Proxy Adviser Regulations ‘Fryed’ In The Senate

By Thaw Thaw Htin

16 February 2022

Josh Frydenberg’s recent changes to the regulation of proxy advice have come to an abrupt end.

Just 3 days after they came into effect (on 7 February 2022), the regulations—which were passed a week prior to Christmas 2021—were disallowed by the Senate following a successful motion brought by independent Senator Rex Patrick.

The regulations concerned proxy advisers: those who promote the accountability of boards and management that deliver poor outcomes for shareholders, in particular superannuation fund managers.

In Australia, there are just 4 proxy adviser groups: the Australian Council of Superannuation Investors, CGI Glass Lewis, Ownership Matters and ISS. These groups provide big investors with independent and non-binding advice on how to vote on critical issues within the corporations in which they hold an interest, such as social governance and executive pay matters.

What did the regulations propose?

In a joint media release from Mr Frydenberg and Senator Jane Hume on 17 December 2021, the regulations were described as ‘strengthening the transparency and accountability of proxy advice services, and improving the disclosure of superannuation funds’ voting records on company resolutions’.

Proxy firms were accused of exercising significant influence by advising institutional investors on positions to take in respect of resolutions put at company meetings. It was argued that proxy advice should therefore be transparent and independent, to ensure that its quality and accuracy could be relied upon by investors and companies alike.

The regulations proposed, among other things, to:

1. extend the Australian Financial Services Licencing regime to cover a greater range of proxy adviser activities and by requiring advisers to be independent of their institutional clients;
2. ensure greater transparency by requiring proxy advisers to provide a copy of their recommendations to companies on the same day they are provided to investors;
3. require superannuation funds exercising voting rights on behalf of their members to disclose more detailed information on their voting records in a way that is consistent across the industry; and
4. impose hefty fines for breaches of this prohibition to provide services, exposing advisers to fines of up to $11.1 million for companies and $1.1 million for individuals.

Critics argued that the new regulations would have increased the ‘red tape’ faced by proxy advisers. They would have also caused advisers to lose control of their intellectual property under the requirement to provide free reports to companies on the same day the advice is provided to investors.

According to the Chief Executive of the Australian Council of Superannuation Investors, Louise Davidson, ‘proxy advisers play an important role in facilitating informed shareholder voting at listed Australian company meetings on a range of financial material issues’. Dean Paatsch, co-founder and director of Ownership Matters, said that the regulations attempted to ‘weaponise financial services laws to punish advisers’.

The Senate responds

On 10 February 2022, the Senate voted on a motion to disallow the regulations, which was successful with 29 votes in favour compared to 25 votes against. Labor and the Greens joined forces in the vote. When commenting on the successful vote to overturn the regulations, Senator Patrick commented that the regulations were ‘bad law, crafted to please Josh Frydenberg’s big business mates and political donors’. In a similar vein, Shadow Assistant Treasurer Stephen Jones said the Senate’s vote was a ‘great outcome for transparency and shareholders’.

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