Securities Law & Instruments

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REQUEST FOR COMMENT

PROPOSED REVOCATION AND REPLACEMENT
OF RULE 13-503 (COMMODITY FUTURES ACT) FEES AND

COMPANION POLICY 13-503CP (COMMODITY FUTURES ACT) FEES

Request for comments

The Commission is publishing for a 90-day comment period Rule 13-503 (Commodity Futures Act) Fees and Companion Policy 13-503CP (Commodity Futures Act) Fees. The proposed Rule and Policy (collectively, the Proposed Materials) are intended to replace the rule and policy currently in force under the same number.

In addition to being published in this bulletin, the Proposed Materials are available on the Commission's website (www.osc.gov.on.ca).

We request comments on the Proposed Materials by November 10, 2005.

Substance and purpose of the Proposed Materials

The Proposed Materials are consistent with the current rule and policy. That is, the proposed Rule requires registrants to pay a "participation fee" each year. This fee is designed to reflect a market participant's proportionate participation in Ontario's capital markets in the upcoming year.

As with the current rule, the proposed Rule also requires the payment of "activity fees". These fees are designed to represent our direct cost where staff has undertaken certain activities in respect of market participants (for example, reviewing a registration application).

While the basic principles of the current rule and policy remain, the Proposed Materials include a number of proposed changes that were made in an effort to:

    • ensure consistency between the fees charged and our costs of providing services,

    • improve the "readability" and "user-friendliness" of the current rule and policy by employing plain language principles and clarification where necessary,

    • simplify the activity fee schedule, and

    • address a number of concerns and comments raised by stakeholders.

The proposed Rule also returns the surplus collected from market participants between April 2003 and March 2006 in the form of reduced participation fees.

The most significant changes to the current rule are as follows:

1. Filing a revised Form 13-503F1 and Form 13-503F2

The current rule provides that a registrant firm that has determined its participation fee using estimated specified Ontario revenues must file a revised Form 13-503F1 and a Form 13-503F2 after it has calculated its participation fee using its actual specified Ontario revenues. The proposed Rule provides that these filings are only necessary if the second participation fee calculated differs from the first; that is, only if the registrant over- or under-paid its participation fee.

2. Changes to Appendix A -- Capital Markets Participation Fees

The proposed capital markets participation fees have been revised in response to concerns raised by stakeholders. A new fourth tier is proposed for registrants with specified Ontario revenue between $3 million and under $5 million. In addition, the proposed participation fees are less at the three lowest levels of specified Ontario revenue and more at every other level. (See 'Anticipated costs and benefits' below for more detail on these changes.)

3. Changes to Appendix B -- Activity fees

Applications for relief, approval and recognition

Some fees under item A have increased, some have decreased, and some have stayed the same. We considered the resources required to process each type of application and have revised the fee structure to generally reflect our costs of the work required.

The fee to apply for a voluntary surrender of registration has been eliminated to encourage registrants to make the application rather than allow their registration to lapse.

Registration-related activity

The proposed fee for reviewing a firm's application for registration as a dealer or adviser is $600 (item B(1)). The proposed fee for reviewing a change to a firm's registration category is also $600 (item B(2)). The fee currently charged under each of these items is $800. This change better aligns the fee charged with the average cost of staff time spent reviewing these applications.

The proposed fee for reviewing an individual's application for registration is $200 (items B(3) and (4)). The fee currently charged under these items is $400. The reason for these changes is that staff require less time to review registration applications since the introduction of the National Registration Database.

The efficiencies created by the National Registration Database have also resulted in a proposed reduction of fees for reviewing firms' applications for registration and continuing the registrations of amalgamating registrants (item B(5)). The proposed fee is $2,000; the current fee is $6,000.

The proposed fee for an application for amending the terms and conditions of a registration is $500 (item B(6)). The current fee for this item is $1,500. This change better aligns the fee charged with the average cost of staff time spent reviewing these applications.

Request for certified statement under section 62 of the Act

The current fee for requesting a certified statement under section 62 is $500 (item D). The proposed fee is $100, which better matches the cost of providing the certificate.

Commission requests

The proposed fee for a search of Commission records (item E(2)) is $150. The current fee is $10. This fee increase reflects the average staff resources required to undertake these searches.

