Canada: CSA Consultation Paper 25-401 – Potential Regulation Of Proxy Advisory Firms

Last Updated: July 19 2012
Article by Stephen Erlichman and Susan M. Newell

On June 21, 2012, the Canadian Securities Administrators (the "CSA") published Consultation Paper 25-401:  Potential Regulation of Proxy Advisory Firms (the "Consultation Paper") to provide a forum for discussion of certain concerns raised about the services provided by proxy advisory firms and their potential impact on Canadian capital markets and to determine if, and how, these concerns should be addressed by Canadian securities regulators.  The Consultation Paper includes an overview of the background of proxy advisory firms in Canada, an analysis of concerns raised and possible regulatory responses, the regulatory landscape in Canada and internationally, and a proposed securities regulatory framework to regulate proxy advisory firms, if deemed necessary.  In addition, the Consultation Paper requests comments from market participants in response to various questions, some of which are specifically directed to institutional investors, issuers or proxy advisory firms.

Background

The Consultation Paper provides an overview of the variety of services that proxy advisory firms provide to their clients, including making vote recommendations to their clients (usually institutional investors), automatic vote execution services and consulting advisory services to issuers on corporate governance matters.  The Consultation Paper states that institutional investors have a duty to deal appropriately with the portfolio securities they hold for their clients or plan beneficiaries which typically require the institutional investors to vote the shares they hold.  The Consultation Paper also discusses the potential or perceived increased reliance on proxy advisory firms by institutional investors in fulfilling their voting duties.  The Consultation Paper suggests that the impact of proxy advisory firms may also extend beyond institutional shareholders to retail investors' voting choices and issuers' corporate governance policies, which due to the lack of regulation and sufficient competition in the proxy advisory industry could impact market integrity.  The Consultation Paper also notes that the proxy advisory industry in Canada is dominated by two firms: Institutional Shareholder Services Inc. and Glass, Lewis & Co.

Concerns with Lack of Regulation of Proxy Advisory Firms

The Consultation Paper identifies specific concerns with the lack of regulation of proxy advisory firms which could have an impact on the voting process and the integrity of Canada's capital markets.  The concerns set out in the Consultation Paper are as follows:

  1. Potential conflicts of interest – A proxy advisory firm could potentially be in a conflict of interest: (i) if a proxy advisory firm provides vote recommendations to institutional investors on corporate governance matters of an issuer to which it also provides consulting services; (ii) if an institutional client could be the proponent of a specific shareholder proposal that could be the subject of a favourable vote recommendation by the proxy advisory firm; and (iii) if there are conflicts of interest in the proxy advisory firm's ownership structure.
  2. Lack of transparency – Proxy advisory firms' recommendations are not publicly available and in addition the underlying analyses of such recommendations are not disclosed.
  3. Potential inaccuracies and limited opportunity for issuer engagement – Anecdotal information suggests that there often can be inaccuracies in the data used by proxy advisory firms to arrive at a vote recommendation and the issuer is given very little time (if any) to comment on a draft report prepared by the proxy advisory firm, which may lead to misinformed decision-making.
  4. Perceived corporate governance implications – Proxy advisory firms may indirectly become corporate governance "standard setters", without necessarily having the necessary expertise to set such standards.  Proxy advisory firms may influence the behaviour of the issuers about which they make recommendations, and certain issuers are compelled to adopt "one-size-fits-all" standards which not may not be suitable for their specific circumstances.
  5. Extent of reliance by institutional investors – The extent to which institutional investors in Canada rely on proxy advisory firms in making their voting decisions is unknown as there is limited Canadian information available in this regard; however, the extent could be as significant as complete reliance in certain circumstances, meaning that institutional investors cast an automatic vote in accordance with proxy advisory firms' recommendations.

Existing Securities Regulatory Frameworks Considered

The Consultation Paper analyzes existing securities regulatory frameworks that could be amended in order to provide for the regulation of proxy advisory firms.  The CSA is of the view that proxy advisory firms should not be: (i) required to register as "advisers" under Canadian securities legislation given that they are not in the business of advising in the purchase or sale of securities; nor (ii) captured within the definition of "solicit" because giving proxy voting advice is not actually soliciting proxies.  As a result, the Consultation Paper describes that amending National Instrument 31-103 – Registration Requirements: Exemptions and Ongoing Registrant Obligations or National Instrument 51-102 – Continuous Disclosure Obligations would be inappropriate because this legislation was not designed to apply to the business of proxy advisory firms and as such extensive amendments would be required.

The Consultation Paper also includes reference to other possible frameworks, such as the "designation framework" similar to the regulation of credit rating agencies, the "certification framework" requiring a person to certify compliance with a certain rule that would be established, the "comply and explain framework" requiring proxy advisory firms to comply with best practices guidelines that would be established and to explain if and why they have not complied with best practices guidelines, and the "best practices guidance" establishing best practices guidelines without providing securities regulators the ability to ensure and enforce compliance.

The Consultation Paper also provides an overview of the various regulatory frameworks and recent developments and initiatives in the United States and Europe.  The Consultation Paper notes that a public consultation process in the United States identified some of the same concerns identified by the CSA, such as potential conflicts of interest and lack of transparency.

New Securities Regulatory Framework Proposed

The Consultation Paper suggests that if the CSA determines that a securities regulatory response is required, then proxy advisory firms in the business of "making" vote recommendations on proposals put to a vote at shareholders' meetings of Canadian reporting issuers would become subject to a new stand alone securities regulatory instrument specifically designed with proxy advisory services in mind.

In order to respond to conflict of interest concerns, the potential new securities rules suggested in the Consultation Paper would require proxy advisory firms to: (i) have policies and procedures designed to identify and manage any potential conflicts of interest that arise in connection with the issuance of a vote recommendation, as well as employee and ownership conflicts; (ii) disclose on their website the procedures in place to mitigate or address conflicts and also possibly disclose a specific conflict in a vote recommendation; and (iii) separate their proxy voting services from the advisory or consulting services. 

In order to increase transparency in the activities of proxy advisory firms, the potential requirements proposed in the Consultation Paper would require proxy advisory firms to: (i) disclose internal procedures, guidelines, standards, methodologies, assumptions and sources of information supporting vote recommendations; (ii) implement policies (which would be disclosed on the firms' websites) that describe their processes to deal fairly with comments from issuers by allowing issuers an opportunity to review the reports and proxy advisory firms to respond to issuers' comments prior to the issuance of the report; and (iii) disclose on their websites the procedures they implement in developing their voting policy guidelines.

Request for Comments

The Consultation Paper sets out a variety of questions seeking comments from all market participants in respect of the concerns identified in the Consultation Paper and the proposed possible regulatory framework.  Additional questions specifically addressed to institutional investors relate to, among other things, the institutional investors' reliance on proxy advisory firms and measures taken to ensure reliability of proxy advisory firms' recommendations.  Additional questions specifically addressed to issuers relate to the issuer's overall experience or concerns with proxy advisory firms, the extent to which proxy advisory firms influence corporate governance practices, even when not appropriate, and whether the issuer has experienced material inaccuracies in a proxy advisory firm's recommendations and how this situation resulted in an improper vote outcome.  The CSA also is seeking comments from proxy advisory firms regarding the possible regulatory approaches and their potential impact on a proxy advisory firm.

Comments on the Consultation Paper are due on or before August 20, 2012.

www.fasken.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Canada LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions