Investor Alert:
CIRO is issuing a warning to Canadian investors regarding Canada Token Trade.
Comments Due By: June 24, 2024
The Canadian Investment Regulatory Organization (CIRO) is proposing a new integrated fee model (the “proposed integrated fee model”) and provides the following materials for comment:
CIRO is proposing that the new integrated fee model be effective on April 1, 2025.
The current proposed integrated fee model is comprised of three components:
Shortly after the amalgamation of IIROC and the MFDA, CIRO commenced a project to develop an integrated fee model. Our process to develop the integrated fee model involves consultations with Dealer Members, a public comment process, and approval by CIRO’s Board of Directors (“the Board”) and the Canadian Securities Administrators (CSA).
The Terms and Conditions of CIRO’s Recognition Orders require, among other things, that:
We also developed overarching principles (“guiding principles”) to help guide the evaluation of the integrated fee model:
CIRO began development work on an integrated fee model with a review of existing fee models. We benchmarked our proposed model with those of other similar regulatory organizations. Several alternative options were also considered.
Ultimately, we feel that the current proposal best meets the guiding principles while minimizing the impact to members upon implementation.
The recommended model was presented to both the Finance, Audit & Risk Committee and CIRO Board on March 19-20, 2024, where it was approved for publication for comment.
In October 2023, we consulted with a dedicated industry working group of Dealer Members on the methodology around the proposed Annual Dealer Member Fee, and the proposals for new Membership Application Fees, and Fees for Dealer Member Business Changes. All CIRO Dealer Members were invited to participate in the working group. The working group represented a diverse cross-section of the membership, including investment dealers and mutual fund dealers of varying business models and sizes.
In the last week of March 2024, we reviewed the draft Bulletin and accompanying FAQs with a select group of Dealer Members for whom the proposed integrated fee model would be changing.
In the upcoming weeks, CIRO will be sending communication to each Dealer Member with information on the directional impact of the proposed integrated fee model on their Annual Dealer Member Fee.
In evaluating the proposed integrated fee model, in addition to any other comments you would like to make, we would appreciate comments on the following:
Comments on the Proposed Amendments should be in writing and delivered by June 24, 2024 (60 days from the publication date of this Bulletin) to:
Membership Services
Canadian Investment Regulatory Organization
40 Temperance Street, Suite 2600
Toronto, Ontario M5H 0B4
e-mail: [email protected]
A copy should also be delivered to the CSA:
Market Regulation
Ontario Securities Commission
Suite 1903, Box 55
20 Queen Street West Toronto, Ontario M5H 3S8
e-mail: [email protected]
and
Capital Markets Regulation
B.C. Securities Commission
P.O. Box 10142, Pacific Centre
701 West Georgia Street, Vancouver, British Columbia, V7Y 1L2
e-mail: [email protected]
Commentators should be aware that a copy of their comment letter will be made publicly available on the CIRO website at www.ciro.ca.
After considering the comments on the proposed changes received in response to this Request for Comments together with any comments of the CSA, CIRO staff may recommend revisions to the proposed changes. If the revisions and comments received are not material in nature, the Board has authorized the President to approve the revisions on CIRO’s behalf and the revised proposed changes will be subject to approval by the CSA. If the revisions or comments are material, CIRO staff will submit the proposed changes, including any revisions, to the Board for approval for republication or implementation, as applicable.
The Annual Dealer Member Fee is the primary method of recovering operating costs from Dealer Members. CIRO is proposing that the Annual Dealer Member Fee for all Dealer Members be based on a combination of Revenue and Approved Persons, as outlined in section 2.
This methodology being proposed is not substantially different from the current Investment Dealer fee model. It does, however, represent a material change in methodology for Mutual Fund Dealer Members.
We conducted a comprehensive impact analysis of the proposed integrated fee model on the industry and on each individual Dealer Member. We also considered a number of different alternatives to determine if there were other better ways to meet the guiding principles. The analysis is described in section 3.
Our aim was to propose a model that adheres to the guiding principles as closely as possible and can continue to be applied regardless of industry changes and evolution. Given the diverse business models and sizes of CIRO Dealer Members, we believe that the methodology we are proposing for the Annual Dealer Member Fee would substantially meet the guiding principles while minimizing the impact of the change – refer to section 4.
It is important to note that the proposed integrated fee model for the Annual Dealer Member Fee is separate from the “Integration Cost Recovery Fee Model” which seeks to recover the costs of integration1 . The Integration Cost Recovery Fee Model is not discussed in this Notice, other than minor amendments to update references to this integrated Fee Model noted in Appendix C.
Currently, CIRO operates two separate fee models to recover costs from both Investment Dealer Members (ID Members) and Mutual Fund Dealer Members (MFD Members) which are based on the fee models that were in place at IIROC and the MFDA, respectively, at the time of the merger. The legacy fee structures (the “Interim Fee Model”) were to be maintained and administered with necessary modifications until such time as an integrated fee model is developed2 . Dealer Members who are registered as both an investment dealer and a mutual fund dealer (“Dual-Registered Dealer Member”) pay fees under both models.
The Annual Fee for each ID Member under the Interim Fee Model is comprised of three components: Revenues, Approved Persons, and Minimum Fee, and calculated as the greater of
Revenue component
The Revenue component is an amount equal to the product of the Total Revenue of the Dealer Member for the previous calendar year as reported to CIRO and the revenue rate prescribed by CIRO’s Board of Directors (in its discretion) for the applicable revenue component tier.
Approved Person Fees component
The Approved Person Fees component is the product of $250 and the number of Approved Persons of the Dealer Member as at the last day of the previous fiscal year.
Minimum Fee component
The Minimum fee for ID Members shall be no less than $16,000.
