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Switzerland: Securities lending in focus

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With only six months to go before the introduction of mandatory voting on domestic equities, the legacy of Switzerland’s 2013 Minder Initiative is being keenly felt.

Named after the policitian Thomas Minder, the referendum passed with support from nearly 70% of voters, requiring changes to the way remuneration at domestic companies is agreed, but also for local pension funds to vote on any domestic shares in which they may hold a stake. 

Dominique Biedermann, chief executive of the Geneva-based proxy voting foundation Ethos, says the distinction between direct ownership of shares and indirect ownership through a stake in funds will be important for many in the industry, as initial lack of clarity led to the hope that indirectly owned shares would not have to be voted. However, indirect holdings in shares will not completely absolve trustees from their responsibility to exercise their shareholder rights. 

Biedermann notes that large Pensionskassen with their own fund vehicles will still be required to vote at AGMs. Additionally, some large asset managers, such as UBS, already allow pension investors to register their voting intentions for their share of equity within funds. The CEO says that trustees will be required to act in such circumstances. 

An initial verbal recommendation, expected to be supported with written guidance from the federal Ministry of Justice before 2015, is clear on the issue of direct compared with indirect holdings. But the wording of the current draft law on excessive pay (VegüV) is ambiguous when it comes to how these votes need to be cast.

While emphasising that voting decisions must be reached in the interest of beneficiaries, but that the beneficiary’s interest is served if the fund continues to thrive, Biedermann acknowledges a potential conflict. “There remains a certain freedom of interpretation, and there are a number of ongoing debates as to what this could mean, but in the end you will need to cast a vote.

“This poses the first problem for pension funds – they will have to decide under which criteria they will be casting their votes, requiring guidelines. And, in the end, there will be a vote, unless you’re no longer directly invested but through a fund.” 

A further problem arises in this area of securities lending, notes Barbara Heller of proxy voting advisory firm SWIPRA. “You cannot ensure you’re acting in the interest of beneficiaries if you lend away your shares during the AGM of a company.

“I don’t see any issue around what you do for the rest of the year,” she adds. “But, if you really follow what the ordinance is requiring, then you cannot lend your shares to a third party to avoid casting a vote at the AGM.”

Biedermann refers to the Justice Ministry’s public statements, noting that it opposes systematic and targeted lending of securities close to a company’s AGM, as it would be circumventing the law. “But, if it is not systematic, but rather accidental, then it would be less damaging.”

He nevertheless says that the ministry, the pension association ASIP and Ethos itself recommend that a pension fund should recall any lent securities in time to be able to vote.

This view is reflected in the Swiss Investor Code, which is backed by the first-pillar fund AHV/AVS, ASIP, Ethos and business and banking associations. Published before the initiative was put to a referendum last year, it recommends against securities lending ahead of any AGM in strong terms – if there are any controversial items on the agenda that could affect an investor’s interests. The paragraph does, however, state that this should only be done where possible, which creates some room for manoeuvre. 

Heller notes that some pension funds are considering ceasing any type of securities lending, regardless of the time of year. “I think this is a rather stringent approach – I don’t think it is necessary to go that far.”

She is uncertain if the new law will lead to a tick-box approach to voting, but points to the existence of proxy advisory companies such as her own as important in providing trustees with an understanding of all proposals that may be put to a vote at each AGM. 

The real impact will not be felt until the rules are enforced in 2015, but even then it will remain to be seen if greater transparency on remuneration by the large listed corporates of Switzerland, and a greater emphasis on engagement by pension funds will have the desired effect, or simply result in schemes seeking new ways to sidestep the responsibility foisted on them by the public.

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