Uncertainty may be gripping the markets these days, but if there’s one thing that the securities sector can count on, it’s higher regulatory costs.

Several of Canada’s biggest securities regulators have released their annual reports in recent weeks, revealing the ever-rising cost of regulation. According to the budget forecasts of the major regulators, the Ontario Securities Commission is expected to remain the biggest spender on regulation this year, but only barely.

The OSC is budgeting for a 7.9% rise in expenditures for the year, which would take its annual expenses to $90.7 million. If the OSC meets that forecast, it will remain just ahead of the Investment Industry Regulatory Organization of Canada, which is forecasting operating expenses of $89.9 million for the coming year.

The Alberta Securities Commission is forecasting a 15% increase in annual operating expenses, to $37.3 million. And the B.C. Securities Commission expects that its expenses will increase by 9.5% in fiscal 2011-12, compared with its forecast for 2010-11, taking the BCSC’s total spending to $33.3 million.

Staffing costs, for the most part, are driving the increases as regulators try to keep up with greater demands for increased oversight in various areas. IIROC’s report, for example, indicates that its growth in expenses is being driven mostly by “additional human resource requirements in response to increasing demands on IIROC’s regulatory mandate.”

Last year, IIROC’s operating costs were up by 5% on the dealer side, and they rose by 9% on the markets side. Dealer regulation costs rose primarily as a result of increased staffing, salary increases and the impact of the introduction of the harmonized sales tax in Ontario. Increases in market regulation costs rose mostly because of the introduction of IIROC’s new market surveillance system. That system will carry out cross-market surveillance and handle increased trading and messaging volumes. Compensation costs associated with the new surveillance system rose as well.

IIROC anticipates that costs will continue to rise this year to allow for increased compliance reviews and enhanced complaint handling, and to pay for additional information-technology staff.

Similarly, the OSC’s report says, its budget increase includes investments in several new strategic initiatives, including: the new staff required to deal with numerous, complicated market structure issues; and to create a new group to focus on the regulation of over-the-counter derivatives, a new chore facing securities regulators in the wake of the financial crisis.

The obvious implication of higher expenses for regulators is higher costs for the securities sector. Regulators’ revenue is primarily composed of fees collected from the sector and — in the case of the securities commissions — issuers. However, regulators are using accumulated surpluses to try to limit the pain for the sector.

IIROC’s report says that as a result of its rising costs, fees for this fiscal year are set to increase by 12% for dealer regulation activities and 8% for market regulation activities compared with the previous fiscal year’s fees. However, as IIROC has been subsidizing its fees from previous surpluses in recent years, it plans to do so again in the current fiscal year, limiting fee increases to 4% on the dealer side and 0% on the markets side.

Susan Wolburgh Jenah, president and CEO of IIROC, stresses that IIROC’s management and board are both sensitive to the rising costs of regulation. Wolburgh Jenah adds: “We are always actively seeking ways to reduce costs and to operate in a fiscally prudent manner” — even as costs increase in response to regulators’ growing responsibilities. And, indeed, IIROC’s expenses have come in significantly lower than initially projected over the past two years.

During the past year, IIROC also has developed new dealer and market fee models to try to reflect firms’ increasingly diverse businesses better and to fairly allocate costs. The proposed new models have been submitted to the securities commissions for approval; assuming they receive approval, IIROC plans to implement those new models in April 2012.

Similarly, the OSC has been absorbing some of its rising costs with the help of its accumulated surpluses. In fiscal 2011, for example, it ran an $11.1 million operating deficit, which reduced its surplus to $17.7 million. For 2012, the OSC is expecting to record an operating deficit of $10.4 million.

The ASC also expects to operate at a loss this year. It is forecasting a $7.8 million deficit for the year. However, like IIROC, the ASC notes that its spending has routinely come in below budget over the past few years, primarily because of staffing vacancies. As a result, that operating deficit probably won’t be as large as feared.

The BCSC is planning to stay in the black this year, albeit with a smaller surplus than last year. The regulator anticipates fee revenue rising by 3.8%. IE