On Being Sensitive To…Sensitive Industries Monitoring

By: Gaurav Chandra, Product Manager, Global Shareholding Disclosures, AxiomSL

Sovereign nations have always been concerned about investors reaching critical ownership levels in the industries they deem sensitive. Think about the potential risks of foreign nationals gaining controlling interests in industries that impact a sovereign’s welfare or security. Sectors including banking, defense, mining, media, aerospace, and aviation immediately come to mind.

Indeed, national regulators and sovereign agencies mandate limits with which investment managers and all investors – domestic and foreign – must comply. Abiding by these rules entails:

  • Observing statutory thresholds which may not be breached
  • Obtaining pre-approvals before crossing certain thresholds
  • Notifying regulators when thresholds are crossed (initial/subsequent/exit)

Are You Sensitive Enough?

Rules are difficult to source and interpret. Investment managers need to automate sensitive industries monitoringDespite a general recognition that nations often and quite rightly protect their sovereign interests in this way, there is a perception among investment management organizations that the beneficial ownership threshold bars are set quite high – high enough that sensitive industries monitoring may seem a less pressing concern.

Could my firm amass enough holdings in a designated sensitive entity to even approach obtaining a prohibited controlling interest? Hmmm…Unlikely. We can probably deal with one-offs as they arise.

Or so the thinking goes.

In contrast, firms are more tuned to monitoring the three jurisdiction-specific investment scenarios that have been core concerns of their global shareholding disclosure compliance efforts, namely:

  • The accumulation of a significant long position in an issuer/security
  • Investment exposure to a company that is the subject of a takeover bid
  • Short position monitoring

A Changing Sensitivity Landscape

But things are changing across the investment management landscape. The industry continues to consolidate, creating larger firms. Recognizing the growing need to surveil more assets under management across more complex global organizations and a wider range of investment activities, organizations have been strengthening and automating their shareholding monitoring and disclosure processes.

The poor second cousin in this effort, however, remains the fourth and least often mentioned jurisdiction-specific scenario – investment exposures to issuers in industries deemed sensitive. Yet, significant change is also happening in the sensitivity zone.

Rules, What Rules?

Mandated sensitive industries investment rules are becoming more prevalent across multiple jurisdictions worldwide. To put this in perspective, in its work on global shareholding monitoring and reporting, AxiomSL is incorporating more than 600 rules across more than 80 jurisdictions that pertain to sensitive industries alone, and that list is growing.

The rules are also becoming more complex and limits are getting tighter. In some jurisdictions, thresholds are set to trigger at as low as 1 percent – startlingly lower than a perceived controlling interest high-bar hurdle – and others require monitoring/pre-approval for any holdings at all.

In addition, market disruptions from the Covid-19 crisis have provoked rule tightening and are precipitating revised guidance, new regimes, and regime overhauls as exemplified here:

New and revised regulatory rule regimes increase sensitive industries monitoring challenges for investment firms globally

To accommodate a steep drop in foreign investor screening thresholds as happened in France and Finland or incorporate the new guidance in Greece, Vietnam, and the United Kingdom, investment managers must be able to operationalize change quickly. Regulators and internal risk functions are beginning to scrutinize more closely.

In short, firms that remain insensitive to sensitive industries monitoring rules – do so at their peril.

So Many Supervisors To Be Sensitive About

When investment management firms dive deeper into the sensitivity zone and its many rules, they may soon find themselves in unfamiliar territory because these rules are often created outside the traditional investment management supervisory arena. Various sovereign agencies and entities, industry oversight boards, and even court systems play roles in rules and oversight.

Australia offers a typical example. As would be expected, ASIC, the Australian Securities and Investments Commission, and APRA, the Australian Prudential Regulatory Authority, oversee most shareholding rules encompassing the financial and banking sectors. However, the Australian Foreign Investment Review Board (FIRB) plays an overarching role examining proposals by foreign persons to invest in Australia and making recommendations to the Treasurer on those subject to FATA, the Foreign Acquisitions and Takeovers Act 1975 and Australia’s foreign investment policy. When you dig deeper, more players enter the action at the industry level. For example, the Australian Communications and Media Authority (ACMA) under the BSA (Broadcasting Services Act) also plays a role. And in many industries, Ministers and the Federal Courts also enforce sensitive industries investment rules.

In short, uniquely among global shareholding disclosure scenarios, in many jurisdictions, sensitive industries regulators include multiple, diverse, ‘atypical,’ supervisory bodies and they create multiple and frequently overlapping or layered rules. The sensitivity zone is a complex place where rules are difficult to source and interpret. Investment management firms face tough operational challenges to comply with any sort of confidence or efficiency.

Insensitive Industry Classifications

Those operational difficulties become immediately apparent at the industry classification level. Each regulator may define a sensitive industry differently, or worse, provide no definition at all. Before they can hope to monitor their holdings accurately against multiple rules, firms must solve the industry-classification jigsaw puzzle.

Are Bikers Sensitive Types?
Investing in Harley-Davidson, Inc., the iconic company incorporated in the U.S. known affectionately by its ticker HOG, would seem a benign case in terms of sensitive industries monitoring. It is about motorcycles, and how sensitive could bikers be? But there is a surprise under the hood.

Under its Global Industry Classification Standard (GICS) identifier, Harley-Davidson is classified as: Automobile & Components/Automobiles/Motorcycle Manufacturers. But, that classification simply cannot and does not reveal the crucial fact that within its corporate legal entity structure, Harley-Davidson has a financial subsidiary, Harley-Davidson Financial Services, Inc., and it provides finance through various additional subsidiaries.

