Background

IIROC collects most of its revenue under four fee models: the Dealer Member Fee Model, the Equity Market Regulation Fee Model, the Debt Market Regulation Fee Model and the Debt Information Processor Fee Model. The main elements of these fee models were developed after consultation with the industry and were published for comment prior to approval by IIROC’s recognizing regulators.

Under the Dealer Member Fee Model, an IIROC Dealer Member pays, among other fees, Annual Fees for each Fiscal Year. For ease of reference, Appendix 1 contains an extract from IIROC’s Fee Model Guidelines, setting out the relevant sections regarding the calculation of the Annual Fee. IIROC’s Fee Model Guidelines can be viewed in their entirety at IIROC Notice 17-0072.

Annual Fees are determined with reference to four components:

• the Revenue Component
• the Approved Person Fees Component
• the Minimum Dealer Regulation Fee Component
• the Risk Component.

The current proposal would amend only the Minimum Dealer Regulation Fee Component of the Annual Fee.

Currently, IIROC uses a Dealer Member’s Total Allocated Costs (as defined in the Fee Model Guidelines) to determine the Dealer Member’s Minimum Dealer Regulation Fee Component (“Minimum Fee”). The calculation results in two possible Minimum Fee categories. If the Total Allocated Costs are equal to or less than $20,000, the Minimum Fee is $15,000. If the Total Allocated Costs are greater than $20,000, the Minimum Fee is $27,500.

We believe that this method is unnecessarily complex.

Guiding Principles

IIROC uses the following guiding principles as an objective frame of reference to evaluate potential fee model changes:

• Fairness – A Dealer Member’s share of fees should be based on its usage or consumption of IIROC’s regulatory services.

• Transparency – Dealer Members should understand how their fees reflect the application of the guiding principles.

• Consistency – Fees and principles that determine such fees should be consistently applied and understood by all Dealer Members.

• Industry Competitiveness – In the public interest and to the greatest extent possible, fees should not inhibit new entrants to or prevent smaller Dealer Members from remaining in the industry. The setting of fees should be designed to not favor one Dealer Member over another.

• Cost Recovery of Regulatory Services Provided – IIROC will operate on a cost recovery basis.

Disadvantages of the Current Minimum Fee

IIROC has identified the following disadvantages of the current calculation:

• Volatility:  Changes in allocated costs can move a Dealer Member between the $15,000 and $27,500 Minimum Fee categories. For example, if a dealer’s current Minimum Fee is $15,000, and the dealer was the subject of a review by one of IIROC’s Compliance departments, this would increase its allocated costs and would move it into the $27,500 Minimum Fee category. Subsequently, if the dealer were no longer the subject of such a review and assuming no other increase in allocated costs, the Dealer Member would then fall back into the $15,000 Minimum Fee category. This type of movement will repeat itself depending on the circumstances of each individual Dealer Member and the IIROC resources expended on it in a given year.

• Lack of Predictability: Due to the movement of Dealer Members between Minimum Fee categories, a Dealer Member may not be able to accurately predict which Minimum Fee they will pay. This in turn may make budgeting more challenging for Dealer Members.

• Element of Unfairness: A small change in allocated costs could mean the difference between paying $15,000 or $27,500. An allocated cost above or below $20,000 will determine the Minimum Fee category. If the allocated costs are close to $20,000 then a small movement in these costs could mean the difference in the category.

Proposed Change

In order to address these disadvantages, we propose to:

• introduce a single $22,500 Minimum Fee category to replace the current $15,000 and $27,500 Minimum Fee categories

• eliminate the Total Allocated Cost element of the Minimum Fee.

Analysis

To determine which Dealer Members would be impacted by the proposed change, IIROC analyzed the 4-year average minimum fee paid by Dealer Members active over those 4 years. We found that most minimum-fee-paying Dealer Members have a 4-year average fee payment greater than $22,500 and will benefit from a drop in their fees.