Annual Fee for new Dealer Members
The Annual Fee for new Dealer Members approved during a fiscal year is based on the timing of the CIRO Board of Directors’ approval, after contemplating the non-refundable application review deposit of $10,000, as follows:
The Annual Fee for each MFD Member under the Interim Fee Model is calculated as the greater of
Assets under Administration (AUA)5
The Annual membership fees are equal to the fee rates multiplied by the two-year average of the Dealer Member’s AUA in all of the provinces and territories of Canada except Québec. Fee rates are established annually by CIRO’s Board of Directors.
Minimum Fees
The Minimum fee for MFD Members shall be no less than
Annual Fee for new Dealer Members
The Annual Fee for new Dealer Members approved during a fiscal year is based on the timing of the CIRO Board of Directors’ approval, calculated on a prorated basis of the minimum fee. The amount payable would be the calculation less the non-refundable application review deposit, or nil in the case where the deposit was greater than the calculated Annual Dealer Member Fee.
The Annual Dealer Member Fee for each Dealer Member under the proposed integrated fee model will be comprised of three components: Revenues, Approved Persons, and the Minimum Fee.
The proposed Annual Dealer Member fee shall be the greater of
Revenue component
The Revenue component of the proposed Annual Fee shall be an amount equal to the product of the total revenue of the Dealer Member for the previous calendar year (“total revenue for fee purposes”) and the annually set prescribed rate for the applicable tier.
Approved Person fee component
The Approved Person fee component of the proposed Annual Dealer Member Fee will be an amount equal to the product of $250 and the number of Approved Persons8 of the Dealer Member based on the 12-month average for the previous calendar year.
Minimum fee component
The Minimum Fee payable is the amount prescribed below, if the sum of the Revenue component and the Approved Person Fees component is less than the minimum fee amount.
Type of Dealer Member | Proposed Fee |
---|---|
MFD Member - Level 1-3 | $5,000 |
MFD Member - Level 4 | $15,000 |
ID Member or Dual Registered Dealer Member | $25,000 |
Annual Fee for new Dealer Members
For new Dealer Members approved during the fiscal year, the Annual Dealer Member Fee is an adjusted amount of the Minimum Fee based on the timing of the CIRO Board of Directors’ approval. CIRO’s fiscal year starts on April 1.
The amount payable upon approval is prescribed below (calculated as the difference between the adjusted minimum fee9 , and the portion of the application deposit applied towards the minimum fee component10 ):
Type of Dealer Member | Q1 approval (April 1 – June 30) | Q2 approval (July 1 – September 30) | Q3 & Q4 approval (October 1 – March 31) |
---|---|---|---|
MFD Member - Level 1-3 | $2,500 | $1,250 | $0 |
MFD Member - Level 4 | $7,500 | $3,750 | $0 |
ID Member or Dual Registered Dealer Member | $12,500 | $6,250 | $0 |
As required by the Québec Recognition Order, Mutual Fund Dealers operating in Québec must benefit from an adequate transition period. Members registered only in Québec and dealing representatives of MFD Members registered only in Québec are not regulated by CIRO as of yet11 . Transitionary measures will be implemented to ensure that such Dealer Members do not pay fees associated with their Québec-based MFD activities and dealing representatives until CIRO starts to provide regulatory services to these Dealer Members and individuals. Accordingly,
To reduce the burden associated with additional reporting from MFD Members, CIRO will compute the value of Québec-based revenues for MFD Members based on the Québec-based AUA relative to the total AUA of the MFD Member13 .
CIRO conducted a comprehensive analysis of the impact of the methodology to determine the Annual Dealer Member Fee under the proposed integrated fee model. Here are some important points to keep in mind when reviewing the analysis:
Cost recovery by size of Dealer Member15 will remain substantially the same under the proposed integrated fee model relative to the Interim Fee Model. 75% of costs will be recovered from large Dealer Members and only 3% of costs will be recovered from small Dealer Members.
Dealer Members by Size | Cost recovery under the proposed integrated fee model | Cost recovery under the Interim Fee Model |
---|---|---|
Large firms | 75% | 77% |
Medium-sized firms | 22% | 21% |
Small firms | 3% | 2% |
The proposed integrated fee model shifts about 9% of cost recovery from MFD Members to ID Members once the transitionary measures have ended. This is because ID Members currently account for about 80% of the total revenues for the membership. The impact on the ID Members’ fees is, however, reduced somewhat by the Approved Person fee because MFD Members have twice as many Approved Persons, in aggregate, as ID Members.
Dealer Members by registration | Cost recovery under the proposed integrated fee model | Cost recovery under the Interim Fee Model |
---|---|---|
ID Members and Dual-Registered Dealer Members | 71% | 61% |
MFD Members | 29% | 39% |
For those Dealer Members seeing a fee increase, when grouped by size, the fee increase is no greater than 0.25% of Form 1 revenues:
ID Members | Proposed Annual Dealer Member Fee As a % of Revenue | Current Annual Dealer Member fees As a % of Revenue | Change |
---|---|---|---|
Large firms | 0.16% | 0.13% | 0.03% |
Medium-sized firms | 0.17% | 0.16% | 0.01% |
Small firms | 0.68% | 0.44% | 0.23% |
TOTAL | 0.16% | 0.14% | 0.02% |
MFD Members | Proposed Annual Dealer Member Fee As a % of Revenue | Current Annual Dealer Member fees As a % of Revenue | Change |
Large | 0.51% | 0.41% | 0.10% |
Medium-sized firms | 0.21% | 0.07% | 0.14% |
Small firms | 0.38% | 0.13% | 0.25% |
TOTAL | 0.36% | 0.23% | 0.13% |
For those Dealer Members seeing a fee decrease, as noted above, the largest decreases will be experienced by the MFD Members:
ID Members | Proposed Annual Dealer Member Fee As a % of Revenue | Current Annual Dealer Member fees As a % of Revenue | Change |
---|---|---|---|
Large firms | - | - | - |
Medium-sized firms | 0.18% | 0.19% | (0.01%) |
Small firms | - | - | - |
TOTAL | 0.18% | 0.19% | (0.01%) |
MFD Members | Proposed Annual Dealer Member Fee As a % of Revenue | Current Annual Dealer Member fees As a % of Revenue | Change |
Large | 0.29% | 0.48% | (0.19%) |
Medium-sized firms | 0.29% | 0.67% | (0.39%) |
Small firms | 0.33% | 0.47% | (0.14%) |
TOTAL | 0.29% | 0.49% | (0.20%) |
In determining the methodology for the proposed Annual Dealer Member Fee, we considered a number of alternatives:
In order to ensure that Dealer Member input was considered in the development of an integrated new fee model, we established an ad-hoc industry working group in October 2023. We invited all Dealer Members to participate. The working group represented a good diversity of Dealer Members with participants from both ID Members and MFD Members, and included a cross-section of large, small, independent, retail, institutional, and bank-owned firms. We also provided a confidential draft of the proposal to a select group of MFD Members in the last week of March 2024. We made a number of changes to the proposed integrated fee model based on their feedback.
