In June 2012, the Canadian Securities Administrators (CSA) sought comments from market participants on Consultation Paper 25-401 Potential Regulation of Proxy Advisory Firms (Consultation Paper). The CSA has provided an update on the comments it has received on the Consultation Paper.

Of concern to the CSA is the integrity of the proxy voting system, in particular its transparency, accuracy and the potential for conflicts of interest.

The comments received show that opinions are generally divided between two camps: issuers, issuer related associations and law firms in one camp, and institutional investors and related associations in the other.

Issuers were of the opinion that while proxy advisory firms are important, they expressed concern over the influence such firms may have on the voting patterns of institutional investors; whereas institutional investors saw proxy advisory firms as useful and cost effective and the institutional investors noted that they did not always follow the recommendations of the proxy advisory firms.

Issuers raised concerns about the lack of transparency of underlying methodologies and analyses which brings into question the quality of vote recommendations, suggesting that more transparency and disclosure is necessary. Institutional investors saw no benefit to such additional disclosure. In addition, issuers were concerned about the limited dialogue between themselves and proxy advisory firms, which could lead to inaccuracies in research reports.

Most commenters agreed that the ownership structure and business model of the proxy advisory firms could lead to conflicts of interest. Opinions diverged on whether such conflicts are properly mitigated. Also, most agreed that proxy advisory firms should consult with market participants when updating voting guidelines.

Predictably, proxy advisory firms have stated that they have appropriate policies in place to address the concerns raised and that their industry does not need to be regulated.

The CSA can take one of three approaches regarding proxy advisory firms: keep the status quo and do nothing, implement a policy-based system of best practices, or take a rules-based approach and implement regulations (which may include the registration of proxy advisory firms). Based on the comments received, the CSA had concluded that a policy-based approached is the appropriate response and is in the process of developing this approach and publishing it for comment in the first quarter of 2014.