1) selected “don’t know” as an answer. 29% of the
respondents (2), who chose “yes”, did not, however, identify any specific issues. Lastly, it
is noted that a similar question is addressed specifically to intermediaries, in the section
where they provide their own input (i.e., Question 59).

389.

138

390.

Question 43

Question 43 asks whether issuers encountered difficulties in identifying shareholders
and in obtaining other information regarding shareholder identity. 29% of respondents (2)answered they encountered difficulties to a limited extent and 14% (1) to a large extent.
43% of the respondents (3) did not express an opinion on the subject.

391.

For respondents who encountered difficulties to a large and to a limited extent, theissue is multifaceted. In particular, one respondent is concerned about the high quantity of
information received in relation to the shareholder identification procedure, which could bein direct contradiction to the GDPR and its principle of minimising disclosure of personal
data. In addition, this respondent underlined that it is not clear which authority could ensurethat the receipt of shareholders’ personal information is compliant with the GDPR.

392.

Another respondent noted that, as the shareholder identification procedures initiatedby the end of 2021 were the first ones under the new SRD2 regime and that more time isneeded to analyse the full effect of the introduction of the Directive and whether it results
in any improvement compared to the previous regime. However, as a preliminary
indication, it is reported that some issuers are unable to fully identify their shareholders dueto the absence of responses from some intermediaries.

393.

139

Lastly, most respondents who opted for “no opinion” argued that they have not initiateda shareholder identification procedure due to the introduction of a threshold in certain
countries, which prevents issuers from obtaining a full picture of their shareholder base 90.

394.

395.

Question 44

Question 44 requires the few respondents that have submitted a request for
identification of shareholders under the SRD2 to specify a number of elements:

396.

i.

To whom the request was made (e.g. CSD or other intermediaries);

ii.

For what purpose the request was made;iii.

If and when they were provided with all the required information onshareholder identity;iv.

The predictability and proportionality of the costs incurred;v.

How many shareholders the respondents were able to identify;vi.

If they have noticed any improvement in the ability to identify non-EU
shareholders compared to the pre-SRD2 framework.

Only three respondents answered the first two questions. With regard to whom theidentification of shareholders request was made, two solicited the CSD while one
contacted their intermediary. On the purpose for which the shareholder identification
request was made, beyond the need to identify their shareholders, one respondent
initiated the process to steer investor relations activities and for internal reporting purposes.
Another respondent, an issuer association, wanted to have a picture of the shareholder
base of a limited number of issuers as at the end of that year.

397.

Four respondents answered the question on the completeness of the information
received in relation to shareholders’ identity and provided different indications. One
respondent stated that its members do not always receive all the required shareholder
information. Another underlined that the feedback received following the identification
request provided much more information than required, including about shareholders
already identified by the issuer due to the absence of any customisation of the possible

398.

90

Interestingly, a respondent from Germany underlined the importance for regulation to encourage the direct registration ofshareholders in the issuer’s share register, which in the respondent’s view could also be applied on a cross-border basis. In
addition, it is specified that in Germany, intermediaries support two types of identification requests: i. The full request for all
shareholders and ii. Information about the identification of shareholders above a certain threshold set by the issuer. It is therefore
suggested that the CSD as the first intermediary should allow for the customisation of shareholder identification requests.
140scope of the request. However, it was flagged that shareholders holding less than a certain
threshold of capital or distributing their shares to several intermediaries de facto remain
under the threshold and cannot be identified. One respondent reiterated its
recommendation that regulation should foster the direct registration of shareholders with
the issuer’s share register on a cross-border basis. Finally, according to another
respondent, the process appears to be seamless with information received in accordancewith the terms of the contract with the service provider.
Only two respondents provided input on the predictability and proportionality of costs
incurred for the shareholders’ identification procedure. Again, the indications provided
seem quite diverse. On one hand, a respondent found there is a high predictability of costs
due to contractual agreements in place with service providers. On the other hand, another
respondent highlighted the lack of any cost predictability when initiating a shareholder
identification procedure, which could discourage issuers from engaging in sucha procedure.

399.

Three respondents indicated that they were able to identify shareholders
representing less than 90% of their share capital (<90% being the lowest possible answer
provided in the questionnaire). The response is consistent for domestic, European andnon-European shareholders.

400.

Two respondents provided input on issuers’ ability to identify non-EU shareholders
when compared to the regime in place before the SRD2. While one respondent
identified meaningful improvements compared to the pre-SRD2 framework, the other did
not.

401.

141

402.

Question 45

Question 45 asks issuers whether they consider thresholds for shareholder
identification an obstacle in the dialogue with their shareholders. 29% of respondents (2)considered it to be “fully” – and 14% of respondents (1) “to a large extent” – a barrier incountries where it is in place. On the other hand, 29% of respondents (2) answered, “notat all” and 14% (1) indicated “to a limited extent”, arguing that no threshold was put in placein their country.

403.

Article 3a(1) of the SRD2 specifies that MSs may provide for companies having
a registered office on their territory to be only allowed to request the identification ofshareholders holding more than a certain percentage of shares or voting rights. Sucha percentage shall not exceed 0.5%. As noted previously, ESMA published the list of
thresholds in place above which shareholders can be identified in the different EU MSs
in 202091.

404.

Among the explanations provided, notably one respondent who picked “fully” argued
that such threshold prevents issuers with a dispersed and fragmented investor base from

405.

91

ESMA, 2020.
142having a comprehensive view of their ownership structure and discourages issuers frominitiating an identification request.
Another respondent, who opted for “to a large extent”, reiterated that in its country(Germany) the issuer is allowed to choose a full request or specify a certain threshold forthe identification of shareholders. In its view, such flexibility is particularly important as thecost of the respective identification is calculated per investor, therefore giving companies
with a large shareholder base a possibility to mitigate costs.

