FAIR Canada
FAIR Canada Newsletter
May 2010 - Second Edition
Conflicts of Interest Go Alpha
Greetings!

Alpha ATS announced on April 22, 2010 that it had filed an application with the Ontario Securities Commission to become an exchange. Bloomberg reported the news as follows:

Alpha Trading Systems, a bank-owned stock trading platform in Canada, applied to become an exchange so that it can add new listings and challenge the Toronto Stock Exchange.


"The key objective is to give us access to the listings business," Alpha Chief Executive Officer Jos Schmitt said today in an interview. "This is an important evolution, it's a big step forward."

Alpha is the leading Alternative Trading System (ATS) for Canadian listed securities. Alpha is owned by nine of Canada's largest financial institutions, including the six largest banks. According to Alpha's website, Alpha was "established for the industry by the industry..."

The term "alpha" means an abnormal rate of return in excess of what would be expected. Exactly how will Alpha achieve an abnormal rate of return in the listings business? Can "abnormal returns" be achieved in a manner consistent with the public interest and in the best interest of investors?

The OSC has not announced how it intends to deal with the Alpha application. FAIR Canada calls on the OSC to undertake a full public consultation, including public hearings. The Alpha application raises major public policy issues that should not be swept under the carpet with a
short 30-day comment period, quick approval process, and a promise to address the policy issues in due course. That would not be in the public interest.  

See note below for more on the public policy issues raised by Alpha's application to become an exchange. 
 
Ermanno Pascutto, Executive Director
 
Alpha Proposal to Become an Exchange
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.
 
Click here for full story.
 
 
 
FAIR Canada submitted its comment letter to the Task Force on Financial Literacy on April 30, 2010, outlining a detailed, seven-point Action Plan. FAIR Canada believes that the Action Plan will allow the Financial Literacy Strategy to make a real, lasting impact on the financial well-being of all Canadians.
  
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