28 February 2022

Proxy advice – if it ain’t, broke don’t try to fix it

GILES RAFFERTY, Corporate Communications and Media Adviser

The dust has settled following the short-lived federal regulations designed to impose new licensing and independence requirements on the Proxy Adviser industry. The now defunct rules were introduced as regulations by Federal Treasure Josh Frydenberg, just before Christmas last year, rather than as legislation that could have been the subject to debate by the Federal Parliament.

Proxy Advisers provide advice to their clients, which include investment managers and industry funds, on how to vote on corporate resolutions that deal with issues such as executive remuneration, governance and climate impacts. There are four companies operating in Australia: Ownership Matters, ISS, Glass Lewis and the Australian Council of Superannuation Funds (ACSI).

The overturned regulations initially forced Proxy Advisers to apply for an Australian Financial Services Licence (AFSL), designed to ensure financial services companies give fair investment advice. The Proxy Advisers would also have to share the advice they provided to their paying clients to the companies they were making the recommendations about and also record and provide details of all conversations they had with their clients where they discussed their advice.

The regulations amounted to an attack on the Proxy Adviser business model. It significantly increased the risk of doing business. We could have faced huge fines, even jail time, for an administrative error. There was no safe harbour provision for best efforts to comply”

Dean Paatsch, Director, Ownership Matters

The discarded regulations also included rules that would have come into force on the 1st of July 2022 requiring that Proxy Advisers were independent of their clients. These rules would have effectively destroyed the business model of the Australian Council of Superannuation Funds (ACSI), which is owned by and provides advice to Australian industry super funds. An ACSI spokesperson confirmed the implications of the regulations were a concern and that the requirement to record client conversations was unworkable and ran contrary to how proxy advice works.

The regulations around Proxy Advisers holding an AFSL license and sharing their recommendations and confidential conversations with clients to companies were in force for 3 days before being overturned by the federal Senate. The penalties for failing to comply were extremely onerous. The Proxy Adviser companies could have faced fines of $11 million and individuals could have faced fines of $1.1 million as well as the possibility of up to 5 years jail time.

The practical implications of ensuring compliance meant that Proxy Advisers had to put in place IT infrastructure to capture and record conversations that could be shared same day and also make sure they had up-to-date databases of key corporate contacts to share information with. Interestingly the requirement to share their advice did not require much by way of change since all the advisers had existing policies to share, for free1, their advice with companies upon request.

We have always encouraged companies to submit relevant email details to receive their reports, for which there is no charge. ISS offered this process before the new regulations and we continue to offer it now.”

Vasili Kolesnikoff, Head of Australia and New Zealand Research, ISS

So what, if anything, has changed as a result of the now defunct regulation. The simple answer is nothing. The Proxy Adviser companies have returned to their pre-existing business models, which already allowed companies to access their advice for free but protected their right to own the intellectual property contained within their advice papers. Perhaps more fundamentally the confidentiality of conversations between two sophisticated financial market actors, Proxy Advisers and their fund manager clients, continues to be protected as is the right of industry funds to create a vehicle for the express purpose of providing them with expert advice on matters of governance.

  1. Glass Lewis offers a free Issuer Date Report (IDR) containing the data points uses to formulate their advice but charge a fee for the Final Proxy Paper – https://www.glasslewis.com/issuer-data-report/


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