406.

407.

Question 46

Answering Question 46 on whether the shareholder identification request is always
submitted in a format that allows STP, 57% of respondents (4) answered, “don’t know”.
These answers are motivated either by the absence of any shareholder identification
request or because the request is submitted directly by the service provider and not theissuer.

408.

43% of the respondents (3) answered “yes” to the question arguing that they submit
the request through the CSD and as a result, the format necessarily allows STP.

409.

143

410.

Question 47

Answering Question 47 on whether the entry into application of Article 3b of the SRD2
made issuers change the way they provide the required information to shareholders for the
exercise of their rights, 57% of the respondents (4) indicated that no change took place,highlighting that it is provided through the CSD and the subsequent chain of intermediaries.
However, 43% of respondents (3) reported some changes either in the format, which allows
STP, or – in one case – in the publication of the so-called “golden operational record”92.
Another respondent noted that the implementation of Article 3b of the SRD2 does notchange the way the information is provided, neither through the chain of intermediaries nor
directly to the shareholder, with the only noticeable evolution being that the announcement
has also to be sent through the CSD, which increases costs.

411.

No respondents noticed changes with regard to the transmission of information directly
to shareholders or through an announcement. Some country-specific rules have beenhighlighted, although they are not the result of the entry into application of the SRD293.

412.

92

However, it is reported that such a record does not reach private investors on a cross-border basis, and they therefore do notreceive meeting information and voting material.
93
It is reiterated that in Germany, the direct registration of shareholders in the issuer’s share register removes the need forintermediaries to transmit such information and the annual GM is also convened via an announcement in the Federal Gazette.
144

413.

Question 48

With reference to Question 48, all 7 respondents confirmed they communicate toshareholders the information necessary for the exercise of their rights in a way which allows
STP, however they did not notice changes following the entry into application of the SRD2.

414.

One (German-based) respondent noted that where shareholders register directly with
the issuer’s share register, direct communication can take place. Such a registration
removes the need for intermediaries to issue a confirmation of entitlement, as it will bederived directly from the share register. In contrast, the same respondent argued that, forcompanies with bearer shares, the communication takes place through intermediaries until
the registration for the GM. Once the registration is complete, communication can takeplace directly via a shareholder portal for larger companies, allowing voting rights to be
confirmed and votes to be cast directly.

415.

416.

Question 49

Answering Question 49 asking which other corporate events – in addition to GMs – fallunder the scope of Article 8 of the IR in their experience, three respondents indicated that
corporate actions should be included in the scope. Two respondents went further andsuggested that the applicability of the Directive should be clarified as Table 8 of the IR is
not appropriate for all corporate actions and that standard formats should be designed forthe most recurring ones.

417.

145

418.

Question 50

Question 50 asks which documents issuers require the shareholders to submit in orderto participate in a GM. 43% of respondents (3) to this question indicated that they require
a confirmation of entitlement (as under Table 4 IR) and a notice of participation through theclosest intermediary (as under Table 5 IR) to participate in a GM. Responses depend on
the jurisdiction: for instance, in Italy the legislation provides that a statement from theintermediary to the issuer, based on its accounting records, must confirm shareholders’legitimate attendance at GMs and the exercise of voting rights. The Italian secondary
regulation defines the procedure for such statement and therefore one single
communication fulfils both the purposes of confirmation of entitlement and notice ofparticipation. Under French law, each intermediary in the chain must reconcile the positions
held with those of the previous intermediary. Consequently, the last intermediary facing theshareholder is able to confirm the shareholder’s entitlement.

419.

With reference to the other options, 29% of respondents (2) require only a notice ofparticipation through the closest intermediary while another 29% of the respondents (2),both German-based, require other types of documentation (for companies with bearer

420.

146

shares, it is noted that the process is similar to the previously highlighted process where
the last intermediary sends the confirmation of entitlement directly to the company, while
for shareholders registered with the issuer’s share register, no other evidence ofentitlement is required).
421.

Question 51

Question 51 seeks input on whether issuers had noticed any change in the participation
rate at GMs following the entry into application of the SRD2. According to one respondent,
while a slight decrease in participation was recorded in 2020 due to the COVID-19
pandemic, the years of 2021 and 2022 showed that participation is growing again. 29% of
the respondents (2) noticed a decrease in the participation also in the 2022 annual GMs.

422.

29% of respondents (2), both German-based, did not notice any change, witha participation rate that appears stable. One respondent noted a gradual increase in asset
managers’ and institutional investors’ presence, which can, in its view, be connected to theintroduction of virtual GMs. At the same time, however, this respondent also observed that
foreign investors’ participation remains low. Therefore, the respondent concluded that inits view the goals of the SRD2 to facilitate the cross-border transmission of information forshareholders to exercise their rights have yet to be achieved.

423.

147

Finally, 43% of respondents (3) did not indicate whether they had experienced
a decrease or an increase in attendance at their GMs since the implementation of the
SRD2.

424.

425.

Question 52

Only four respondents answered Question 52, asking if, after the entry into applicationof the SRD2, they have received any request by shareholders to confirm that their vote has
been validly recorded and counted, as per Tables 4 and 6 of the IR. Two of the respondents
indicated having received requests by shareholders to confirm that their votes have beenvalidly recorded and counted. One respondent indicated not having received any requests.

426.

148

427.

Question 53

94

Question 53 asks whether market standards elaborated and used by the industry forthe application of provisions of Chapter Ia are in fact useful to complete the regulatory
framework. 20% of respondents (1) chose “to a large extent”, arguing, as raised also in
the responses to previous questions, that ISO20022 has been useful to facilitateshareholder identification but should be further developed to allow additional customisation
where the issuer can decide the scope of the request. 20% (1) answered “to a limited
extent” due to the cost related to the implementation of such market standards as well as
the difficulties faced in limiting the scope of the identification process. Lastly, 60% of the
respondents (3) did not express an opinion. It is noted that a similar question is addressed
specifically to intermediaries, in the section where they provide their own input(i.e., Question 71).

