United Kingdom Calls for Greater Transparency of Proxy Advisory Firms

May 20, 2019

This week, the UK Treasury published the Proxy Advisors (Shareholders’ Rights) Regulations 2019, a wide-range of measures addressing proxy advisors and their services, which will go into effect on June 10. The new regulations prove that the desire for proxy reform isn’t limited to one country or party, but instead is a global, bi-partisan aspiration .

For the first time in UK history the Proxy Advisors (Shareholders’ Rights) Regulations 2019 will establish a system for companies and individuals to report proxy advisory firms to a regulating body. The rules also give regulators the ability to penalize proxy advisors.  Part 3, sections 7-19, outlines the functions of the Financial Conduct Authority (FCA) in relation to proxy advisors, and states:

Complaints: The FCA must maintain arrangements designed to enable any person to submit to it a complaint that a proxy advisor has contravened a relevant requirement.

Financial penalties: Where the FCA considers that a proxy advisor has contravened a relevant requirement, the FCA may impose a penalty of such amount as it considers appropriate on the proxy advisor.

The new standard also explicitly outlines requirements of transparency for proxy advisors. In addition to general business standards and code of conduct, the newest regulations clearly define disclosure requirements for research methods, accuracy of information, potential errors in recommendations, and any conflicts of interest.  Part 2, sections 3-6:

Information giving assurance about the accuracy and reliability of advice: With the object of giving the clients of a proxy advisor (“P”) assurance about the accuracy and reliability of P’s proxy advisor services, P must disclose to the public the following information relating to P’s preparation of research, advice and voting recommendations—

Conflicts of interest: A proxy advisor (“P”) must take all appropriate steps to ensure— (a) that P identifies any actual or potential conflict of interest or any business relationship that may influence P in the preparation of research, advice or voting recommendations; and (b) that such a conflict of interest or business relationship is identified without delay after the time at which it arises.

Between the SRD and Proxy Advisors (Shareholders’ Rights) Regulations 2019, the European Union has identified the influential and persuasive role of proxy advisory firms leading to the call for greater transparency and disclosure. The UK’s most recent move to further regulate the proxy advisory firms echoes this sentiment. As SEC staffers ponder proxy reform here at home, we on Main Street hope that they are taking note of what our friends across the Atlantic are doing in this space.

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