IIROC dealer fees set to rise

Costs are budgeted to decline by 4% in the current fiscal year (which would be 6% lower than its actual costs last year). The primary reason for the expected decline is due to the cost savings associated with the move to use its new market surveillance system, known as STEP, to monitor trading on the TSX and TSX Venture Exchange. This move is expected to save $7 million annually in market surveillance costs. However, it incurred a one-time charge of $4.4 million last year due to the early termination of an agreement between TSX and IIROC relating to the previous surveillance system.

Other areas where costs are budgeted to decrease are in rental payments and telecommunications, it notes. However, it expects costs to increase due to higher compensation expenses, and amortization from the build-out of its consolidated Toronto offices.

The decrease in regulatory costs will primarily benefit the market regulation side, where fees for 2013 are expected to decline by 8% from the previous year. Dealers fees, however, are due to rise by 5% year over year. Fees in fiscal 2012 were subsidized by regulatory surpluses. Comparing 2013 fees to 2012 fees without the subsidy, dealer fees are increasing 3%, whereas market regulation fees are decreasing by 15%, it says.

IIROC implemented new dealer and market regulation fee models on April 1, that are designed to reflect the drivers of its regulatory costs, and fairly allocate them to the sources of those costs. IIROC notes that it is reviewing the impact of this new fee model and will adjust it as necessary.

Total operating expenses for the coming year are budgeted at $86.8 million, down by about $3.2 million from the previous year’s budget. Along with the routine costs of regulation, IIROC indicates that in the year ahead it will be building a data mining system that will allow it to study, identify trends, and conduct deeper reviews of trading in Canadian equity markets to inform policy making. It is also building-out and furnishing new office space in Calgary.

Last year, IIROC reports that total operating costs were $92.7 million, up 20% from fiscal 2011. Dealer regulation costs increased by 10% to $56.3 million, and market regulation costs increased by 38% to $36.4 million, it reports (largely attributable to the $4.4 million termination fee).

Compensation costs increased during the year due to increased staffing to implement a new complaints handling process, to enable more field reviews, and in its IT department. Occupancy costs were also higher due to one-time transition costs arising from the consolidation of Toronto office staff into one location. It also saw cost increases driven by more use of outside counsel to handle challenges to IIROC’s jurisdiction and enforcement process, and for the review of the Maple Group offer for the TMX Group, Alpha and The Canadian Depository for Securities.

Revenues rose 6% last year to $85 million, as dealer membership fees rose 12%. Combined revenue from secondary sources declined by 3% during the year, as underwriting levies declined by 6%. Registration fees increased by 5% and timely disclosure fees were up by 6%.

The year ended with an operating deficit of $6.6 million; which, combined with $10.7 million in capital asset purchases, reduced the balance in IIROC’s Unrestricted Fund to $25.3 million from $34.9 million.

Its Externally Restricted Fund, which is primarily comprised of fines, penalties and disgorgement of profits in enforcement cases, saw total revenues of $2.9 million during the year, up 47% from the previous year; primarily due to higher investigation fines, which increased by 66% year over year. IIROC says that fine revenue was up as a result of increased assessments on individuals.

IIROC didn’t report its fine collection rate in this year’s report, but it did say it’s working to improve that performance. “IIROC endeavours to collect all fines imposed by hearing panels; however, IIROC continues to work towards enhancing its ability to collect all fines,” it says.

In addition to monetary sanctions, during the year, it also suspended 26 individuals, banned nine individuals from the industry, and suspended 3 firms; compared with 18 individual suspensions, 13 individual bans, and one firm suspension in the previous year. Enforcement completed 73 prosecutions, up by 13 from the previous year.

In the report, IIROC also notes that it remains open to exploring merger discussions with the Mutual Fund Dealers Association of Canada (MFDA). The two SROs broached the idea last year, but the MFDA ultimately backed way after both organizations surveyed their members about the idea.