The proposed integrated fee model applies similar principles and methodologies to those of other comparable regulators. We compared our proposed integrated fee model to those of similar regulatory organizations like the Financial Industry Regulatory Authority (FINRA), the Ontario Securities Commission (OSC), the Financial Conduct Authority (FCA), and the Australian Securities and Investments Commission (ASIC).
Overall, the proposed fee model meets the guiding principles:
As part of the integrated fee model for Dealer Members, we are proposing:
CIRO’s current entrance fees for membership are:
We are proposing an overall increase in the entrance fees and a specific entrance fee for ID Members that operate a crypto asset trading platform that facilitates the buying, selling and holding of crypto assets, to align more closely with the cost of reviewing membership applications:
Type of Dealer Member Application | Current Fee | Increase | Proposed Entrance Fee |
---|---|---|---|
MFD Member – Level 1 | $1,500 | + $8,500 | $10,000 |
MFD Member – Level 2-3 | $3,000 | + $7,000 | |
MFD Member – Level 4 | $5,000 | + $15,000 | $20,000 |
ID Member or Dual-Registered Dealer Member19 | $25,000 | + $15,000 | $40,000 |
ID Member – Crypto Asset Trading Platform | $25,000 | + $35,000 | $60,000 |
The entrance fee is non-refundable and payable in full upon CIRO’s acceptance of the Dealer Member application. A portion of this fee equal to 25% of the minimum dealer regulation fee is to be credited towards the annual fee upon Board approval of the application.
A payment to the Restricted Fund equal to 0.5% of a Dealer Member applicant’s expected initial capital calculated according to CIRO’s Form 1, is also payable upon Board approval of the application.
If an existing MFD Member applies to become an ID Member, the transaction would be reviewed as a new ID Member application. However, since the MFD Member is already a CIRO Dealer Member, the MFD Member would only be charged the difference in the entrance fees for an MFD Member and an ID Member. For example, if a Level 4 MFD Member applies to become an ID Member, then the MFD Member will be charged a fee of $20,000, which is the difference in the entrance fee for an ID Member ($40,000) and a Level 4 MFD Member ($20,000).
Since these fees are only for firms applying for membership, existing Dealer Members will not be negatively impacted by the proposed increase in fees. Instead, the increased application fees will reduce the costs that would otherwise be absorbed by existing Dealer Members.
The payment to the Restricted Fund upon approval for MFD Member applicants is an insignificant one-time impact estimated to be $250 to $1,000 based on minimal capital requirements. There is no change for ID Member applicants approved.
In determining the proposed entrance fees, we considered lower fees for applicants; however, the fees proposed represent more closely CIRO’s estimated costs associated with reviewing new Dealer Member applications without becoming unreasonable barriers to entry. Even with the higher entrance fees, these amounts still only represent a portion of CIRO’s estimated costs, considering the resources required for the review and assessment of a firm’s application for membership.
We also considered expanding the number of categories of ID Members (e.g., retail ID Members, non-retail ID Members). However, the costs associated with reviewing membership applications will vary even for the same type of business model, depending on the firm’s back-office arrangements, product and service offering, general level of preparedness, and other factors. The one exception was for ID Members operating a crypto asset trading platform. For these types of ID Member applications, CIRO’s estimated costs consistently exceeded the estimated costs of other types of ID Member applications.
In driving consistency for the additional payment to the Restricted Fund (upon Board approval of the membership application), we considered eliminating the contribution for ID Members. Given the insignificant impact of applying it to MFD Members, and because those funds are used directly or indirectly in the public interest, it was decided to keep the payment requirement and apply it to all applicants.
In order to ensure that Dealer Member input was considered in the development of an integrated new fee model, we established an ad-hoc industry working group in October 2023. We invited all Dealer Members to participate. The working group represented a good diversity of Members with participants from both ID Members and MFD Members, and included a cross-section of large, small, independent, retail, institutional, and bank-owned firms.
We compared our proposed application fees to those of the OSC and FINRA. The proposed integrated fee model applies similar principles and methodologies to those of FINRA and our proposed fee amounts are comparable to FINRA’s application fees, which range from $5,000 to $55,000 USD.
Overall, the proposed application fees meet the guiding principles:
Currently, CIRO does not require Dealer Members to pay a fee for the review of business changes, even for material business changes that can result in significant costs to CIRO for the review of these requests. Instead, these costs are absorbed by CIRO’s broader membership, including those Dealer Members that may not have directly benefitted from these regulatory services.
We are proposing fees for the following types of business changes:
Each type of material business change and their associated fees are described below. If a Dealer Member’s submission entails more than one type of material business change, the Dealer Member will only be charged the highest applicable fee (as summarized in the tables below), rather than being charged multiple fees.
The proposed fees are non-refundable and payable in full upon CIRO’s acceptance of the Dealer Member’s submission for review.
