SEBI tightens disclosure norms for proxy advisory firms

To bring more transparency to the functioning of proxy advisory firms, SEBI has asked them to follow specific guidelines when issuing recommendations.

The market regulator has asked proxy advisory firms to disclose the methodologies and processes followed in the development of their research and in the corresponding recommendations to their clients.

Proxy advisors have also been told to share their reports with clients and the company being reviewed.

“This sharing policy should be disclosed by proxy advisors on their website. The timeline to receive comments from the company may be defined by proxy advisors and all comments/clarifications received from the company, within the timeline, shall be included as an addendum to the report,” SEBI said on Monday.

Issue an addendum

If the company has a different viewpoint on the recommendations given in the report of a proxy advisor, the proxy latter, after taking into account the said viewpoint, may either revise the recommendation in the addendum report or issue an addendum to the report with its remarks, as considered appropriate.

Proxy advisors help shareholders with data, research and recommendations on management/corporate governance issues. They also issue recommendations on voting over proposals at annual general and extraordinary meetings of companies.

So far, proxy advisory firms were registered by SEBI under the research analyst norms of 2014, which prescribe a certain code of conduct. This is the first time that SEBI is issuing specific disclosure standards for these firms.

Among other things, SEBI has asked proxy advisory firms to clearly disclose conflict of interest, if any, in their recommendations against or in favour of any company. The regulator has said that proxy advisors should formulate voting recommendation policies and disclose the updated policies to their clients. Proxy advisors have to review their policies at least once annually.

“Most of the guidelines issued are already being followed. The new guidelines codifies the norms and standards,” said JN Gupta, a former SEBI official and founder of proxy advisory firm Shareholder Empowerment Services.

SEBI had earlier set up a six-member working group to examine the functioning of proxy advisory firms.

The panel had made recommendations mainly aimed at managing conflict of interest and ensuring independence. The committee had also proposed more scrutiny of global proxy advisory firms that have made some controversial recommendations in the past.

“The circular implements several of the recommendations of the SEBI Working Group on Proxy Advisors relating to disclosures, factual corrections by companies and conflict of interest,” said Sandeep Parekh, founder of Finsec Law Advisors, who chaired the committee that gave its recommendations on proxy advisors.

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