EUROPE – The European Securities and Markets Authority (ESMA) does not see any evidence of market failure within the European proxy adviser services market that would warrant the implementation of a new regulatory framework.

Institutional investors called for Brussels to introduce a European framework for proxy services in July last year, in response to a discussion paper on the subject, arguing that asset owners must ensure the suitability of third-party services since the investor incurs the ultimate voting decision for each resolution at a company meeting.

In the UK, the £36bn (€41bn) Universities Superannuation Scheme (USS) said: "The user should be required to publicly disclose how they employ the services of proxy advisory firms and the extent to which the signatory follows, relies upon or uses the recommendations made by such services.

"The disclosures would encourage regular reviews of the suitability of service providers and be a low-cost solution to ensuring accountability and continued improvement in the proxy advisory industry."

Even though ESMA disagreed on the need to implement a new framework, it nonetheless accepted the institutional investors' concerns.

The authority is therefore calling on the proxy advising industry to develop a voluntary EU code of conduct that would focus on identifying, disclosing and managing conflicts of interest.

"Proxy advisors should seek to avoid conflicts of interest with their clients," ESMA said in its statement responding to feedback to its discussion paper.

"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."

Additionally, the code should foster transparency to ensure the accuracy and reliability of the 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," ESMA added.

ESMA said it had conducted preliminary discussions with a number of participants from the industry seeking to start work on a code, including Glass Lewis, Institutional Shareholder Service (ISS), IVOX, Manifest, Nordic Investor Services, PIRC and Proxinvest.  

According to ESMA, the work is expected to get underway during the first quarter of 2013.