Conflicts Arise with “For Profit” Exchanges

FAIR Canada has repeatedly expressed concerns about the inherent conflict of interest between the “for profit” status of the TSX (part of the TMX group listed on the TSX), and the TSX acting as a regulator of listed companies where it has a responsibility to act in the public interest. We have advocated for regulators to address this conflict of interest in a way that is consistent with international standards. Our concern is shared by other stakeholders. In its Report (page 35), the Standing Committee on Government Agencies called on the OSC to “review the potential for conflicts of interest between the regulatory and commercial functions at the TSX and [that it] take the steps necessary to address any problems identified.”

The U.S., U.K., and other major markets have all addressed the conflict between the exchange’s role as a regulator and the duty of a listed exchange to maximize profits for its own shareholders. Alternatives include (but are not limited to) a separation of the listed company regulatory function, either by:  (1) creating a separate entity within the TSX with its own board of directors, or (2) transferring responsibility for listed company regulation to an independent SRO.

FAIR Canada is currently conducting a study outlining the role of exchanges in listed company regulation. The study will examine the inherent conflicts of interest that arose when the exchanges themselves became “for profit” listed companies. The study will describe how the conflicts in listing regulation were addressed in the U.S., U.K. and other markets.

Alpha to Compete with TSX for Listings Business: Conflicts of Interest Multiply

With the recent news of Alpha Group applying for exchange status in Canada, we are even more concerned about potential conflicts of interest. Alpha is majority owned by the investment arms of Canada’s five largest banks, plus Canaccord Capital, CPPIB and Desjardins Securities. FAIR Canada wants to ensure that investor protection and the public interest are carefully considered when Alpha’s application is reviewed by the OSC and other securities commissions. The ownership structure of Alpha raises a whole new set of conflicts that do not exist with the TSX. The conflicts of interest and public policy issues raised by Alpha’s application to become a recognized exchange are of even greater importance to the public than the conflicts involving the “for profit” TSX.

Competition by Lowering Standards

How will Alpha compete with the TSX for listings? Will it do so on the basis of listing requirements that are more lax (ie. detrimental to investors) than those of the TSX? Will this result in a competition between Alpha and the TSX to lower standards in the name of a “level playing field” with the result that Canada faces a “race to the bottom” in listed company regulation?

Ownership of Alpha Raises New Issues

Thomas Caldwell, Chairman of Caldwell Financial Ltd., recently wrote an opinion piece in the Financial Post entitled, “Big Banks continue their bid for power: Canadian banks’ exchange sets up conflict of interest,” outlining his concerns about potential conflicts that arise with Alpha’s application to become an exchange. In particular, he asks governments and regulators to consider two points: (1) Conflicts of interest are a breeding ground for crises, and (2) How powerful do you want our banks to be? The ownership of Alpha by the dominant financial institutions in the country clearly raises public interest issues beyond those that arise with the TSX.

FAIR Canada Calls for Full Public Consultation

FAIR Canada urges regulators to engage in a transparent public consultation process to determine whether recognizing Alpha as an exchange would be in the public interest and in the best interest of investors. The process should include publication of the Alpha application (including the listing rulebook), together with an analysis of the conflicts of interest, competition and other regulatory issues. The public consultation period should be open for a minimum of 90 days, given the significance of the application and the extensive material that would need to be included in an application to become an exchange. The public consultation should be followed by public hearings by the OSC and other securities commissions that are considering the Alpha application. FAIR Canada welcomes the opportunity to discuss these important and timely issues with the regulators and other interested parties.