Should proxy advisory firms be regulated in Canada?

On June 21, 2012, the Canadian Securities Administrators (otherwise known as the “CSA”) published Consultation Paper 25-401 – Potential Regulation of Proxy Advisory Firms, the purpose of which is to obtain feedback regarding some of the concerns raised by market participants in order to assist the CSA with determining whether there is a need to regulate proxy advisory firms and to outline and solicit feedback on potential regulatory responses and frameworks that may be used to regulate proxy advisory firms.

Proxy advisory firms are businesses that review and analyze matters that are put before shareholders of public companies for a vote.  A proxy advisory firm will make a recommendation in respect of a shareholder vote related to a variety of matters involving a voting decision by shareholders, including M&A transactions.  Some proxy advisory firms provide additional services to clients, including consulting services on corporate governance matters, automatic vote execution (which can be overridden by a client) and back-office support.  Currently, proxy advisory firms are not regulated in Canada.

The Consultation Paper notes that there is a growing demand for proxy advisors who play an important role by facilitating investor participation, providing research and aggregating information, among other things.  However, the CSA discusses a number of concerns raised by market participants regarding proxy advisors, including:

  • potential conflicts of interest;
  • a perceived lack of transparency;
  • potential inaccuracies and limited engagement with issuers;
  • potential corporate governance implications; and
  • the extent of reliance of institutional investors on the recommendations provided by proxy advisory firms.

A number of potential regulatory responses are outlined by the CSA, including:

  • enhanced disclosure requirements to mitigate conflicts of interest and increase transparency;
  • regulation of proxy advisory firms;
  • a certification framework;
  • requiring proxy advisory firms to comply with best practices or explain why it has not done so; and
  • the provision of best practices guidelines.

In the Consultation Paper, the CSA notes that based on its analysis to date, enhanced disclosure requirements are the preferred alternative for any potential regulation of proxy advisory firms.

In the Consultation Paper, the CSA poses a number of questions to market participants, issuers, institutional investors and proxy advisory firms, perhaps the most interesting of which include questions related to:

  • potential amendments to National Instrument 51-102 – Continuous Disclosure Obligations that would require reporting issuers to disclose consulting services from proxy advisors in their circulars;
  • a question posed to institutional investors regarding how they view their duty to vote and how the vote recommendations of proxy advisory firms play a part in the decision making process; and
  • a question posed to issuers regarding the extent to which such issuers adopt the corporate governance standards proposed by proxy advisors even if the standards are not appropriate for the issuer.

Do you have a view on the regulation of proxy advisory firms?  If so, be sure to submit your written comments on or before August 20, 2012 to:

Me Anne-Marie Beaudoin
Corporate Secretary
Autorité des marchés financiers
800, square Victoria, 22e étage
C.P. 246, Tour de la Bourse
Montréal, Québec, H4Z 1G3
Fax : 514-864-6381
e-mail: [email protected]

John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 1900, Box 55
Toronto, Ontario, M5H 3S8
Fax: 416-593-2318
e-mail: [email protected]



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