On January 29, 2015, the Canadian Securities Administrators (CSA) published CSA Staff Notice 54-303 - Progress Report on Review of the Proxy Voting Infrastructure. The report outlines the progress made to date by the CSA in its review of the network of organizations, systems, legal rules and market practices that support the solicitation and tabulation of proxy votes in Canada. In the CSA's view, its efforts have revealed that the "current proxy voting infrastructure is antiquated and fragmented and needs to be improved". As the proxy voting infrastructure needs to support accurate, reliable and accountable vote reconciliation, the report identifies areas for improvements and, for entities that play key roles in vote reconciliation, sets out steps for them to take for the 2015 and 2016 proxy seasons.
Scope of the CSA Proxy Voting Review
The CSA published a consultation paper in 2013 outlining at a high level the various components of vote reconciliation and seeking comments from market participants to address concerns about the integrity and reliability of the proxy voting infrastructure. Between January and March 2014, the CSA conducted roundtable discussions held at various securities commissions.
The two key themes arising from the comment letters and roundtable discussions were that the securities regulators need to take a leadership role in reviewing the accuracy of vote reconciliation (because no single market participant or set of market participants is able to access all the information used for vote reconciliation), and that over-voting is occurring, indicating that vote reconciliation is not always accurate. However, no consensus was reached as to the causes of over-voting or how to solve the problem.
The CSA also reviewed six uncontentious shareholder meetings held in 2014, and formed a technical working group with key proxy voting representatives, including issuers, investors, intermediaries, transfer agents and CDS, to share information about their respective operational processes in meeting vote reconciliation and to discuss possible solutions to potential gaps in the vote reconciliation process. In addition, the CSA conducted targeted consultations with consultants and investment dealers.
The CSA review process resulted in five key findings, including that: (i) although over-reporting and over-voting occurred in all meetings attended by the CSA as part of their review, the number of vote entitlements and proxy votes involved did not appear to be material; (ii) over-reporting and over-voting were due to the fact that meeting tabulators were missing or had incorrect information when calculating official vote entitlements (due to, among other things, the use of paper omnibus proxies and human and technology errors); and (iii) meeting tabulators employ different methods to reconcile proxy votes from intermediaries to calculate official vote entitlements. In addition, the CSA found that a significant factor that appears to increase the risk of over-reporting and over-voting is that intermediaries do not have access to their official vote entitlement as calculated by the meeting tabulators. The CSA also found that some meeting tabulators made errors resulting in valid proxy votes being rejected or not counted.
The CSA found that the current proxy voting infrastructure is antiquated and fragmented and recommends the following five improvements:
- modernizing how meeting tabulators receive omnibus proxies;
- ensuring the accuracy and completeness of vote entitlement information in omnibus proxies;
- enabling intermediaries to find out their official vote entitlement for a meeting;
- increasing consistency in how tabulators reconcile proxy votes to official vote entitlements; and
- establishing communication between meeting tabulators and intermediaries about whether proxy votes are accepted, rejected or pro-rated.
For the 2015 proxy season, the CSA is recommending that all the entities playing a key role in vote reconciliation identify and implement any immediate steps they can take to improve the accuracy and reliability of vote reconciliation, including that intermediaries take steps to provide timely and accurate vote entitlement information to meeting tabulators. In addition, during 2015, the CSA intends to review one or more past proxy contests to determine if there are any vote reconciliation issues that are specific to proxy contests. The CSA would also like to explore whether factors such as higher volumes of proxy votes, revocations of previous proxy votes, and the use of a dissident form of proxy pose specific challenges to accurate meeting vote reconciliation.
For the 2016 proxy season, the CSA will direct the key entities that engage in vote reconciliation to work collectively to develop appropriate industry protocols. The protocols would specify the roles and responsibilities that depositories, intermediaries, Broadridge and the meeting tabulators have in meeting vote reconciliation, and outline the specific operational processes that each of these key participants is expected to implement in vote reconciliation (including the enhanced use where appropriate of electronic methods of data transmission and communication). Also, the protocols would, at a minimum, address the five areas requiring improvement identified in the CSA's report.
Of note, the CSA left open the possibility that it may recommend mandating aspects of the protocols and/or regulating entities in the proxy voting infrastructure if it deems it necessary or appropriate.