MFD Members applying to become ID Members
If an existing MFD Member applies to become an ID Member, the transaction would be reviewed as a new ID Member application. However, since the MFD is already a CIRO Dealer Member, the MFD would only be charged the difference in the entrance fees for an MFD Member and an ID Member. For example, if a Level 4 MFD Member applies to become an ID Member, the MFD Member will be charged a fee of $20,000, which is the difference in the entrance fee for an ID Member ($40,000) and a Level 4 MFD Member ($20,000), as outlined in the table below.
MFD Member applying to become an ID Member | MFD Member Entrance Fee | ID Member Entrance Fee | Proposed Fee for Change from MFD to ID |
---|---|---|---|
MFD Member Level 1-3 applying to become an ID Member or Dual-Registered Dealer Member | $10,000 | $40,000 | $30,000 |
MFD Member Level 4 applying to become an ID Member or Dual-Registered Dealer Member | $20,000 | $40,000 | $20,000 |
Dealer Member Reorganizations, Transfers and Amalgamations
We are proposing fees for Dealer Member reorganizations, transfers, amalgamations and other similar business combinations captured under By-law No. 1, section 3.10, which requires that,
“If the business or ownership of a Member is proposed to be reorganized or transferred, amalgamated or otherwise combined in whole or in part with another person (including another Member) in a manner which the Member or its business will cease to exist in, or will be substantially changed from, its then current form, or a change of control of the Member may occur, the Member (not less than 30 days prior to the proposed effective date of such event) shall give written notice to the Corporation.”
The proposed fees for Dealer Member reorganizations, as described above, are as follows:
Dealer Member Reorganization 21 | Proposed Fee |
---|---|
MFD Member Level 1-3 | $5,000 |
MFD Member Level 4 | $10,000 |
ID Member or Dual Registered Dealer Member | $15,000 |
ID Member Material Changes to Business Activities
We are proposing fees for ID Members that submit “any material change to business activities,” under IDPC Rules, subsection 2246(2) and described further in published guidance. While IDPC Rules, subsection 2246(2) is applicable only to ID Members, CIRO plans to propose corresponding fees for MFD Members if the harmonized Rulebook expands this requirement to MFD Members.
The proposed fees for ID Member material changes to business activities are listed below:
ID Member Material Change to Business Activities 22 | Proposed Fee |
---|---|
ID Member or Dual-Registered Dealer Member Material Change to Business Activities | $15,000 |
ID Member or Dual-Registered Dealer Member adding a Crypto Asset Trading Platform | $20,000 |
CIRO is proposing a specific fee for ID Members adding a new crypto asset trading platform, since CIRO’s costs for reviewing this type of change are significantly higher than the costs associated with CIRO’s review of other types of business changes.
If an ID Member has an existing crypto asset trading platform and proposes a material change in business, the applicable fee would be the same as for any other ID Member material change in business (i.e., $15,000).
ID Member Changes not considered a Material Business Change
For the purpose of the integrated fee model, a “material business change” does not include the transactions listed below:
Dealer Members proposing the types of changes listed above would not be charged fees for those changes.
Since 2020, CIRO (or its predecessor organizations) has received approximately 30 to 60 material business changes each year. Most have been for ID Members since the Mutual Fund Dealer Rules do not have the same requirement in the IDPC Rules to notify CIRO of a material change in business. Based on the historical information, less than half of ID Members send in a material change in business in a year and only a small handful of ID Members submit more than one material business change per year. Although the impact on the Dealer Members in general is somewhat limited, CIRO’s costs for providing this regulatory function are considerable, as each request can take several months to review.
The proposed fee model is intended to improve the proportion of cost recovery from those Dealer Members that utilize the regulatory services provided by CIRO, thereby reducing the amounts that must be subsidized by Dealer Members that do not utilize or directly benefit these regulatory services.
CIRO has not identified any regional-specific effects or impacts.
In determining the fees for material business changes, CIRO considered specific fees for other types of Dealer Member transactions, such as ownership.
The costs associated with CIRO’s review of ownership changes are significantly lower than the costs associated with material business changes and would not warrant the administrative resources required to collect and process such minimal dollar amounts.
To ensure Dealer Member input was considered in the development of an integrated new fee model, we established an ad-hoc industry working group in October 2023. We invited all Dealer Members to participate. The working group represented a good diversity of Members with participants from both ID Members and MFD Members, and included a cross-section of large, small, independent, retail, institutional, and bank-owned firms.
We compared our proposed material change in business fees to those of FINRA. The proposed integrated fee model applies similar principles and methodologies to those of FINRA and our proposed fee amounts are comparable to FINRA’s fees for mergers and material changes, which range from $7,500 to $100,000 USD.
Overall, the proposed material business change fees meet the guiding principles:
CIRO operates on a cost recovery basis and there are several references in our By-laws, Rules and Fee Models that speak to CIRO’s ability to require reimbursement for costs and expenses incurred in connection with the review and approval of an application, reorganization or substantial change in business of a Dealer Member23 .
CIRO staff generally complete their compliance review of membership applications and material business changes within six (6) months, and the proposed fees for these transactions only consider our costs for performing these compliance reviews within this 6-month timeframe. For clarity, the “compliance review” is considered complete when CIRO staff have finished assessing the applicant's proposed business model and control infrastructure, and are prepared to make a recommendation to the relevant decision-maker regarding approval (or refusal) of the membership application or material business change.
Compliance reviews that cannot be completed within six (6) months are generally because:
In both scenarios, the prolonged compliance review (i.e., more than six (6) months) requires excessive attention, time and resources, resulting in extraordinary costs and expenses for CIRO.
Under the proposed extraordinary costs reimbursement framework, if a firm’s membership application or proposed material business change remains under compliance review for any period longer than six (6) months, the applicant (or Dealer Member) will be required to reimburse CIRO for the additional costs and expenses. Firms will be required to reimburse one-sixth (1/6) of the application or business change fee for each month (or partial month) that the application remains under review longer than six (6) months. This reimbursement model ensures that amounts collected from applicants do not exceed CIRO’s costs for completing the compliance review as the application fees recover only a portion of CIRO’s costs.
