On September 19, 2013, the Canadian Securities Administrators published CSA Notice 25-301 to provide an update to market participants on the results of their consultation on the potential regulation of proxy advisory firms.
After review of the comments received, the CSA have concluded that they will regulate proxy advisory firms through a policy-based approach, which they intend to publish in the first quarter of 2014.
Proxy advisory firms provide a variety of advisory services to different categories of clients, including institutional investors and issuers. The services offered by these firms to institutional investors include providing analyses with respect to matters to be voted at shareholders' meetings and making vote recommendations regarding such matters. Some firms also provide consulting services to issuers, including in relation to corporate governance, executive compensation and the development of proposals to be submitted to shareholders.
With a growing concern among certain market participants regarding the absence of a regulatory regime applicable to proxy advisory firms, the CSA initiated a consultation process by releasing, on June 21, 2012, Consultation Paper 25-401 Potential Regulation of Proxy Advisory Firms, which identified the following concerns and outlined possible responses the CSA could take to address them:
- potential conflicts of interest with negative impacts on the integrity of the voting process;
- perceived lack of transparency;
- potential inaccuracies and limited dialogue between proxy advisory firms and issuers;
- potential corporate governance implications; and
- the extent of reliance by institutional investors on the recommendations provided by proxy advisory firms.
Further details on the role that proxy advisory firms play in the market and on the concerns raised in the Consultation Paper, may be found in our article on these matters entitled Potential Regulation of Proxy Advisory Firms.
Over a 3-month comment period, which ended on September 21, 2012, the CSA received 62 comment letters from various market participants, which included issuers, institutional investors, proxy advisory firms, and law firms.
Brief summary of comments submitted by market participants
The CSA noted that comments varied depending on the group of market participants from which they emanated. The CSA Notice provided a summary of the positions expressed by the commentators, which include the following:
- While agreeing with each of the concerns identified in the Consultation Paper, issuers seemed concerned about the influence of proxy advisory firms on the voting decisions made by institutional investors. Law firms and issuer associations generally shared the views expressed by issuers.
- Institutional investors noted that proxy advisory firms provided them with useful voting services and emphasized that they do not necessarily follow the vote recommendations of these firms. Overall, institutional investors expressed their satisfaction with respect to the services provided by proxy advisory firms.
- There was a general consensus that the business model or the ownership structure of advisory firms may lead to conflict of interest situations, but opinions differed on whether conflicts of interest were properly mitigated. While a majority of institutional investors believed that there was proper mitigation and disclosure of conflicts of interest, a majority of issuers were of the opinion that conflicts of interest were not appropriately mitigated within proxy advisory firms.
- With respect to the quality of vote recommendations by proxy advisory firms, issuers were in favour of additional disclosure of underlying methodologies and analyses, while institutional investors submitted arguments against such disclosure and did not believe the information to be beneficial to the market.
- There was a concern among issuers about potential inaccuracies in research reports and a limited level of dialogue between proxy advisory firms and issuers, while institutional investors believed that the current dialogue process in place is sufficient to avoid factual errors.
- There was no consensus among commentators about the extent of dialogue that should exist between proxy advisory firms and market participants when proxy advisory firms develop and update voting guidelines. However, there was consensus on the importance for such dialogue to exist.
The conclusion of the CSA and their intended approach
There was no consensus among commentators as to whether or how the CSA should intervene to address the concerns identified in the Consultation Paper. Some commentators proposed a set of recommended best practices while others suggested a rule-based approach. Proxy advisory firms and some institutional investors were of the opinion that no CSA intervention was warranted, and argued against regulating the activities of proxy advisory firms.
After reviewing the comments, the CSA concluded that they should respond to address the concerns expressed in the Consultation Paper. The CSA are of the view that "a policy-based approach that would give guidance on recommended practices and disclosure for proxy advisory firms will promote transparency and understanding in the services provided and is an appropriate response under the circumstances."
The CSA are in the process of developing this proposed approach and intend to publish it for comment in the first quarter of 2014.
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