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Why (proper) shareholding disclosure doesn't end at delegation

Written by Karl Schindler | Feb 9 2023

When asked about their views on whether a delegating party would still have a Shareholding Disclosure (“SD”) obligation, the in-house counsel of a large asset management firm suggested that, “it depends on the jurisdiction’s regulation”. Unfortunately, they’re right. 

Institutional asset owners and managers often make an implicit, but inaccurate, assumption that once they delegate management responsibility to an external investment manager or investment advisor they no longer have any responsibility for shareholding disclosure. The truth is that's not the case, and endowments or pension plans that partially or completely delegate management discretion to a third party are, in many cases, exposed to risk as a result.

While many regimes focus their regulatory disclosure obligations on entities that hold discretion over management and/or voting rights over securities, there are other entities that should also aggregate and disclose. In some jurisdictions, even if an entity has fully delegated management to an external third party manager, that entity may still have an obligation. That includes instances when the same security is in question. 

One might think that being a mere owner who hires and sets up “separately managed accounts” (SMAs) with one or more external asset managers, would mean that the only disclosure obligation lies with the manager(s), but that’s not the case. 

Some jurisdictions require asset owners, or any entity which has the power to delegate management discretion, to continue to aggregate those delegated assets. The external manager also likely has an obligation as well, but they would aggregate their SMAs and other managed assets/funds together according to the aggregation rules which apply to their activities. 

The answer to whether an asset owner continues to have an SD obligation for assets they delegate is rarely as explicit as it is in the major shareholding regime in Germany. Regimes often have very broad language regarding who “has an interest” or in-depth legal analysis indicates that delegating parties still have an obligation. 

What does it all mean in practice? 

It means that as an asset owner, if you partially or completely delegate the management of your assets to external parties, you should still ensure that you’ve analysed all of those assets for shareholding disclosure requirements. Not only does that mean having timely access to those positions, but a strong approach to compliance monitoring and understanding of where a security is listed as well.