EU regulator finds no market failure in proxy advisory industry, recommends self-regulation

The European securities market regulator has ruled there is no market failure in the proxy voting advisory market and recommends that the sector self regulate via a code of conduct.

The European Securities and Markets Authority (ESMA) concluded its review of the sector saying there was no clear evidence of market failure in how proxy firms interact with investors and companies.

“On this basis, ESMA currently considers that the introduction of binding [regulatory] measures would not be justified,” the body states.

But the industry will have to develop a code of conduct centering on transparency and disclosure based on a set of principles ‘suggested’ by ESMA.

The report follows a consultation in March last year prompted by concerns about the influence of proxy firms over investors’ voting decisions at company meetings that has also seen the Securities and Exchange Commission (SEC) in the US launch its own probe.

But ESMA found that investors were broadly comfortable with the situation despite the calls for some form of regulation coming from companies.

ESMA recognises proxy firms are “facilitators for institutional investors to help them to discharge aspecific part of the investors’ stewardship responsibilities more efficiently”.

“Investors can legitimately use external advice in order to make informed decisions, bearing in mind that proxy advisors cannot be held responsible for the way an investor uses their advice,” ESMA says.

Proxy firms are “facilitators for institutional investors”

One contentious issue had been thought to centre on the potential conflicts of interest when proxy firms provide consulting services to corporates, but ESMA said “no clear evidence of market failure stemming from this” had been brought to its attention.
ESMA has had initial discussions with proxy firms Glass Lewis, Institutional Shareholder Services (ISS), IVOX, Manifest, Nordic Investor Services, PIRC and Proxinvest and work on the code is expected to begin in the next few weeks.

UK-based PIRC welcomed the report, with Managing Director Alan MacDougall saying the proposals are “entirely reasonable”. He hoped that the critics of the industry accept ESMA’s findings. Link