ESMA: EU should consider minimum standards on proxy adviser codes of conduct

Financial watchdog calls on European Commission to consider defining standards for sector's codes of conduct.

EU flags in front of European Commission building in Brussels

Europe’s securities and markets regulator, ESMA, has recommended that the European Commission consider setting “minimum standards” around codes of conduct for proxy advisers.  

In a joint report with the EU’s banking regulator, the EBA, on the implementation of the Shareholder Rights Directive (SRD II), ESMA argued that “in light of the evolution of market practice in this area”, the commission should “consider defining minimum standards for codes of conduct for proxy advisers (as the SRD2 currently only refers to these without requiring any specifications)”.

ESMA said the commission should be mindful of the impact of any intervention given the fact that the proxy adviser industry is “already highly concentrated” but added that it should “consider whether the general reference included in Article 3j(1)(2) to ‘a code of conduct’ still serves the purpose of ensuring adequate transparency”.

“In this regard, more specific qualifications of what features such a code should have, in particular an independent monitoring mechanism, may be helpful in providing further clarity to the market.”

The publication fulfils a request from the commission in October for input from the regulatory duo for its own report on SRD2, which will be submitted to the European Parliament and Council. 

The commission’s report, which will look at articles related to proxy advisers and the broader investment chain, will also focus on implementation and effectiveness.  

ESMA’s report was informed by a seven-week public consultation that closed in December, drawing 73 responses from the market.  

Under SRD2, proxy advisers are required to disclose reference to a code of conduct and report on its application. If they do not apply a code or they depart from it, they should provide an explanation.  

ESMA revealed that some respondents to its consultation, including a proxy adviser, reported that “appropriate disclosure on the reasons for departing from a code of conduct and/or on alternative safeguards in place was not provided by some proxy advisers”. The report flagged particular issues with “new entities offering advisory services and that are not signatories to the BPP [Best Practice Principles Group]”. 

The BPP was created in 2014 following a review by ESMA, which called on the sector to develop its own set of principles focused on transparency and disclosure. Members include Glass Lewis, ISS, Minerva, PIRC and EOS.  

The group is overseen by a 12-strong independent oversight committee, which includes investor representatives from BNP Paribas Asset Management and HSBC Global Asset Management, as well from academia and the corporate world.  

ESMA also suggested in its report that the EU introduce a “basic registration mechanism for proxy advisers”, which it said should be “coupled with the publication of an overview of proxy advisers operating in the EU and whether they apply a code of conduct or not”. 

The financial regulator revealed that concerns around “conflict of interest” were also raised by respondents to its consultation.

On this topic, ESMA suggested that disclosure requirement could be enhanced “in cases where proxy advisers render consultancy services to issuers and advise investors on those same entities”. 

Overall, however, the financial regulator said its call for evidence suggested that the current regulatory framework is regarded as “robust” and its application is seen to be “gradually improving”. It concluded that the “present approach of ‘monitored self-regulation’ should be maintained”.