On August 15, 2013, the Canadian Securities Administrators (CSA) initiated a public consultation process that seeks to examine issues affecting the integrity and reliability of the Canadian proxy voting infrastructure. In outlining the rationale for more active securities regulatory involvement in this area, the CSA cited their concern with the lack of confidence expressed by some issuers and investors in regards to the reliability of the proxy voting system, particularly given the fundamental role of the system in the legitimacy of shareholder voting and fostering confidence in the capital markets.
The consultation paper is not prescriptive. Rather, the CSA provide a detailed description of the proxy voting infrastructure (including numerous market practices not prescribed in securities legislation, such as the key functions performed by Broadridge Investor Communication Solutions Canada on behalf of the vast majority of intermediaries) and are requesting feedback from stakeholders regarding their practices and experiences with certain features of the system in order to assist the CSA in determining whether there is a need to further regulate proxy voting.
Understanding the Proxy Voting Infrastructure
The consultation paper describes the Canadian proxy voting infrastructure (referred to herein as the "infrastructure") as a network of organizations (including the depositary, brokers and other intermediaries), systems, legal rules and market practices that support the solicitation, collection, submission and tabulation of proxy votes for a shareholders' meeting. As discussed in an earlier post, the CSA identify and describe at length several factors that contribute to the complexity of this infrastructure, namely:
- the intermediated holding system (described below);
- share lending, whereby title to shares, and accordingly the right to vote such shares, is temporarily transferred from one party (the lender) to another party (the borrower) in return for a fee;
- the use of voting agents (i.e. advisors such as proxy firms and investment managers); and
- the OBO-NOBO distinction, whereby "objecting beneficial owners" object to the disclosure of their identity, thereby reducing the rate of direct communications with owners, while "non-objecting beneficial owners" do not so object.
The intermediated holding system, as discussed in the consultation paper, is a system in which a single share has multiple associated entitlements – otherwise known as "securities entitlements". While CDS Clearing and Depository Services Inc. (CDS) is the registered holder of most shares on a reporting issuer's share register, the other stakeholders in the system obtain entitlements to these shares as follows:
- CDS transfers its voting authority, as registered holder, to its participants through an omnibus proxy;
- these CDS participants, or intermediaries, send meeting materials (in some cases through multiple levels of intermediaries) to, and collect votes from, the intermediary closest to the beneficial owner through intermediary omnibus proxies (also known as mini omnibus proxies); and
- unless an OBO or NOBO has requested voting authority through an appointee request, in which case the intermediary will transfer voting authority down to the beneficial holder, such holder will vote through voting instructions submitted to the intermediary with whom it holds an account. In cases where an issuer sends meeting materials directly to NOBOs, intermediaries will transfer voting authority to the issuer's management using a NOBO omnibus proxy.
The functions of the infrastructure include: (i) identifying the parties with securities entitlements; (ii) delivering the appropriate materials to these entities and soliciting voting instructions; and (iii) collecting voting instructions and executing these instructions through the transmission of proxy votes to the tabulator. The CSA note that, in Canada, approximately 97% of intermediaries have contracted with a single service provider –Broadridge – to perform the foregoing functions.
Purpose of the Consultation
The CSA identified for examination two key issues that they believe have the greatest potential to impact the ability of the infrastructure to operate in a reliable and accurate manner:
- Is accurate vote reconciliation occurring within the infrastructure?
- What type of end-to-end vote confirmation system should be added to the infrastructure?
On each issue, the consultation paper poses a number of specific questions to stakeholders.
The infrastructure requires that voting instructions from beneficial owners and proxy votes of registered holders be reconciled against the securities entitlements in the intermediated holding system. The CSA describe several key risks that result from improper reconciliation:
Valid proxy votes submitted to the tabulator (typically the issuer's transfer agent) may be discarded or otherwise adjusted downward if they cannot be properly matched to a position in the share register or to appropriate omnibus proxies (i.e. CDS' depository omnibus proxy and/or intermediary omnibus proxies) as a result of missing or incomplete proxies.
The CSA are also concerned that the use of so-called "restricted" proxies – which term refers to a proxy that, while not regulated by securities legislation, is used by an intermediary to directly submit votes to the tabulator on behalf of a client for whom it holds shares – could create the risk of the same share position being voted twice. This could occur, for example, when such a proxy is used to allow a shareholder who has purchased a share after the applicable record date to vote the share where the seller has agreed to transfer voting authority to the purchaser, but the seller has already voted the share.
Over-reporting (also referred to as "over-voting") occurs where an intermediary submits to the tabulator votes exceeding its CDS account position. In cases where the tabulator has identified over-reporting, votes initially accepted by the tabulator are later determined to be invalid. Computershare's experience as transfer agent for Canadian public companies, testifying to an average over-reporting rate of almost 18% for shareholder meetings held between 2009 – 2011, reflects the significance of this discrepancy resulting from the system.
As a result of share lending, the same share may be voted by both the lender and the borrower. In this regard, the CSA note that certain intermediaries have indicated that it is their practice to include lent shares in the files provided to Broadridge for purposes of generating voter lists, resulting in the operational risk that lenders may be able to submit votes notwithstanding that they are not legally entitled to do so.
End-to-end Vote Confirmation
The CSA also note that the infrastructure lacks functionality to inform beneficial owners, intermediaries and registered holders that their voting instructions and proxy votes have been properly transmitted through the intermediated holding system and properly tabulated, and believe that the lack of such functionality may undermine confidence in the accuracy and reliability of proxy voting results. Broadridge has advised that efforts are underway to develop end-to-end vote confirmation functionality, and the CSA aim to consider the features that should be incorporated into such a system.
Other Issues Relating to the Proxy Voting Infrastructure
The CSA have performed triage on the proxy voting infrastructure and identified the foregoing issues for examination, suggesting an initial assessment that other issues, including certain of those raised in reports published by Davies Ward Phillips & Vineberg LLP, RBC Dexia and the Canadian Society of Corporate Secretaries, are of less urgency. The CSA have, however, requested feedback on the appropriateness of their focus, and have indicated that comments on other matters relating to the infrastructure submitted in response to the consultation will be considered. The paper also raises the following specific issues for stakeholder feedback:
- the impact of the OBO-NOBO concept on voting integrity;
- the inability of investment managers to vote due to gaps in managed account information; and
- accountability of service providers (e.g. transfer agents and proxy solicitors).
Notably, while the CSA have concluded that there is a need for more active securities regulatory involvement in reviewing the infrastructure, the CSA stress that at this time they have not concluded as to whether any specific regulatory measures are required. As discussed in an update to the consultation paper, the CSA intend to initiate further consultations in early 2014 targeted at specific topics, which may include roundtable discussions and the formation of an advisory committee, order to inform the CSA's next steps. Given the lack of regulatory reform by the United States Securities and Exchange Commission following its significant concept release in 2010, Canadian market participants are sure to inquisitively await the CSA's decision with respect to further regulation.
The CSA are accepting comments on the consultation paper until November 13, 2013. For more information, see CSA Consultation Paper 54-401.
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