Canada: Proposed Revocation and Replacement of OSC Fee Rule

Proposed OSC Rule 13-502 Fees, (the "New Rule") which replaces the existing Rule 13-502 is set to come into force on April 1, 2006. The New Rule preserves most aspects of the existing fee regime, with an aim of creating a clearer and more streamlined fee structure, as well as imposing fees at levels that more accurately reflect costs incurred by the Ontario Securities Commission (OSC) in connection with capital markets-related services.

The fee regime in its current form requires registrants, investment fund managers and reporting issuers to pay annual "participation fees", and "activity fees" as appropriate. The participation fee category is comprised of a "corporate finance participation fee" and a "capital markets participation fee", and is intended to reflect a market participant’s proportionate expected participation in Ontario’s capital markets in the upcoming year. When this fee regime was introduced in 2003, the OSC attempted to set fees at levels that would meet actual operating costs. Since the implementation, however, the OSC’s revenues have exceeded original projections, resulting in a surplus sought to be redistributed through the New Rule. Changes to "activity fees" are also targeted at ensuring that these fees reflect the actual cost of the work required to provide the related services.

Corporate finance participation fees must generally be paid by all Ontario reporting issuers, other than investment funds who have investment fund managers. The fees are based on the market participant’s capitalization, as a measure of its participation in Ontario’s capital markets. In keeping with the OSC’s stated intention of returning some of the surplus accrued over the last three years, the graduated fees for reporting issuers have been reduced, ranging from a low of $600 to a high of $50,300 as per the chart below.

Determination of a market participant’s capitalization for the purposes of establishing the applicable fee varies, depending on whether the reporting issuer is classified as a Class 1, 2 or 3 reporting issuer. In addition to changes to the graduated fees described above, the New Rule also changes certain definitions. A Class 1 reporting issuer is defined under the New Rule as a reporting issuer that "is incorporated or organized under the laws of Canada or a jurisdiction in Canada and that has securities listed or quoted on a marketplace in Canada or the Unites States of America." This definition has been expanded to include issuers whose listed or quoted securities do not include equity securities. In determining capitalization for the purposes of ascertaining the applicable participation fee, Class 1 reporting issuers are required to include all listed or quoted securities (including debt securities, warrants and options).

The definition of Class 3 reporting issuer has also been changed by dividing Class 3 reporting issuers (generally those issuers who are not incorporated or organized under the laws of Canada or a jurisdiction of Canada) into three different categories: Class 3A, Class 3B and Class 3C. Different fees and/or methods of calculating capitalization apply to each category of Class 3 reporting issuer in order to better align the applicable participation fees with the benefits derived from participation in Ontario’s capital markets.

The New Rule codifies discretionary relief which was frequently granted by including a new exemption from the requirement to pay a participation fee for a reporting issuer that is a subsidiary entity of another reporting issuer. The exemption only applies if the subsidiary entity is permitted to file the continuous disclosure documents of its parent in lieu of its own. If a subsidiary is relying on this exemption, it is required to file a Form 13-502F6.

Capital markets participation fees must be paid by registrants and unregistered investment fund managers, and are calculated on the basis of the amount of revenue generated by the market participant in Ontario. Capital markets participation fees have been decreased for the lower tier market participants ranging from $800 for participants with Ontario revenue up to $500,000, to $2,500 for participants with Ontario revenue up to $1 million. The fees have been increased for all tiers of capital market participants with revenue exceeding $1 million (peaking at $1,435,000 for Ontario revenue exceeding $2 billion).

In addition, the category of capital market participants with specified Ontario revenues between $1 million to under $5 million has been divided into two tiers: a fee of $5,600 apples to those participants with revenue under $3 million and $12,600 for those with revenue under $5 million. The method of calculating Ontario revenue to determine the applicable capital markets participation fees remains the same and varies depending on whether or not the registrant is a member of the Investment Dealers Association of Canada or the Mutual Fund Dealers Association of Canada.

Activity fees are flat fees charged for specified activities (for example, prospectus review or filing of an exempt trade report). Similar to the existing fee regime, every person or company that files a document or takes an action listed in Appendix C of the New Rule is subject to the activity fee referable to that action. Some of the more notable changes to activity fees under the New Rule are outlined below.

An investment fund prospectus prepared in accordance with Form 81-101FI and Form 81-101F2 will be subject to a reduced fee of $400, while a preliminary prospectus prepared in accordance with Form 15 or Form 45 will be subject to a single fee of $3,000 per prospectus or $600 per investment fund in a prospectus, whichever is the greater (this is intended to align these fees with fees payable for prospectuses prepared in accordance with Form 41-501FI). A single fee of $3,000 will apply to all other prospectus filings irrespective of type or size of the offering.

The $2,000 fee for filing an initial annual information form under National Instrument 44-101 Short Form Prospectus Distributions is no longer applicable since the requirement to file an initial annual information form has been removed from that instrument. Instead, a "Notice Declaring Intention to be Qualified under NI 44-101" needs to be filed, for which no activity fee is payable.

Filing of exempt trade reports on Form 45-501F1 or Form 45-106F1 still requires a fee of $500 if the relevant issuer is not subject to a corporate finance participation fee.

Fees for reviewing an application for registration as a dealer or adviser have been reduced, as have fees for reviewing individual and firm applications, and continuing registrations for amalgamating registrants. Amendments to the terms and conditions of a registration have also been reduced to $500 from $1,500.

Under the New Rule, the late payment of a participation fee will continue to incur a late penalty of 1% of the participation fee for each business day the fee remains unpaid, capped at 25% of the total participation fee payable.

A late fee of $100 per business day up to a maximum aggregate of $5,000 per annum continues to apply to the late filing of specified documents (for example, annual financial statements, interim financial statements, AIFs and exempt trade reports). The list of specified documents to which a late filing fee applies has been extended to include AIFs under NI 51-102 and Form 13-502F4, Form 13-502F5, and Form 13-502F6. To simplify tracking of late fees for the purposes of determining whether the maximum of $5,000 has been reached, the New Rule uses the calendar rather than the fiscal year in the case of registrants and unregistered fund managers. Late fees are tracked on the basis of the fiscal year for reporting issuers.

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