OSC surplus rises nearly 50%

(November 8, 2004) Despite a commitment to matching fees with the costs of regulation, Ontario’s securities regulator posted a surplus of more than $21 million in its latest fiscal year, up nearly 50% from the previous 12 months. The surplus issue has become a focal point for critics who believe that securities regulation should not be a profit-making activity.

In its annual report, the Ontario Securities Commission (OSC) revealed that the excess of revenue over expenditures in the year ending March 31, 2004 was $21.6 million, much higher than expected.

“Our budget forecast was for an excess of revenue over expenditures of $7.2 million in 2004,” the OSC says. “The $14.4 million variance occurred because actual expenses were $2.8 million lower than budget and revenues were $11.6 million higher than forecast.”

In fiscal 2004, fees collected under the Securities Act and the Commodity Futures Act increased 8.7% to $76.6 million. Expenses came in at around $55 million, dominated by $40.7 million in salaries and benefits.

Last year, the commission introduced a new streamlined fee structure intended to reduce overall fees charged to market participants and accurately reflect the commission’s costs of operations.

The OSC says the revised fee structure has generated surpluses for a number of reasons. It explains that “fee levels were set to generate a small surplus given the newness of the fee model and because a significant number of variables had to be estimated,” and “incomplete data resulted in conservative estimates for certain fee revenues.”

Still, the OSC says it remains committed to ensuring that market participants pay fees equivalent to the costs of regulation. “Before setting fees for the three-year period ending in 2009, we will review each service activity and its related cost,” the commission says. “Activity fees will be set based on the cost to provide the service. Participation fees will be set at levels to generate a cumulative deficit equal to the surplus collected from market participants as of March 31, 2006. Fee levels will also reflect our goal to ensure that the fees paid by issuers and registrants reflect the projected costs to regulate each group.”

In a change from previous years, the OSC is no longer required to remit its surplus to the provincial government. But it’s unclear what the commission will do with the extra cash. “Any surpluses retained are subject to appropriate terms and conditions which are yet to be finalized,” the annual report states. “Any deficits will be funded either through surpluses previously generated or generated in the future, or from the OSC’s reserve.”

The annual report also includes a list of OSC staff members earning more than $100,000 a year. In calendar 2003, 130 employees were in the $100K club, up from 106 in 2002. OSC chair David Brown tops the group, with an annual salary of more than $606,000. Executive director Charlie Macfarlane earned about $405,000 last year while vice-chair Paul Moore made close to $392,000. The Ontario government requires all provincial departments and agencies to publicly list staffers earning more than $100,000 a year.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com