428.

9.2.4 Input from intermediaries
This section was answered by 30 respondents. These include 26 different
intermediaries such as international and national banks, CSDs (either individually or as

429.

94

[e.g. ISO20022, market standards for shareholder identification, etc.]149

part of their group) and relevant industry associations. A few responses (4) were also
received from the investor community, namely a representative of an asset manager,a representative of alternative investment managers and two service providers.
430.

Question 59

25 respondents answered to Question 59, which investigates the existence of doubts
or ambiguities about the MS or NCA competent for intermediaries’ activities. 60% of
respondents (15) indicated that they encountered doubts or ambiguities either fully (48%or 12) or to a large extent (12% or 3). A few respondents found either no (16% or 4) orlimited (12% or 3) doubts and ambiguities while 12% (3) expressed no opinion.

431.

Among those falling in the first group, explanations pointed to the diversity of nationaltranspositions. In particular, it is raised by a few respondents that no NCA has been
identified in certain countries, such as in Germany or in the Netherlands. Generally, it isindicated that it is unclear which MS and authority is responsible especially when multiple
jurisdictions are involved, creating risks of both non-compliance and over-compliance. This
happens for example when the issuer’s registered seat is in another country than the
country of issuance and/ or the country or countries where the shares are listed. In addition,
the obligations to transmit information, to forward requests and to answer them, as well as
to facilitate the exercise of rights, apply to intermediaries in multiple jurisdictions. In this

432.

150

regard, a few respondents asked that ESMA be charged with maintaining a register withthe distribution of competences in MSs95.
Among those replying either “not at all” or “to a limited extent” it is often argued that intheir own MS the transposition of the SRD2 has brought clarity on the applicable law andauthorities involved.

433.

434.

Question 60

Question 60 asks about the frequency with which respondents receive shareholder
identification requests, when compared to the pre-SRD2 period. All 27 respondents
answering Question 60 indicated that they have been receiving such requests more
frequently than during the pre-SRD2 period, often observing that increases have been
higher in markets where there had been no well-functioning disclosure processes available
before the entry into application of the SRD2. One respondent added that shareholder
identification has become more frequent where no threshold has been implemented into
national transposition law.

435.

Numbers provided by respondents are not easily comparable but are in the range ofa few thousand unique disclosure requests within the EU, with material variation acrossMSs (ranging from more than a thousand to a handful of requests). In terms of geographicalallocation, one international bank responding to the questionnaire indicated that it has seen
the most significant volume of shareholder identification requests from the Western
European markets, in particular from Portugal, the Netherlands and France.

436.

A few respondents indicated that in their jurisdiction, the number of requests did notincrease particularly, but the number of responses did. A few other respondents also notedthat there is still a large volume of requests received which cite historical national legislation
as their basis, rather than SRD2 provisions, or do not meet the necessary requirements
and as such cannot be processed.

437.

95

Incidentally, ESMA notes that it has carried out an ad-hoc survey that is summarised in Annex VII: SRD2 transposition.
151

438.

Question 61

Question 61 asks whether respondents have encountered obstacles in providing all therequired information regarding shareholder identity to the requesting issuers. A large
majority of respondents (74% or 20) answered affirmatively.

439.

According to several respondents, one of the main obstacles is uncertainty as to thelegal basis of the request, in particular whether the national definition of shareholder allows
for a response, whether a security is within the scope of the SRD2, and whether an issuer
agent is duly authorised to act on behalf of the issuer. In addition, a few respondents
indicated that the proof for authentication of the request is not always provided on time, sothat it would be helpful to have at least a general requirement to promptly have a letter ofauthorisation signed by the issuer. Finally, one respondent mentioned that some issuers
make shareholder identification requests in formats other than the ISO20022 shareholder
identification disclosure messages.

440.

Overall, while the amount of shareholder information issuers can expect to receive andsubsequently the quantity of information intermediaries are required to disclose haveincreased, differences in national transpositions may result in delays and in certain
information not being provided by foreign intermediaries where there is no legal basis in
their jurisdiction. According to one major service provider, unfamiliarity with the local
transposition can also lead certain intermediaries to either under-disclose with filler

441.

152

information thus diminishing the quality of the disclosure data or over-disclose in othermarkets by sending data that is not required. One respondent, an intermediary, added thatcertain response collectors request additional information beyond that required by the
SRD2 or proprietary formats and timeline requirements that differ from the ones defined inboth the SRD2 and the industry standards.
On the other side of the spectrum, 22% of respondents (6) flagged that they have notencountered obstacles in providing all required information regarding shareholder identity
to requesting issuers, mentioning for example that the data provision in itself is not an issue
and that data quality and information speed have generally improved.

442.

443.

Question 62

Question 62 follows up on the previous question by asking if the respondents’ answer
would change in connection with cross-border shareholder identification processes (rather
than national processes), especially when involving third-country intermediaries. Here, thegreat majority of respondents either responded negatively (56% or 13) or did not express
an opinion (26% or 6).

444.

A few respondents (17% or 4) explained that this is not so much dependent on the
country of the intermediary but on the processes implemented by each intermediary, suchas whether they use internal or third-party solutions and whether their clients can send/

445.

153

receive ISO20022 messages. One respondent clarifies however that requests not coveredby the SRD2, i.e., requests for securities following national rules or from third (non-EEA)
countries, need to be processed manually.
Positive answers were provided by 17% of respondents (4), either pointing to all crossborder shareholder identification or with regard to cross-border identification involving
a third country intermediary.

446.

