Canada's securities regulators have trodden a careful middle ground with a new policy to regulate the work of increasingly influential proxy advisory firms.
The Canadian Securities Administrators, an umbrella group representing provincial securities commissions, issued new guidance Thursday for firms that advise large shareholders on how to vote their shares – notably Institutional Shareholder Services Inc. and Glass Lewis & Co.
The guidelines do not impose new regulations on proxy advisory firms, but instead urge them to adhere to new recommended best practices that will make them more transparent in their work and more responsive to companies that want to provide input.
Bill Rice, chair of the Alberta Securities Commission, said the guidelines recognize that proxy advisory firms play an important role by helping shareholders vote their shares, but also have obligations.
"We believe that providing proxy advisory firms with recommended practices and disclosure is appropriate to heighten transparency and maintain a high degree of confidence in the quality of the voting process," Mr. Rice said in a statement.
The guidelines, which are open for public comment until June 23, do not adopt recommendations submitted in 2012 by some companies calling on regulators to require all proxy advisory firms to be registered with securities commissions and meet mandatory disclosure standards.
But they go further than recommendations from some large institutional investors who use the services of proxy advisory firms, who said there was no need for regulators to intervene in a private business arrangement. Many large investors said they had no concerns about the quality of work done by proxy advisory firms.
The non-binding guidelines call on proxy advisers to manage conflicts of interest – which can include providing consulting services to companies that are the subject of their voting recommendations – both by avoiding conflicts and by disclosing any potential conflicts to their clients.
The guidelines also said proxy advisory firms should disclose the processes that lead to their voting recommendations and ensure that staff have the knowledge and expertise required to make good recommendations on complex issues.
As well, regulators said proxy firms should ensure they do not impose "one-size-fits-all" governance rules and should engage with market participants on the development of their voting guidelines.
The guidelines also say proxy advisory firms do not have to meet with companies when they prepare their voting recommendations – which is a practice some companies were seeking – but they have to publicly disclose their approach to dialogue and contact with companies.
Proxy advisory firms have become increasingly influential in recent years as institutional shareholders face more pressure to vote their shares and disclose their voting records. Many investors rely on a proxy firm to handle the task, with some investors giving the advisers full control over voting their shares while others use their recommendations as input and manage voting themselves.
ISS told Canadian regulators it was already doing many of the things companies were urging should be mandated as regulations, including creating strict internal walls to ensure consulting services are separate from advisory services, and undertaking effort to improve public transparency.
The new guidelines praise proxy firms for their efforts to improve their standards.
"In light of the foregoing, we concluded that a policy-based approach providing guidance on recommended best practices … represents a sufficient and meaningful response," the CSA said in its comments.