Including parent entities in aggregation
Controlling, Affiliated, or Parent Entities (including persons)
When modeling a firm’s entities (including persons) and portfolios in our shareholding disclosure aggregation model (covering over 100 countries, each with a variety of regimes/rules), it's important to include the correct ones. One should not only include the entities/persons who have the contractual power to manage (i.e. discretionary management authority) or discretionary voting authority over assets but include all entities who have any type or level of control or ownership (e.g. even minority percentage ownership) of such entities. This should be done even if those “parent” entities do not directly hold management or voting power, or direct legal title. One cannot make a general assumption across all jurisdictions that a given controlling/parent entity is not relevant. In fact, in most jurisdictions, such controlling/parent (e.g. holding companies or otherwise) are relevant not only in terms of aggregating assets where they may be considered "indirect" relevant holders but also for the accurate population of disclosure forms/documents.
There are numerous examples but in EEA countries, the full chain of controlling entities must be listed on disclosure forms; in addition, there are requirements to aggregate holdings to controlling entities. Failing to do so may lead to missed or incorrect disclosures and potential sanctions. There are even regimes where holding as little as 20% voting power in an investment entity is relevant and requires aggregation to the indirect (parent) holder (e.g. Australia). For other regimes, whether a controlling entity should be included in the aggregation is determined by other “soft” factors like information independence (or lack thereof) or if the parent entity has effective control or influence over a subsidiary’s board.
Because of this, we strongly recommend that all of our clients include any and all parent entities of entities that hold management or voting power (or in some cases direct legal ownership of shares), even if the parent entity itself doesn't directly hold such power.
Of course, this general aggregation model can be modified in specific, justified ways in order to hone one's disclosure results for a given regime (or to take advantage of exemptions set out in law for a given regime). The ability to avail oneself of aggregation exemptions in a given rule/regime is handled by our Disaggregation functionality (also see our HC article on this topic). In short, once their full, generalised aggregation model is in place as outlined above, clients can "disaggregate" a given parent entity from a subsidiary (for example a holding company from its subsidiary investment manager), if for a given disclosure regime, the specific facts of the relationship satisfy the disaggregation criteria set out in the aosphere memo.
This method also ensures our clients have an audited log of where they have (or have not) made determinations about the relationship between their entities that affect specific shareholding disclosure results.
As a compliance service provider who seeks to ensure our clients follow the most prudent course of action and avoid missing a disclosure, our view is that our clients should include parent entities in their aggregation model. Failing to do so may represent false assumptions, particularly when it comes to regime-specific nuances like disaggregation.