Louise Davidson

Proxy advisers are gearing up for the federal government’s new regulations, with the first step due to come into force on February 7.

But the controversial regulations, which were introduced by treasurer Josh Frydenberg, after the end of the 2021 parliament, could still face a rocky road in federal parliament.

The regulations include the need for proxy advisers to apply for a new financial services licence from the Australian Securities and Investments Commission (ASIC) and to provide copies of any advice they have prepared for clients to the company which is the subject of their advice on the same day.

But the most controversial is the broad reaching provisions aimed at ensuring that the proxy advisers must be independent of their institutional clients.

While all four proxy advisers in Australia, the industry-fund-backed Australian Council of Superannuation Investors (ACSI), Ownership Matters, CGI Glass Lewis and ISS, are going through the process of renewing their financial service licences with ASIC as required by the regulations, all eyes are on the key player, ACSI, which observers feel has been specifically targeted by the federal government because of its links with the industry super movement and its proactive stance on issues such as climate change and gender equity on boards.

ACSI potentially hardest hit

The federal government says the reforms will “bring greater transparency and accountability to proxy advice”, but ACSI is potentially the hardest hit by the strict requirements for advisers to be independent of their institutional clients by July 1.

Founded in 2001, ACSI was specifically set up to provide information and recommendations to its members which now include 34 Australian and offshore institutional investors with more than $1 trillion in funds under management.

The organisation says it is still working through the implications of the regulations.

“ACSI intends to continue to provide proxy advice in compliance with the law,” ACSI chief executive Louise Davidson said.

“Like all proxy advisers, it is working through the regulatory impact on our business and going through the licensing process with ASIC.”

“Unprecedented intervention”

Davidson says the new regulations, which she says “seek to regulate ownership, governance and professional networks of proxy advice”, are an “unprecedented intervention globally”.

“The regulations provide no evidence of the need for these changes and do not reflect the views of most stakeholders that responded to the Treasury consultation last April,” she said.

“Given that no harm has been identified, the timing and lack of transparency around these reforms are concerning.

“The Treasurer states the regulations were predicated on greater transparency and accountability, yet released them before Christmas without consultation with proxy advisers or proper parliamentary scrutiny.”

High penalties

Davidson and others in the sector are particularly concerned about the high penalties in the regulations.

They include fines of $11.3 million at the corporate level and $1.3 million for individuals for each offence.

“We have concerns at the disproportionate penalties associated with this provision and the potential burden from having to provide records of conversations to companies,” Davidson said.

“The requirement to provide a written record of oral conversations, where they are not materially different to those provided in writing, creates red tape for both advisers and companies for no benefit.”

Increased risk

Ownership Matters director Dean Paatsch has been a vocal critic of the new regulations and said that the changes “targeted the business model” of proxy advisers.

He said the new regulations made his business “a lot riskier” and meant a proxy adviser could potentially be hit with a big fine for small things like being late in sending a company a copy of its research report on it. “Sometimes we don’t [even] have an email address for some of these tiddler companies [we report on],” he said.

He added he could also be personally liable for a fine for an inadvertent breach of the regulations and that the new requirements that proxy advisers be independent of the clients they were advising were also potentially very onerous. He maintained this requirement could range from the clients having a share or an equity investment in a proxy adviser, to whether it could hire someone who used to work for one of its clients.

“We now have a situation where I can’t raise equity [for my business from someone who could be a potential client],” he said.

Paatsh explained that if this were expanded into the broader corporate world it could mean a fund manager like Magellan could not own an investment bank like Barrenjoey on the basis that Barrenjoey analysts could provide it with some advice.

He said Ownership Matters was applying to ASIC for a new licence but said it had already had an unblemished Australian Financial Services Licence since it started.

The new rules would affect Ownership Matters’ reports which would cover the annual general meeting season starting in February.

Influence of industry funds

Some critics of the legislation have argued that it was a response to actions taken by some industry funds calling for the resignation of the chair of mining giant Rio Tinto and its chief executive in the wake of the destruction of Juukan Gorge in Western Australia in 2020 and for heads to roll at AMP in the wake of the Bohari issue.

But others see it as part of a wider agenda by the Morrison government to curb the potential influence of the $900 billion industry fund sector on the boardrooms of corporate Australia.

Paatsch said the Federal Government was more than happy to see industry super funds come to the party when it came to helping out big companies which sought to raise cash in the wake of the pandemic but also seemed to see them as a threat to capitalism.

Divided opinions

The Australian Institute of Company Directors (AICD) has welcomed the proposed changes which it said would “increase the transparency and accountability of proxy advice”. The Business Council of Australia has also welcomed the changes.

But the changes have attracted criticism from research house Morningstar which has described the proposals as “rushed and flawed”.

In a detailed three-page paper produced in January, analyst Erica Hall criticised the proposals as placing “undue pressure on a sector that has been effectively highlighting corporate issues, helping institutional clients identify weaknesses and mitigate risks, and ultimately improving investor outcomes”.

Wild card

The wild card is whether the regulations will survive the necessary scrutiny in the federal parliament over the next few months.

The first part of the regulations requiring proxy advisers to get a new Australian financial services licence and for them to provide same-day reports to the companies they are commenting on comes into effect on February 7. This is before the resumption of federal parliament later in the month.

But the regulations still have to be approved by parliament itself, raising the issue of whether they could be overturned in the senate where the Morrison government does not have a majority.

Independent senator from South Australia, Rex Patrick, has already indicated that he will move a motion in the Senate to disallow the regulations.

“Given the widespread lack of support for these regulations, the failure to consult appropriately, the lack of scrutiny of the impact of the actual measures and that the outcomes seek to limit access to cost-effective advice that is in the best financial interest of millions of investors, it is understandable that members of parliament are concerned,” Davidson said.

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