Canada: Update On The CSA's "Proxy Plumbing" Initiative

The Ontario Securities Commission (OSC) recently held a roundtable on the "Proposed Protocols for Meeting Vote Reconciliation". The purpose of this roundtable was to discuss issues identified during the consultation phase of CSA Multilateral Staff Notice 54-304, Final Report on Review of the Proxy Voting Infrastructure and Request for Comments on Proposed Meeting Vote Reconciliation Protocols (Staff Notice) as well as to discuss the OSC's proposed next steps in implementing the protocols outlined in Annex A of the Staff Notice, which protocols are intended to address some of the widely accepted issues with the proxy voting infrastructure.

Background on the Proxy Plumbing Initiative

Shareholder voting in Canada generally occurs through proxy voting as well as in person attendance. As most shareholders are not registered shareholders and hold their shares through intermediaries, proxy votes are typically submitted by intermediaries and not the actual shareholder. Intermediaries in turn hold their shares with a central depository, the Canadian Depository for Securities Limited (CDS). This indirect manner of holding shares is known as the "intermediated holding system".

Various entities implement the processes used to tabulate proxy votes for shares held through intermediaries. The OSC refers to these processes as "meeting vote reconciliation".

There have been concerns raised by issuers and investors, as outlined in the Staff Notice, that the proxy voting infrastructure and meeting vote reconciliation systems are inaccurate, unreliable and non-transparent in the following respects.

  1. Over-voting: over-voting is an instance of an intermediary submitting proxy votes and the meeting tabulator being unable to establish that the intermediary has any vote entitlements, or the number of proxy votes submitted exceeds the number of vote entitlements as calculated by the tabulator.
  2. Missing votes: voting results suggest proxy votes were not included in the tabulation and therefore went "missing". Beneficial owners largely cannot find out whether a tabulator or meeting chair accepted their intermediary's proxy votes.

Proposed Protocols

The protocols outlined in the Staff Notice aim to address two key issues: information gaps and communication gaps.

Information gaps relate to the fact that meeting tabulators do not always have the accurate and complete vote entitlement information they require to properly establish which intermediaries have vote entitlements for a meeting and how many vote entitlements these intermediaries have.

To address information gaps, the protocols provide guidance on: (i) the vote entitlement information intermediaries should provide to tabulators and how to generate this information; (ii) how the tabulator should use this information to establish which intermediaries are entitled to vote, and how many proxy votes they can submit; (iii) how the tabulator can match proxy votes to vote entitlement positions; and (iv) what the tabulator should do if it appears that depositories or intermediaries have not provided necessary vote entitlement information.

Communication gaps relate to the fact that there is no way to accurately and efficiently confirm that all necessary information has been sent and received by tabulators and intermediaries, such that problems giving rise to proxy votes being rejected or pro-rated at meetings can be detected in advance.

To address communication gaps, the protocols outlined in the Staff Notice provide guidance on: (i) the OSC's expectation regarding tabulators, intermediaries and Broadridge (the main proxy voting agent for intermediaries) developing appropriate mechanisms to confirm that all votes submitted by Broadridge on behalf of intermediary clients have been received by the tabulator, as well as appropriate mechanisms to do so; (ii) steps tabulators should take to obtain missing vote entitlement information if the intermediary appears to the tabulator to be in an over-vote position; and (iii) how parties should communicate with each other where proxy votes from an intermediary are rejected, uncounted or pro-rated to enable beneficial owners to know if proxy votes submitted in respect of their shares were not accepted at a meeting and the reason why.

Results of the Roundtable

Panelists at the November 18 roundtable included representatives from Broadridge, the Governance Professionals of Canada, the Securities Transfer Association of Canada and institutional investors. A transcript of the roundtable can be viewed here.

Industry participants were generally supportive of the proposed changes. One of the key impediments identified to improving the system was an over-reliance on paper based systems, the costs of transforming which are unknown at this time.

Panelists noted that the primary unsettled issue arising from any Canadian Securities Administrators (CSA) proxy infrastructure reforms would be the allocation of increased costs between participants. Likewise, it was suggested that efficiency gains from new technology, such as blockchain, could actually reduce the cost of meeting vote reconciliation procedures over time.

Looking Ahead

The OSC hopes that the protocols will eventually lay the foundation in the future to eliminate paper and move to an electronic transmission of vote entitlement and proxy vote information, and develop end-to-end vote confirmation capability that would allow beneficial owners, if they wish, to receive confirmation that their voting instructions have been received by their intermediary and submitted as proxy votes, and that those proxies have been received and accepted by the tabulator.

The securities regulators aim to publish the final protocols as a CSA staff notice at the end of 2016 in time for the 2017 proxy season.

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