On September 19, 2013, the Canadian Securities Administrators
(CSA) provided an update on the potential regulation of proxy
advisory firms. Based on feedback from market participants, the CSA
advised that they will develop a policy-based approach to the
regulation of proxy advisory firms. The proposed regulatory
approach is intended to promote transparency and understanding in
proxy advisory services through recommended practices and
disclosure. The proposed approach is expected to be published for
comment in the first quarter of 2014.
The CSA published, and sought feedback on, Consultation Paper
25-401 Potential Regulation of Proxy Advisory Firms in
June, 2012. The purpose of the consultation was to: (i) provide a
forum for discussion of certain concerns about the services
provided by proxy advisory firms and their impact on Canadian
capital markets, and (ii) to determine if, and how, these concerns
should be addressed by the CSA. Refer to our June 25, 2012 client
update, "Canadian Securities Administrators Considering
Regulation of Proxy Advisory Firms" for a discussion on
the Consultation Paper and the potential concerns raised by the
expanding role of proxy advisory firms in Canada.
The CSA update provides a summary of the feedback received from
market participants in response to the Consultation Paper. The CSA
note that although all market participants generally acknowledge
the important role of proxy advisory firms, issuers and
institutional investors are divided on whether the issues
identified in the Consultation Paper represent pressing concerns,
and whether a CSA response is required. According to the CSA
update, the responses received from market participants can be
summarized as follows:
Potential conflicts of
interest. A majority of issuers believe that
conflicts of interest exist within proxy advisory firms and are not
generally mitigated. Institutional investors acknowledge potential
conflicts of interest within the business model and ownership
structure of proxy advisory firms but believe that they are
properly identified, managed and disclosed.
Perceived lack of
transparency. Issuers believe that
additional transparency and disclosure of underlying methodologies
and analyses would enhance the quality of vote recommendations made
by proxy advisory firms. Institutional investors do not believe
that such information would be beneficial to the market and do not
believe that proxy advisors should be required to disclose their
methodologies or reports.
Potential inaccuracies and limited dialogue between
proxy advisory firms and issuers.
Issuers are concerned that the limited opportunity for dialogue
with proxy advisory firms results in potential inaccuracies in
research reports and vote recommendations. Institutional investors
do not generally share this concern, and some believe that
perceived inaccuracies may simply be due to differences of opinion
Potential corporate governance
implications.Commentators agree that proxy advisory
firms should consult with market participants when developing and
updating voting guidelines. However, there is no consensus among
respondents on the level of dialogue required.
Commentators have expressed different views on whether
regulation of proxy advisory firms is appropriate and what form
such regulation, if implemented, should take. Proxy advisory firms
indicated that they do not believe their activities should be
regulated as they recently demonstrated a willingness to respond to
concerns raised in Consultation Paper 25-401 by making voluntary
changes to their services and procedures. Similarly, some
institutional investors have suggested that a CSA response is not
warranted at this time. Given the lack of consensus on this issue
we expect there to be a continued and protracted debate before the
CSA reach a final determination on the appropriate nature and scope
of proxy advisory firm regulation.
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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