In FY 2017, there were 69 Dealer Members in both Minimum Fee categories combined, of which 61 (38% of active Dealer Members) were active over the past 4 years:

• Of these 61 Dealer Members, 52 had a 4-year average fee greater than $22,500 and 9 had an average below $22,500.

• Of these 9 Dealer Members, 7 had a 4-year average of $21,000 - $22,500 and so will only be slightly affected by the proposed change. Of these 7 Dealer Members, only 1 is among the bottom 20 Dealer Members sorted by revenue. The remaining 2 Dealer Members had a 4-year average below $21,000, 1 of which is not found in the bottom 20 Dealer Members sorted by revenue and therefore will not be significantly impacted by the change.

Of the Dealer Members in the $15,000 Minimum Fee category in FY 2017, only 2 could be found in the bottom 20 Dealer Members sorted by revenue. The remaining 18 Dealer Members are not in the lowest Minimum Fee category, and are currently paying $27,500.

Essentially, in FY 2017, under the current calculation method, the majority of lowest-revenue Dealer Members are in the higher Minimum Fee category. This is important for two reasons. First, it indicates that under the current model, the lowest-revenue Dealer Members may end up paying the higher Minimum Fee if their allocated costs increase in a particular year due to IIROC activity with that Dealer Member. Second, a single, new $22,500 Minimum Fee category will not necessarily increase the fee burden on the lowest-revenue Dealer Members.

The impacts of the proposed change in FY 2017 would have seen a majority of Minimum Fee payers benefit from a reduction of fees and result in an overall increase of $200,000 or 0.4% of fees paid by non-Minimum-Fee payers.

Conclusions

In determining the Minimum Fee level, we sought to minimize the impact on Dealer Members, particularly any significant impact of a fee increase. Most Minimum Fee payers will benefit from a reduction in fees.

The reduction in volatility resulting from the proposed change strongly suggests that IIROC should move to a single Minimum Fee category.

Alternatives Considered

In looking to simplify the Minimum Fee, we considered two alternative approaches.

• Removal of Total Allocated Costs: We considered simplifying the calculation by eliminating the Total Allocated Costs component, while keeping the two Minimum Fee categories at $15,000 and $27,500. In this alternative, the Minimum Fee would be purely driven by the sum of the Revenue Component and Approved Person Fee Component.
  
  Although this alternative simplifies the calculation, retaining two Minimum Fee categories is overly complex.
• Elimination of Minimum Fee categories: We considered removing the concept of a “Minimum Fee” altogether.
  
  Adopting this alternative would have caused a significant decrease in Annual Fees paid by certain Dealer Members and would have shifted the financial burden to other Dealer Members. This alternative would go counter to IIROC’s guiding principles of fairness, which requires Dealer Members to pay their share of regulatory resources consumed.

Effective Date

IIROC anticipates that the proposed changes to the Minimum Fee would become effective April 1, 2018.

Industry Consultation

IIROC presented its proposal to the Financial and Operations Advisory Section Executive Committee and to the Investment Industry Association of Canada Small Dealers Committee.

Request for Comments

The amendments were approved for publication for comment in November 2017 by both the IIROC Finance Audit and Risk Committee and IIROC Board of Directors.

IIROC seeks written comments on the proposed amendments.  Comment letters should be delivered by February 5, 2018 (45 days from the publication date of this notice) addressed to the attention of:

Request for Comments

The amendments were approved for publication for comment in November 2017 by both the IIROC Finance Audit and Risk Committee and IIROC Board of Directors.

IIROC seeks written comments on the proposed amendments.  Comment letters should be delivered by February 5, 2018 (45 days from the publication date of this notice) addressed to the attention of:

Shuaib Shariff
Senior Vice President, Finance and Administration
121 King Street West, Suite 2000
Toronto, ON, M5H 3T9
[email protected]

Commenters should be aware that a copy of their comment letter will be made publicly available on the IIROC website at www.iiroc.ca