OSC limits flow of funds into broker-dealers’ pockets

The Ontario Securities Commission has finally given its stamp of approval to the Thompson Committee’s report of junior mine financing. While most of the report’s recommendations have been given the go-ahead, the osc has decided to tighten the rules which allow certain licensed stock sellers (“broker-dealers”) to make a killing in dealer commissions.

It wants a lid on sales commissions of 45% (from up to at least 60% under current Ontario regulations). Such a rule would allow a mining company to receive at least 55% of the proceeds it raises for exploration work (compared to the current 30%).

In a written statement, the osc says it is “extremely concerned with the small proportion of the total funds raised from the public which is actually received by the treasury of junior resource issuers and used for the exploration and development of its resource properties.

That is the result primarily of the large commissions charged by securities dealers in connection with public distributions.”

The criticism seems directed mainly at broker-dealers. The term is used loosely to refer to sellers of high-risk stock who typically use high-pressure selling tactics and aim to control the after-market. They are, by nature, not members of any self-regulatory organization such as a stock exchange or the Investment Dealers Association. (Officially the broker-dealer category no longer exists under the Securities Act. Former broker- dealers are now registered as “securities dealers.”)

The commission goes on to say that brokers who are members of the Toronto Stock Exchange charge much less in mining stock commissions. (These commissions are said to average around 10% to 12%). “The difference in the level of commissions charged cannot be justified solely on the basis that financings effected by securities dealers tend to raise smaller amounts net to an issuer’s treasury,” the osc insists. Compromise

The 45%/55% principle is essentially what the Thompson committee proposed, in a last-minute compromise, at hearings held last October (N.M., Nov 3/86). The committee was responding to pressure from the osc to back down from its original recommendation that dealer mark-ups of up to 100% of the proceeds to the issuer be sustained. A 100% mark-up (already permitted under the much- maligned osc Policy 3-02, though not normally charged) is equivalent to a 50% dealer commission.

Edward Thompson, chairman of the provincially-appointed task 0000,0600 force, says he’s happy with the osc’s response. “The only problem is that they have reduced the broker – dealer commissions further than we originally recommended,” he says. “We were trying to phase in that reduction.”

In fact part of the Thompson committee’s compromise was that, over a 3-year period, the commission would be lowered to 35%. As a result, a company would receive a possible 65% of the proceeds it raises. The osc has yet to respond specifically to this proposal.

“We would now like to see as high a percentage as possible going to the junior company,” Mr Thompson says. Discouraging set-up

He adds that large dealer commissions are “the result of the whole bloody set-up we’ve had in Ontario for the past 20 years. This set-up is discouraging many of the major houses from doing deals, and the regulatory environment has been very tough. The current regulations (which allow comparatively high mining stock commissions) are in place with the backing of the osc. In our report we recommended lowering the rates and, of course, they just picked up on that.”

Most junior mining deals will probably involve normal (lower than 35%) commissions as a result of Canarim Investment Corp. opening up offices in Toronto next month, Mr Thompson says. He predicts the Vancouver-based brokerage firm will do around 100 financings per year (compared to the normal 4-5). “That will bring down the over-all cost of these junior issues; instead of charging 50% commissions, they will roll the deals through at 10% or 15%.”

Commissions will also be lowered as a result of the osc principle that a promoter be able to qualify some of his shares under the prospectus and sell a limited number of his shares at the time that the prospectus is done, he says. “This, of course, will lower the amount that goes to the broker-dealer underwriter. We don’t want the broker-dealer to take it all and squeeze out the promoter. After all, the promoter is really the guy who makes it all happen.”