Once the extraordinary costs reimbursement is triggered, the applicant will continue to be charged for each month (or partial month) until the compliance review is complete, the firm withdraws its application, or CIRO staff have suspended their review of the application.
Having a simplified framework of this nature enables the organization to communicate to applicants the potential and basis of assessing reimbursement for extraordinary costs associated with applications that take longer than six (6) months to complete the review process.
The tables below list the monthly reimbursement rate for each type of Dealer Member application or material business change.
New Dealer Member Applications
Type of Dealer Member Application | Proposed Fee | Monthly Extraordinary Cost Rate (triggered after 6 months) |
---|---|---|
MFD Member – Level 1-3 | $10,000 | $1,666.67 |
MFD Member – Level 4 | $20,000 | $3,333.33 |
ID Member or Dual-Registered Dealer Member | $40,000 | $6,666.67 |
ID Member – Crypto Asset Trading Platform | $60,000 | $10,000.00 |
MFD Member applying to become an ID Member
MFD Member applying to become an ID Member | Proposed Fee | Monthly Extraordinary Cost Rate (triggered after 6 months) |
---|---|---|
MFD Member Level 1-3 applying to become an ID Member or Dual-Registered Dealer Member | $30,000 | $5,000.00 |
MFD Member Level 4 applying to become an ID Member or Dual-Registered Dealer Member | $20,000 | $3,333.33 |
Dealer Member Reorganization
Dealer Member Reorganization24 | Proposed Fee | Monthly Reimbursement Rate (triggered after 6 months) |
---|---|---|
MFD Member Level 1-3 - Reorganization | $5,000 | $833 |
MFD Member Level 4 - Reorganization | $10,000 | $1,667 |
ID Member or Dual Registered Dealer Member - Reorganization | $15,000 | $2,500 |
ID Member Material Change to Business Activities
ID Member Material Change to Business Activities25 | Application Fee | Monthly Reimbursement Rate (triggered after 6 months) |
---|---|---|
ID Member or Dual-Registered Dealer Member Material Change to Business Activities | $15,000 | $2,500 |
ID Member or Dual-Registered Dealer Member adding a Crypto Asset Trading Platform | $20,000 | $3,333 |
The proposed extraordinary costs reimbursement framework will be applicable to new Dealer Member applications and material business changes that remain under review by CIRO staff after six (6) months. This differs from forfeit of the nonrefundable deposit for membership applications referenced in CIRO’s by-laws26 . Forfeit of the nonrefundable deposit per the by-law is triggered when:
Applicants or Dealer Members may choose to withdraw their membership application or business change. In addition, CIRO staff may consider an application or material business change request to be abandoned if the applicant or Dealer Member does not take appropriate action to advance their application. This includes significant delays in the application or Dealer Member responding to requests for information and materials from CIRO staff.
The proposed extraordinary costs reimbursement framework is intended to address applications or material business changes that remain under compliance review after the six-month mark.
For the description on the alignment of reimbursement of extraordinary costs and expenses with the guiding principles refer to sub-section 6.4.
As part of the integrated fee model for Dealer Members, CIRO is proposing to amend its Equity Market Regulation Fee Model27 to eliminate the per trade fee discount currently provided to Qualified Market Makers28 trading in furtherance of Marketplace Trading Obligations29 on a listing exchange. This proposed change will result in a corresponding reduction in the per trade regulatory fee applied to all other equity security trades executed on a Marketplace30 by ID Members that are participating organizations, members or subscribers of a Marketplace (Participants).
In considering the proposed removal of the Trade Fee Discount, CIRO evaluated the discount primarily from the perspective of fairness. Currently, the Trade Fee Discount results in an increased per trade fee for all other trades across all Participants but CIRO does not receive the intended regulatory benefit.
While the Trade Fee Discount may have been justifiable when implemented in 2004, for the reasons described in this Rules Bulletin, CIRO has not identified any substantial basis on which it can continue to be justified.
While there may be some negative impacts on certain Dealer Members who have been benefitting from the Trade Fee Discount, and potentially on some listing exchanges, in our view these potential negative impacts do not outweigh the associated fairness concerns.
In the absence of sufficient evidence that the regulatory function associated with the Trade Fee Discount is being performed, we propose that it be eliminated.
CIRO’s current Equity Market Regulation Fee Model operates as a cost-recovery model and is applicable to trades on Marketplaces that trade equity securities. It allocates fees based on:
Qualified Market Makers have responsibilities related to Marketplace Trading Obligations on a listing exchange, as well as regulatory obligations to report suspicious order and/or trade activity. In return for performing this dual role, the number of trades they execute on the listing exchange in securities for which the role is applicable is discounted by 70% for the purposes of calculating the total Trade Fee paid by all Participants (the “Trade Fee Discount”). The Trade Fee Discount received by Qualified Market Makers results in a higher Trade Fee for all other trades by all Participants.
The Trade Fee Discount has existed for many years (in the same or similar form) in the fee models of various predecessor organizations to CIRO. An exemption from the payment of regulation fees for trades pursuant to market maker obligations was proposed by Market Regulation Services Inc. (RS) and approved by the OSC in June 200331 , subject to certain terms and conditions, including that the exemption be reviewed by RS within 12 months. In October 2004, the exemption was revised and limited to a 70% reduction of the regulation fee that would otherwise be payable by market makers for trades made pursuant to their market maker obligations. The 70% reduction has been in place since that time in the same or similar form.
The proposed changes to the Equity Market Regulation Fee Model would remove both the definition of Qualified Market Maker and the Trade Fee Discount applicable to trades by Qualified Market Makers.
As set out in the current Equity Market Regulation Fee Model, the number of trades executed by Qualified Market Makers is limited to market makers who have an obligation with a listing exchange to:
The above elements must also be demonstrated through adequate policies and procedures of the listing exchange that can reasonably assure continued satisfactory performance of these requirements.
