Canadian Securities Regulators Propose Guidance on Practices and Disclosure for Proxy Advisory Firms but Steer Clear of Rules
May 2, 2014
Sonia J. Struthers
The Canadian Securities Administrators (CSA) recently released for comment proposed National Policy 25-201, Guidance for Proxy Advisory Firms (Proposed Policy). Comments are requested by June 23, 2014.
The Proposed Policy will apply to all firms that provide any of three types of proxy advisory services:
- analyzing matters put to a vote at a shareholders’ meeting;
- making vote recommendations; and
- developing proxy voting guidelines.
The Proposed Policy follows the publication by the CSA in June 2012 of Consultation Paper 25-401, Potential Regulation of Proxy Advisory Firms, which was the subject of extensive commentary by issuers, institutional investors and other market participants. See our earlier article Should proxy advisory firms be regulated in Canada? for a discussion on the consultation paper.
Rather than impose rules or prescriptive guidelines on proxy advisory firms, the CSA encourages recommended practices in the Proposed Policy, including:
- Conflict of interest – Proxy advisory firms are expected to identify, manage and mitigate actual or potential conflicts of interest. Steps suggested to address actual or potential conflicts of interest are (i) establishing written conflict of interest policies and procedures, (ii) designing internal safeguards and controls to monitor the effectiveness of the policies and procedures, (iii) establishing a code of conduct setting standards of behaviour and practices for the firm and individuals acting on its behalf and (iv) evaluating the effectiveness of such measures. The firm’s chief executive officer and the board of directors are expected to be responsible for a culture of compliance respecting conflicts of interest. The Proposed Policy also encourages the firms to designate a qualified person responsible for monitoring compliance with conflict of interest policies. Actual or potential conflicts of interest are expected to be disclosed to the firm’s clients in a timely manner.
- Vote recommendations – Proxy advisory firms should consider establishing written policies and procedures regarding the methodology used to determine vote recommendations, including the relative weight of each element taken into consideration, so that recommendations are determined in a transparent manner and the underlying information is accurate. Firms are also encouraged to have a quality assurance process to review vote recommendations before they go out to clients and are expected to inform clients of any factual error or inaccuracy in a timely manner. Steps suggested when determining vote recommendations are (i) establishing written vote recommendation methodology policies and procedures, (ii) designing internal safeguards and controls to increase the accuracy and reliability of underlying information and (iii) evaluating the effectiveness of such measures.
- Development of proxy voting guidelines – Proxy advisory firms are encouraged to establish written policies and procedures regarding their process for developing voting guidelines, which process should include regular consultations with clients, market participants and the public.
- Communications with clients, market participants, the media and the public – Proxy advisory firms are expected to publicly disclose their policies and procedures regarding dialogue or contact with issuers prior to a vote recommendation. The Proposed Policy sets out a minimum list of information which the CSA expects firms to communicate to clients in their reports, including factual information and information that is derived from analytical models and assumptions. Firms are also encouraged to establish written policies and procedures governing their communications with clients, market participants, the media and the public.
The CSA expects that, without compromising proprietary or commercially sensitive information, the proxy advisory firms will disclose policies and procedures adopted in relation to the guidance provided in the Proposed Policy on their websites.
The CSA has requested comments on certain specific issues, including:
- Will the Proposed Policy promote meaningful disclosure to the proxy advisory firms’ clients, market participants and the public? If not, what additional information should be disclosed?
- The CSA expects proxy advisory firms to disclose their approach regarding dialogue or contact with issuers when they prepare vote recommendations. Should the CSA also encourage proxy advisory firms to engage with issuers during this process? If so, what should be the objectives and format of such engagement?
- A proxy advisory firm may provide automatic vote services to a client based on the proxy advisory firm’s proxy voting guidelines. Should the CSA encourage proxy advisory firms to consider obtaining confirmation that the client has reviewed and agreed with the proxy advisory firm’s proxy voting guidelines leading to vote recommendations? If so, should the CSA encourage proxy advisory firms to consider obtaining such confirmation annually and following any amendments to the proxy advisory firm’s proxy voting guidelines?