LEADR: The data pillar of beneficial ownership
If Shareholding Disclosure rules were the same across the world, regulatory compliance would be pretty simple. But life’s not like that and regulatory compliance is rarely, if ever, an exact science. Compliance teams know this only too well but does everyone else really get it? Across the industry, companies of different sizes, operating across different regions, and implementing different strategies naturally creates entirely unique reporting obligations. For compliance teams, that makes running into hurdles and complications a ‘when’ rather than an ‘if’.
The good news is there is an industry framework for checking how fit your current systems and processes are for beneficial ownership monitoring and reporting. The importance of checking how competent and complete has never been more important as regulators are making good on a long anticipated shift to a more strict regime.
The 5 pillars of shareholding disclosure are a helpful way of breaking down the broad, deep and complex regulatory requirements demanded of the industry and provide a framework for sense-checking which areas are good enough for now, which need more work and which have less importance for your unique obligations.
The five pillars to mitigate risk and future proof shareholding disclosure compliance are; legislation, events, aggregation, data and region or LEADR. These considerations can aid compliance teams in navigating the endless shifting landscape, stay compliant and, importantly, provide a framework to easily break down and demonstrate to the C-suite, risk and legal where systems and processes are fit and where they aren’t for both the current and future compliance landscapes.
Let’s start with the data pillar and the most common ways that issues with data can lead to missed, late or incorrect disclosures.
Can you even get the data?
Keeping fit and healthy starts with a good diet, you know, the old adage of ‘you are what you eat’. Everything else becomes easier when what you’re putting in is the right mix of what you need to fuel the engine, you know where it’s coming from and how it’s sourced.
Data is an issue across financial services, compliance and data in shareholding disclosure works is no exception. Of course ‘good’ data isn’t as easy to come by as a trip down the produce aisle. There is a time and operational burden of putting together and maintaining reliable, clean, usable data. And, unfortunately, it’s only when firms incorrectly report, or fail to report, to regulators that the true impact of unreliable, low-quality data becomes clear.
Just commit a whole team to takeover panel data checking
Monitoring takeover panels for announcements presents a perfect storm of difficulties for compliance officers.
Updates are frequent and sporadic, demanding immediate attention, and must be interpreted accurately to discern the impact on their organisation under tight regulatory timelines. These deadlines can be as short as same-day disclosures.
The task is further complicated by varying international disclosure standards, necessitating a keen understanding of multiple regulatory environments.
The most well-equipped teams are checking takeover panel information on a regular cadence, or better yet, are scraping it automatically. Efficient tools, combining both data and regulatory interpretation are essential to manage this high-stakes aspect of regulatory compliance effectively.
How much data to calculate exposure to indices and ETFs?!
When it comes to shareholding disclosure, many jurisdictions require a firm to calculate its exposure to a single issuer through indices and ETFs. Simple, right? The problem is that purchasing constituent data and information for relevant indices is near-prohibitively expensive, and can run into the 10’s of 1000's of dollars per index. The costs of working with a more complicated data structure, as well as data fees for index instruments means some firms are left disclosing incorrect information to regulators.
A time consuming and onerous exercise, the idea that these exposures are low doesn’t reduce the risk of not calculating them correctly. A small exposure is all that’s needed to tip over a threshold, particularly when holding other non-index exposure.
Go hunt for that pesky denominator data
Much like constituent data, sourcing denominator data for shares outstanding (or voting shares/rights etc.) faces compliance officers with another challenge. The hurdle lies in the accuracy and timeliness of the information. Shares outstanding data is often dispersed across various sources and regulatory filings, which is rarely synchronised or updated simultaneously.
This fragmentation leads to discrepancies, potentially resulting in non-compliance with regulations such as disclosure requirements and insider trading laws. The stakes are high, as inaccurate reporting can lead to significant penalties, reputational damage, and legal consequences.
To mitigate these risks, compliance officers must employ rigorous data verification processes and ensure that they have access to the most current and reliable data sources. It's imperative that they establish relationships with data providers who can supply real-time updates and confirmations of shares outstanding. Additionally, they must stay aware of changes in securities legislation in different jurisdictions, which can affect the reporting of shares outstanding.
The process of collating and verifying this information is resource-intensive, requires a high level of diligence to ensure that all data points are accurate and compliant with relevant regulation and uses multiple data providers. .
Are you sure which is the EU Home Member State?
The EU Transparency Directive (TDA) requires an investor to determine an issuer’s Home Member State to determine the relevant thresholds, calculation rules and notification deadlines. One of the key determinative factors is an issuer’s chosen Relevant Competent Authority (RCA). This makes RCA data critical in assessing a firm’s shareholding disclosure obligations under the TDA.
The problem (another one) is there’s no reliable centralised method to properly comply with the TDA. In practice, many investors seeking to comply with the TDA turn to FIRDS for assistance in determining an issuer’s Home Member State.
FIRDS records all those instruments reported by EU trading venues as being traded on them. The RCA of the issuer under the TDA (the Home Member State) is different from the RCA of the instrument under MiFID II. Suffice to say, it is not an ideal solution. And recent fines have been pretty hefty.
Excel as the omnipresent central character
Excel is useful for all sorts of things. Compliance monitoring shouldn’t be one of them.
The odds are that, baked somewhere within large spreadsheets containing thousands of formulas and data points, there exist undetected errors, resulting in compliance breaches and ill-informed decision making. Excel is manual, and while it’s possible to automate some calculations, spreadsheets are likely to include copy and pasting errors, tracking changes is extremely difficult, and teams will inevitably end up with stale data. Despite all of this, Excel persists as a staple within Shareholding Disclosure monitoring.
However, the real risk lies in what happens if something goes wrong. Homegrown systems like this provide a limited, meagre defence against regulators asking how a conclusion was drawn when a mistake was made.
Firms should be using standardised APIs, data feeds and software, complete with reliable audit trails. Should something go awry, proof of investment in compliance is required - not a proliferation of versions sent by email.
Data as the foundational pillar
Given the impact of data across the whole shareholding disclosure workflow, it’s natural to have it as the foundational pillars. The regulators are staying true to their determination to increase transparency and accountability and, if we look at last year’s once-in-a-lifetime announcement from the SEC, they can be both monumental and marginal. Either way, the central role of data never changes. It’s the fuel to everything else. Shall we say it? Bad data in, bad data out.
Next in the series, we’ll be talking about the aggregation pillar. Globally, aggregation is one of the most convoluted areas to stay on top of as regulators don’t subscribe to a uniform set of standards. More on that next time.
This blog is part of FundApps’ LEADR series which covers the Shareholding Disclosure five pillars of Legislation, Events, Aggregation, Data and Regions.