The obligation to provide a two-sided market assists in maintaining a fair and orderly market, while the obligation to report suspicious order and/or trade activity to CIRO is a regulatory “gatekeeper” function that assists CIRO in identifying and reviewing potential trading violations more effectively and expeditiously. CIRO is not questioning the important role that market makers play in relation to market quality. Further, CIRO is not disputing that Qualified Market Makers are required to maintain a two-sided market for their assigned securities, a responsibility for which their performance is monitored by the listing exchange.
However, it is the gatekeeper function noted above that represents the regulatory role associated with the Trade Fee Discount received by Qualified Market Makers, and it is this regulatory role that is being considered in relation to the proposal to eliminate the Trade Fee Discount. CIRO has very little demonstrable evidence to indicate that Qualified Market Makers continue to perform this role, therefore we are of the view that the cost imposed on other Participants associated with the Trade Fee Discount is not commensurate with the benefit received.
The regulatory role of market makers has historically been described as an expectation that Qualified Market Makers would notify CIRO (then RS or IIROC) in the event of:
Since 2004, equity markets have evolved considerably, including with respect to the traditional activity and role of market makers. Many Participants acting in the capacity of Qualified Market Makers now employ automated market making strategies that involve significantly less human (meaning, non-automated) interaction in the process of order entry and execution. While this evolution in market structure and market making has likely resulted in market quality benefits, another expected result from less human interaction is the reduced ability to act in a gatekeeping capacity as described above.
For the period of April 2022 to March 2023, 15 Participants acted in the capacity of a Qualified Market Maker. Collectively, the trades executed by these firms pursuant to Marketplace Trading Obligations (i.e., trades executed on the listing exchange in securities for which the firm has a market making responsibility (Qualifying Trades) represented approximately 4% of the total number of trades executed by all Participants in all equity securities across all Canadian marketplaces.
The number of Qualifying Trades executed by market making firms is also highly concentrated, with a very small number of Qualified Market Makers benefitting from the vast majority of the total Trade Fee Discount provided.
The application of the Trade Fee Discount increased the Trade Fee for all other trades executed by all other Participants by over $0.001 per trade. Depending on the Participant firm, the significance of this increased Trade Fee will vary.
Pursuant to the definition of Qualified Market Maker in the current Equity Market Regulation Fee Model, we have very little demonstrable evidence that Qualified Market Makers are reporting suspicious order and/or trade activity to CIRO that would support the Trade Fee Discount.
While the Trade Fee Discount imposes higher fees that may be considered negligible for some Dealer Members, from a fairness perspective it is difficult to justify any increase in fees without receiving sufficient regulatory benefits.
An assessment of the impact of the proposed removal of the Trade Fee Discount has been included below, and we have identified potential impacts to Participants and Marketplaces. The proposed removal of the Trade Fee Discount is not expected to impact investors and CIRO has not identified any regional-specific effects or impacts.
The proposed removal of the Trade Fee Discount is expected to have a net positive impact for Participants, as most would be subject to a reduced Trade Fee. Some, but not all Participants that act in the capacity of a Qualified Market Maker would be subject to an increased Trade Fee.
April 2022 to March 2023
Category of Dealer Member Firm | Number of Firms | Number of Firms with a Trade Fee Increase under Proposed Changes | Number of Firms with a Trade Fee Decrease under Proposed Changes |
---|---|---|---|
Participant (Qualified Market Maker) | 15 | 7 | 8 |
Participant (Not Qualified Market Maker) | 49 | 0 | 49 |
We expect a neutral to potentially negative impact to Marketplaces. Where a Marketplace is not a listing exchange that imposes obligations on a Participant to act in the capacity of a Qualified Market Maker, we do not expect any impact.
For some securities on some listing exchanges with Qualified Market Makers, the proposed removal of the Trade Fee Discount may impact decisions of Qualified Market Makers to continue acting in that capacity. If certain Qualified Market Makers determine to exit the role, the listing exchange will need to re-assign the responsibilities to another Participant.
We note however, that most Qualified Market Makers would see a Trade Fee decrease under the proposed changes, as set out in the table above. We also note again that a very small number of the 15 Participants that acted as Qualified Market Makers received the vast majority of the total dollar value of the Trade Fee Discount from April 2022 to March 2023.
CIRO does not expect Participants and Access Persons to undertake any implementation efforts with respect to the amendments being proposed that would eliminate the Trade Fee Discount.
Where a listing exchange determines that it is necessary to adjust the benefits/obligations of existing market making programs to account for the elimination of the Trade Fee Discount, it would be expected that this would require implementation efforts, including any required regulatory approvals.
We consulted with the following on the proposed removal of the Trade Fee Discount:
Overall, the proposed changes to the Equity Market Regulation Fee Model meets the guiding principles.
Appendix A – Blackline version of Interim Fee Model Guidelines applicable to Investment Dealer Members and Marketplace Members
Appendix B – Clean version of the Integrated Fee Model
Appendix C - Text of MFD Rules to Reflect MFD Rules Amendments Respecting the Integrated Fee Model
Appendix D - Text of Integration Cost Recovery Fee Model Guideline to Reflect Integration Cost Recovery Fee Model Guideline Amendments Respecting the integrated Fee Model
Appendix E – Frequently Asked Questions (FAQs)
Appendix E – Frequently Asked Questions (FAQs)
I. Membership Annual Dues
Why is the fee model being changed?
The fee model is being changed in order to have a consistent and harmonized approach to collecting fees for the newly combined membership. There is a need for an integrated fee model which:
I am a mutual fund dealer. How is the fee model changing for my firm?
The proposed methodology for the Annual Member Fee will be changing significantly for MFD Members in the following ways:
I am an investment dealer. How is the fee model changing for my firm?
