Canada: CSA Extends Deadline For Comments On Regulating Proxy Advisory Firms

The Canadian Securities Administrators (the CSA) have extended the comment period to September 21, 2012 for comments from market participants on concerns raised about services provided by proxy advisory firms (such as Institutional Shareholder Services Inc. (ISS)), and their impact on Canadian capital markets and to determine if, and how, these concerns should be addressed by Canadian securities regulators.

The CSA's request for comments is contained in CSA Consultation Paper 25-401: Potential Regulation of Proxy Advisory Firms dated June 21, 2012 (the Consultation Paper). See our June 2012 Blakes Bulletin: CSA Invite Comments on Regulation Proxy Advisory Firms. The time period for comments on the Consultation Paper was extended to September 21, 2012 from August 20, 2012 in CSA Staff Notice 11-319 dated August 16, 2012.

As indicated in our previous bulletin, the Consultation Paper indicates that the CSA would like to obtain information and views about the concerns raised by market participants regarding proxy advisory firms to further inform the CSA's analysis before the CSA conclude whether there is a need to regulate such firms.

The Consultation Paper identifies concerns raised by market participants with respect to proxy advisory firms, such as potential conflicts of interest, lack of transparency as to the basis for voting recommendations, inaccuracies in reports and degree of issuer engagement, development of corporate governance standards, and the extent of reliance on such firms by institutional investors.

A number of comment letters have already been submitted to the CSA in response to the Consultation Paper. Issuers who have submitted comment letters have generally agreed with the concerns articulated in the Consultation Paper. Issuers, and issuers' directors, have advocated that proxy advisory firms make completely available the criteria and methodologies applied for voting recommendations, provide issuers with sufficient time to review and comment on draft reports and voting recommendations before disseminating such reports and voting recommendations to the proxy firm's clients and for proxy advisory firms to disclose conflicts of interest generally and with respect to particular reports on specific issuers. Issuers and issuers' directors have also expressed the view that proxy advisory firms should consult with issuer and director communities as to proxy voting guidelines so that the proxy advisory services voting guidelines do not reflect a "one-size-fits-all" approach. Some issuers have also proposed that proxy advisory firms be required to disclose the number of shares subject to automatic vote execution services by proxy firms. The commentators to date who believe the concerns should be addressed in some form are not definitive as to whether the concerns are best addressed as a CSA policy, a set of best practices or requirements set forth in binding rules.

On the other hand, institutional investors have indicated that they do not agree that the concerns identified in the Consultation Paper have an adverse impact on the integrity of the markets and accordingly in their view regulatory intervention is not warranted. ISS has also made a submission, indicating that it believes that, in light of its efforts as outlined in its response, the perception of its limited engagement with issuers is misinformed. It also believes it has a rigorous, inclusive and transparent policy development process. ISS also believes its potential conflicts of interest are appropriately mitigated, in the ways set out in its submission. ISS says it has seen no evidence of market failure arising from the proxy advisory industry that might warrant regulatory intervention.

It will be interesting to see how the CSA addresses the concerns raised by market participants as to proxy advisory services, in light of the differing views of issuers and directors, on the one hand, and institutional investors and proxy advisory firms, on the other.

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