A short overview of the changes being considered and initial response to the consultation.
- The government is seeking feedback on potential changes to the way in which proxy advisers who provide proxy services to institutional investors are regulated. Options being considered include (among others) the introduction of new licensing requirements for proxy advisers and the introduction of a new requirement for proxy advisers to provide their research/voting recommendations to the company before supplying it to their clients (to allow time for the company to respond).
- In addition, the government is seeking feedback on potential changes to disclosure requirements for superannuation funds who use proxy advice services. In particular, the consultation seeks views on whether funds should be required to publicly disclose more detailed information on their voting record, including whether their vote was consistent with any proxy advice received as well as views on whether funds should be required to disclose how they exercised their independent judgement in determining how to vote.
- The closing date for submissions to the consultation is 1 June 2021.
The government has released a brief consultation paper, seeking feedback on a five proposals/options that if implemented, would both: a) tighten the current regulatory regime for proxy advisers in the context of providing proxy services to institutional investors; and b) increase transparency around how superannuation funds exercise their voting rights.
According to the consultation paper, the purpose of the consultation is to both to assess the adequacy of the current regulatory regime and to seek feedback on potential reform options aimed at strengthening the transparency and accountability of proxy advice.
Announcing the consultation, the government emphasised the need for greater transparency.
'Collectively, superannuation funds own around 20% of the Australian Stock Exchange (ASX), worth around $440 billion, and the market for proxy advice in Australia is dominated by just four firms. It is important therefore that proxy advice is transparent and its quality and accuracy can be relied upon by investors and companies that are the subject of their reports. There is currently very limited regulation on how this proxy advice is formulated, provided, used and disclosed. Given the influence of proxy advisers on the conduct of businesses listed on the ASX, Treasury will consult on measures to help facilitate greater transparency of proxy advice'.
The consultation follows recent reforms in the United Kingdom and United States to strengthen the oversight of proxy advice.
Summary of proposed options under consideration
New disclosure requirements
The paper includes two proposed changes aimed at increasing transparency around how superannuation funds exercise their voting rights, and the role of proxy advisers in this context.
- Under option 1, superannuation funds would be required to disclose more detailed information around their voting decisions including: a) whether they received advice from a proxy adviser and if so which adviser; b) how they voted; and c) whether their decision was consistent with the proxy advice.
- Under option 2, proxy advisers would be required to be 'meaningfully independent from a superannuation fund they are advising to ensure that proxy advice is provided to and used by superannuation funds on an "arm’s length" basis'. Trustees would also be required to publicly disclose how they 'implement their existing trustee obligations and duties around independent judgement in the determination of voting positions'.
The consultation paper seeks feedback on:
- what impact the proposed options would have on both superannuation fund members and superannuation funds (from a regulatory compliance perspective)
- 'what level of independence between a superannuation fund and a proxy adviser should be required' and to which entity (the fund or the proxy adviser) the new requirement should apply
- the appropriate timing of reporting and in particular, whether trustees should be required to provide their proxy voting policy to members ahead of an annual members' meeting
- whether there is other information on how voting decisions are informed by proxy advice that should be disclosed by superannuation funds.
A new requirement for proxy advisers to provide their reports/recommendations to companies first
Option 3 proposes to introduce a new requirement for proxy advisers to provide their report (ie the report containing their research and voting recommendations for resolutions at a company’s meeting) to the relevant company five days before providing it to investors/making it publicly available. The consultation paper suggests that this timeframe would enable sufficient time for both the company and the proxy adviser to comment, and for the proxy adviser to 'amend the report in response if warranted'.
Feedback is sought on both: a) what length of time would be appropriate to enable companies opportunity to respond to the proxy report and for the report to be amended to correct any errors; and b) whether there are any 'requirements' (eg confidentiality requirements) that should be placed on companies or advisers during this period.
A new requirement for proxy advisers to inform clients how they can access the company's response
Option 4 in the paper proposes to introduce a new requirement for proxy advisers to notify their clients about how they can access the company’s response to the report. The consultation paper suggests that this could be through providing a website link/instructions on how to access the response. Feedback is sought on what method proxy advisers should be required to use to inform clients.
The consultation paper also seeks stakeholder views on a how options 3 and 4 would: a) impact engagement between proxy advisers and companies; and b) whether the changes would increase the likelihood of investors being aware of the company's position on proxy reports/advice.
New AFSL requirement for proxy advisers
Currently, proxy advisers provide advice on a range of matters, much of which does not require an Australian Financial services Licence (AFSL).
Option 5 proposes to change this by introducing a new requirement for proxy advisers to obtain an AFSL in order to provide proxy advice/recommendations to institutional investors.
According to the consultation paper, the purpose of requiring proxy advisers to hold an AFSL is to ensure that they are 'making assessments on issues that have a material impact on the conduct of business in Australia with appropriate regulatory oversight and the necessary care and skill required'.
Feedback is sought on whether the AFSL regime is an appropriate licensing regime through which to regulate the provision of proxy advice and whether coverage under the AFSL regime would result on an improvement in the standard of proxy advice.
- The closing date for submissions is 1 June 2021.
- At this stage, the government has not specified any proposed timeframe for the implementation of the options set out in the consultation paper.
The initial response has been mixed
In a statement, Business Council of Australia (BCA) President Tim Reed welcomed moves to increase transparency around voting decisions and how they are reached, and in particular the proposal to enable companies to access/respond to proxy reports/recommendations. Mr Reed said,
'The decisions made by proxy advisors have big implications on how businesses run and their ability to make returns for shareholders, so of course the system should be as transparent as possible. Proxy advisers have a role in ensuring businesses are accountable to shareholders, but advisers must also be subject to appropriate levels of accountability given the significant influence that they now wield. When proxy advisors provide advice, companies should have chance to respond and all the facts should be on the table about how decisions that impact people’s lives are made. We look forward to contributing to this review and working with the government to deliver a system that gives shareholders the transparency and accountability they need to trust the system.'
Similarly, The Australian Institute of Company Directors (AICD) has welcomed the consultation. AICD CEO and Managing Director, Angus Armour commented,
'The AICD has long supported more robust regulation of proxy advisers. The current lack of minimum standards means a key market actor is largely unregulated. Given the important role of proxy advisers, it is vital that their advice is subject to appropriate safeguards to ensure it is fair and accurate. The AICD welcomes this move by the Government to consult on measures to help facilitate greater transparency.
Likewise, The AFR reports that some prominent directors are supportive of the proposed changes.
However, according to media reports (The AFR, The AFR, The Guardian, Financial Standard) proxy advisers and some commentators have questioned the rationale for tighter regulation and raised concerns about the impacts of the proposed changes.
[Sources: Treasury media release 30/05/2021;Consultation Paper; BCA media release 01/05/2021; Joint media release: Treasurer Josh Frydenberg and Minister for Financial Services, Superannuation and the Digital Economy Jane Hume 30/04/2021; AICD media release 04/05/2021]