Request for Comments: Proposed Amendments to OSC Rule 13-502 Fees and Companion Policy 13-502CP Fees

REQUEST FOR COMMENTS

PROPOSED AMENDMENTS TO OSC RULE 13-502 FEES
AND COMPANION POLICY 13-502CP FEES

September 18, 2014

Introduction

The current fee structure under the Securities Act and the Commodity Futures Act was established in 2003 and the OSC typically re-evaluates its fee levels every three years. In February, the OSC committed to re-examine its fee structure early to consider issues raised by market participants and to ensure it remains appropriate and sound.

The Commission is publishing for a 90-day comment period proposed amendments (the Proposed Amendments or Proposed Rule) to OSC Rule 13-502 Fees (the Current Rule) made under the Securities Act (OSA), together with proposed changes (the Proposed CP Changes) to Companion Policy 13-502CP. In this Notice, the proposed versions of the Current Rule and the Companion Policy are referred to as the Proposed Rule and the Proposed CP, respectively. The Proposed Amendments and the Proposed CP Changes are referred to collectively as the Proposed Materials.

The Proposed Materials are available on the Commission's website (www.osc.gov.on.ca). Related proposed changes to OSC Rule 13-503 (Commodity Futures Act) Fees are also being published for comment in this Bulletin.

The on-going feedback received by us on Commission fees charged suggests that they are considered by market participants to be a modest component of their overall cost structures. The input sought by the Commission includes whether any part of the proposals put forth today would, if implemented, change this assessment.

We request comments on the Proposed Materials by December 17, 2014.

Substance and Purpose of the Proposed Materials

The fee structure is designed to recover the costs the OSC incurs to provide protection to investors and promote efficient capital markets that are aligned with global markets. The two main types of fees charged under the Current Rule are participation fees and activity fees.

Participation fees are based on the cost of a broad range of regulatory services that cannot be practicably or easily attributed to individual activities or entities and are intended to serve as a proxy for the market participant's use of the Ontario capital markets. Participation fee levels are set using a tiered structure. Fees for issuers are based on average market capitalization in a fiscal year; fees for registrants are based on their Ontario revenues. Participation fees are set based on estimates of OSC operating costs for upcoming periods. The Current Rule has four main categories of participation fees:

a. corporate finance participation fees for reporting issuers;

b. capital markets participation fees for registrants and certain unregistered capital markets participants;

c. participation fees for specified regulated entities (such as exchanges, alternative trading systems, clearing agencies and trade repositories), which are based on different factors depending on the type of regulated entity. For example, the entity's Canadian trading share, for exchanges and certain ATSs;

d. participation fees for designated rating organizations which are set at a flat rate.

When the Current Rule was introduced in 2013, the calculations of participation fees were changed to be based on historical data or a reference fiscal year (RFY). Under the Current Rule, market participants who had a decline in their Ontario revenue or market capitalization across the fee cycle do not see any reduction in their fees. Similarly, those participants who experienced growth in Ontario revenue or market capitalization did not see any increase in their fees. At the time of the publication of the Current Rule the OSC undertook to monitor carefully the participation fees collected and to assess the impact of using the RFY and to also consider whether any adjustments were necessary.

The Proposed Amendments introduce adjustments so that the fees charged by the OSC are aligned more closely with the Commission's costs and address concerns raised by market participants about the use of the RFY. The Proposed Rule will remove the use of the RFY and market participants will be required to calculate their participation fees payable using their most recent financial year information and, for registrants, the most recent financial year ending in the calendar year. The key advantage of this proposed change for participants is that the fees will more closely track current market conditions. The fees payable will increase or decrease based on actual changes in business conditions and performance. The disadvantage of this change is that it will reduce the predictability of fees receivable by the OSC.

Activity fees are generally charged where a document of a designated class is filed. Estimates of the direct cost of Commission resources expended in undertaking the activities listed in Appendix C of the Current Rule are considered in determining these fees (e.g., reviewing prospectuses, registration applications and applications for discretionary relief). Generally, the activity fee charged for filing a document of a particular class is based on the average cost to the Commission of reviewing documents of the class. Under the Current Rule, there is also a provision in narrow circumstances for charging a variable cost-based fee for certain filings by entities such as exchanges, alternative trading systems and clearing agencies, in light of the high degree of variability of the costs in these filings. A small number of new fees are proposed primarily to achieve better matching of revenues to costs incurred for a specific activity (i.e. takeover bid fees) or to improve fairness or consistency of approach within the rule. Various minor administrative changes are also proposed to improve fairness, improve compliance or reduce regulatory burden (e.g. by reducing the collection of minor fees).

