Written By Will Osler, Paul Barbeau, Matthew Olson and Lisa Telebar
On April 30, 2015, the Canadian Securities Administrators (CSA) adopted National Policy 25-201 Guidance for Proxy Advisory Firms. The Policy may be viewed on the websites of CSA members, including the Alberta Securities Commission and the Ontario Securities Commission.
The purpose of the Policy is to address concerns of market participants about services provided by proxy advisory firms by providing non-mandatory guidance on recommended practices and disclosure for proxy advisory firms on conflicts of interest, transparency, development of proxy voting guidelines and communications with the public. The Policy intends to assist all firms that provide "proxy advisory services", which include any of the following: (i) analyzing the matters put to a vote at a shareholders' meeting; (ii) making vote recommendations; and (iii) developing proxy voting guidelines.
On June 21, 2012, the CSA published for comment Consultation Paper 25-401 Potential Regulation of Proxy Advisory Firms. The purpose of the Consultation Paper was to facilitate discussion about services provided by proxy advisory firms and to explore the need for the CSA to address concerns of market participants surrounding proxy advisory firms. Based on comments received on the Consultation Paper, on April 24, 2014, the CSA subsequently published for comment a proposed policy. After considering the comments received in respect of the proposed policy, the CSA adopted the Policy on April 30, 2015, with some non-material modifications from the policy initially proposed.
Key Provisions of the Policy
Conflicts of Interest
The potential for conflicts of interest in the proxy advisory industry may compromise the independence of advice provided by proxy advisory firms. The CSA expects firms to identify, manage and mitigate actual or potential conflicts of interest and to consider doing so by, among other things:
- establishing and maintaining written policies and procedures to mitigate actual or potential conflicts of interest that could influence research, analysis, voting recommendations or proxy voting guidelines;
- designing and implementing internal safeguards and controls to monitor policies and procedures and adopting a code of conduct to mitigate actual or potential conflicts of interest (which have the endorsement of the board of directors or, if the proxy advisory firm does not have a board of directors, the executive management team or a designated committee of the firm); and
- regularly evaluating the effectiveness of processes to ensure they remain appropriate (including appointing an appropriately qualified person or committee of appropriately qualified persons for monitoring and assessing compliance by the firm of its processes).
In addition, proxy advisory firms are expected to disclose actual or potential conflicts of interest to their clients in a timely manner, and, where possible, to post or describe on their websites their policies, procedures, safeguards, controls and code of conduct.
Transparency and Accuracy of Vote Recommendations
The CSA promotes transparency in the processes leading to voting recommendations, so that market participants can appropriately evaluate the merits of such guidance. The CSA expects proxy advisory firms to ensure that voting recommendations are determined in a consistent manner, based on up-to-date publicly available information and prepared in accordance with a methodology aimed at reducing the risk of errors.
Proxy advisory firms may consider taking the following steps:
- regularly evaluating the effectiveness of internal controls and procedures;
- implementing a quality assurance process to review voting recommendations before they are provided to clients;
- establishing and, where possible, disclosing policies and procedures describing the methodology used in the analysis as well as internal safeguards and controls to increase the accuracy and reliability of the information and data used in the preparation of voting recommendations;
- ensuring that they have the resources, knowledge and expertise required to prepare well-researched and analyzed voting recommendations, by hiring, training and retaining individuals with the appropriate competencies; and
- describing, where possible, the policies and controls applicable and the practices adopted with respect to hiring, training and retaining on their firm website.
Development of Proxy Voting Guidelines
Proxy advisory firms are encouraged by the CSA to ensure that their proxy voting guidelines, which may have influence on corporate governance practices of issuers, avoid a "one-size-fits-all" approach and to consider the following when developing such guidelines:
- establishing, maintaining and applying written policies and procedures describing the process followed in developing and updating proxy voting guidelines;
- consulting regularly with clients, other market participants and other stakeholders and taking into account local market or regulatory conditions;
- having the resources, knowledge and expertise required to develop and update voting guidelines; and
- posting, where possible, on their website their proxy voting guidelines, policies and procedures, and consultations leading to the development of proxy voting guidelines as well as the practices adopted with respect to hiring, training and retaining individuals.
Communications with Clients, Market Participants, Other Stakeholders, the Media and the Public
The CSA encourages proxy advisory firms to foster an understanding of the activities of such firms by:
- communicating to their clients in their reports: (i) how the approach or methodologies were used or applied in determining the vote recommendations; (ii) sources of information used in determining the voting recommendations; (iii) the extent to which proxy voting guidelines are used when making voting recommendations; (iv) the nature of dialogue with the issuer, shareholder proponents or other stakeholders in the preparation of voting recommendations; (v) the limitations or conditions in the research and analysis used in the preparation of voting recommendations; and (vi) including a statement that the voting recommendations are intended solely as guidance to assist the client in their decision-making process;
- correcting any factual error or inaccuracy found in a report in a timely manner;
- establishing policies and procedures governing their communications with clients, market participants, other stakeholders, the media and the public and posting such policies and procedures on their websites; and
- establishing a contact person to manage communications with clients, market participants, other stakeholders, the media and the public.