So, the plot immediately thickens. Say you are a foreign banking organization (FBO) in the U.S. with ownership in Harley-Davidson. Bear in mind that as an FBO, you are held to more restrictive sensitive industries investment rules than entities deemed ‘regular investors’: your thresholds start at 5%, whereas for regular investors, the bar is 25%.

Now knowing that the company has a financial subsidiary, you must investigate your investment exposure under at least two monitoring perspectives:

  1. Your investment in Harley-Davidson as U.S. incorporated automobile company:
    In the first place, you must rule out any prohibition vs. the parent company’s industry in the U.S. Currently there are no specific restrictions in the automobile sector. However, the BE‑13 rule may apply.
  2. Your investment in Harley-Davidson as having a financial subsidiary:
    You must also investigate U.S. Banking & Finance sector issuers protected under the Bank Holding Company Act. Currently these rules do restrict FBO ownership of financial services entities.


Onion Peeling
In addition, processing your HOG shareholding exposure through parent-child perspectives may trigger additional rule layers – making even the most insensitive type want to weep. When it comes to sensitive industries monitoring, knowing the parent company’s industry is simply not enough. In the Harley-Davidson case, it was necessary to investigate the company’s corporate structure to reveal the its financial services subsidiary.

No single industry classification code enables firms to peel the onion deeply enough to uncover all potential sensitive industries monitoring exposures.

Collective Wisdom To The Rescue – A Fresh Approach

In contrast, solving the crucial classification puzzle requires thoughtful work and astute layering of various pieces of critical information. In consultation with its active global shareholding disclosures client community group, AxiomSL has explored this challenge carefully and invented a fresh approach to solving this critical problem in a workable manner.

AxiomSL’s new extensible industry classification methodology for sensitive industries monitoring uniquely weaves in the crucial parent-child subsidiary relationship, capturing information from:

  • Clients’ choice of standard classification codes such as GICS and Refinitiv Business Classifications (TRBC)
  • Investigation of corporate parent-child entity structures
  • Continuous feedback from the user community

The launch of the Sensitive Industries Monitoring Solution on the ControllerView® data integrity and control platform provides a fresh, rigorous approach that enables firms to automate the sensitive industries monitoring process. The new module seamlessly interoperates with AxiomSL’s Global Shareholding Disclosures Solution overall, enabling efficient generation of compliance-required point-in-time datasets and successful audit defense.

Feeling Very Sensitive Indeed

Successfully complying with jurisdiction-specific sensitive industries monitoring entails yet more layers of competency. So, we need to keep a lot of sensitivities in mind, including the following.

We must be able to map position datasets to a single data dictionary that reflects granular industry classifications…

AxiomSL’s Sensitive Industries Monitoring Solution is powered by its EquityView extensible data dictionary. Now incorporating industry codes and the new classification methodology, the data architecture for global shareholding disclosures facilitates mapping datasets across legal entities, position source systems, and reference data from market data vendors. This enables clients to pinpoint mandatory data elements missing from the shareholdings dataset (e.g., market value, capacity type, outstanding shares, currency code, conversion date) and rectify gaps.

We must have access to a rules library and a robust rules calculation engine to enable monitoring across multiple jurisdictions. And, we must be able to adjust rules to our business interpretation when necessary…

The solution’s robust rules engine is powered by a deep and transparent rules library interpreted and curated by AxiomSL’s team leveraging aosphere’s (an Allen & Overy LLP affiliate) Rulefinder SD legal memo feed. Currently the library catalogues more than 600 sensitive industries’ rules across more than 80 jurisdictions worldwide.

Uniquely, the solution enables clients with the ability to override or create rules. Given the multiplicity and overlap of rules and regulators, having this degree of flexibility to adapt sensitive industries monitoring to suit specific business needs is utterly necessary and powerfully supports successful compliance.

We need to be highly alert to sensitive industries monitoring events…
AxiomSL’s rules engine calculates beneficial ownership percentages and generates alert notifications across the event types specific to sensitive industries monitoring including:

  • Warnings
  • Client parametrized proximity thresholds
  • Pre-configured thresholds for Breaches and Alerts
  • Breaches
  • Pre-approval threshold
  • Prohibited investment
  • Restricted investment
  • Alerts
  • Issuer/security limits crossed
  • Threshold breaches (initial/subsequent/exit)

Portfolio-Level Mandates Like ESG Can Also Benefit From A Sensitive Touch

With the Sensitive Industries Monitoring Solution, firms gain access to transparent, granular data that they can repurpose to meet other requirements, beyond complying with ownership threshold rules. Industries exposures also impact strategies at the portfolio level.

Environmental, Social, and Governance (ESG) requirements driven by institutional investors are an obvious use-case for repurposing industry classification data, as are portfolio or fund mandates that allow/disallow investments in certain sectors.

Therefore, implementing sensitive industries monitoring in the right manner serves the needs of the enterprise risk function and also enables the client service function to report against ESG or other industry characteristics of its portfolios.

If You Are A Sensitive Type, We Are The Folks For You!

AxiomSL’s new Sensitive Industries module’s classification methodology, flexible, EquityView data-dictionary-led architecture, and sophisticated events notification automation provides investment management organizations with a fresh approach for sensitive industries compliance. On a single cloud-deployable platform, firms can achieve holistic global shareholding monitoring and disclosure across all jurisdiction-specific scenarios including those covering sensitive industries.

We look forward to discussing your issues around sensitive industries monitoring – here!



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