The proposed methodology for the Annual Member Fee will not be changing significantly for ID Members. Here are some of the key changes:
I am a dual registered dealer. How is the fee model changing for my firm?
A dual registered dealer is considered an “investment dealer” for the purpose of calculating fees. Throughout this document, references to “mutual fund dealer” refer to firms that are only mutual fund dealer licensed.
How will I know what the potential impact of the new fee model is on my individual firm?
CIRO will be contacting each individual Member to notify them of the directional impact of the proposed integrated fee model on their fee assessment.
Why are most firms experiencing a fee increase under the proposed integrated fee model?
40% of Members are seeing a fee increase because the minimum fee amounts across all categories are increasing. Only 24% of Members are seeing an increase due to the unavoidable redistribution of fees resulting from:
Why was AUA not used in the proposed integrated fee model?
CIRO was focused on developing a methodology for an integrated fee model that would apply to all Members regardless of size or business model. While AUA was the primary factor in the mutual fund dealer fee model, it cannot be applied to all ID Members consistently due to the diverse nature of business lines, products and accounts at ID Members. For example, AUA does not apply to capital markets activity. We found that Revenue and Approved Persons was the most consistent basis of measurement across all members.
Why doesn’t the proposed integrated fee model apply to Deemed Members and individuals registered only in Québec?
The proposed integrated fee model does not apply to Deemed Members during the transition period as provided in the Québec Recognition Order.
However, reduced fees, proportionate to services offered and based on cost recovery, will be charged to Deemed Members for the functions performed by CIRO under the delegation of powers granted by the AMF during the transition period.
Will this impact Integration Cost Recovery Fees?
There is no change to the manner in which integration costs are being recovered. Integration costs are recovered from affiliated members with the same controlling ownership interest and any member that becomes dually registered before the cost recovery period ends. Integration Cost Recovery Fees will continue to be set as a percentage of the applicable Member firm’s annual membership fees.
Why were transitionary measures not implemented for all Members?
Changes to the fee model impact all Members to varying degrees. Creating transitionary measures for all Members in addition to those required for the transition period for MFDs in Quebéc would not adhere to the principles of practical, proportionate, or consistent. Revenue Component
Why did CIRO implement a normalization factor? And why does it only apply to mutual fund dealers with AUA greater than $1 billion?
Some MFD Members reported lower Form 1 revenues compared to other MFD Members even though they had proportionately larger AUA than other MFD Members. These MFD Members are typically part of cost-sharing or transfer pricing arrangements amongst a corporate group, (i.e. where the fund manufacturer is affiliated and therefore, pays a lower fee to the MFD Member to distribute their products than they would typically pay to a third-party MFD Member). The change to a revenue-based fee model would see such Members experience material fee decreases relative to their peers.
As the model is now changing for MFD Members, from AUA to Revenues and Approved Persons, the normalization factor is being proposed to add equity to the allocation of costs.
Members that have more than $1 billion of average AUA represent medium and large size MFD Members, and therefore this threshold avoids capturing smaller MFD Members that may have lower Form 1 revenues compared to AUA for other reasons, such as being a relatively new Member. Of the Members with more than $1 billion of average AUA, only a small number of Members have a revenue to AUA ratio low enough for the normalization factor calculation to apply.
Why is the normalization factor not considered for ID Members?
ID Members typically have a diverse range of revenues, business lines, products and accounts. The normalization factor would be significantly more complex to determine for ID Members and would require additional reporting from ID Members to separate revenues. We felt that the benefit of attempting a normalization factor for ID Members would be eclipsed by the cost.
How do I calculate the normalization factor to determine the revenue for fee purposes if my firm is an MFD Member with more than $1 billion of average AUA?
Here is a hypothetical example of the calculation:
Assumptions:
Calculations:
Normalization factor
= Median – 0.10%
= 0.85%
Normalized revenues for the MFD Member
= AUA x Normalization factor
= $10 million x 0.85%
= $85,000
Total revenue for fee purposes:
The MFD Member’s revenues for fee purposes is the GREATER of:
- $85,000, and
- the MFD Member’s Form 1 revenues.
Why are MFD Members with Revenues in Québec given a transitionary reduction in revenues?
During the transition period, MFD members registered in Québec pay reduced fees proportionate to the services offered to them, in accordance with the Recognition Order. Until the transition is complete, MFD members with activity in Québec will be subject to a reduction in Québec revenues for fee purposes as follows:
How will CIRO determine the dollar amount of Québec-based revenues for MFD Members?
In order to reduce the burden associated with additional reporting from MFD Members, CIRO will compute the value of Québec-based revenues for MFD Members based on the Québec-based AUA relative to total AUA of the MFD Member. Note that MFD Members report their Québec-based AUA to CIRO annually.
Here is a hypothetical example of the calculation:
Assumptions (for all years):
Calculations:
Form 1 revenues as a percentage of total AUA
= $100,000 ÷ $10 million
= 1%
Computed Québec-based revenues for the MFD Member
= (Form 1 revenues as a percentage of total AUA) x (Québec-based AUA)
= 1% x $3 million
= $30,000
Total revenue for fee purposes:
Year one:
The MFD Member’s revenues for fee purposes is:
= Total Form 1 revenues – Québec-based revenues
= $100,000 - $30,000
= $70,000
Year two (and/or until transition period is complete):
The MFD Member’s revenues for fee purposes is:
= Total Form 1 revenues – (50% x Québec-based revenues)
= $100,000 – (50% x $30,000)
= $85,000
After the transition period is complete:
The MFD Member’s revenues for fee purposes is:
= Total Form 1 revenues
= $100,000
How are activities carried out by the CSF considered during and after the transition period to comply with the Recognition Order of the AMF?
During the transition period, MFD individuals registered only in Quebec are subject to CSF and AMF oversight, but not CIRO oversight, and therefore there are no fees applied as part of the Annual Dealer Member Fee, as no services are provided by CIRO during this time. After the transition period, CIRO will have responsibilities for oversight that are not materially different from other MFD Member firms and individuals, and therefore the integrated fee model will apply at that time and fees will be calculated in a consistent manner to other members.
