As the next step in its effort to improve the proxy voting infrastructure and vote reconciliation process, the Canadian Securities Administrators (CSA) has published CSA Multilateral Staff Notice 54-304 Final Report on Review of the Proxy Voting Infrastructure and Request for Comments on Proposed Meeting Vote Reconciliation Protocols (Final Report).
The proposed vote reconciliation protocols (Proposed Protocols) included in the Final Report provide CSA staff’s expectations on the roles and responsibilities of the key entities involved in the process of tabulating proxy votes for shares held through intermediaries, as well as guidance on appropriate operational processes to be followed by them. The Final Report follows CSA Consultation Paper 54-401 Review of the Proxy Voting Infrastructure (see our August 2013 Blakes Bulletin: Regulators Consult on Concerns about Canada’s Proxy Voting Infrastructure) and the subsequent CSA Staff Notice 54-303 Progress Report on Review of the Proxy Voting Infrastructure (see our February 2015 Blakes Bulletin: Are We Closer to Fixing the Proxy Voting System?).
The CSA acknowledged in the Final Report that it does not typically seek comments on staff guidance but elected to do so in this instance because the Proposed Protocols vary from typical staff guidance by providing extensive and detailed operational guidance to the key entities involved in tabulating proxy votes for shares held through intermediaries: the Canadian Depository for Securities Limited, intermediaries (typically bank custodians and investment dealers), Broadridge Investor Communication Solutions Canada and the transfer agents who act as tabulators at shareholder meetings (Key Participants).
The Proposed Protocols are intended to address the widely held concerns that the proxy voting infrastructure is complex, opaque and fragmented, leading to a meeting vote reconciliation process that may be inaccurate and unreliable. One problem specifically identified in the Final Report is over-voting, which occurs when an intermediary submits proxy votes that exceed the intermediary’s vote entitlement as calculated by the meeting tabulator. Another identified problem is the inability of beneficial shareholders to confirm that their proxy votes have been included in the vote tabulation. In instances where the meeting results imply that a shareholder’s proxy votes were not included in the vote tabulation, it may not be possible to confirm whether or not this is so.
To address these concerns, the CSA undertook a study of how the proxy voting infrastructure and meeting vote reconciliation works in practice, which included a detailed examination of the process involved in six uncontested shareholder meetings. The CSA concluded that the current proxy voting infrastructure includes significant information gaps that leave tabulators unable to confirm that they have an accurate and complete understanding of intermediary vote entitlements; a weakness that enables inaccurate vote tabulations and over-voting. This systemic failure is exacerbated by inconsistency in the procedures used by tabulators and intermediaries to reconcile voting entitlements.
The other significant shortcoming in the current system identified by the CSA is a lack of effective communication among the key participants. This undermines the ability of participants to both identify and resolve inaccurate vote tabulations.
The CSA’s proposed solution to these problems is the voluntary adoption by Key Participants of detailed vote reconciliation protocols as set out in the Proposed Protocols. Representatives of Key Participants worked with the CSA in developing the Proposed Protocols, allowing them to share their unique perspectives and identify potential areas for improvement in information collection and communication. The CSA commented: “[T]here was not always consensus on how to address these problems and who should be responsible for fixing them.”
The Proposed Protocols take into account existing operating processes and the CSA claims they can be implemented within the current system without major technological changes. The Proposed Protocols were drafted with reference to uncontested meetings, but the CSA says they will also be effective in contested shareholder meetings.
The Proposed Protocols are organized into four sections that correspond with the process of meeting vote reconciliation:
- Generating and sending accurate and complete vote entitlement information for each intermediary that will solicit voting instructions from beneficial owners and submit proxy votes
- Establishing vote entitlement accounts in a consistent manner
- Sending accurate and complete proxy vote information and tabulating and recording proxy votes in a consistent manner
- Informing beneficial shareholders of any rejected votes or votes that are reduced on a pro rata basis as a result of over-voting.
In each of these sections, the Proposed Protocols identify sequentially the relevant documents, the information to be included in them, responsibility for the documents and related actions among the Key Participants, and detailed protocols for collecting and communicating the information. The Proposed Protocols also contain guidance on dealing with errors, e.g., “A tabulator that becomes aware of errors in the NOBO list should notify Broadridge and the relevant intermediary.” The Proposed Protocols address variations in the process, such as an intermediary’s use of a proxy voting agent and an issuer’s solicitation of proxy voting instructions from non-objecting beneficial owners.
The Proposed Protocols nudge key participants towards greater use of electronic communications, e.g., “Tabulators, intermediaries and Broadridge are strongly encouraged to collectively develop efficient electronic transmission methods for Supplemental Omnibus Proxies.”
Compliance with the Proposed Protocols will be voluntary, however the CSA has indicated that after the Proposed Protocols are finalized, the CSA will monitor their implementation during the 2017 proxy season and evaluate their efficacy.
The CSA has also started to consider what types of further rules and guidance may be required. In fact, the Proposed Protocols are envisioned as the first step in a more ambitious project. The CSA has identified the goal of moving to a paperless voting entitlement and reconciliation system that allows beneficial owners to confirm that their voting instructions have been received and successfully submitted as proxy votes. With that ultimate objective in mind, the CSA intends to establish a technical committee composed of representatives of Key Participants that will not only help support the implementation of the Proposed Protocols, but will consider further refinements to the system.
The CSA has indicated that if Key Participants identify alternative means of achieving the underlying objectives, they should not feel constrained by the Proposed Protocols. Among other things, the proposed industry committee will have an important role in ensuring that any further refinements to the Proposed Protocols are adopted by Key Participants in a consistent manner.
In addition to general comments on the Proposed Protocols, the CSA has identified several specific issues on which they are seeking further input:
- Whether the Proposed Protocols support accurate, reliable and accountable proxy voting and any suggested improvements or additional guidance
- Indications of the anticipated cost and resources impact of the Proposed Protocols on Key Participants, and particularly intermediaries, and a reasonable timeframe for implementation of the Proposed Protocols
- Which aspects of the Proposed Protocols, if any, should be codified as securities legislation, and which as CSA Policy or CSA staff guidance
- Whether Key Participants, such as proxy voting agents and meeting tabulators, that are currently not “market participants” or otherwise subject to compliance review provisions should become such.
The CSA has requested that comments be provided by July 15, 2016. It is anticipated that final protocols will be published as a CSA staff notice at the end of 2016, in time for the 2017 proxy season.