Canadian Securities Regulators Consider Whether to Regulate Proxy Advisory Firms

The Canadian Securities Administrators (CSA) have invited input from issuers, institutional investors, proxy advisors and other market participants on concerns raised regarding the activities of proxy advisory firms and possible securities regulatory responses to such concerns. The activities of proxy advisory firms are currently unregulated in Canada.  Interested parties have until August 20, 2012, to submit comments.

The recent release of CSA Consultation Paper 25-401 “Potential Regulation of Proxy Advisory Firms” (the Consultation Paper) follows in the wake of similar steps by regulators in both the United States and Europe, as the prominence and perceived power of firms which provide proxy voting advice and ancillary services, such as Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co (Glass Lewis), has been debated in numerous jurisdictions in recent years.  A similar information-seeking exercise by the U.S. Securities and Exchange Commission (SEC) in 2010 has not resulted in any change in practice in the U.S. to date.        

The Consultation Paper highlights a number of concerns raised by public issuers and their advisors, including:

  • potential conflicts of interests – arising most obviously when the voting recommendation services provided to institutional investors concern issuers to which the proxy advisory firm also provides consulting services in exchange for fees;
  • a perceived lack of transparency with regard to how proxy advisory firms formulate voting recommendations;
  • potential inaccuracies in proxy advisory firms’ reports, and limited interaction with issuers that might provide an opportunity to correct errors;
  • impact of proxy advisory firms in setting corporate governance practices, including concerns that adopted standards fail to reflect the particular circumstances of a given issuer and the thoroughness and transparency of the standard-setting process; and
  • the extent to which institutional investors rely on the recommendations provided by proxy advisory firms without exercising independent judgement.

The Consultation Paper seeks information on the extent to which such concerns are shared by market participants and possible regulatory responses.  The CSA state that it is not clear whether these concerns merit a securities regulatory response, but if a response is merited their preferred approach would be to adopt a new securities regulatory framework and that framework would necessitate legislative amendments in order to be implemented.

Canadian public companies and other market participants now have a little more time to express their views to the CSA - the comment period has been extended from August 20, 2012 to September 21, 2012. For more information, please contact the authors.