The proposed CP Changes reflect the Proposed Amendments. Further details on the Proposed Amendments and the Proposed CP Changes are provided below under the headings "Summary of Proposed Amendments" and "Summary of Proposed CP Changes".

Options to introduce new exempt market and derivative related fees were also considered. We are not proposing to include these fees in the Proposed Rule at this time because the underlying policy work on these issues has not been completed. Once this policy work is finalized, any proposed related fees will be included as consequential amendments to the fee rules within those policy proposals.

Anticipated Costs and Benefits and Supplementary Information

Background

The OSC, as a self-funded agency, strives to operate on a cost-recovery basis and is dependent on fees from market participants. Fees are generally set every three years based on the anticipated costs to be incurred over the following fee period. For the purpose of the Proposed Rule, the OSC used an annual growth factor of five percent over the current budget. Over recent years, the OSC has strived to contain costs. For example, the year over year cost increase from fiscal 2013 to fiscal 2014 was 2.5%. We also abide by all government fiscal directives. Despite this fiscal restraint, we need to make investments in infrastructure over the next few years including improvements in our information technology. We have also considered the requirement for additional resources in high growth areas. Given this, we believe that five percent is an appropriate growth rate which reflects our desire to keep cost increases to a minimum, while still allowing for some infrastructure spending and any growth required to regulate our increasingly complex marketplace.

Financial Impact

The Proposed Rule contemplates reverting back to the previous model of utilizing a market participant's most recent financial year information. We are proposing to keep participation fee rates at the levels that became effective on April 7, 2014. We are also proposing to keep the participation fees flat for the duration of the Proposed Rule. This means that the participation fee rate increase in the Current Rule will not be implemented. Our analysis indicates that there has been sufficient growth in the markets since the reference fiscal year to allow the OSC to keep participation fees at current levels while still allowing us to cover our costs over the term of the Proposed Rule. Although the participation fee rate will remain unchanged, the amount of fees to be paid by each market participant will likely be higher, given the fact that the market has grown since the reference fiscal year; however the impact on each market participant will vary and be dependent on whether their Ontario revenue or market capitalization has increased or declined.

As discussed earlier in this notice, participation fees are currently calculated based on historical information, specifically information from a market participant's reference fiscal year. This change, which was implemented in April 2013, has been the subject of criticism from market participants due primarily to the disconnect between the reference year and their current market or fiscal situation. In particular, certain market participants whose fiscal information declined over the past two years expressed concern that they were required to pay more in participation fees than they otherwise would have. This concern led to the OSC's announcement to offer fee relief to certain market participants in February 2014. Additionally, other market participants expressed concern over the complexity of having to reference their participation fee calculation to historical information. The use of the reference fiscal year also contributed to a number of incorrect filings.

Predictability of OSC Fee Revenues

The OSC's revenues, in particular revenue generated from participation fees, are directly tied to changes in market growth. For example, increases in the market capitalization could result in a reporting issuer being elevated to the next tier and paying a higher fee. This variability is tempered by the size of the tier, however this possibility still remains. The use of the reference fiscal year improved the predictability of fees for participants and the OSC's revenues. Reverting to using information from the most recent financial year will reduce our ability to accurately predict revenues and should there be a market decline, revenues may not be sufficient to cover costs.

Fairness of share of fees among registrants and issuers

The OSC strives to balance the level of fees charged to registrants and issuers in relation to costs incurred for each group. This is evident in the Current Rule whereby the percentage change in the participation fee rates for issuers and registrants was different for each group. The proposal to maintain participation fee rates at their current levels, will result in achieving appropriate levels of cost recovery from each group.

Activity fees

As has historically been the case, activity fees will generate just under 15% of total revenues. The OSC reviewed the current activity fees to determine whether the fee covered the average costs to perform the service as well as determine whether there were any other activities that should have fees associated with them. Overall, most activity fees either increased or remained flat with the majority of increases in the 6% to 8% range. Activity fees for Specified Regulated Entities are proposed to be increased by 10% to reflect the amount of staff effort required to address the filings.

Financial Summary

	2014/2015	2015/2016	2016/2017	2017/2018
	$ Thousands
Total Revenues	1 01,325	114,289	114,631	115,677
less Expenses	102,976	108,125	113,531	119,208
Net Excess/(Shortfall)	( 1,651)	6,164	1,100	( 3,531)
Opening Surplus{*}	6 ,539	4 ,888	11,052	12,152
Closing Surplus{*}	4 ,888	11,052	12,152	8 ,621