On June 21, 2012, the Canadian Securities Administrators (CSA) published Consultation Paper 25-401 — Potential Regulation of Proxy Advisory Firms. In light of the increased demand for the services of proxy advisors, the paper seeks to initiate a discussion of concerns about the effect of such services on the Canadian capital markets and how these concerns may best be addressed by Canadian securities regulators.

The potential concerns identified by the CSA which they are seeking public response on include:

  • any possible conflicts of interest that arise due to the fact that proxy advisors provide both vote recommendations on governance matters and consulting services or that arise due to their ownership structures;
  • the perceived lack of transparency in how vote recommendations are determined by proxy advisors and the lack of public disclosure of their reports;
  • the limited engagement proxy advisors have with issuers which may result in potential inaccuracies in their reports and recommendations;
  • the potential for proxy advisors to become corporate governance standard setters which may result in issuers being compelled to adopt "one-size fits all" standards which may not be suitable for their circumstances; and
  • the extent of institutional investor reliance on proxy advisory recommendations. One particular distinction identified is how reliance upon proxy advisors may differ between larger and smaller institutions.

The paper concludes that neither the current registration or proxy solicitation regime is the appropriate framework for regulation of proxy advisors, if regulation is in fact needed. The CSA is seeking consultation on whether any of the following regimes is appropriate for regulation: a separate regime applicable to proxy advisory firms; a certification regime or a requirements and disclosure framework.

The CSA staff initiative follows international regulatory initiatives which are addressing the role of the proxy advisors in capital markets and the appropriate standards of transparency and accountability of such advisors. The paper invites public comment on these issues until August 20, 2012.

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