One of these respondents, an international bank, noted that the answer would changewith respect to all cross-border identification, specifying that the additional challenges
come from the complexity of third-country intermediaries not following SRD2 formats or notusing STP communication methods (arguing in particular that requests are being sent via
email and disclosure responses are requested to be returned in such a manner too).

447.

Similarly, according to the three respondents that pointed to cross-border identification
involving in particular a third country intermediary, requests from such intermediaries
clearly do not follow the SRD2 and exacerbate issues in terms of authentication, inclusionof minimum information and formatting.

448.

154

449.

Question 63

Question 63 asks whether after the entry into application of the SRD2, shareholder
identification requests and the relevant information required are always transmitted tointermediaries in a format which allows STP. 65% of respondents (17) reported that it is
not the case. On the other side of the spectrum, 35% of respondents (9) concurred that
this is currently the market practice.

450.

96

Among those answering negatively to this question, several argued that whileintermediaries generally use ISO20022, in line with market standards for shareholder
identification, requests to them still come at times in formats which do not allow STP. Morespecific issues such as letters of authority lacking digital signatures are also flagged. Thereseems to be no consensus on the typical situation when requests are not transmitted in an
STP flow of information, but it is often indicated that this happens mainly when issuers or
their agents (rather than intermediaries in the custody chain) are directly involved.

451.

On the other hand, positive responses pointed to improvements that have taken placein the industry with ISO20022 messaging having become common in the market, in linewith market standards for shareholder identification.

452.

96

[e.g. shareholder identity data, etc.]
155

453.

Question 64

Question 64 asks whether intermediaries communicate the information necessary forthe exercise of shareholder rights (such as the GM notice, the notice of participation, etc.)
in a format which allows STP. 81% of respondents (21) indicated that they indeed do so.
Conversely, 19% (5) indicated that they do not.

454.

Among those answering positively, one international bank clarified that when theirclients are not ready to process messages in ISO20022 format, they instead send
messages in ISO15022 format (where agenda points are included in the free text field).
An industry association reported that in other cases online portals can also be used to that
effect. Two respondents also highlighted that, as issuers and their proxy agents are notmandated to use ISO messaging, the STP flow of information is often interrupted.

455.

Among those responding negatively to Question 64, the notification sent to institutional
shareholders in ISO messaging via STP is considered to generally work well. However,retail shareholders cannot be contacted using ISO formats. The last intermediary therefore
informs retail clients electronically or by post using continuous text.

456.

156

457.

Question 65

Question 65 asks whether respondents have experienced improvements in thedownstream transmission of information to investors for the exercise of their rights along
the chain of intermediaries thanks to the entry into application of the SRD2. 81% of
respondents (22) argued that they have experienced such improvements. On the other
hand, 19% (4) did not see any improvements.

458.

Among those answering positively, one respondent replied that they have experienced
a significant improvement in the downstream transmission of information to investors forthe exercise of their rights namely for meeting notices.

459.

A couple of respondents made a more general remark, noting that a greater number ofintermediaries provide proxy voting services to their underlying clients/ investors and assuch, a greater number of shareholders is being alerted to governance events and to theexercise of voting rights, although some practical obstacles regarding the latter still remain.
In addition, shareholders now reportedly receive GM-related information in connection with
all EEA MSs.

460.

Rather than due to the new formatting standards, the improvements in downstream
transmission of information to investors seem to be mainly connected to the amount of
information now being proactively distributed through the chain to investors as a result of

461.

157

the Directive, as specifically flagged by one proxy advisor responding to the consultation.
The same respondent further highlighted that the industry seems to lack alignment andstandardisation throughout the custody chain which can create inefficiencies andchallenges along the chain, due to varying interpretations of the Directive and scatteredcompliance by intermediaries. Also, a couple of respondents highlighted that issuers are
generally unable to receive and process ISO formats causing delays and/ or interruptionsin the flow of communication.
On the other side of the spectrum, the few respondents that answered negatively to thequestion generally argued that even before the entry into application of the SRD2,
information would flow well along the chain including via ISO/ SWIFT, although theyrecognised that more information is currently transmitted, as well as more quickly. With
respect to the quality of the information transmitted, one respondent mentioned that the
mandatory information set out in the IR’s Annex tables in relation to both GMs andcorporate actions falls short of market standards, including language requirements, and assuch should be improved. Although positively responding to the general question, a few
stakeholders considered that messages are still often incomplete, received in local
language and not in ISO format.

462.

463.

Question 66

158

Answering Question 66, almost a majority of respondents (45% or 10) indicated thatthey have not experienced changes in how frequently they receive upstream voting
indications from investors at any level of the chain of intermediaries. Only less than one
third (32% or 7) responded positively and 23% (5) did not provide any indications.

464.

Among those answering negatively, most mentioned that the exercise of voting rights
has not increased significantly mainly due to differences in the process applied across MSs
and costs involved. On the other hand, respondents experiencing changes in the frequencyof voting generally saw an increase, especially with regard to asset managers and also
due to intermediaries being more active in providing notification and voting services.

465.

466.

Question 67

Question 67 investigates what systems have been put in place by intermediaries toenable the communication between issuers and shareholders in compliance with
Article 2(4) of the IR. The majority of respondents (58% or 14) have put in place a fully
electronic system while a little more than a third (37% or 9) have implemented a mixed(electronic and paper form) system. 4% of respondents (1) provided a different explanation.

467.

Generally, most intermediaries who responded to this question, indicated that they fullyuse electronic tools. Also, service providers, often supporting intermediaries, argue that

468.

