On April 24, the Canadian Securities Administrators published for comment National Policy 25-201 Guidance for Proxy Advisory Firms (the Proposed Policy) setting out proposed recommendations for proxy advisory firms in relation to their activities and the services they provide to their clients. The recommendations are primarily designed to (i) promote transparency in the processes leading to a vote recommendation and the development of proxy guidelines and (ii) foster understanding among market participants about the activities of proxy advisory firms. The Proposed Policy recognizes that certain market participants have raised concerns about proxy advisory firms and the services they provide, including the potential for conflicts of interest and concerns in respect of proxy voting recommendations. While applicable to all such firms, the Proposed Policy is not intended to be prescriptive or exhaustive but rather should be considered by proxy advisory firms in developing and implementing their own practices.

As we previously discussed, the proposed guidance addresses comments received from stakeholders in response to the CSA’s Consultation Paper 25-401, published in June 2012, including comments in respect of inaccuracies in advisory reports, the inability of issuers to identify and correct such errors and the lack of consultation between proxy advisors and issuers. Specifically, the Proposed Policy addresses four main issues:

  1. Conflicts of interest: Under the Proposed Policy, proxy advisory firms are expected to, among other things, identify, mitigate and manage actual or potential conflicts of interest. In addition, they are also recommended to disclose to their clients any actual or potential conflicts of interest and to provide sufficient information so that the client may understand the nature of the conflict. Conflicts identified in the Proposed Policy include where:
  • a proxy advisory firm provides vote recommendations to an investor client on corporate governance matters of an issuer to which the proxy advisory firm provided consulting services;
  • an investor client of a proxy advisory firm submits a shareholder proposal to be put to a vote at a shareholders’ meeting that could be the subject of a favourable vote recommendation by the proxy advisory firm; and
  • a proxy advisory firm is owned, in whole or in part, by an investor client who invests in issuers in relation to which the proxy advisory firm is or has been mandated to make vote recommendations. 
  1. Transparency and accuracy of vote recommendations: In calling for greater transparency and accuracy in vote recommendations, the Proposed Policy provides that the CSA expect proxy advisory firms to ensure consistency in vote recommendations in accordance with their specific proxy voting guidelines, use up-to-date information in making such determinations, and prepare recommendations with the goal of reducing the risk of factual errors and inaccuracies. Proxy advisory firms may also consider disclosing their policies and procedures as well as internal safeguards and controls leading to vote recommendations.  
  2. Development of proxy voting guidelines: The Proposed Policy expresses that it is good practice for proxy advisory firms to develop their proxy voting guidelines in a consultative and comprehensive manner, acknowledging that such guidelines have been seen to have an influence on issuers’ corporate governance practices. Among the considerations suggested for proxy advisory firms in the development of proxy voting guidelines are the local market or regulatory conditions and regular consultation with and consideration of the preferences and views of their clients, market participants and the public.  
  3. Communications with clients, market participants, the media and the public: The CSA expect proxy advisory firms to communicate certain information with their clients, including, actual or potential conflicts of interest, identification of factual information versus information resulting from analytical models and assumptions and any known or potential limitations or conditions in the research and analysis used to prepare the recommendation. In addition, the CSA expect proxy advisory firms to correct any factual error or inaccuracy found in a report and to duly inform their clients in a timely manner. While the CSA leave it to the proxy advisory firm to determine whether to engage issuers, they do expect firms to publicly disclose their approach to contacting issuers.

More generally, and in connection with a number of the issues addressed above, proxy advisory firms are encouraged to have sufficient resources, knowledge and expertise, including hiring, training and retaining competent and skilled individuals with the necessary experience and competencies to perform their duties. In addition, proxy advisory firms will be expected to post or describe on their websites the nature of their policies and procedures, internal safeguards and controls, code of conduct and compliance program respecting conflicts of interest, vote recommendations and dialogue or contact with issuers.

The CSA are not alone in their proposal, citing other international publications and initiatives, including ones from the SEC, NYSE, European Commission (here and here) and ESMA (here and here), as generating a renewed focus on the activities of proxy advisory firms.

The CSA is accepting comments, including responses to a number of specific questions set out in the proposal, until June 23, 2014.