As new SRO looms, costs rise

With the launch of a new self-regulatory organization on the horizon, SRO costs are rising — even before the expense of merging the Investment Industry Regulatory Organization of Canada (IIROC) with the Mutual Fund Dealers Association of Canada (MFDA) are considered.

In its annual report released on Sept. 16, IIROC said that it expects total operating expenses to rise 9.8% in fiscal 2023 to $105.7 million — an increase that only reflects IIROC’s continuing operations as a standalone operation, and doesn’t factor in merger costs.

“The increase in expenses reflects salary increases for merit and market adjustments in [fiscal 2023], annualized impact of headcount and technology costs to support new activities and targeted investments, higher server and storage costs for higher market surveillance transaction volumes and added applications,” the report said. The increase also reflects a reversal of savings that occurred in fiscal 2022 due to the impact of Covid-19.

On top of rising standalone expenses, the planned merger of IIROC and the MFDA “is expected to require significant one-time costs and IIROC may be subject to greater financial and liquidity risk,” the report said.

In fiscal 2022, the SRO incurred $3.2 million worth of integration expenses, primarily consulting and legal costs, the report noted.

“Integration costs will be recovered through a separate fee model and the proposal will be communicated to members through the member information circular sent in advance of the member vote,” it said.

That vote is expected later this month, with the amalgamation of IIROC and the MFDA planned for Dec. 31, and the new SRO’s launch slated for Jan. 1, 2023.

Assuming the the proposed merger is approved by the SROs’ members and the Canadian Securities Administrators (CSA), the assets and liabilities of both SROs would be combined, at their carrying value on the closing date.

In the meantime, with costs rising, IIROC’s annual report said that fees will increase in fiscal 2023 too.

Specifically, dealer regulation fees are going up by 3.0%, equity market regulation fees will increase by 6.4% (including a 3.5% increase for existing activities and a 2.9% increase for expanded market surveillance capabilities), and debt regulation fees are rising 1.0%.

“Overall fees charged out will increase by 4.0% versus the previous year,” the report said.

Even so, IIROC expects to run a deficit of $1.5 million in fiscal 2023, it noted.

And, the report pointed out that these rising costs also come against the backdrop of strong industry results.

IIROC reported that its fees have typically amounted to 0.3% of industry revenue over the past five years, and that its share of industry profits is now down to 1.5% from 1.9% in fiscal 2019.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.