For MFD individuals registered in Quebec and other provinces, they will be counted as part of the Approved Person count in the calculation of the Annual Dealer Member Fees, and Quebec MFD revenues will be adjusted per the transitionary measures, to reflect reduced fees proportionate to services provided.
Approved Person Fee Component
Why is the Approved Person count based on an 12-month average instead of the number as at December 31?
MFD Members tend to experience material fluctuations in their Approved Person counts from month to month. Therefore, using a 12-month average for the year helps to eliminate volatility in the determination of the fee amount for all Members.
Are Québec MFD dealing representatives included in the Approved Person count?
If an individual is registered in Québec and other provinces, they would be included in the Approved Person count. If an individual is only registered in Québec, they generally would not meet the definition of an Approved Person under MFD Rules34 .
Minimum Fee Component:
Why were the minimum fees increased?
To ensure a more proportionate distribution of costs across the membership, the proposed fee model is increasing the minimum fees marginally over the pre-integration levels.
For information, the minimum fees for ID Members prior to the Interim Fee Model were:
For information, the minimum fees for MFD Members prior to the Interim Fee Model were:
Why were the minimum fees reduced under the interim fee model from the legacy IIROC and MFDA fee structures?
When planning the amalgamation, both legacy SROs felt that it was important to retain and support the smaller dealer community through the transition to the new regulatory model. Accordingly, the Interim Fee Model reduced minimum fees and rebalanced downward the fee rates per Revenue Tier for ID Member fees and rates per AUA for MFD Member fees applicable to the small dealer group. This modification, as noted in the Information Circular to all Members in August 2022, was to apply only on an interim basis starting in fiscal year 2024 and for a minimum of two years or until the final integrated fee model was determined.
II. Membership Application and Business Change Fees
Why are the membership application fees being increased?
The membership application fees have not changed in over 20 years and are far below CIRO’s costs of reviewing these applications. The proposed fee amounts represent more closely CIRO’s costs associated with providing regulatory services.
Why is there a specific application for Crypto Dealers?
Membership applications for Crypto Dealers require a much more extensive review by CIRO staff due to the novel nature of their business models in comparison to other Investment Dealer applicants that trade traditional securities. For example, Crypto Dealer applications generally include applications for exemptive relief from CIRO requirements, which require additional review, assessment and approval by CIRO. For other types of membership applications, requests for exemptive relief from CIRO requirements are rare. The higher entrance fee for Crypto Dealer applications reflects the increased costs incurred by CIRO in comparison to other types of Investment Dealer applications.
Why am I being charged for material changes in business?
The proposed fees are intended to recover some of CIRO’s costs associated with our review of material changes in business, from the Dealer Members that make use of this regulatory service.
Will MFD Members be charged for material changes in business?
MFD Members will pay a fee for a reorganization, amalgamation, or other similar business combination, captured under CIRO By-law No.1, section 3.10. MFD Members will also pay a fee if they apply to become an ID Member. However, MFD Members will not be charged a fee for other types of material changes to business activities. If the harmonized Rulebook requires MFD Members to submit “material changes to business activities" for CIRO review, as currently required for ID Members under IDPC Rules, subsection 2246(2), then we expect to propose corresponding fees at that time.
What is the application fee for an MFD Member that wants to become an ID Member?
The MFD Member would pay a reduced application fee since it is already a CIRO Member. For example, if a Level 4 MFD Member wants to become an ID Member, the required fee would be $20,000. This fee is the difference in the proposed ID Member application fee ($40,000) and proposed MFD Member application fee ($20,000).
What is the fee for an ID Member to become a Dual-Registered Member?
An ID Member becoming dual-registered is “a material change to business activities” under IDPC Rules, section 2246(2). The proposed fee for an ID Member’s material change to business activities is $15,000.
Why is CIRO implementing an “extraordinary costs and expenses” reimbursement for applications and business changes that take more than 6 months to review?
The proposed reimbursement framework is intended to recover costs for excessive attention, time and resources spent on an application or change in business. The fees associated with membership applications and material business changes are based on CIRO’s review keeping within 6 months. We often find that delays in advancing applications are generally due to a lack of preparedness and/or responsiveness by the firm.
CIRO has several ways to try to ensure that firms are prepared before sending an application:
III. Market Maker discount
Will this change impact my firm?
The removal of the discount for Qualified Market Makers will only impact fees for investment dealers that directly execute trades in equity securities or ETFs on Canadian marketplaces. Meaning, only investment dealers that are also Participants (meaning, a member or subscriber of a marketplace).
How will this change impact my firm?
If your firm is a Participant and NOT a Qualified Market Maker, the fee that is applied on a per trade basis will decrease. If your firm is a Participant and IS a Qualified Market Maker, the impact will depend on how many trades your firm executes as a Qualified Market Maker.
Type of Member | Q1 approval (April 1 – June 30) | Q2 approval (July 1 – September 30) | Q3/Q4 approval (October 1 – March 31) |
---|---|---|---|
MFD Member – Level 1-3 | $3,750 | $2,500 | $1,250 |
MFD Member – Level 4 | $11,250 | $7,500 | $3,750 |
ID and dual-registered Member | $18,750 | $12,500 | $6,250 |
Type of Member | Amount |
---|---|
MFD Member – Level 1-3 | $1,250 |
MFD Member – Level 4 | $3,750 |
ID Member and dual-registered Dealer Member | $6,250 |
Size | Number of firms | ID Members | MFD Members |
---|---|---|---|
Large firms | 24 | Revenues >= $1 billion | AUA >= $10 billion |
Medium-sized firms | 101 | Revenues >= $10 million and < $1 billion |
AUA >= $1 billion and
< $10 billion |
Small firms | 128 | Revenues < $10 million | AUA < $1 billion |
04/25/24
24-0154