Proxy Advisers (PAs) are required to make additional disclosures beyond those applicable to Research Analysts. These disclosures cover the extent of research involved and policies for interacting with issuers. This article provides a comprehensive technical analysis of these additional disclosure requirements.
Regulatory Basis
Primary Provision: Regulation 23(2)
Regulation 23(2) provides that:
"The proxy adviser shall additionally disclose the following:
(i) the extent of research involved in a particular recommendation and the extent and/or effectiveness of its controls and procedures in ensuring the accuracy of issuer data;
(ii) policies and procedures for interacting with issuers, informing issuers about the recommendation and review of recommendations."
Additional Disclosure 1: Research Extent and Controls
What Must Be Disclosed
i. Extent of research involved in a particular recommendation
Description: How much research is conducted for each recommendation.
What to Include:
- Scope of research
- Depth of analysis
- Resources allocated
- Time spent
ii. Extent and/or effectiveness of controls and procedures
Description: How effective the PA's controls and procedures are in ensuring the accuracy of issuer data.
What to Include:
- Data verification procedures
- Quality control mechanisms
- Accuracy checks
- Error correction processes
Sample Disclosure
"Extent of Research and Controls:
Our research process involves a comprehensive analysis of all publicly available information, including regulatory filings, annual reports, and other relevant documents. We employ a team of [X] research analysts who dedicate [Y] hours per recommendation.
Our controls and procedures include:
- Verification of data from multiple sources
- Independent review of recommendations
- Quality control checks at each stage
- Regular training on accuracy standards
The effectiveness of these controls is regularly reviewed through internal audits and quality checks. We have achieved an accuracy rate of [Z]% in our data verification."
Additional Disclosure 2: Issuer Interaction Policies
What Must Be Disclosed
i. Policies and procedures for interacting with issuers
Description: How the PA interacts with issuers.
What to Include:
- Communication protocols
- Engagement guidelines
- Information requests
- Meeting procedures
ii. Informing issuers about the recommendation
Description: How the PA informs issuers about recommendations.
What to Include:
- Timing of communication
- Method of communication
- Content of communication
- Follow-up procedures
iii. Review of recommendations
Description: How the PA reviews recommendations.
What to Include:
- Review process
- Review team
- Review timeline
- Review criteria
Sample Disclosure
"Policies and Procedures for Interacting with Issuers:
1. Interaction with Issuers: We engage with issuers through formal communication channels. We request information through official channels and provide issuers with an opportunity to clarify any factual inaccuracies.
2. Informing Issuers: We share our reports with issuers at the same time as we share them with clients. We provide issuers with an opportunity to comment on factual accuracy before finalization.
3. Review of Recommendations: Recommendations are reviewed by a team of senior analysts before publication. The review process includes a quality check, factual verification, and compliance review."
Compliance Requirements
1. Disclosure to Clients
Disclosures must be made to clients.
2. Website Disclosure
Disclosures should be available on the PA's website.
3. Regular Updates
Disclosures should be updated regularly.
4. Transparency
Disclosures should be transparent and comprehensive.
Common Compliance Gaps
1. No Additional Disclosures
Some PAs do not make required additional disclosures.
Solution: Make all required additional disclosures.
2. Incomplete Disclosures
Some PAs provide incomplete disclosures.
Solution: Provide comprehensive disclosures.
3. Not Updating Disclosures
Some PAs do not update disclosures.
Solution: Update disclosures regularly.
4. Not Disclosing Controls
Some PAs do not disclose controls and procedures.
Solution: Disclose controls and procedures.
Consequences of Non-Compliance
1. Regulatory Action
SEBI may take action for non-compliance.
2. Monetary Penalties
SEBI may impose monetary penalties.
3. Reputational Damage
Non-disclosure can damage the PA's reputation.
Conclusion and How Anuj Desai & Associates Can Help
Additional disclosures are a critical requirement for PAs.
Anuj Desai & Associates offers specialized services to help PAs comply with additional disclosure requirements:
- Disclosure review
- Development of disclosure templates
- Compliance audit and advisory
Contact us today to ensure your additional disclosures comply with SEBI requirements. Our team will guide you through the process.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers are advised to consult qualified professionals for legal and compliance matters. Anuj Desai & Associates is a SEBI compliance consulting firm based in India.