159

they distribute information electronically through their platform with tools such as SWIFT,STP or API.
However, several respondents (including a few among those using a fully electronicsystem) flagged that on certain occasions there are still some requirements for paperworkthat originate from the issuer or from national legislation applicable to it, such as in the caseof a requirement for a PoA, or also at times because retail shareholders do not have thecapability to receive electronic communication (or at least not in ISO20022). In effect, theissuer’s communication with shareholders in another jurisdiction than the country of
issuance still seems to depend to an extent on national legislation and practices.

469.

470.

Question 68

Consistently with the picture emerging from the previous question, responses to
Question 68 confirmed that intermediaries (either themselves or with the support ofa service provider) make electronic tools available to their clients to facilitate the exerciseof shareholder voting, including at a cross-border level. All twenty-four respondents to thisquestion responded positively.

471.

However, a couple of comments clarified that electronic tools are not always used,
e.g. when it comes to retail investors. In addition, it is flagged that cross-border voting may
depend on whether the CSD or depository agent offers electronic cross-border voting,which is not always the case. Nonetheless, service providers in the area of proxy collection
or foreign intermediaries generally support intermediaries in addressing issues at crossborder level.

472.

160

473.

Question 69

Question 69 enquires whether intermediaries have experienced difficulties in complying
with the timelines envisaged by Article 9 of the IR, such as the cut-off date. Here, the picture
looks a bit more scattered, as around two thirds (64% or 16) responded affirmatively, whilea little more than a third (36% or 9) responded that they did not find any issues.

474.

Among those responding affirmatively, typically CSDs and major intermediaries, some
reported receiving disclosure and meeting requests on or even after the deadline,
especially when information flows are not in STP, such as when informing retailshareholders. Reportedly, this is either due to late announcement by the issuer or due todelays in the chain of intermediaries, e.g. when notifications are received late on theprevious day. As such, it sometimes can be difficult to meet the requirement to not provide
end investors with a deadline that is earlier than three business days prior to market
deadline. Overall, it is argued that the SRD2 deadlines (Article 9 IR) may lead to information
being sent multiple times and pose the risk of losing quality of information for the sake oftimeliness.

475.

Conversely, those answering affirmatively are often service providers and theygenerally saw major improvements to processes made in order to comply with timelines.

476.

161

477.

Question 70

Question 70 asks intermediaries in which way they ensure that the costs charged forproviding the services of Chapter Ia are: a) transparent, b) proportional and c) nondiscriminatory as provided for by the SRD2. In addition, stakeholders are asked to clarify
what further steps could be taken to address any difficulties encountered by intermediaries
in complying with the rules and to improve compliance with Article 3d. Generally, thisquestion collected only limited input, especially with reference to its second part on whatfurther steps could be taken to improve compliance in this area.

478.

Regarding transparency, several respondents indicated that they ensure transparency
by disclosing the fee structure on their website. A few respondents also clarified thatnational rules often provide transparency and proportionality requirements on the costs
that can be charged by intermediaries. Finally, a few respondents did not provide clarity on
this issue, in one case citing competition law as the reason.

479.

A few respondents from the banking community emphasised that even in cases of clear
cost regulation, intermediaries are often only partially reimbursed for their expenses andoften only after several reminders, arguing that in such cases intermediaries effectively
bear the costs of issuers’ investor relations.

480.

Regarding proportionality, several respondents did not provide clarity on this point,
citing again in one case reasons of competition law.

481.

The majority of explanations provided indicated that prices are set in such a way thatthey compensate the costs incurred. One respondent added that following the entry into
application of the SRD2, intermediaries have reviewed their costs and fee structure to
improve proportionality while at the same time having to make certain investments tocomply with the new rules. According to the same respondent, the costs incurred vary
widely, depending on a number of market-specific costs such as sub-custodians, theregistration, requested representation to the GM by attorney, the notary process, etc.

482.

With reference also to non-discrimination, several respondents did not provide clarity,
in one case referring once again to reasons of competition law.

483.

Most respondents providing explanations on this point reported that they have standard
rates applying across clients.

484.

Interestingly, one respondent indicated that fees take into account existing difficulties
to access foreign markets, although it is not always possible to fully pass on such costs toclients. This seems to confirm that cross-border provision of services remains more difficultand expensive. Finally, it should be noted that for all the 3 points this question addresses,

485.

162

a few respondents (both banks and CSDs) mentioned that they do not request fees fromissuers at all due to the difficulties in collecting them.
486.

Question 71

Answering Question 71, respondents indicated that they consider market standards
elaborated by the industry useful to complete the regulatory framework in this area. In
particular, two thirds of respondents (18) found those fully helpful and around a quarter(almost 26% or 7) considered them helpful to a large extent. Only two respondents either
did not express an opinion or agreed only to a limited extent.

487.

Comments received from respondents pointed to the greater level of detail (in terms ofadditional information requirements) that market standards (such as the Standards for
Shareholder Identification and the market standards for Corporate Actions) have whencompared with EU Level 1/Level 2 legislation. Generally, respondents also saw a positive
contribution to develop common practices across the Union, although, according toa couple of respondents, implementation remains uneven as the standards are not binding.
Further market standards such as in the area of Article 3c are seen as a potential tool toimprove implementation of Chapter Ia. In addition, it is flagged that market standards
advocate for shareholder identification requests to be routed through the issuer CSD,
although the SRD2 allows for alternative arrangements.

488.

163

At the same time, it is recognised that there are areas for further improvement to allow
for more effective investor communication, especially at cross border level, also due to the
SRD2 being a Directive and as such allowing for somewhat differing transpositions acrossMSs. In particular, one respondent emphasised that improvements should focus on
harmonising national differences, such as the definition of shareholder, as also raised in
responses to previous questions.

489.

According to a few respondents, there is a need for a comprehensive review of existing
standards to adapt them to market developments and issuers’ activities, as well as fora rethinking of governance in terms of supranational bodies (that should be made up ofrepresentatives of all parties in the intermediary chain, issuers and CSDs) delegated toreview and create new standards. The issuers community is particularly seen as not
sufficiently engaged in such work.

