What is shareholding disclosure compliance?

Shareholding disclosure rules and the compliance that goes with them are not a new challenge by any means; there have been rules in some jurisdictions for over 50 years. However, the number of jurisdictions requiring compliance, the complexity of the rules and the sanctions for non-compliance are ever-increasing. 

What are shareholding disclosures rules? 

There are a number of different types of rules and they serve different purposes;

• Substantial shareholding rules (also referred to as major shareholding and long disclosures) – these are designed to provide transparency to the market, the issuer, and the relevant regulator, about positions that are being accumulated, provide information on who can vote at the company’s AGM or who has access to voting rights.
• Short position disclosures – these were first introduced in 2008 as a direct and immediate result of the financial crisis and in particular the HBOS rights issue whose share price was targeted by a shorting strategy resulting in a failed rights issue. These disclosures were designed as a way for regulators to have transparency of those responsible for shorting an issuer. 
• Takeover disclosures – these were first introduced in the UK in 1968 to oversee the takeover and mergers of issuers as a result of the devastating consequences of dawn raids on issuers. Nowadays more and more jurisdictions have introduced these disclosure requirements, which allow additional transparency whilst a company is under offer to ensure fair treatment of shareholders.
• Issuer Requests – in some jurisdictions issuers or their investor relations representatives are able to legally request disclosure of your holdings in their issuer and the identity of other parties to that position. This provides the issuer with transparency of their shareholders. 
• Sensitive Industry – this can often be a pre-approval requirement before you trade in a certain industry above a certain threshold. These are industries that a government want to protect.  These often include the financial industry, defence, and aviation but other industries are affected too.  Restrictions on foreign ownership of issuers can also apply.
• Articles of Association – companies may include lower thresholds for disclosure within their company’s articles of association and include their own sanctions for non-compliance.

There are now over 95 jurisdictions that have some type of disclosure rules.  

Who is subject to these shareholding disclosure rules? 

Anyone who holds shares or derivatives of these shares (also referred to as financial instruments) can be subject to these disclosure rules.  These can be held in a number of different ways such as, but not limited to; nominee, custodian, prime broker, trading book, as a hedge to client trade, proprietary holdings, on a discretionary or non-discretionary basis for an asset management client.  Borrowed shares and those subject to a repurchase agreement can also fall subject to these rules. 

Do shareholding disclosure rules in other countries apply to me?

The short answer is yes!  The rule generally is if you invest in an issuer incorporated in another country you are likely to be subject to their disclosure rules.  There are other concepts involved such as Home and Host Member State, country of listing and country of primary exchange. 

Are cash settled derivatives captured by these disclosure rules?

Over the years’ regulators have become more concerned about cash settled derivatives and you will find they are increasingly included in a large number of rules. 

What are the implications for non-compliance with the shareholding disclosure rules?

Compliance with these rules is a necessity as the sanctions can be quite considerable.   There are public examples of sanctions as a result of non-compliance, however many sanctions are served privately and therefore they are never known to the wider public.  Here are some examples of the sanctions for non-compliance with shareholding disclosure rules; across much of Europe the sanctions include fines of up to €10 million or 5% of the annual turnover of the discloser and a suspension of voting rights for both the legal and beneficial owners. In Switzerland non-compliance is a criminal office and monetary penalties are up to CHF 10,000,000 (approx. €9.3m).  In South Korea non-compliance is a criminal offence and sanctions include fines, suspension of voting rights and imprisonment of up to 3 years for failure to disclosure and 5 years imprisonment for a disclosure that is false or omits any material information.  The sanctions in Hong Kong are similar but they also include personal liability of a company’s officers. 

How do I comply with these rules?

A mis-perception can be that the only difference in the rules are the percentage thresholds that trigger a disclosure, however there is much more to consider.  These rules are complex, and the methods used to calculate your exposure/holding  varies significantly from rule to rule from jurisdiction to jurisdiction. No two rules are the same. Accurate and timely disclosures are key to compliance in this area.  

In order to comply you need access a global rules library, you also need to have a methodology for tracking and implementing rule changes. Once you have access to the rules you then need a way to calculate your exposure/position specific to each individual rule.  Because there are so many components to these rules the most effective way to reduce your operational and technical risk is to use a configurable rules engine for calculating your global disclosure obligations.  Any rules engine you chose needs to be flexible as there is no “one size fits all” in the world of shareholding disclosures, the solution needs to meet your specific corporate structure, exemptions that apply specifically to your business and any bespoke requirements your firm have, which can be a result of a number of factors including the application of specific legal advice you have received as there is no “one size fits all” in the world of shareholding disclosures.

Compliance with these shareholding rules is not an easy task; however with our expertise in this specific niche area and industry experience (we’ve been in your shoes) we offer you with a solution that meets your needs and gives you peace of mind. 

• For more information about our Shareholding Disclosure Service or to watch our short introductory video, visit our SDS service page.
• For a demonstration of the system or a conversation with Angie Huff, please contact us.