Dark clouds over the LEI system?

Take a deep breath. You need time to process.
Suzanne Kane – “What to Do When You Get Unexpected Bad News”

It seems we do see dark clouds hanging over the LEI system… Moreover, it is perhaps strange for me, the LEI enthusiast and the founder of LEI.INFO, to admit that. However, I feel that both intellectual and business honesty does not allow me to keep the news to myself, only because they are not right.

So, what happened?

The first negative signal came from Europe…

On February 5th, 2019 the European Parliament and the EU Member States reached a provisional agreement on new rules allowing companies to expand the set of formal processes they can do online. The collection includes, among others, the ability to register a new company across Europe, set up branches and file official documents online:

“The digitalization of company law will help entrepreneurs create and run companies more easily, especially when they want to operate in different EU countries (…)” [1]

I must admit this is a promising law, and – seen in the context of the “Single Market Strategy”[2] – it helps European businesses to expand their activity across all countries of the Union even further than it’s been possible so far.

However, from the business identification perspective, the law is far from being innovative. While in Directive 2017/1132 “relating to certain aspects of company law” [3] we do not find specific solutions – when you trace how the “system of interconnection of registers” (Article 223) is going to be implemented, you can find that the key identifier for the system is a newly created EUID[4]: “European unique identifier of companies and branches (‘EUID’)”. The critical problem with the EUID is that is NOT GLOBAL – it is limited, in its origin, and applicable to European companies, registered in one of the EU countries and most certainly will not be useful for doing business on the global marketplace.

There was several attempts to suggest a change of course[5], but, as we recently learned, they all failed.

What impact does this legislation have on the LEI system? Indeed, it won’t kill it! The LEI system will survive as the system for companies in the financial industry and all those whose financial instruments are traded. However, the hopes to become a genuine global ID for about 25 million EU companies are gone now …

The second lousy signal just came from the US…

On April 2nd, the Security and Exchange Commission decided to drop the requirement for legal entity identifier in reports. As you can read in the Federal Register[6]: “Several commenters, however, expressed doubts about the benefits of the information or were concerned that it would be costly and time-consuming to acquire and maintain LEIs, particularly for registrants with numerous subsidiaries or affiliates operating globally. In light of these comments, we have decided not to adopt the amendments”. The decision was not made unanimously, however. SEC Commissioner Robert Jackson not only opposed it, but has also published the rationale of his dissent[7].

In our opinion, it is a terrible decision: it contradicts the recommendation and intentions of other US regulators, contradicts the provisions of FTA[8] (Financial Transparency Act) and casts a shadow over the long-term transparency of businesses. As you could imagine, these events will undoubtedly have an impact on our start-up and its plans. However, I do not want to jump to any conclusions now.

As Suzanne Kane says in the quote that opens this post, we need to take a deep breath and take time to process the bad news…
Stay tuned, and we will sincerely communicate our plans soon!

Mirek Sopek

[1] Vice-President Frans Timmermans: http://europa.eu/rapid/press-release_STATEMENT-19-867_en.htm

[2] https://ec.europa.eu/growth/single-market/strategy_en

[3] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32017L1132

[4] https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52018PC0239

[5] https://ml.ms/euid_response , https://ml.ms/euid_citi

[6] Page 25 in https://ml.ms/sec_lei

[7] https://www.sec.gov/news/public-statement/statement-jackson-032619

[8] https://www.datacoalition.org/issues/financial-transparency-act/

Author: Mirek Sopek