By Annabelle Yip and Hon Yi Lim

On 19 February 2013, the European Securities and Markets Authority ("ESMA") published a final report and feedback statement setting out its response to the issues raised in its consultation on the role of the proxy advisory industry.

ESMA has found that currently there is no clear market failure relating to the activities of the proxy advisory industry and therefore considers that the introduction of binding measures would not be justified. However, it has recommended that the proxy advisory industry develop its own Code of Conduct.

To this end, ESMA has drafted a set of principles as a guide for the development of such a Code of Conduct. These principles are as follows:

  • Proxy advisors should seek to avoid conflicts of interest with their clients. Where a conflict effectively or potentially arises the proxy advisor should adequately disclose this conflict and the steps which it has taken to mitigate the conflict, in order that the client can make a properly informed assessment of the proxy advisor's advice.
  • Proxy advisors should provide investors with information on the process they have used in making their general and specific recommendations and any limitations or conditions to be taken into account on the advice provided so that investors can make appropriate use of the proxy advice.
  • Proxy advisors should, where appropriate in each context, disclose both publicly and to client investors the methodology and the nature of the specific information sources they use in making their voting recommendations, and how their voting policies and guidelines are applied to produce voting recommendations.
  • Proxy advisors should be aware of the local market, legal and regulatory conditions to which issuers are subject, and disclose whether/how these conditions are taken into due account in the proxy advisor's advice.
  • Proxy advisors should inform investors about their dialogue with issuers, and of the nature of that dialogue.

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