490.

Finally, a respondent highlighted that the industry Corporate Events Group (CEG) is
conducting work to assess non-compliance with market standards, namely in the context
of the AMI-SeCo advisory group on market infrastructure 97 . This group is in charge ofmonitoring compliance with financial corporate actions and shareholder identification(although it does not cover GMs). Regular reports identifying progress towards compliance
as well as persisting gaps and issues are issued by the CEG.

491.

9.2.5 SMSG input
492.

The SMSG advice provides remarks on several elements included in Chapter Ia.

A preliminary comment addresses the right for issuers to identify their shareholders andconsiders that the way some MSs have transposed the option provided by the SRD2 limits
the scope of shareholder identification to holdings exceeding a given threshold isquestionable and should be repealed as it has created fragmentation of the market andhas not proven to work in practice.

493.

According to the SMSG, if such a system is kept and MSs apply the option, thedetermination of the holdings exceeding the threshold should solely be made at the levelof the first intermediary, not at that of each intermediary in the holding chain as construed
by some MSs, so as to ensure that shareholdings are captured correctly.

494.

Overall, in the view of the SMSG, the shareholder identification process has not
significantly improved since the introduction of the SRD2. The main reason for this is thatthe term “shareholder” continues to be defined by applicable national company law,

495.

97

For more details, please see the following link: Advisory groups on market infrastructures.
164

meaning that the determination of the shareholder depends on the MS of the issuance.
This results in diverse “shareholder’” concepts which cause an unlevel playing field, andthus makes shareholder identification incomplete as well as more complex and costly.
In line with some respondents who are of the view that the end investor should be
identified as the shareholder, the SMSG considers that the definition should set as
shareholder the “legal or natural person [which,] having invested his/ her own money
directly into a share, bears the financial risk and is entitled to the dividends/ corporate
actions”. In the SMSG’s view, this definition should be able to capture the end investor intoshares. In addition, the SMSG considers that the IR needs to be strengthened in its
language to ensure that the information flow does not end at the nominee level but that theend investor, i.e., the ”final” shareholder, receives the information from the issuers throughthe chain of intermediaries and is able to exercise his/ her rights emanating from theshares.

496.

In addition, it is reported that in many countries, issuers are still not issuing corporate
event information in a standardised and timely manner, thus affecting the transmission of
information across the custody chain. Intermediaries still need to resort to multiple sourcesof information to be able to issue timely and complete notifications.

497.

Coming to the transmission of information along the intermediaries’ chain, in the viewof the SMSG this remains not fully satisfactory even after the entry into application of the
SRD2 and its IR on 3 September 2020 regarding corporate actions’ messages. In thisregard, the SMSG infers that there is a de facto blocking of communication between theissuer and investors in the chain, preventing information from passing down to theshareholder, especially in instances where the record date is close to the meeting date. In
this regard, the SMSG highlights that both direct and intermediated communication
channels between issuers and shareholders should have equal footing.

498.

Nevertheless, in line with other respondents to the Call for Evidence, the SMSG
members find that there has been an improvement in the transmission of information for
GM notifications, with the implementation of ISO20022 meeting messages. Differently, forcorporate action events, ISO15022 and ISO20022 messages are seen as both fit for
purpose, and accordingly the CSDs’ and non-CSD intermediaries’ implementation projects
were primarily devoted to GMs and shareholder identification.

499.

The SMSG nonetheless highlights that the lack of “same language” format for GMs
hampers the communication between issuers and shareholders, creating significant
problems for all parties in the chain and may lead to a break in STP. In fact, as the input
received shows, many issuer agents and intermediaries are not yet able to process
shareholder identification requests in the correct ISO20022 reporting format. The SMSG

500.

165

advice points out that the introduction of ISO20022 format, originally planned for November
2021 was delayed with a full implementation not expected before November 2023.
Regarding GM processes and shareholder identification, it is argued that thetransmission of information needs to be improved in a cross-border context due toremaining country-specific market practices (especially regarding meeting notification), thenumber of identification documents provided and the information therein, the way ofreceiving such information (i.e., sometimes in a non-standardised format) and theidentification of the securities accounts of clients/ intermediaries, especially in cases inwhich CSDs do not have any relationship with them.

501.

502.

The SMSG identifies some additional reasons for this lack of effectiveness, as follows:i.

The late implementation of the SRD2 in some MSs;ii.

The late enforcement of SRD2 rules. In relation to this aspect, the SMSG seesa need to review the regulatory oversight of GM-related processes to ensurethat shareholder rights become enforceable in all MSs andiii.

The market structure. According to the SMSG, problems have beenencountered regarding omnibus accounts, which is the predominant accountmodel in the EU and still creates obstacles in identifying proprietary interestsof beneficial owners98.

Coming to the exercise of shareholder rights, the SMSG identifies the documentation
requirements as an issue noting that shareholders have to provide various documentation(e.g. a proof of entitlement) to their last intermediary to be able to participate in GMs andexercise their voting rights. The SMSG suggests that intermediaries and issuers should
consider an EU wide form of proof of share ownership at record date as sufficient, which
could simplify processes for shareholders. This could help simplify processes and foster
STP as foreseen by the IR.

503.

98

The SMSG therefore calls on ESMA to examine whether current intermediated systems and the current CSDR framework need
to be reassessed to ensure that omnibus accounts no longer create (factual) obstacles to the processing of information between
issuer and shareholder and for exercising voting rights. With specific regard to vote confirmation, the SMSG quotes literature
which suggests that omnibus accounts may even lead to issuers’ registrars having to disregard votes because there is no means
to ascertain that votes had been validly cast, as an accurate reconciliation of holdings to votes in omnibus accounts may be close
to impossible. In line with this, the SMSG notes recital 11 of the CSDR stating that “Immobilisation and dematerialisation should
not imply any loss of rights for the holders of securities and should be achieved in a way that ensures that holders of securities
can verify their rights” Please refer to paragraph 108 of the “Analysis” section.
166

In this regard, the SMSG observes that academic research finds that the ”permissioned
blockchain solution” may offer shareholders:504.

