FAIR Canada made a presentation at the OSC’s Policy Hearing on the Maple Group Acquisition Corporation Application to acquire TMX Group Inc., Alpha Trading Systems Limited Partnership, Alpha Trading Systems Inc., The Canadian Depository for Securities Limited and, indirectly, CDS Clearing and Depository Services Inc. (the “Maple Policy Hearing”).
FAIR Canada focused its submission on how the OSC need to address the conflict of interest that arises from regulating listings while also profiting from the listings business and how the Maple Proposal, if it should proceed, would exacerbate the existing conflict.
The structure that the TSX has to deal with this conflict is the same one that existed at the time it demutualized and is not in accordance with international standards. While the TSX refuses to believe that any real conflict exists, the Ontario Government’s Standing Committee on Government Agencies, in a March 2010 Report cited concern “with the perception that the TSX falls below international standards with respect to the separation of its regulatory and commercial activities.” The Committee recommended “that the [Ontario Securities] Commission review the potential for conflict of interest between the regulatory and commercial functions of the Toronto Stock Exchange and that it take the steps necessary to address any problems identified.”
An example of the conflict is illustrated by the TSX and TSX-V’s marketing efforts to attract China listings over the last decade, absent consideration of whether the regulatory framework in Canada is adequate to ensure sufficient oversight and investor protection. The media recently reported that the TSX has opened an office in China to attract new listings. Recent events involving Sino-Forest and, subsequently, more than a dozen TSX-V issuers that are also emerging market listings, have resulted in billion-dollar losses for investors, and in particular, retail investors. This demonstrates that the TSX and TSX-V have not properly considered the risks or the public interest in their campaign to increase their China listings. It demonstrates the conflict in the two mandates.
The Maple Proposal will exacerbate the existing conflicts of interest given that listings standards and administration of listings requirements may be influenced by the financial interests of the firms that make up Maple Investors. A conflict of interest exists where the dealers who dominate the listing business are owners and significant shareholders of the exchange. The subsequent acquisition of Alpha, would also likely result in an increased focus on the listings business function.
We recommend that the listings regulation function be transferred to another regulator; preferably an independent self-regulatory organization. This was the approach taken by Canadian regulators with respect to the TSX’s member regulation and market regulation functions when it demutualized and would therefore be the most natural, evolutionary approach to address the issue and given provincial nature of securities regulation. Other potential methods of addressing these issues include: 1) transferring the regulatory function from the exchanges to provincial regulators, or (2) establishing a separate subsidiary with an independent board of directors.
The Canadian Coalition for Good Governance shares FAIR Canada’s concern with the listings regulation conflict of interest at the TSX and stated in its submission to the OSC that “…the approval of the Application should be contingent on the TSX finally addressing the conflicts of interest inherent in its business model… At a minimum, the TSX should be required to establish an independent entity, overseen by securities regulators, to establish, interpret and enforce the requirements for its listed issuers.”
