Canada: Regulators Consult On Concerns About Canada's Proxy Voting Infrastructure


  • CSA question whether accurate vote reconciliation occurring within the proxy voting infrastructure
  • Should an end-to-end vote confirmation system be implemented?
  • CSA remind registered firms they are accountable for functions outsourced to service providers

The Canadian Securities Administrators (CSA) have published Consultation Paper 54-401 – Review of the Proxy Voting Infrastructure for a 90-day comment period. The Consultation Paper starts with an educational background summary about how Canada's complex proxy voting infrastructure operates. The CSA then request comment on two particular issues they identified that have the most potential to impact the ability of the proxy voting infrastructure to function accurately and reliably:

  • Is accurate vote reconciliation occurring within the proxy voting infrastructure?
  • What type of end-to-end vote confirmation system should be added to the proxy voting infrastructure?

The CSA are specifically seeking comment on whether their focus on these two issues is appropriate in reviewing the accuracy and reliability of the proxy voting infrastructure. They are also seeking comment on specific questions they have identified as relevant to addressing these two issues.

Is accurate vote reconciliation occurring within the proxy voting infrastructure?

Vote reconciliation refers to the process by which proxy votes from registered shareholders and voting instructions from beneficial owners of shares are reconciled against the securities entitlements in the intermediated holding system. The CSA identified two main reconciliation challenges. First, the intermediated holding system results in one share having multiple associated entitlements. Unless there is an effective system of reconciliation, there is a risk that valid proxy votes submitted to the tabulator ultimately are discarded because they cannot be properly matched to an appropriate omnibus proxy or registered position. Second, share lending creates a risk that the same share could be voted multiple times.

The CSA want to better understand whether the proxy voting infrastructure adequately addresses these vote reconciliation challenges and raised a number of specific questions, including the following.

Impact of share lending on generating voter lists

The CSA raised a concern that the practice of share lending creates an operational risk that beneficial owners may be able to submit votes even if they are not entitled to do so.

1. What processes do intermediaries implement to prepare their back office files for transmission of vote holdings, such as shares that are part of a share lending program?

2. How frequently do intermediaries' back office records reflect share positions that exceed their CDS reported position, and what reconciliation processes are used in such circumstances?

3. How do dealers ensure in practice that no vote is submitted for a lent share without a proxy from the borrower?

Omnibus proxies and restricted proxies

The CSA raised concerns that missing or incomplete omnibus proxy documentation can create reconciliation challenges for tabulators that could result in proxy votes being discarded or otherwise adjusted downward. In addition, the use of restricted proxies could create a risk that the same position is voted twice.

1. How often are tabulation issues caused as a result of missing or incomplete omnibus proxy documentation?

2. How does an intermediary who submits a restricted proxy ensure that the same position is not also being voted through the omnibus tabulation report?

Over-reporting and over-voting

Over-reporting refers to the situation where an intermediary returns more votes than are reflected in the intermediary's CDS participant account. This practice is also referred to as over-voting, although some use the term over-voting more narrowly to refer to a situation where intermediary proxy votes accepted by a tabulator are later determined to be invalid due to the vote exceeding the intermediary's actual position.

1. How often do over-reporting and over-voting occur (including pending over-votes that are ultimately resolved)?

2. To what extent do over-reporting or over-voting situations actually reflect a situation where an investor is attempting to vote when it does not have the right to vote (e.g., because it has lent shares and has no voting entitlement as at the record date), as opposed to other reasons such as missing omnibus proxy documentation?

3. Is over-reporting or over-voting more common for certain types of intermediaries than others? Are NOBO solicitations by issuers a factor in the frequency of over-reporting or over-voting?

4. What processes are used to reconcile share positions in an over-reporting situation?

What type of end-to-end vote confirmation system should be added to the proxy voting infrastructure?

End-to-end vote confirmation refers to a communication provided to shareholders that their proxy votes and voting instructions have been properly transmitted by the intermediaries, received by the tabulator and tabulated as instructed. Currently, the proxy voting infrastructure does not contain an end-to-end vote confirmation system for beneficial owners of shares, although efforts are underway to develop such functionality. The CSA are concerned that the lack of such functionality can undermine confidence in the accuracy and reliability of proxy voting results.

1. What is the current formulation and development status of end-to-end vote confirmation functionality in Canada?

2. What functionality should be part of an end-to-end vote confirmation system?

Other Issues

The CSA also identified some additional issues on which they are seeking information in order to better understand whether the proxy voting infrastructure is collecting, submitting and tabulating proxy votes reliably and with integrity.

Use of Voting Agents

Where an investor delegates voting authority for its shares to a professional investment adviser, there is no mechanism in place to confirm that it is the adviser, and not the investor, who is solicited for voting instructions.

Impact of OBO-NOBO concept on voting integrity

An OBO(objecting beneficial owner) is a beneficial owner of shares in the intermediated holding system who objects to the intermediary disclosing his name, contact information and securities holdings. A NOBO (non-objecting beneficial owner) is a beneficial owner who does not object to disclosure of such information. There has been some suggestion that the OBO-NOBO concept reduces the reliability of proxy votes.

1. Are there any specific instances where the existence of the OBO-NOBO concept has compromised the accuracy and reliability of proxy voting?

2. Would temporarily allowing issuers and official tabulators access to the identity of OBOs for purposes of tabulation improve the reliability and accuracy of proxy voting? Would it make the reconciliation process more effective? Would this prejudice investors?

Accountability of service providers

The CSA noted that several of the key proxy service providers, such as Broadridge, and processes are currently not directly regulated.

1. What mechanisms are in place to support the accountability of the various service providers in proxy voting? How effective are these mechanisms?

2. The CSA noted that registered firms are required to establish a system of controls and supervision to ensure compliance with securities legislation and that registered firms are responsible and accountable for all functions that they outsource to a service provider.

This should include ongoing reviews of the quality of outsourced services and ensuring access to the work product of a third-party service provider to the regulator, the registered firm and the firm's auditors.  

Next Steps

In each case, the CSA ask what changes would be desirable to address these concerns and is there a need for further regulation in this area?

The comment period will end on November 13, 2013. The CSA intend to engage in "targeted consultations with stakeholders" during the comment period to gather information and provide different perspectives on these issues.

This Consultation Paper specifically does not address other proxy-related issues, such as "empty voting", anonymity for beneficial owners, existing vote reconciliation guidance, the discretion afforded to chairs of shareholders meetings to rule on proxies, broker solicitation fees and the role of proxy solicitors. The CSA have said they would consider comments on such issues as part of their ongoing monitoring and consideration of the proxy voting system.

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.

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