”real-time transmission of the information and directcommunication between issuers and shareholders as it
would make it ‘possible to remove all intermediaries
involved in the proxy votes collection and instructions
process if all ownership information from different tiers is
uploaded to the distributed ledger”99.
The SMSG suggests to ESMA to investigate whether the use of new technologies could
facilitate direct dialogue between issuers and investors while taking into account risks inrelation to investor protection. It is argued that there is also a need to further specify in the
SRD2 that both direct and intermediated communication channels between issuers andshareholders have an equal footing.

505.

A further comment raised by the SMSG points to recent research100 finding that several
neo brokers, according to their terms and conditions, do not always comply with the legal
requirements of the SRD2, i.e., to facilitate the transmission of information between issuers
and investors. For the SMSG it remains unclear whether some neo-brokers grant
themselves the right to execute voting rights on behalf – or instead – of the client (e.g. dueto a securities lending business model, for instance).

506.

The SMSG therefore recommends to further investigate the impact of neo-brokers’
practices on the governance of the proposed issuers, also in relation to the business modelon which they are based.

507.

Moreover, the SMSG notes that costs and charges for GM-related services continue tobe a deterrent, especially for individual shareholders. While at the national level,
participating in and voting at GMs is generally free of charge, it may become very costly
when the same rights are to be exercised abroad. In this sense, the SMSG considers thatany difference between the charges levied for the domestic and the cross-border exerciseof shareholder rights should be allowed only if they are duly justified and reflect the variationin actual costs incurred for delivering the services by intermediaries.

508.

The SMSG also notes that issuers perceive a lack of transparency regarding fees forservices provided to them by intermediaries. In their view, not only is the fee calculation
not always fully transparent, but there is also no clarity on whom the task of invoicing should509.

Lafarre, A., Van der Elst, C., “Shareholder Voice in complex intermediated proxy systems: Blockchain technology as a solution?”(2021).
100
In this regard, please see Better Finance & DSW (2022).
99

167

be attributed to (the CSD or a separate intermediary service provider). The group considers
it important that, like for other banking services, where fees are charged by intermediaries
for GM-related services, these are made transparent for investors in advance.
On this basis, the SMSG invites the Commission to review the regulatory oversight ofcosts and charges connected to GM-related processes and harmonise it. As a first step,
they suggest that a central database of intermediaries’ custody service fee structures beestablished at the European level, for example at the EBA.

510.

Finally, the SMSG suggests that ESMA undertake an in-depth analysis of whether GMrelated costs and charges invoked by intermediaries are indeed transparent, duly justified
and reflect the variation in actual costs incurred for delivering their services.

511.

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10 Annex VI: SMSG Advice
The Executive Summary of the SMSG Advice is presented below. For the full Advice,please click here.

512.

Executive summary
The SMSG welcomes the opportunity to respond to the call for evidence on certain
provisions of the SRD2 and considers that the cross-border voting process should become
simple, cost effective, and efficient.

513.

In view of the SMSG, the shareholder identification process has not significantly
improved, as the term ‘shareholder’ continues to be defined by applicable national
corporate law, which makes shareholder identification incomplete. The SMSG therefore
considers that the definition of the ‘shareholder’ should be harmonized and aim at capturing
the end-investor.

514.

Moreover, the option provided by the SRD2 to limit the scope of shareholder
identification to holdings exceeding a given threshold should be repealed and be made at
the level of the first intermediary, not at each intermediary in the holding chain to ensurethat shareholdings are captured correctly.

515.

The SMSG also considers that the transmission of information along the intermediaries’
chain remains not fully satisfactory and may have had an impact on the flow of information
between issuers and investors around a general meeting. The main reasons for this are:

516.

i.

The late implementation: Not all Member States had transposed the SRD2
into national law by 3 September 2022;

ii.

The lack of ‘same language’ format: The format to achieve a “same language”
purpose, ISO 20022, originally foreseen for 22 November 2021, had been
postponed and ‘go live’ is now planned for November 2023. The reason forthe delay is unclear and will hamper the communication between issuers andshareholders for a further general meeting season (2023);

iii.

The late enforcement: Neither shareholders nor issuers, have any valid means
to accelerate the harmonisation process nor do (national) regulators often
have the option yet to enforce the rules of the SRD2 and its IR which are being
delayed by the late ISO 20022 implementation effectively at least until four
years after transposition. The SMSG sees a need to review the regulatory

169

oversight of general meeting-related processes to ensure that shareholder
rights become enforceable in all Member States;
iv. The market structure: While information regarding corporate action processes
are flowing smoothly through the intermediaries’ chain, for general meeting
processes, omnibus accounts still create obstacles as they make it difficult to
identify proprietary interests of beneficial owners. Moreover, in many systems,
the separation of legal ownership and beneficial ownership creates additionaldifficulties. The SMSG calls on ESMA to assess whether the intermediatedsystems currently in place and current CSDR framework needs to bereassessed to ensure that omnibus accounts do no longer create (factual)
obstacles to the processing of information between issuer and shareholder;v.

