Exercise of voting rights by institutional investors
1686.Institutional investors own and manage assets on behalf of and for the benefit of clients or members and have an obligation to manage those assets in their interests. In some cases there is a trustee-beneficiary relationship between the institution and the client, and in all cases there are contractual and regulatory requirements imposing duties of asset management on the institution. Voting is central to the exercise of ownership control. However, the ability of ultimate beneficiaries (e.g. members of a pension fund) to monitor the way in which institutional investors exercise voting rights is limited in practice.
1687.The CLR (Final Report, paragraph 6.39) concluded that disclosure of voting by institutional shareholders was a desirable objective. There has been a growing trend internationally to require disclosure. There has also been an increasing trend by UK fund managers towards voluntary disclosure.
Section 1277: Power to require information about exercise of voting rights
1688.This section confers a power on the Secretary of State and the Treasury to make regulations requiring certain categories of institutional investor to provide information about the exercise of their voting rights. The power is drawn intentionally widely to enable any mandatory disclosure regime to respond to varied corporate governance arrangements and to capture a range of institutions investing in different markets. Exercise of the power is subject to affirmative resolution procedure.
1689.Subsection (4) provides that the obligation imposed by regulations under this section is enforceable by civil proceedings brought either by the person to whom the information should have been provided or by a regulatory authority specified in the regulations (which could, for example, be the FSA).
Section 1278: Institutions to which information provisions apply
1690.This section lists the categories of institutions in relation to which the power conferred by section 1277 is exercisable. Subsection (2) enables the Treasury or Secretary of State to add to or amend the categories. Subsection (3) requires that the regulations specify by whom the duty imposed by the regulations is to be fulfilled.
Section 1279: Shares to which the information provisions apply
1691.This section confers power to specify by regulations the descriptions of shares in relation to which the information provisions apply. They will apply wherever a listed institution has an interest in such shares. Subsections (2) to (4) provide that an institution is taken to have an interest in shares in certain cases.
Section 1280: Obligations with respect to provision of information
1692.This section specifies the information that can be required. This covers the exercise or non-exercise of voting rights, instructions given by the institution and any delegation of a function related to the exercise or non-exercise of voting rights.
1693.Subsection (1) contains a power to require institutional investors to procure disclosure of voting or of any instructions given by any person acting on the institution’s behalf. Institutional investors would need to make sure that their investment contracts required such information to be passed on to them or disclosed on their behalf.
1694.Under subsection (4), the regulations may specify how and to whom the disclosure is to be made. This would allow the regulations to both specify the manner of disclosure and require disclosure to (for example) clients and members only, or to the public generally.
