Norges Bank says regulation “warranted” in proxy voting advisory services market

Giant investor responds to ESMA consultation on effectiveness of self-regulation

Norges Bank Investment Management (NBIM), the asset management arm of the Norwegian Central Bank which runs the assets of the country’s giant NOK6.4trn (€708bn) Government Pension Fund, says regulation of the voting advisory market is “warranted” given the lack of adequate self-regulation in the sector.

The comments build on its reaction to an earlier consultation in 2012 in which it called for aspects of the European proxy voting industry to be regulated, arguing at the time that some parts of the industry stray into subjective investment research and are thus “worthy of regulation”.

The 2012 consultation by ESMA, the European Securities and Market Authority, eventually led to the formation of the Best Practice Principles (BPP) self-regulatory body in 2014 comprising leading firms such as ISS, Glass Lewis and others.

NBIM’s latest response was to a new ESMA consultation about the impact the BPP has had.

“Given the lack of adequate self-regulation set out in the BPP, voting advisory services is an area where regulation is warranted,” the giant investor says in its submission to Paris-based ESMA. “The nature of the regulation may be binding if it then falls into the realm of EU or nationally-supervised activities.”

Norges says it has been broadly supportive of the BPP initiative but is concerned that proxy solicitation agents don’t fall under its scope: “We see many examples where such agents selectively communicate favourable voting research recommendations to a wide body of investors, irrespective of whether the investor is a voting research client.”

And the BPP also lacked detail around conflicts of interest, particularly “when voting advisors sell services to both shareholders and issuers”. This introduced an “unavoidable question” about the integrity of the analysis provided to investor clients.Despite this, NBIM claims to be satisfied with the first BPP signatory statements, though believes it is too early to determine the real impact of the BPP and whether it will meet the needs of “the wider proxy voting chain”.

Other submissions to the latest consultation were more supportive, for example from the likes of the International Corporate Governance Network (ICGN) and fund management giant BlackRock, which said it thinks the BPP has led to greater transparency.

Frank Curtiss, Head of Corporate Governance at RPMI Railpen counselled against “more prescriptive regulation which we feel would have both unforeseen and unhelpful consequences”. The BPP had led to “encouraging early signs” on improved transparency on issues such as identifying, disclosing and managing conflicts of interest. He went on: “We would suggest, however, that the conflicts faced by other parties involved in the provision of research in the investment chain, such as the sell side analyst community, are arguably far greater.”

Dutch governance platform Eumedion called for a single clear definition of proxy advisors, saying the scope of the BPP has extended too far. European asset management trade body EFAMA supported self-regulation and said its members are, by and large, satisfied with the quality of proxy advisors’ services.

A discordant note was sounded by Manifest Information Services CEO Sarah Wilson, who said of those antagonistic towards the industry: “The ad hominem attacks we are subject to are really nothing less than disrespect and disregard for our clients, the shareholders.” She was braced for feedback that would paint the BPP as an “unacceptable failure” saying: “Shooting messengers is extremely easy.” The consultation launched in June and ran until July 27. Link