Securities regulators have launched a consultation on the possible regulation of proxy advisory firms, which provide voting recommendations to shareholders on both issuer and shareholder proposals and M&A transactions, among other services.
The Canadian Securities Administrators (CSA) published a consultation paper Thursday that aims to address regulatory concerns about the services provided by proxy advisory firms and their potential impact on the capital markets. Those worries include: conflicts of interest; a perceived lack of transparency; potential inaccuracies and limited engagement with issuers; corporate governance implications; and, the extent of reliance by institutional investors on the recommendations of proxy advisory firms.
The paper notes that these services are not currently subject to any regulatory oversight. At the same time, it says there is limited information about the extent to which institutional investors actually rely on proxy advisors, and whether investors are concerned about their impact on the market. Therefore, the regulators are looking to assess whether there is a problem, and, if so, what the appropriate regulatory response would be.
Some market participants cite the potential influence of proxy advisory firms over vote outcomes and the corporate governance of issuers, combined with the possible negative impact of conflicts of interest and lack of transparency concerns… as support for greater regulatory oversight in this area,” the paper says. And, it notes that some critics argue that the risks to market integrity may be greater because of limited competition in the proxy advisory industry.
The proxy advisory industry in Canada is dominated by two firms – Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co (Glass Lewis), which are both based in the U.S. ISS is owned by MSCI, Inc., and Glass Lewis is a wholly-owned subsidiary of Ontario Teachers’ Pension Plan Board.
The CSA says it “may be appropriate” to consider regulating proxy advisors. It suggests that it could require proxy advisory firms to identify and control conflicts of interest; to disclose the methodologies, analytical models and assumptions used in arriving at a vote recommendation; and, to have a policy to deal with issuer comments on vote recommendations and the underlying analysis, among other things.
If regulation is warranted, the paper suggests that the CSA would likely adopt a new securities regulatory framework that would apply specifically to proxy advisory firms, which would require legislative authority to regulate proxy advisory firms. “This approach would not attempt to compel proxy advisors to comply with requirements of existing regimes that were not designed with them in mind,” it says.
“This consultation is aimed at providing the CSA with more information from market participants to assist us in our analysis into the need for potential regulation of proxy advisory firms,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission. “The feedback will help us determine the validity of the concerns raised, consider their impact on the integrity of Canadian capital markets, and assess whether there is a need for a securities regulatory response.”
The paper is out for comment until August 20.