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Exchange Conflicts of Interest Must be Appropriately Managed

In a recent Financial Post Comment, Ian Russell (CEO of IIAC) and Ed Waitzer (J.D. Professor) ask many important questions, including “Are stock exchanges still a necessary public utility, ensuring the efficient allocation of capital and, thereby, contributing to economic growth? As for-profit entities, should they continue to have regulatory responsibility?”

The Comment points out many potential conflicts of interest inherent in the current exchange business model. FAIR Canada has previously drawn these issues to the attention of Canadian regulators, including through its July 2010 report entitled Managing Conflicts of Interest in TSX Listed Company Regulation, submissions to the OSC regarding the proposed Maple acquisition of TMX Group, a letter responding to requests for comment on the proposed TMX-LSE merger, and in our submission on Alpha LP’s application to convert from an ATS to an exchange.

Recent issues with emerging market issuers have highlighted the need to effectively and appropriately manage these conflicts of interest. Several high-profile cases involving emerging market issuers have received widespread media attention. At the same time, the TSX opened an office in China to promote TSX/TSV listings for Chinese companies, in furtherance of its listings business. The TSX’s Beijing office was opened while Canadian regulators were struggling with the structural challenges posed by regulating emerging market listings and were in the process of investigating several TSX and TSX-V listed China companies for fraud, accounting irregularities and other serious   matters.

FAIR Canada agrees with the Comment that it is time to go back to first principles “to re-examine the public utility of stock exchanges (and other marketplaces) that gives rise to their regulated status”. It is essential that public markets be appropriately regulated in the public interest and not to further the profit motive of an exchange.

March 19, 2012