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UK Law Commission calls for input on pooled fund voting laws

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Technology could be used to improve voting processes for pooled investment funds, according to the UK’s Law Commission.

The commission – an independent body tasked with reviewing laws in England and Wales – cited split voting as a possible option, in the context of its first step towards delivering a study about the system of “intermediated securities”.

In a call for evidence document published last month, the commission noted that, according to the Association of Member Nominated Trustees (AMNT), “the current manual process of voting is said by fund managers to be a barrier to allowing split voting on behalf of ultimate investors in pooled accounts”.

“This appears to be a clear example of a situation in which technology could be used to improve efficiency and strengthen the rights of ultimate investors.”

The AMNT has long pushed for fund managers to vote shares as directed by pension schemes invested in pooled funds. Earlier this year it alleged that fund managers remained unwilling to accept client-directed voting in pooled arrangements on the basis of voting guidelines it developed in 2015. These so-called ‘Red Lines’ cover a range of environmental, social and corporate governance issues.

The Law Commission was asked to conduct the scoping study by the Department for Business, Energy and Industrial Strategy.

Stephen Lewis, commissioner for commercial and common law, said: “The system of intermediated securities has brought significant benefits such as making trading more efficient but, at the same time, investors are losing out on some of the benefits of share ownership, with a wider impact on the governance and stewardship of the companies they invest in.

“We’re asking investors and businesses in the market to inform our work by letting us know where they think the system is working, and where it needs to be improved.”

The intermediated securities model refers to the phenomenon whereby investors increasingly hold shares and bonds “through a system of computerised credit entries administered by financial institutions” – including, but not limited to, pooled funds – instead of through directly-held traditional paper certificates. This results in investors having an economic interest in the securities but not being considered as the securities’ legal owners. 

AMNT hopes

Voting

The AMNT has campaigned for some time to get asset managers to take pooled fund investors’ views into account when voting company shares

Janice Turner, co-chair of the AMNT, said the association was hopeful the study was “the first step in finding a way to address the current failure of asset managers of pooled funds to accept their clients’ voting policies even on a ‘comply or explain’ basis”. 

She said the intention to investigate how technology could play a role in overcoming this was encouraging. However, she added that “technological change will need to be accompanied by the will to make that change and that is something that AMNT perceives is currently lacking”.

The Law Commission said it had not been asked to produce detailed recommendations for reform and that it would not be proposing or consulting on potential reforms as part of the project.

However, its terms of reference require it to consider the costs and benefits of any potential solutions to the issues it has asked questions about.

“The purpose of the scoping study is to inform public debate, develop a broad understanding of potential options for reform and develop a consensus about issues to be addressed in the future,” the commission said.

Its study comes against the backdrop of the UK’s transposition of the revised EU Shareholder Rights Directive (SRD II). This has so far included changes unveiled in June to investment regulations for UK pension scheme trustees and the UK regulator, the Financial Conduct Authority, adopting new rules for asset managers.

According to the Law Commission, the government was bringing forward plans to transpose “Chapter 1a” of SRD II, which considered similar issues as the scoping study, including the identification of shareholders, transmission of information, and facilitation of shareholder rights.

The Law Commission’s work would be carried forward separately from the government’s immediate work on the transposition, it said.

It also explained that SRD II defined “shareholders” in accordance with the law of the member state in which the company had its registered office, and that in the UK this meant the member on the register of members of a UK company, and not the ultimate investor.

“We have been advised that the UK transposition will be carried out on this basis,” it said.

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