Costs and charges: The SMSG notes that costs and charges for general
meeting-related services continue to be a deterrent, especially for individual
shareholders. While at national level, participating in and voting at general
meetings is generally free of charge, it may become very costly when the samerights are to be exercised abroad. The SMSG suggests ESMA to undertakean in-depth analysis on general meeting-related costs and charges invoked byintermediaries considers important that fees are made transparent forinvestors in advance;

vi. Lack of harmonised oversight: Next to that, there is a lack of harmonised
regulatory oversight of intermediaries’ general meeting-related processes;vii. Neo brokers: Certain provision deviating from the legal requirements of theSRD2, i.e., to facilitate the transmission of information between issuers andinvestors could be found in some neo brokers’ terms and conditions. The
extent to which neo brokers comply with the legal requirements of the SRD2
should be further investigated in their involvement in the governance of the
proposed issuers, also in relation to the business model on which they arebased;
viii. Simplification of documentation requirements: As of today, shareholders haveto provide various documentation (e.g., a proof of entitlement) to their lastintermediary when wanting to exercise their shareholder rights at a general
meeting. The SMSG considers that an EU wide form of proof of shareownership at record date accepted by any intermediary in the chain as well as
any EU issuer could help to simplify processes and foster a straight-throughprocessing (STP) as foreseen by the SRD2 IR and170

ix. Direct communication between shareholders and issuers: The SMSG
recommends ESMA to investigate further whether the use of modern
technology, could improve the information flow between issuers and investors
while taking into account potential risks for investor protection as both direct
and intermediated communication channels between issuers andshareholders have equal footing.
Whilst proxy advisors are not subject to mandatory regulation beyond the requirements
laid down in Article 3j of SRD2, the Best Practice Principles (BPP) were formed to establish
voluntary best practice principles. The SMSG considers that the latter’s impact on the threeprinciples (services quality, conflicts of interest and communication with issuers) remains
unsatisfactory.

517.

In the area of ESG services, the SMSG considers it important that any future legislativeor regulatory actions on proxy advisors are coordinated with the upcoming review on ESG
rating providers.

518.

Also, the SMSG considers it important to ensure that a structured dialogue procedure,proper and transparent engagement is put in place by proxy advisors; so that factual errors
in the report can be corrected by proxy advisors after a dialogue with issuers before thevoting deadline.

519.

The SMSG sees a need for more disclosure to ensure that the methodology andprocedures put into place to ensure that voting recommendations are of appropriate quality
and are not deviated from in case of services for both issuers and investors.

520.

In addition, the SMSG further sees a need to clarify how voting recommendations andpolicies are being developed and reviewed, whether an investor/stakeholder consultation
process been established, and what the main features of the process justifying revisionsof the voting policy are.

521.

The SMSG considers that conflicts of interest should be avoided by any circumstances
and that proxy advisor should not offer consulting advice to analysed companies inparticular on topics that are part of the general meeting agenda and should inform theirclients individually about any actual or potential conflicts before or at the same time as thevoting recommendations are made available to clients.

522.

The SMSG furthermore would consider it helpful if any review of the proxy advisory
market would look into the de facto duopoly in this market preventing smaller, local service
providers to compete with the existing market players.

523.

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The SMSG notes that the SRD2 did not achieve more transparency when it comes toproxy advisors, or at least only marginally. When reviewing the SRD2, the SMSG therefore
would favour a reinforced voluntary approach, based on the “comply or explain” principlewith the NCAs being in charge of the supervision.

524.

11 Annex VII: SRD2 transposition
The below four tables summarise ESMA’s survey into the transposition of the SRD2 by
EU MSs (as well as the implementation by other EEA countries).

525.

Table 2: Transposition of Chapter Ia at national level

Has Chapter Ia of the SRD2 been transposed at national level?

Respondents

Countries

Primary law only

23 countries

AT, BE, CY, CZ, DE, DK, EE, EL, ES,
FI, HR, HU, LI, LU, LT, LV, NL, PL,
PT, RO, SE, SI, SK

3 countries

EE, HU, PL

6 countries

BG, FR, IE, IT, MT, NO

1 countryFR

1 countryIS

Has Art. 3j of the SRD2 been transposed at national level?

Respondents

Countries

Primary law only

24 countries

AT, BE, BG, CY, CZ, DE, DK, EE, EL,
ES, FI, HR, HU, LI, LT, LU, LV, NL,
NO, PL, PT, RO, SI, SK

1 country

HU

4 countries

FR, IE, IT, SE

Thereof: Also via non-legislative tools
Primary and secondary law
Thereof: Also via non-legislative tools
No transposition yet

Table 3: Transposition of Article 3j at national level

Thereof: Also via non-legislative tools
Primary and secondary law
Thereof: Also via non-legislative tools
No transposition yet

0 countries
2 countries

MT, IS

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Table 4: NCAs in charge of monitoring and/ or supervising the transposition of Chapter Ia
Is there any National Competent Authority in charge of monitoring
and/or supervision of the relevant legislation transposing Chapter Ia of Respondents
the SRD2?

Countries

ESMA NCA

19 countries

AT, BG, CY, CZ, EE, EL, ES, FI, FR,
HU, IT, LT, LV, MT, NO, PT, RO, SE,
SK

ESMA NCA in addition to other NCAs

1 country

DK

NCA different from the ESMA NCA

2 countries

LI, SINo NCA in charge of monitoring

8 countries

BE, DE, HR, IE, IS, LU, PL, NL

Table 5: NCAs in charge of monitoring and/ or supervising the transposition of Article 3j
Is there any National Competent Authority in charge of monitoring
and/or supervision of the relevant legislation transposing Art. 3j of the Respondents
SRD2?

Countries

ESMA NCA

16 countries

AT, BG, CZ, DK, EE, EL, ES, FI, IT,
LT, LV, NO, PT, RO, SE, SK

ESMA NCA in addition to other NCAs

0 countries

NCA different from the ESMA NCA

3 countries

IE, LI, SI

No NCA in charge of monitoring

11 countries

BE, CY, DE, FR, HR, HU, IS, LU, MT,
NL, PL173