Dealers across Canada are taking a closer, more critical look at the fees they’re paying to the self-regulatory organizations and securities commissions that license and oversee them, particularly during these tough economic times.
While acknowledging that the various regulatory bodies do useful and necessary work, compliance officers and senior executives at dealer firms who were surveyed by Investment Executive said their regulatory costs were too high and that they weren’t receiving enough value for their buck. And whereas fees may have been borne with relatively little grumbling during boom times, dealers today are feeling the strain of regulatory costs.
Provincial securities commissions come in for a fair amount of the criticism.
“What does the Ontario Secur-ities Commission do for us?” says a compliance officer at a dealer based in Central Canada. “We spend thousands and thousands on registration.”
Other compliance officers complain that fees set by securities commissions aren’t as transparent as those set by the SROs; that the commissions aren’t as responsive as they should be, considering the fees dealers pay; and that having to deal with a number of securities commissions is just too expensive.
“We should have a single regulator,” says a compliance officer at a British Columbia-based dealer. “This would reduce the cost to players.”
But even as some in the industry balk at the cost of regulation, provincial commissions and the SROs are also feeling the pinch of declining revenue. The fees regulators charge member firms are often based on firms’ asset levels and revenue. With the crash in the equities markets and a global recession in full gear, asset levels and revenue at dealer firms are falling. And so are the operating budgets at regulators.
Last fall, the OSC proposed raising rates to compensate for an anticipated shortfall in revenue in its new fiscal year, which begins April 1. Over the past three years, the OSC says, the fees that it had been charging market participants were artificially low because they were being subsidized by surpluses the OSC had amassed during the boom times in the market. The OSC operates on a “cost recovery” basis and generates revenue by charging fees to market participants, not from taxpayer dollars.
The industry reacted by strongly criticizing the proposed fee hikes, arguing that it was coming at the worst possible time.
“While the desire for the OSC to have fee and revenue predictability is commendable,” wrote Eric Adelson, a senior vice president in the legal department of Toronto-based Invesco Trimark Ltd., in a letter to the OSC, “we note that none of the subjects of OSC regulation have that degree of comfort and the cost of that comfort is simply too high in the present circumstances.”
As a result, the OSC is backing down from the fee hikes, saying that it will freeze rates until March 31, 2010, and use an anticipated $45-million surplus to make up for the expected shortfall in revenue in fiscal 2010. After that date, however, the OSC will probably have to raise its rates in order to recover fully its cost of operations.
“We want to make sure the fees are fair and are seen to be fair,” says Ken Gibson, director of corporate services for the OSC. “We want to ensure they’re transparent.
“But also, from our own point of view, over the long term, we need to recover our costs,” he adds. “We have some flexibility now, because we generated surpluses. But that doesn’t last forever.”
Industry players are hoping that the regulator will find ways to reduce costs by tightening its belt.
“Part of the answer to the OSC’s anticipated shortfall in revenue will be found in it examining its operational costs and generating efficiencies,” says Ian Russell, president and CEO of the Toronto-based Investment Industry Association of Canada. “I’m sure the OSC is already in the process of doing that.”
The OSC maintains that it carefully looks at its operational budget. “We feel we’re making very sincere efforts to control our costs, while balancing the need to maintain our ability to regulate in these difficult times,” Gibson says. “We’re trying to control our costs, but also set fees in the future so that we can recover those costs.”
Both the Alberta Securities Commission and the British Columbia Securities Commission expect revenue to drop, but neither has any immediate plans to raise its rates. “We’re respectful of what’s going on in the market,” says John Hinze, director of human resources and administration and CFO with the BCSC in Vancouver.
@page_break@Compliance officers, especially at smaller firms, also have problems with the fees levied by the Mutual Fund Dealers Association of Canada, saying they are too high and that the regulator isn’t as effective as it ought to be, considering the fees it charges, in going after “bad apples” in the industry.
“They nitpick the little guys,” says a senior executive at an Ontario dealer, “but aren’t capturing the big crooks.”
Other dealers feel that MFDA fees are reasonable, but that MFDA Investor Protection Corp. fees, collected by the MFDA on behalf of the IPC, are far too high. The dealers are paying for insurance that covers only those funds under nominee name, while leaving investors with funds under client name — which represent the majority of industry assets — unprotected.
For its part, the MFDA says that its fees are reasonable.
“Nobody likes to pay fees, especially in the current economic environment,” says Larry Waite, president and CEO of the MFDA. “But our fee formula — based on assets under administration — is structured in such a way that it reflects the needs of smaller dealers.”
The MFDA’s minimum fee of $3,000, Waite adds, represents a more than fair deal for the industry’s smallest dealers, as it does not fully reflect the cost of overseeing them.
The fund dealer regulator has no plans to raise rates for at least the next couple of years, Waite says.
Compliance officers and senior executives at investment dealers had mixed reactions to rates charged by the Investment Industry Regulatory Organization of Canada. Some feel that the fees charged by IIROC are reasonable.
“I don’t find IIROC’s fees onerous, given the burden it has,” says a senior executive at a wealth-management firm based in Central Canada.
Other executives aren’t as happy with IIROC’s fee structure. One compliance officer at a firm based in Western Canada felt that IIROC “nickelled and dimed” companies, particularly smaller firms, with a slew of incidental costs on top of membership fees.
“It is putting the little guys out of business,” the compliance officer says.
IIROC, which operates on a not-for-profit basis, develops its budget and its fees on an annual basis. Its current fee formula is under review as part of the integration process following the merger of Regulation Services and the enforcement side of the Investment Dealers Association of Canada, which created IIROC. The SRO says that it hasn’t yet completed its budget process for this fiscal year and, therefore, hasn’t determined what its fees will be for its coming fiscal year. IE