CSA Notice 25-301
Update on CSA Consultation Paper 25-401 Potential
Regulation of Proxy Advisory Firms
September 19, 2013
Introduction
On June 21, 2012, the Canadian Securities Administrators (CSA) published for comment
Consultation Paper 25-401 Potential Regulation of Proxy Advisory Firms (the
Consultation Paper).
The purpose of the consultation was to provide a forum for discussion of certain concerns
raised about the services provided by proxy advisory firms and the potential impact on
Canadian capital markets and to determine if, and how, these concerns should be
addressed by the CSA.
This notice provides an update to market participants on the status of the consultation.
Background
In the Canadian context, limited information was available about the ways in which
institutional investors use the services of proxy advisory firms and the extent of reliance
on their services. Whether institutional investors shared any of the concerns raised was
also unclear.
We sought additional information and views to determine whether we need to address the
following concerns identified in the Consultation Paper:
•
potential conflicts of interest;
•
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.
The Consultation Paper outlined possible CSA responses and requested feedback.
Summary of Comments
The comment period ended on September 21, 2012. We received 62 comment letters
from various market participants, including issuers, institutional investors, industry
associations, proxy advisory firms and law firms. We have reviewed the comments and
wish to thank all of the commenters for contributing to the consultation.
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The comments differed between the respective market participant groups. The following
is a brief summary of the comments received:
•
While issuers generally acknowledged the important role of proxy advisory firms,
they seemed concerned about their influence on the voting decisions of
institutional investors. Most issuers agreed with each of the concerns identified in
the Consultation Paper. Issuer associations and law firms generally share the
views of issuers.
•
Institutional investors noted that proxy advisory firms provide them with useful
and cost effective services when exercising their voting rights. They subscribe to
the research reports prepared by proxy advisory firms to inform their voting
decisions which are based on their own assessment of the proposals and their
proxy voting guidelines. They indicated that they do not necessarily follow the
vote recommendations of proxy advisory firms. Institutional investors are
generally satisfied with the services provided by proxy advisory firms.
Associations representing institutional investors generally expressed the same
views.
•
Commenters generally agreed that the business model or the ownership structure
of proxy advisory firms may lead to conflicts of interest. A majority of issuers
believed that conflicts of interest exist within proxy advisory firms and that they
are not appropriately mitigated. On the other hand, a majority of institutional
investors acknowledged the potential of conflicts of interest but took the position
that they are properly identified, managed and disclosed.
•
Issuers questioned the quality of vote recommendations and concluded that
additional transparency and disclosure of underlying methodologies and analyses
would benefit market participants. Institutional investors did not believe that the
information would be beneficial to the market. They argued against requiring
disclosure of proprietary analytical models.
•
Issuers were concerned with potential inaccuracies in research reports and limited
dialogue between the proxy advisory firms and the issuers. A majority of
institutional investors were of the view that the dialogue processes in place suffice
to avoid factual errors. Some institutional investors believed that, in reality,
perceived inaccuracies are mere differences of opinion or analysis.
•
Commenters agreed that it is important for proxy advisory firms to consult with
market participants when developing and updating voting guidelines. They also
agreed on the importance of disclosing such guidelines publicly. There was no
consensus among commenters about the extent of dialogue necessary between
proxy advisory firms and market participants.
•
The views on the appropriate CSA response diverged. Some commenters
suggested that a set of recommended best practices is sufficient while others were
of the view that a rule-based approach, including registration of proxy advisory
firms as advisers, is necessary. Some institutional investors suggested that a CSA
response was not warranted.
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•
Proxy advisory firms indicated that they have appropriate policies and procedures
in place to address the concerns identified in the Consultation Paper. They noted
that they are committed to provide objective and accurate services to their clients
and have recently demonstrated a willingness to respond to concerns by
voluntarily making changes to some of their processes. Proxy advisory firms do
not believe that their activities should be regulated.
Next Steps
After an extensive review of the comments received, our conclusion is that a CSA
response is warranted. In our view, 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.
We are in the process of developing our proposed approach, which we intend to publish
for comment in the first quarter of 2014.
Questions
Please refer your questions to any of the following:
Autorité des marchés financiers
Autorité des marchés financiers
Michel Bourque
Marie-Josée Normand-Heisler
Senior Policy Advisor
Senior Policy Advisor
514-395-0337 ext.4466
514-395-0337 ext.4464
1-877-525-0337
1-877-525-0337
michel.bourque@lautorite.qc.ca
marie-josee.normand-heisler@lautorite.qc.ca
Ontario Securities Commission
Ontario Securities Commission
Naizam Kanji
Frédéric Duguay
Deputy Director, Mergers &
Senior Legal Counsel, Corporate Finance
Acquisitions, Corporate Finance
416-593-3677 1-877-785-1555
416-593-8060 1-877-785-1555
fduguay@osc.gov.on.ca
nkanji@osc.gov.on.ca
Alberta Securities Commission
Sophia Mapara
Legal Counsel
403-297-2520 1-877-355-0585
sophia.mapara@asc.ca
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