New requirements introduced for proxy advisory services as part of SRD II implementation
In January the Financial Conduct Authority ("FCA") published a consultation paper on proposed regulations implementing the provisions of the revised Shareholder Rights Directive ("SRD II"). We noted in our March legal update on these proposals that further activity in connection with SRD II was expected and, as anticipated, on 15 May the Proxy Advisors (Shareholders' Rights) Regulations 2019 were published implementing the Article of SRD II dealing with proxy advisors (businesses which primarily offer voting services and/or voting advice to shareholders in publicly listed companies, to make certain disclosures).
What is the Shareholders Rights Directive?
SRD II aims to promote effective stewardship and long-term investment decision making by institutional investors in public companies. It seeks to do this by enhancing transparency of engagement policies and investment strategies across the institutional investment community. SRD II must be implemented in the UK by 10 June 2019.
How do the new regulations fit with the FCA's proposals?
To implement SRD II, the FCA proposes to introduce a number of rules focussing on good stewardship. These include requirements for:
- asset managers and certain life insurers to make public disclosures relating to their shareholder engagement policies on a 'comply or explain' basis; and
- asset managers to make a number of disclosures (at least annually) to the investors and funds they provide services to, to help them evaluate the manager's alignment with their investment and engagement strategies.
Where investors are using proxy advisory services, those advisors will have a role in the delivery of engagement policies and the required reporting. The EU has noted a lack of transparency in the way in which proxy advisors carry out their work and was concerned that this could lead to institutional investors purchasing poor quality, inaccurate or unreliable advice. This would clearly undermine investors' ability to fulfil their stewardship role effectively. The new regulations are, therefore, intended, to add more transparency to such arrangements.
What do the new regulations entail?
The new regulations implement Article 3j of SRD II. They require proxy advisors to:
- disclose reference to a code of conduct which they apply, and report on the application of the code. If proxy advisors do apply a code of conduct they must operate on a "comply or explain" basis. Where proxy advisors do not apply a code of conduct at all, they must explain why this is the case.
- disclose information on their research capabilities and how they produce their advice and voting recommendations (e.g., models, methodologies, information sources and resources); and
- identify and disclose any actual or potential conflicts of interests or business relationships that may influence the preparation of their research.
These new regulations should be helpful to institutional investors as they navigate their SRD II duties,as well as more generally in ensuring they are receiving good quality services from proxy advisors.
If you require any advice or further information, please do get in touch with your usual Brodies contact.