When it rains, it pours. just as dealers find revenue under siege from difficult market conditions, the Ontario Securities Commission (OSC) has imposed higher participation fees for the next three years. But the question isn’t just by how much the fees have risen; it’s also whether dealers and all market participants are getting what they need from the regulatory authority.
Dealers are pressed to afford higher fees. Revenue for the industry’s roughly 185 boutiques has fallen by 24% this year and, on average, by 17% over the past five years. More than half of these firms are now losing money. The industry is aware of the need for regulatory reform to restore investor trust and confidence in the markets – which is why industry professionals have supported and contributed to extensive reform of the regulatory framework.
And we realize the OSC is conscious of the fee burden on registrants and reporting issuers – a fact reflected in leaving fees unchanged in 2009 by drawing down the regulator’s surplus. The steady escalation in the OSC budget has left it no choice but to push up fees on registrants and issuers at an inopportune time.
But funding of the regulatory agenda is not limitless. To wit, Stein’s Law: that which can’t go on forever, won’t. There is no assurance that the growth of the OSC budget in the next three years, following significant increases in the past five years, will not escalate even higher in the years beyond 2015. There will always be well-meaning measures, be they new regulations or improvements to existing regulations. So, how do we reconcile good intentions with budget realities?
We can start by recognizing that the regulatory approach must be carefully engineered to protect investors while ensuring the related regulatory burden – both direct costs from fees and charges, and indirect costs of compliance – doesn’t jeopardize our market competitiveness, so that we can attract participants to the Ontario market.
This is another reason we need a national securities regulator, which is the only mechanism that can take the array of fees and charges that registrants and reporting issuers face from the many securities regulators across the country and factor them into a comprehensive fee model.
In the Investment Industry Association of Canada‘s (IIAC) Nov. 26 submission, we recommended several amendments to the proposed fee model. For one thing, dealer participation fees for the next three years should be based on a rolling three-year average of revenue, not market performance in a single year – especially when revenue for the benchmark year (effectively, 2011) was significantly above actual revenue in 2012, and possibly in 2013 and beyond. For another thing, the OSC should not prohibit registrants from treating participation fees as a business expense and factoring these costs into their fee models, similar to the treatment of other fees and charges. (If the OSC does prohibit this, it should be adopted as a rule and clearly explained.)
And the burden of participation fees on registrants and reporting issuers should be eased by increasing the proportion of fees on activities. This could include, for example, lowering the threshold to charge variable fees to stock exchanges and clearing agencies, and charging fees for applications on a takeover bid, such as “poison pill” hearings.
To the extent possible, we must do more with less. But more than that, we must focus, not just on how we carry out regulatory responsibilities but also on what the objectives should be and how we measure them. For example, do we have sufficient regulatory expertise to oversee the new consolidated stock exchange and clearing system? Have we built adequate protections and restored investor confidence through the wide scope of the client relationship model framework and extensive disclosure, or will additional rules and regulations have much impact?
Broad consultation clearly is integral to the regulatory process, and the OSC does a commendable job of drawing out the views of the marketplace. But what is needed is a comprehensive perspective to define clear regulatory objectives and analytical tools to assist in rule-making.
That is why the IIAC has argued for increased accountability. We need a formal process under which the OSC explains its regulatory practices, business plan, budget, objectives and achievements before a standing committee of the legislature on an annual or biannual basis. As such a forum does in Britain and the U.S. (the latter with Securities and Exchange Commission appearances at congressional hearings), this would provide for an exchange of views before a credible third party and the public on the appropriate measures to achieve a cost-effective regulatory process.
We need to understand how regulatory priorities are established, and we need to see a cost/benefit analysis rigorously applied to assess the merits of prospective rules, the configuration of resources to meet objectives, the co-operation among regulators and other practices that bear on the regulatory process.
We need full transparency of the OSC business plan, budget and other documents – an appropriate standard for a government agency that sets its own fees to fund its operations.
Ian Russell is president and CEO of the Investment Industry Association of Canada.
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