The
Canadian Securities Administrators are consulting on the possible regulation of
proxy advisory firms as market participants cite the potential influence of such
firms over shareholder vote outcomes and the corporate governance of issuers,
combined with the possible negative impact of conflicts of interest and
transparency concerns. A broader concern is that proxy advisory firms may have
become de facto corporate governance
standard setters and that, as a result, issuers are compelled to adopt certain
one size fits all standards which may not be suitable for their specific
circumstances. It may be appropriate, said the Canadian Securities
Administrators, to consider regulating proxy advisors if the above-noted
concerns are validated and have a negative impact on the integrity of Canadian
capital markets.
A
conflict of interest may exist if a proxy advisory firm provides vote
recommendations to institutional investors on corporate governance matters for
which the same firm provided consulting services to the issuer. A proxy
advisory firm’s independence may also be compromised by conflicts arising in
the ownership structure of some proxy advisory firms. Transparency concerns
appear to be a combination of both the lack of disclosure about how proxy
advisory firms arrive at their vote recommendations and the lack of public
disclosure of the actual report.
In
the view of the CSA, proxy advisory firms are not in the business of advising
in the purchase or sale of securities, and therefore, should not be required to
register as advisers under Canadian securities acts. Although proxy advisory
firms provide advice when they make voting recommendations to their clients
regarding proposals put to shareholders, this advice is most often not directly
with respect to an investment in securities or the purchase or sale of
securities. Moreover,
the activities of proxy advisory firms do not fit within the principles
underlying the registration regime since these activities have little
connection with registration in the traditional sense and are remote from the
protection of retail investors.
If
the CSA opted to regulate proxy advisory firms through the existing proxy
solicitation framework, they would have to either remove the exception to the
definition of solicit or add further conditions to that exception. Currently,
the definition of solicit does not include a proxy advisory firm communicating
to security holders, as clients, if the communication is in the ordinary course
of business, the firm discloses any potential conflicts of interest, the firm
receives remuneration only from clients, and the proxy voting advice is not
given on behalf of a person soliciting proxies
To
the extent that the Canadian Administrators conclude that a securities
regulatory response to concerns around proxy advisors is warranted, their
preferred regulatory solution would be the creation of a new stand alone
securities regulatory instrument. Such an instrument would require clear
legislative authority to regulate proxy advisory firms. This approach would not
attempt to compel proxy advisors to comply with
requirements
of existing regimes that were not designed with them in mind.
This
new regulatory framework would be primarily based on disclosure to address
concerns around conflicts of interest and transparency. Proxy advisory firms
would be required to establish and disclose procedures designed to identify and
manage any potential conflicts of interest that arise in connection with the
issuance of a voting recommendation. Disclosure of a specific conflict in a
vote recommendation report to their clients could also be required. Proxy
advisory firms would also be required to separate their proxy voting services
from their advisory or consulting services.
In
order to increase transparency, proxy advisory firms would disclose internal
procedures, guidelines, standards, methodologies, assumptions and sources of
information supporting voting recommendations.