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Manitoba's securities regulator a "cash cow" for provincial government

Appeared in the Winnipeg Free Press
Release Date: April 23, 2012

Ottawa’s dream of a national securities regulator continues to flicker with the announcement in the recent budget that the federal government will consult with provinces and territories on finding a cooperative basis to move towards a common securities regulator. This, coming after the Supreme Court of Canada at the end of 2011 rejected a proposed federal model for a national regulator.

Several provinces, including Manitoba, have expressed strong opposition to the idea of a national securities regulator, so whether Ottawa can win support for such a body and what form and responsibilities it would take on remains an open question.

But the practice of some provincial regulators to milk capital markets through excessive fees does nothing to further the provinces’ case for autonomy of regulation, and if anything, may embolden the feds to move on this issue.

Take, for example, Manitoba. As the chart below shows, the Manitoba Securities Commission has consistently charged fees to market participants well in excess of its expenditures, handing over the bulk of the balances to the provincial government. In the last reported year, less than 30 per cent of the Manitoba Securities Commission’s revenue was actually spent on its regulatory functions. Transfers to the Manitoba government have increased steadily since 2003.

Manitoba Securities Commission Financials (in $ thousands)
YearRevenueExpensesTransfers to Manitoba CRF

Source: Manitoba Securities Commission Annual Reports

While not all provinces are using their monopoly power over local securities regulation to treat capital markets as a cash cow, Manitoba is not alone. Saskatchewan and the Atlantic provinces engage in similar behaviour, collecting fees well beyond what they need to undertake their regulatory functions.

For instance, the Saskatchewan Financial Services Commission, which regulates securities as well as other financial sector activity such as insurance, collected $14.6 million in revenue in 2011 of which more than $10 million was handed over to the provincial government. Charging a mark-up and earning a profit is appropriate in offering products and services in a competitive market. However, this is not the case when regulators have a monopoly over accessing investors.

The excess fees charged may not be that significant for large public companies. However, Canada’s capital markets are dominated by smaller venture companies. At the end of 2011, more than 91 per cent of the 2,250 TSX Venture Exchange companies had a market cap (value of shares outstanding) less than $50 million. For small venture companies, these fees have a greater impact on the cost of raising capital as the fees are the same regardless of the amount of capital raised.

The cash grab mentality of some provinces has taken away a lot of the value from significant regulatory reforms such as the introduction of the passport system. Under the passport system, in which all provinces and territories participate (with the exception of Ontario), market participants can automatically access capital markets in other Canadian jurisdictions by obtaining a decision only from its “principal regulator.”

However, securities regulators are charging fees for access to investors in their jurisdiction even when they rely on the decision from another jurisdiction. Securities regulators now commonly charge the same fee whether they are the principal regulator or not, although there are sometimes modest discounts. For instance, the New Brunswick Securities Commission charges $1,250 for a preliminary prospectus when it is the principal regulator but only $850 when it is not. But why does the New Brunswick Securities Commission need to charge this much when it is relying on another regulator to review and approve the document?

Manitoba exhibited its passion about securities regulation prior to the Supreme Court decision by coming out against the model for national securities regulation. The province could demonstrate its commitment to quality securities regulation in Canada by operating on a break even basis, and encouraging other provincial regulators to do the same. This would be consistent with the Manitoba Securities Commission’s mandate, which includes facilitating the raising of capital while maintaining fairness and integrity in the securities marketplace.