The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) has released a report calling on the TMX Group Inc. (TSX:X) to do more to manage the conflicts of interest that arise from the fact that it both profits from the business of listing companies and regulates that listings function.

The report authored by John Carson, former senior vice president listings and market regulation at the Toronto Stock Exchange, and now managing director of Compliax Consulting, examines the way seven other exchanges have dealt with these conflicts (including the New York Stock Exchange and Nasdaq in the United Staetes, along with markets in the UK, Japan, Hong Kong, Australia and Scandinavia).

The report concludes that those exchanges have all implemented measures to deal with these conflicts, including corporate governance policies, changes to organizational structures, and other corporate policies and procedures.

“The TSX is the only exchange among this group that has not implemented specific measures to manage its conflicts of interest in regulating listed companies,” the report says. Instead, it points out that the TSX carries out listings regulation within a department that is responsible for both listings regulation and the listings business.

According to the report, the TSX doesn’t believe there are conflicts between its listings business and the regulation of listings. The TSX argues that maintaining a credible listings business is best accomplished by upholding listings rules and standards. The exchange stresses that the listings process is transparent and that it favours sound regulation and high standards. “Therefore the TSX believes that the goals of maintaining the profitability of the business and regulatory standards are congruent,” the report states.

The report allows that these objectives are broadly aligned, but it finds that this still isn’t good enough to manage conflicts of interest, because commercial considerations could influence policy decisions, and there’s a perception that a conflict exists. As a result, it encourages the TSX to consider the approaches adopted by other exchanges around the world to manage these conflicts, including: transfering listings regulation to another regulator; establishing an independent subsidiary to perform listings regulation; or establishing a separate listings regulation department.

The report doesn’t make any recommendations as to which path to choose, rather, it says the purpose of the report is to stimulate debate at the exchange, and among the regulators, to encourage them to address the issue.

FAIR Canada has been raising the issue of these conflicts at the TSX for some time. As well, a report from a standing committee in Ontario issued earlier this year called on the Ontario Securities Commission to review the potential conflicts of interest at the exchange and address any problems it found.

FAIR Canada says that these issues are becoming even more important for regulators to address as they are considering an application from the Alpha alternative trading system to become an exchange, able to list companies in competition with the TSX.

“If Alpha introduces listing requirements that do not match those of the TSX, this may lead to lower standards in the name of a ‘level playing field’, with the result that Canada could face a ‘race to the bottom’ in exchange listed company regulation,” warns Ermanno Pascutto, executive director at FAIR Canada.

Pascutto added that the results of the report “largely speak for themselves, and are highly instructive for the TSX and Canadian securities regulators.” It looks forward to continuing to discuss these issues with the TSX, the regulators and others, “with a view to ultimately strengthening investor protection in the Canadian capital markets.”

IE