"Request for one's own Form 7" (Item E(3)) has been added to Appendix C. The Commission will provide a Form 7 for a fee of $30 under the proposed Rule.

Late fees

The proposed Rule provides that the late filing of a Form 13-503F1 or a Form 13-503F2 is subject to a late fee.

To ease the burden on staff of tracking late fees, the proposed rule uses the calendar year, rather than the registrant's financial year, as the period to which the $5,000 maximum applies.

Authority for the proposed rule

Paragraph 25 of subsection 65(1) of the Act authorizes the Commission to make rules "prescribing the fees payable to the Commission, including those for filing, for applications for registration or exemptions, for trades in contracts, in respect of audits made by the Commission and in connection with the administration of Ontario commodity futures law".

Alternatives considered

In the process of developing this Rule, the Commission did not consider any other alternatives.

Unpublished materials

In proposing the rule and policy, the Commission has not relied on any significant unpublished study, report, decision or other written materials.

Anticipated costs and benefits

1. Aggregate fees

Under the fee regime implemented in 2003, the Commission tries to set fees at levels to meet our operating costs. We do this by setting the fees charged under Rule 13-502 and Rule 13-503 (Commodity Futures Act) to match our projected costs over a three-year period, less any surplus of fees accumulated during the prior three year period.

Since the introduction of the fee rules both our costs and revenues have exceeded our original estimates. For the three years ending March 2006 our costs are expected to be $11.3 million higher than forecast primarily due to additional staffing. Key growth areas have been Enforcement and the introduction and growth of our Investment Funds branch. Given the uncertainties of our new fee schedule, when it was developed we targeted a surplus of $12.9 million as at March 31, 2006. In late 2004, we projected a significant surplus by March 2006 due to continued high revenues arising from stronger than expected market growth. In March 2005 we rebated $15 million to industry participants based on their contribution to our surplus.

Our current projection for March 2006 is for a surplus of $35.9 million. As shown in the following chart, this amount has been applied to reduce the proposed participation fees. The proposed fee amounts are the average fees per annum projected for the three year period covered by the proposal. Other revenues include interest earned and late fees received. The chart also shows the aggregate fees that the Commission expects to collect under the current fee regime during fiscal 2006.

 

Current

 

Proposed fees

%

Proposed fees

%

 

Fees

 

without surplus{•}

Change

with surplus

Change

 

Activity Fees

$

11,566,000

 

$

10,272,841

-11.2%

$

10,272,841

-11.2%

 

Participation Fees

$

54,900,000

 

$

60,877,362

10.9%

$

48,905,572

-10.9%

 

_____________

 

_____________

 

____________

 

Sub-Total

$

66,466,000

 

$

71,150,203

7.0%

$

59,178,413

-11.0%

 

Other Revenues

$

3,120,000

 

$

2,400,000

-23.1%

$

2,400,000

-23.1%

 

_____________

 

_____________

 

____________

 

Total Revenues

$

69,586,000

 

$

73,550,203

5.7%

$

61,578,413

-11.5%

 

_____________

 

_____________

 

____________

 

{•} Under the proposal, the total fees paid by market participants will be reduced by 11.0%. This decrease results from an 11.2% decrease in activity fees and a 10.9% decrease in participation fees. The fees paid would have increased by 7.0% had we not been able to apply the $35.9 million surplus when setting the new fees

For the three years covered by the new fees, our costs are projected to increase as shown in the table below. This is due to additional staffing (17 staff across 3 years), and general inflation of operating costs, such as salaries and benefits, and occupancy costs. The additional staff are anticipated primarily in Investment Funds and Enforcement to address such issues as the continuing growth of alternative investments and other novel product offerings, harmonization of regulation, and continuing improvements in the responsiveness of Enforcement actions. Forecast Commission operating results for the next three years are as follows:

 

2006/2007

2007/2008

2008/2009

3 Yr. Average

 

Revenues

 

($ thousands)

 

 

________

 

 

 

 

 

Activity Fees

10,273

10,273

10,273

10,273

Participation Fees

46,278

48,877

51,562

48,906

Other

2,400

2,400

2,400

2,400

 

__________

__________

__________

__________

Total Revenues

58,951

61,550

64,235

61,579

less Expenses

70,257

73,426

76,950

73,544

 

__________

__________

__________

__________

Net Shortfall

(11,306)

(11,876)

(12,715)

(11,966)

 

Opening Surplus

35,900

24,594

12,718

11,967

 

__________

__________

__________

__________

Closing Surplus

24,594

12,718

3

1

 

__________

__________

__________

__________

For the three years ending March 2009, we project a breakeven position, after fully applying the expected March 2006 surplus of $35.9 million to reduce fees otherwise paid by participants. Any actual surplus or deficit at the end of this three year period will be reflected in the fee setting process for the following three years.

