SMALL DEALER CARNAGE BEGINS

Independent investment dealer Fraser Mackenzie Ltd. is closing its doors after nine years in business, a move some industry players predict will presage the demise or consolidation of many small firms.

Mark Polubiec, the chairman and chief executive of Fraser Mackenzie, says small and independent dealers are faced with escalating regulatory costs at a time when revenue prospects are dim, particularly in the junior resource sector where Fraser Mackenzie was heavily concentrated.

“We’re not going to continue suffering losses, so we shut the firm down,” the veteran of firms including Burns Fry and Canaccord Capital said in an interview Monday.

Fraser Mackenzie’s directors and partners considered the prospect of merging with a competitor but concluded after surveying the books of other independents that would make more sense to take their money “off the table” and out of the heavily regulated industry, Mr. Polubiec said.

“When I look at some of our competitors’ balance sheets, I think ‘I don’t want to look like that,’ ” Mr. Polubiec said. “We’d be the sugar daddy.” Fraser Mackenzie’s move was preceded by the decision of Loewen Ondaatje McCutcheon Ltd. to resign its membership from the industry’s primary regulatory body, the Investment Industry Regulatory Organization of Canada.

It is understood that Canada’s first independent research-based institutional equity company intends to do only business that falls outside IIROC’s purview.

The Investment Industry Association of Canada (IIAC), which lobbies on behalf of the country’s dealers, has been sounding the alarm for small and medium-sized firms since last fall.

After warning that institutional and retail boutiques were under “severe pressure,” the industry association said consolidation and closures were inevitable as more than onethird of the firms were losing money.

“The viability of the smaller boutique firms is threatened, unless a market turnaround occurs in the near term,” the industry association warned in a March report.

Outspoken industry player Tom Caldwell, the founder of Caldwell Securities, told the Financial Post this month that he expects 20 independent firms to shut their doors this year.

The IIAC report on the state of the industry said total revenue at the boutique firms had shrunk by roughly one-third over the past five years, primarily in the past two, to $4-billion in 2012.

The 185 firms are “caught in a classic vice — falling revenue and rising fixed cost, as business opportunities decline and regulatory compliance demands increase,” the IIAC report said.

The industry group warned that the trend would affect more than just the firms.

“Ultimately, it threatens investors, and small and mid-cap issuers, posing a hazard to competitive and liquid markets for efficient securities trading and financing.”

John Turner, the head of the global mining group at Toronto law firm Fasken Martineau LLP, said the demise of an independent dealer that services junior resource companies “is not good news.”

Times have undoubtedly been tough for such firms over the past 18 months to two years, particularly smaller dealers that rely heavily on equity issues and trading rather than mergers and acquisitions, Mr. Turner said.

“There’s no question the cost of compliance has increased. That becomes a problem when the firms aren’t making money.”

With no way to predict when the revenue picture will improve, Mr. Turner said it would not be surprising to see more small dealers either join forces or close their doors.

This could create problems for junior resource companies that are often nurtured by independents.

“There may be a period where … there are fewer of the boutique firms, or the ones that are around haven’t got the capital,” said Mr. Turner. “There’s no question that’s going to add a challenge.”

However, he predicted that resurgence in the junior resource sector would fuel a comeback among the independent dealers as well.

There were some good times at Fraser Mackenzie after it was founded in 2004. A statement released by the company yesterday says there was a six-fold increase to its capital base during its nine-year run.

At its peak, it employed 80 people and financed more than 120 companies in the mining, oil & gas, biotechnology, technology, alternative energy and industrial sectors, raising more than $7-billion.