Proxy voting protocols generate comments for automation

01 Proxy voting commentary

Comments were received over the summer on CSA Multilateral Staff Notice 54-304, the final report on the review of proxy voting and request for comments. The notice proposes protocols for counting shareholder proxy votes. Proxy voting is “an important and fundamental right,” says Gordon Raman, a partner at Borden Ladner Gervais (BLG) in Toronto. It gives shareholders influence over such things as director elections and transaction approvals.

Most people hold shares through brokers or other intermediaries. Brokers, in turn, hold their shares with the Canadian Depository for Securities (CDS).

“CDS shows up on the share register as the owner of a big chunk of shares. So, how do you get that voting right transferred to shareholders?” Raman asks.

The proposed protocols aim to ensure brokers (and other intermediaries) accurately generate—and tabulators consistently record—information on shareholders’ voting entitlements. That way, proxies can be checked against those records. Further, the protocols support end-to-end vote reconciliation. “Once the vote is registered, shareholders get confirmation their vote was registered the way they wanted,” says Raman.

The current process results in over-voting and missing votes. It’s a complicated system in which some brokers hold shares through multiple intermediaries, and intermediaries may transfer some voting rights to other intermediaries. “And some of this happens in paper—it’s not all electronic,” says Raman.

Ross McKee, a partner at Blake, Cassels & Graydon in Toronto, compares the system to a faulty electoral process in which some polls count and some don’t. He says retail advisors want to ensure clients get the full benefit of their investments—not only through dividends, but also a voice through voting.

But the proposed protocols focus “on the system as it currently stands, without any real, radical solutions,” he says. Like Raman, he notes that the vast increase in beneficial ownership and the general move to digital platforms aren’t reflected in the current voting process.

Indeed, received comments urge automation. Without it, the protocols are “a stopgap measure,” says the Canadian Society of Corporate Secretaries in a comment letter.

Some commenters are calling for more detail in the process. “The [protocols] don’t specifically say how job[s] must be done,” says McKee, pointing out that tabulators aren’t regulated; nor is Broadridge, the proxy voting agent for intermediaries.

Says Raman, “There’ll be discussion about whether these protocols should remain as guidelines or become rules.”

Although there is no uniform view on whether or how to fix the voting system, “this is the plumbing of our capital market system,” says Raman. “We don’t need to know how it works, only that it does.”

Adds McKee, “The study [CSA notice 54-304] stated that other countries are already looking at proxy voting. Canada is just getting started in a process we’re only seeing the beginning of.”

One or more roundtables to discuss the issues raised in the comment letters are expected to be held in Fall 2016.

02 CSA proposes margins for derivatives

On July 7, 2016, CSA published for comment consultation paper 95-401, Margin and Collateral Requirements for Non-centrally Cleared Derivatives. The proposal is part of ongoing regulatory reform to over-the-counter (OTC) derivatives markets.

In February 2016, the Office of the Superintendent of Financial Institutions Canada (OSFI) published margin requirements for Canadian financial institutions.

“The consultation paper is based in large part on the OSFI guideline,” says Carol Derk, a partner at BLG in Toronto, “as well as [on] the global rules that have been implemented elsewhere.”

But the proposal’s scope is broader, applying “to any entity that’s entering into derivative transactions with someone based in Canada,” says Derk, “whether it’s another Canadian financial institution or a foreign financial institution.” (Canadian institutions need comply with only the OSFI guideline.)

Historically, “it’s been left to the parties to negotiate what, if any, margin terms they want,” says Darren Littlejohn, a partner at Blake, Cassels & Graydon in Toronto. “Following the financial crisis, regulators have decided, at least for a certain subset of the industry, that it doesn’t make sense to allow those relationships to go uncollateralized, because it can produce systemic risk.”

Entities that have outstanding OTC derivative notional amounts of $12 billion or more, during March, April and May, would fall under the proposed margin requirements beginning September 1 of the year to August 31 of the following year.

“It’s a very high threshold for portfolio advisors,” says Derk, thus many of them won’t be subject to the proposal. Even relatively small financial institutions not subject to OSFI, like credit unions or large pension funds, would be subject to the proposal if they meet the derivatives threshold.

Further, both the paper and the OSFI guideline aim to exempt from the threshold investment funds managed by portfolio managers by treating them as distinct legal entities.

“But in Canada almost all investment funds are either trusts, limited partnerships or classes of a mutual fund corporation, and none of those are distinct legal entities,” says Derk. “The way they’ve tried to bring them outside the $12-billion threshold doesn’t quite work.” This could result in some uncertainty for portfolio managers when they report their status, she says.

She says portfolio managers who deal with U.S. swap dealers should be aware that U.S. variation margin requirements come into effect in March 2017.

Littlejohn says more margin generally means more cost. But margins “also make the market and the transactions safer.”

by Michelle Schriver, assistant editor of Advisor Group.