The Proxy Advisors (Shareholders’ Rights) Regulations 2019 (“Regulations”) in the United Kingdom went into effect this past Monday. Proxy advisory services typically include research reports on public companies as well as proxy voting recommendations on how the proxy advisors’ clients, namely shareholders, should vote on all shareholder proposals, including those that are submitted by the public company’s management.
General Overview. The new U.K. regulations are “intended to make sure that proxy advisors’ clients will be able to better understand what standards of conduct the proxy advisor adheres to, how the proxy advisor ensures an adequate standard of quality in its advice and how it manages conflicts of interest, in order to help the market for proxy advisor services to function effectively.”
The Regulations primarily establish a transparency framework rather than a conduct regime or expectation level regarding the controls or quality of proxy advisory services. Some of the new disclosure standards include disclosing the application of and deviations from the proxy advisory firm’s code of conduct or an explanation of why the firm has not adopted a code of conduct. Proxy advisors must also disclose information regarding their research capabilities and how the research supports their advice and voting recommendations. In addition, proxy advisors must disclose any actual or potential conflicts of interests or business relationships that may influence the preparation of the recommendations.
The Regulations authorize the Financial Conduct Authority (“FCA”) to oversee and enforce the new requirements. In addition, the FCA is authorized to impose monetary penalties on proxy advisors for noncompliance and establish procedures by which complaints can be lodged against proxy advisors.
Relevance to U.S. Market. The spring 2019 edition of the Unified Agenda of Regulatory and Deregulatory Actions (“Unified Agenda”) shows that the SEC and Department of Labor (DOL) are considering regulatory reform regarding proxy advisory firms. The Unified Agenda is a semiannual compilation of information published in the spring and fall on the actions that administrative agencies plan to issue in the near and long term.
The Unified Agenda states that the Division of Corporation Finance of the SEC is considering whether to propose rule amendments to the Commission on whether exemptions to the proxy solicitation rules under Rule 14a-2(b) should extend to certain proxy advisory activities. (RIN: 3235-AM50) The SEC projects April 2020 as the date for the notice of proposed rulemaking.
In addition, the Unified Agenda also states that the DOL’s long-term plan includes the modernization of the fiduciary rules associated with plans governed by the Employee Retirement Income Security Act of 1974 and the harmonization of those fiduciary rules with those that are issued by other regulatory agencies. (RIN: 1210-AB91) The DOL’s goal for this undertaking is to “protect the interests of participants and beneficiaries by: (1) addressing practices that could present conflicts of interest associated with proxy advisory firm recommendations; (2) ensuring that proxy voting decisions are based on best information; and (3) ensuring that proxy voting decisions are solely in the interest of, and for the exclusive purpose of providing plan benefits to, participants and beneficiaries.” No projected date is provided in the Unified Agenda.