The Canadian Securities Administrators (CSA) recently provided an update on the consultation process relating to the potential regulation of proxy advisory firms. To date, there has been no regulation of proxy advisory firms despite the influence that their recommendations can have on institutional and retail investors when exercising voting rights.

The update (CSA Notice 25-301 – Update on CSA Consultation Paper 25-401 Potential Regulation of Proxy Advisory Firms) provides a summary of the 62 comment letters received in response to the CSA's June 2012 consultation paper, and indicates that the CSA has determined that a "policy-based" response is warranted that would give guidance on recommended practices and disclosure for proxy advisory firms. That proposed approach will be published for comment in Q1 2014.

The update reveals significant differences in perspective between issuers and institutional investors that emerged through the comment process. Among the key comments identified in the update are the following:

  • While issuers are concerned about the influence of proxy advisory firms, institutional clients noted that proxy advisory firms provide them with useful and cost-effective services when exercising voting rights and are generally satisfied with the services provided.
  • Commenters generally agreed that the business model or ownership of proxy advisory firms may lead to conflicts of interest. A majority of issuers believe that conflicts of interest are not appropriately mitigated, whereas a majority of institutional investors believe that conflicts of interest are properly identified, managed and disclosed.
  • While issuers are concerned with potential inaccuracies in research reports, a majority of institutional investors believed that the dialogue processes currently in place were sufficient to avoid factual errors.
  • Issuers questioned the quality of the vote recommendations made by proxy advisory firms and favoured increased transparency and disclosure of underlying methodologies and analyses, whereas institutional investors do not believe that additional information would be beneficial to the market and argued against requiring disclosure of proprietary analytical models.
  • Commenters generally agreed that it is important for proxy advisors to consult with market participants when developing and updating proxy voting guidelines, but there was no consensus about the extent of dialogue necessary.
  • The views on the appropriate CSA response diverged from a rule-based approach, including registration of proxy advisory firms as advisors, to publishing a set of best practices. Proxy advisory firms do not believe their activities should be regulated.

The final form of the "policy-based" approach will no doubt attract further debate and discussion. Balancing the interests of issuers (who are most directly affected by proxy advisors' recommendations) with those of institutional investors (who rely on proxy advisors' recommendations as a cost-effective resource tool) will be a delicate and important task for the CSA over the coming months.

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