Why the compliance challenge of aggregation is often underestimated

LEADR: The aggregation pillar of beneficial ownership

In a world of financial compliance replete with challenges, a crucial yet often underestimated aspect is correctly aggregating financial positions in shareholding disclosure.

Aggregation is much more than just tallying positions held or managed. It's about understanding the intricate web of the legal relationships between your firm's entities, its security positions, and the interconnectedness of entities within your corporate structure.

And, of course, regulators across the globe have different approaches. They demand that firms consider different levels and conditions when aggregating disclosable assets, making it a complex puzzle for any financial institution to solve.

So what are these complexities and what is the vital role aggregation plays in achieving compliance?

Why aggregation is not as simple as it first seems

Aggregation, in the context of shareholding disclosure, involves combining holdings across different entities, portfolios, or funds to show total ownership in a company according to one or more jurisdiction’s criteria. Sounds simple enough, right? Unfortunately, no, it's fraught with challenges, especially when managing the various global regulations. 

To give a simple example,  a single portfolio or even a single security may be disclosable in one country based on discretionary management power, but not disclosable in another country based on discretion over voting rights.

Don’t forget affiliated and controlling entities

A critical factor in accurate aggregation is incorporating all relevant entities, particularly affiliated, controlling, or parent entities. This inclusion extends beyond those with direct management or voting authority, capturing even entities with minority ownership or entities that don’t have a specific percentage ownership but have influence on subsidiaries. The failure to do so can lead to inaccurate disclosures and potential regulatory sanctions.

When assessing your aggregation strategy, it’s essential to ask: Have we adequately considered all affiliated entities within our firm's structure, including both controlling and non-controlling entities, as well as holding companies and similar entities?

Don’t assume: evidence your case for disaggregation

As well as aggregation, there is disaggregation. Disaggregation in shareholding disclosure refers to modifying the standard aggregation logic between entities within a corporate tree. This modification usually relies on specific aggregation exemptions or regulatory allowances, which differ across jurisdictions and even within different regimes of a single jurisdiction.

A common error among firms is the assumption that positions held by entities in their corporate tree can universally be disaggregated. In reality, the criteria for disaggregation vary considerably from one country to another.

For justified disaggregation, firms should also have clearly documented rationale or evidence about the relationships between the entities, whether contractual or otherwise. In some instances, securing confirmation from a regulator is also essential. These measures ensure that disaggregation practices comply with the relevant legal and regulatory framework.

Delegation is more nuanced than many believe

Delegation of investment management or voting rights introduces a complex layer to aggregation. A common misconception is that only entities actively making investment decisions are responsible for aggregating and disclosing holdings. However, the reality is more nuanced, especially considering the variability in requirements across different jurisdictions and even within individual rules or regimes of a single jurisdiction. Entities that delegate these powers, including those in purely supervisory roles, often retain aggregation responsibilities. 

Aggregation responsibilities can vary significantly depending on the jurisdiction and specific regulatory rule, requiring a deep understanding of the delegation agreements and the regulatory environment. Failure to accurately navigate these complexities can lead to incorrect or missing disclosures, posing significant risks of non-compliance and potential regulatory sanctions.

Delegating rights needs some modelling

Have you considered how delegating management or voting rights both internally and externally may impact your obligations to disclose?

Aggregation in shareholding disclosure varies based on regulatory requirements in each jurisdiction and your firm's structure. The level of aggregation might range from consolidating holdings at the top-level holding company to focusing on individual funds or subsidiaries. Accurately modelling the entities in your firm and determining the appropriate level is essential.

Simultaneously, the type of aggregation, based on the relationships between entities and their positions, is critical. It necessitates understanding the relationship between entities and how factors like voting rights, management authority, or legal ownership influence holdings. Each relationship dictates a distinct aggregation criterion, emphasising the importance of a precise and informed approach to meet diverse regulatory demands.

It’s important to ask if your firm has made assumptions about position aggregation without distinguishing between legal ownership, management discretion, or voting rights. Have you, for example, ensured that the correct assets are aggregated in each jurisdiction based on these factors and at the right level of the corporate hierarchy, including considering where fund-level disclosures are required?

It’s easy to have baked-in, hidden risks

Incorrect aggregation carries substantial compliance risks, including severe financial penalties and reputational damage. To mitigate these risks, firms must have an accurate and detailed model of their corporate structure. This model must reflect the complex web of relationships between entities and their holdings across various jurisdictions. Staying current with the ever-evolving regulatory landscape is also crucial, as regulations can vary across different countries and within the rules and regimes of a single jurisdiction.

As well as expert compliance teams who can offer deep insights into regulatory nuances, especially in delegation or disaggregation cases, advanced aggregation software is increasingly becoming a necessity. Such software will automate the aggregation compliance process, ensure accurate reporting globally and, importantly, futureproof the compliance team’s ability to stay on top of changing rules and regulations. It also provides that all-important evidence trail with a reliable log of compliance actions.

Conclusion

In a world of compliance where there are many uncertainties, we can be certain that the growing complexity of regulations and the corporate structures of security position holders will continue. This has elevated the need for financial institutions to regularly evaluate their aggregation capabilities in order to be secure in their ability to comply with regulations and to avoid sanctions. Taking a proactive approach is vital to protect the company's credibility and standing in the market.

This blog is part of FundApps’ LEADR series which covers the Shareholding Disclosure five pillars of Legislation, Events, Aggregation, Data and Regions. 

In our latest LEADR webinar we solve the Aggregation puzzle, examine the moving parts, explain how it all comes together, and offer solutions to make things much easier in future. Despite what people think, it’s much more than tallying up positions; It’s about having clarity around the relationships that exist between individual entities, securities, and the connections that exist in your corporate structure. And, of course, the global regulators all have their own approach, which just adds another layer.

Watch now: https://hubs.ly/Q02nwCGp0