The Commission's revenues are subject to operating risk, such as market fluctuations or mergers of participants, which could materially reduce revenues. Also, due to the timing of the receipt of revenues (generally, approximately 70% of Commission revenues are received in the January to March period), the Commission is subject to cash flow fluctuations each year, which could be exacerbated by a sudden decline in revenues. If this occurs, the Commission has a reserve of $20 million available to offset deficits or cash flow needs. The Commission could also borrow as necessary to address such issues on a short term basis.

2. Allocation of Fees within and between Groups

Our analysis of costs and revenues has confirmed that since the introduction of the new fee regime in 2003, issuers have been paying a disproportionate amount of our costs. In calculating the relative shares of the surplus to be returned to issuers and registrants we relied on the amount generated by each group. We calculated that 84% of the surplus was generated by reporting issuers and 16% was generated by registrants.

As a result, although total participation fees (after applying the surplus) are projected to decline by 10.9%, the impact will be different for registrants and issuers. Participation fees are projected to decrease by 40.5% for issuers and increase by 22.4% for registrants. The table below sets out the required participation fee changes with and without the benefit of the surplus.

 

Current

Proposed fees

%

Proposed fees

%

 

Participation Fees

without surplus

Change

without surplus

Change

 

Corporate Finance Fees

$

29,100,000

$

27,382,506

-5.9%

$

17,316,814

-40.5%

 

Capital Markets Fees

$

25,800,000

$

33,494,856

29.8%

$

31,588,758

22.4%

 

 

_____________

____________

 

____________

Total

$

54,900,000

$

60,877,362

10.9%

$

48,905,572

-10.9%

 

_____________

____________

 

____________

(The appendix to the proposed Companion Policy shows how the Commission has applied the surplus to each level of participation fee.)

The participation fee paid by an issuer will decline in the range of 40% to 57% depending on the issuer's fee tier. The most significant decreases will affect issuers in the lowest four tiers. This group, which represents 77% of issuers, will have an average decrease of 45%.

In an effort to improve fairness to smaller registrants, the changes in fees for the various tiers were adjusted to reduce differences that existed in fees as a percentage of registrant revenue levels. Participation fees for registrants with revenues below $3 million will decrease in the range of 10% to 38%. Participation fees for registrants with revenues between $3 and $5 million will increase by 32%. This group was underpaying under the previous fee structure. Participation fees for registrants with revenues of $5 million or more will increase in the range of 9% to 13%. The percentage changes in fees are lower than the required overall increase in participation fee revenues for registrants due to projected movement of registrants through the tiers.

The overall effect of the changes to both sets of participation fees is that they will be more equitable in two respects. First, the proportion of capitalization or revenue paid in participation fees will be more similar across the fee levels. In addition, the proposed participation fees better reflect the actual regulatory costs associated with each group. That is, where issuers were bearing over 50% of these costs, under the proposed participation fees (before the surplus reduction) they will now cover 45%.

Comments

Interested parties are encouraged to make comments on the proposed rule and policy. Submissions received by November 10, 2005 will be considered. Submissions received after that date may be considered, depending on the status of the initiative at that time.

Deliver your comments to the following address:

c/o John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario
M5H 3S8
jstevenson@osc.gov.on.ca

A diskette containing the submissions (in DOS or Windows format, preferably Word) should also be submitted.

The Commission will publish written comments received unless the Commission approves a commenter's request for confidentiality or the commenter withdraws its comment before the comment's publication.

Questions

Please refer your questions to:

Gina Sugden
Project Manager, Capital Markets
(416) 593-8162
gsugden@osc.gov.on.ca

Text of the proposed instruments

The text of the proposed instruments follows.

August 12, 2005