From 212 to 793 – the world in two parts.

Pity the poor IRO. From the 39 new Directives in financial services put out by the EU in the 21st century so far, to the (increasingly discredited) SOX, regulation is the monkey on their backs.

So why on earth should issuers join with us in seeking to change the rules on disclosure of share-ownership? And more importantly, what is the target? What is the “ideal” disclosure regime for issuers and for the market as a whole?

There is a group of countries – regulatory regimes – which have a set of rules in place allowing proactive demands to be made by issuers of shareholders. Many of these are Commonwealth countries, who have taken a common approach.

Australia, South Africa, some countries in SE Asia, together with the UK, have regimes whereby the company has the legal right to demand the identity of the beneficial owners of issued equity.

In the UK, this process has been known for a generation as a “212”. It has become a verb, a noun, an adjective – even a URL. It has certainly become a highly effective tool for issuers and their advisors to learn who their shareholders are. “212” refers to a section of the Companies Act 1985/9. And since this is in the process of being replaced by the Companies Act 2006, a whole new set of parts of speech will have to be learned. The section is “793”.

Whatever it’s called, how does it work? Most of the equity issued by UK companies is held in custody on behalf of the underlying client (whether they be institutional or retail). Many custodians pool their clients’ shareholdings so that the shares of several beneficial owners are registered in the name of one nominee company in an omnibus account. Hence there is not a clear audit trail as to who is the true owner, and changes in the underlying ownership may not be reflected on the share register.

“793” gives companies the right to know as it gives public companies the right to force shareholders to disclose the nature of interest in their shares. It can be used to force disclosure of both beneficial ownership and institutional control. It is applicable to all holders holding material positions (and that includes hedge funds, overseas holders, market-makers). A key restriction is that it does NOT apply to derivatives, on which I will fulminate later.

So, the company, or its advisor such a specialist analysis firm, a registrar or in house broker, will write to the nominee, and demand disclosure of who is the beneficial owner. And they are obliged – within a reasonable time – to provide full information on who owns the shares.

Ah, you cry, but what if they don’t comply? In practice, the process is so well understood by custodians and investors that challenges and refusals are rare. Mostly they come from overseas investors, and countries with bank secrecy laws, such as Switzerland. However, under “793”, the issuer can force the matter by for example disenfranchising the shares (removing the voting rights), or by removing the rights to a dividend, or not allowing them to be transferred.

There are a number of things that the company has to do in return for this right, such as creating an index of requests that can be inspected publicly, so that the market as a whole has access to the same information.

So it seems to me that this type of rule – in place in every country – would solve many of the challenges that exist in knowing who owns the companies shares. Now all we need to do is to spread the message.