High regulation costs still irritate some dealers

On the other hand, many compliance officers and senior executives at dealer firms surveyed for this year’s Regulators’ Report Card admit that they’ve seen an improvement from the industry’s key regulators in terms of taking a closer, more critical look at their internal costs and fee structures. Dealers gave regulators modestly higher scores in terms of fairness of fees compared with last year.

This fiscal year, the Toronto-based Mutual Fund Dealers Association of Canada froze fees, using $1 million from a reserve fund to offset part of an anticipated shortfall. The MFDA also froze bonuses and salaries for all staff, says president and CEO, Larry Waite, who adds: “We recognized [the firms] were hurting. We didn’t take a dollar more from the industry in the current year than we took in the previous year.”

Dealers, however, had divergent opinions on the MFDA’s fee model, which charges firms based on assets under administration. Some like the regime, describing it as fair; others claim it hurts small firms.

“Big firms get a better deal because the cost is calculated per firm and not per rep,” says a compliance officer in British Columbia.

If the industry doesn’t feel that the fee regime is fair, the MFDA may be open to changing it, Waite says: “We will be looking at our fee structure within the next few years and will look at a number of issues: should the AUA include all products sold by the dealer, or just mutual fund assets, as it currently does; should the number of approved persons be factored into the equation at all; and, if so, to what degree? The members will be actively involved in this review process.”

Provincial securities regulators were also dealt some criticism from dealers about their fees. Although some compliance officers acknowledge that the regulators do necessary work and that they have taken steps to rein in costs, others continue to chafe under what they feel are fees that are still too high.

“The fees are getting better,” says a compliance officer in Ontario, “but I still get nothing for them.”

Facing a revenue shortfall for the 2009-10 fiscal year, the Ontario Securities Commission had proposed raising its fees, but backed down when it received a significant amount of negative reaction from industry firms that were hurting financially from the recession.

In the end, the OSC elected to freeze rates for the year and use a portion of a reserve fund to cover the shortfall. In the meantime, the regulator has looked at its cost structures and consulted the industry on its fee regime.

After speaking with the industry, the OSC has elected to keep its fee structure unchanged but raise its participation rate fees for reporting issuers by 17% annually over three years and raise its capital markets participation fees by 9% annually over the next three years. Still, the regulator anticipates operating at a budgetary deficit until at least March 2013.

The B.C. Securities Commission and the Alberta Securities Commission both say they won’t be raising their rates for the new fiscal year.

In general, compliance officers surveyed this year seem resigned to accepting costs from the provincial regulators. Says a compliance officer in Ontario: “It poses a burden to us, but it’s also a necessary evil.”

Although some compliance officers praise the Toronto-based Investment Industry Regulatory Organization of Canada for transparency and fairness regarding its fee structure, others say they don’t believe their firms are getting fair value. Some particularly balked at both the $25,000 fee to become an IIROC member and the $25,000 minimum annual membership fee.

There was also some concern in that there appeared to be a disconnect between the fees IIROC charges and the harsh business realities facing the industry — particularly for the smaller firms.

“I understand everyone has to pay fees,” says a compliance officer in the West, “[but] there’s no controlling over how much the fees go up.”