Does your firm delegate investment management or the power to exercise voting rights to another entity, either internally or externally? As the pace of growth in financial services continues, many firms now answer yes to this question. However, we have discovered that a high number of firms have not accurately determined if delegation could significantly change their shareholding disclosure obligations!
What do we mean by delegation?
If entities which hold or manage financial securities choose to have another entity involved in the power to manage or exercise voting rights over the same set of securities, this usually means that delegation is at play.
It entails an entity signing what is generally called a delegation or “sub-delegation” agreement with another party and will also be outlined in any Investment Management Agreements (or fund documents like a Prospectus) with a firm’s affected clients or funds.
Some examples are:
1. A fund or portfolio has an investment mandate (e.g. Global Equity Large Cap) which involves multiple regions. The management of the portfolio is split between a firm's internal US, EMEA and APAC investment entities so investors benefit from local investing expertise. If the client or fund is domiciled in the UK, for example, then the entity signs an Investment Management Agreement (IMA) which delegates the actual day-to-day management to the two other entities: the US and APAC entities.
2. A pension fund that delegates investment management to external entities or to another internal affiliated management entity.
3. A UCITS Management Company (or self-managed UCITS) delegates the management of the fund’s assets to another entity. This is very common and often involves internal and external entities.
4. An Alternative Investment Fund Manager (AIFM) of a hedge fund, or other AIF, sub-delegates investment management of the fund or part of the fund to a specialist manager.
5. An Australian Responsible Entity for various Australian managed investment schemes delegates the discretionary management power over certain schemes to several investment managers.
Why does this matter for Shareholding Disclosure?
A common misconception when considering who has a disclosure obligation is to assume only the entity that actually (practically) makes investment decisions or proxy voting decisions will have to aggregate and calculate one’s ownership percentages. Often when an entity delegates these powers to another party, one often considers the delegating party (“delegator”) to have no aggregation and disclosure obligation. This is a dangerous and often mistaken assumption.
The truth is that entities that (even purely) delegate management or voting power often STILL have an obligation to aggregate the assets they have delegated, depending on the regulatory interpretation for a given country.
Certain regimes require delegator entities (like many UCITS Management Companies) to continue to aggregate and disclose.
For example, the BaFin in Germany have clarified, that for entities which delegate the power over voting rights attached to holdings with Germany as their Home Member State (among other criteria), those delegator entities still have an obligation to attribute assets to itself (in addition to the delegatee party). The BaFin’s Issuer Guidelines, Module B, section I.126.96.36.199:
If the proxyholder validly delegates its authorisation, the voting rights are also attributable to the holder of the delegated authorisation under no. 6, provided that the conditions described above are met. Likewise, delegating authorisation does not terminate attribution to the party originally authorised.
Other countries may not make the obligation as explicit as the BaFin does, but many do not absolve a delegator from aggregation and disclosure obligations.
Why is this complicated?
As noted above, one must have legal information on a country-by-country basis to determine if delegator entities have an obligation for assets that are disclosable in the given country.
In addition, once one determines that delegator entities still need to aggregate, one must aggregate assets to that delegating entity correctly. If the delegating entity is part of a larger corporate hierarchy or has another relevant relationship to disclosable assets, it must correctly combine assets while:
- Avoiding double counting
- Ensuring that its controlling entities in the hierarchy include such assets (also a jurisdictional-level analysis)
- Tracking which jurisdiction the assets are disclosable to
- Including relevant aggregation information on disclosure forms
Ok, this is challenging. Now what?
If your firm has any form of delegation in place, it’s vital to ask yourself if all of the nuances in the analysis above have already been covered at your firm. Are you sure you are aggregating to all of the relevant entities in your firm, even those who aren’t practically managing assets but are party to a delegation agreement?
FundApps has been working with our client community and our legal information provider, aosphere (an affiliate of Allen & Overy), on how delegation of management or voting rights affects aggregation and disclosure requirements! We are proud to say that our aggregation model includes this level of complexity and automates the whole process in our rule algorithm and aggregation model.
We work closely with our clients to model delegation relationships in their aggregation structures whether our clients have them between internal entities or delegate externally. Once modelled, our constantly updated rule set distinguishes which disclosure regimes require delegating entities to aggregate. It’s just another example of Compliance Made Simple.
If your firm delegates management or voting rights either internally or externally and you haven’t thought about this important area of Shareholding Disclosure, feel free to reach out to us and ask how we can help! We’d be happy to talk to you in more depth about this topic and how it can affect your firm’s compliance obligations.