Investor relations experts are criticizing TSX Group Inc.'s acquisition of one of Canada's largest independent investor relations firms, saying it could lead to conflicts of interest and put undue pressure on small companies to use TSX services.
Toronto-based TSX Group announced last week it is buying Equicom Group Inc., which has 60 employees in Toronto, Calgary and Montreal. It provides full investor relations (IR) services to about 100 public companies.
"I was stunned when I heard the announcement," said Dick Wertheim, who runs independent IR consulting firm Wertheim + Co. in Toronto. "... I thought there is an amazing conflict of interest at work here."
IR services are typically provided to smaller companies that don't have in-house staff. Services often include managing relationships with shareholders, designing ways to promote a company's stock and preparing communications documents.
Among his concerns, Mr. Wertheim said TSX Group will be responsible for enforcing its listing standards - including rules about appropriate disclosures in press releases - that could involve advice provided by its own IR firm.
"You have the potential conflict of the regulators owning an investor relations firm that may, at times, do things that regulators do not approve of."
He said he is also concerned that Toronto-based Equicom will play a role promoting stocks the TSX is overseeing.
"They have banks of people that call brokers and basically promote the stock," he said. "To think of an arm of the TSX promoting stocks ... is something I find very strange."
Ken Barnes, managing partner at Barnes McInerney Inc. of Toronto, said his firm doesn't compete directly with Equicom in most areas, but it might pick up business from companies that don't want to be advised by a TSX firm.
"The TSX's job is to create a fair and efficient market. To have an in-house IR firm promoting some companies over others is a little strange. I think it's kind of like a law firm being owned by the Justice Department."
Dominic Jones, a principal at Toronto-based Clarity! Communications of Canada Inc. and the founder of IR Web Report, said there is a big difference between Nasdaq Stock Market Inc. investing in a news wire service and the TSX owning an IR firm. "It's different with Equicom because it's very much a full-service kind of firm that is involved in crafting companies' messages that are then subject to the TSX disclosure rules."
Mr. Jones and several other IR professionals who did not want to be identified said they are also concerned that small companies could feel a subtle pressure to hire Equicom to smooth their relations with the exchange.
"If I don't use Equicom, and they've recommended Equicom, does it hurt my approvals to get a listing or anything like that?" said one IR specialist. "I can't see the TSX doing that, but it could leave people with the perception."
TSX Group spokesman Steve Kee said while Equicom is to be an extension of TSX Group's service offering to listed companies, they won't be forced to use its services. "If a company wants to use Equicom, that's their choice." He said Equicom will fall under the listings group run by TSX senior vice-president Richard Nadeau, but will operate separately. "They're not even going to be in our building."
He said Equicom will also end the practice of accepting stock options as compensation, and will surrender options it now holds.
Mr. Barnes said he thinks many companies could decide that Equicom is in a complicated position and will choose not to hire it. In some cases, companies need advice in problematic disclosure situations and want to know what will satisfy mandatory regulatory rules without drawing unwanted attention. He said these needs could create difficulties for staff at Equicom.
"The TSX itself said it wants to encourage its listed companies to act in the most professional manner, so that's a good thing. But, again, I suspect it's going to be a little difficult to do in some circumstances where you have clients with disclosure or performance issues."
Janet McFarland