Securities Law & Instruments

 

In the Matter of Vengrowth Capital Management Inc.




Opportunity to be heard by the Director
under Subsection 26(3) of the Securities Act


Date:
December 30, 2008
 
Director:
Felicia Tedesco, CA
Assistant Manager, Compliance
Ontario Securities Commission
 
Submissions:
Isabelita Chichioco         For Ontario Securities Commission staff
Jay Heller                       For Vengrowth Capital Management Inc.
 
Overview
By letter dated November 24, 2008, staff advised Vengrowth Capital Management Inc. (Vengrowth) that it was deficient in meeting the minimum capital requirements in Regulation 107(3) under the Securities Act (Ontario) (Act) by $44 265 based on annual audited financial statements as at July 31, 2008. The capital deficiency was rectified as at October 31, 2008.

As a direct consequence of the capital deficiency, staff recommended that terms and conditions be imposed on Vengrowth’s registration for a minimum period of six months. The terms and conditions require the filing of monthly year-to-date unaudited financial statements (including a balance sheet and an income statement prepared in accordance with generally accepted accounting principles) and monthly capital calculations. The firm is also required to review its procedures for compliance with Ontario securities law and file a “compliance report” that:
  • sets out the reasons for the failure to meet the minimum capital requirement as at July 31, 2008
  • includes a certification from its chief compliance officer that the firm has reviewed its system for on-going compliance with Ontario securities law, has rectified the problem that led to the capital deficiency and details of the measures that will be taken to ensure that the capital requirement will be satisfied at all times in the future.
Prior to a decision being made by the Director, Vengrowth had the option to oppose staff’s recommendation for terms and conditions by requesting an opportunity to be heard under section 26(3) of the Act. Vengrowth had two options – it could either be heard through written submissions or through a personal appearance before the Director. By letter dated December 5, 2008, Vengrowth requested an opportunity to be heard through written submissions.

This is the Director’s decision based on staff’s and Vengrowth’s written submissions.

Submissions

Staff submissions
Maintaining adequate minimum capital by registrants is one of the most serious regulatory requirements in the Act. Financial solvency is one of the essential components of an adviser’s continued suitability for registration. Capital deficiencies raise serious potential regulatory concerns and need to be addressed in a serious fashion.

For these reasons, staff generally recommend terms and conditions on registrants that are capital deficient. Staff does this notwithstanding the variety of reasons registrants provide for capital deficiencies including inadvertence/oversight, change in staffing at the registrant or its auditors, misclassification of accounts, or errors. In staff’s opinion, maintaining adequate minimum capital is a serious regulatory obligation for registrants and only in extremely rare circumstances would staff consider not imposing terms and conditions. Staff argues that those circumstances are not present in this case.

Submissions by Vengrowth
Vengrowth’s alleged capital deficiency as at July 31 was not caused by any failure of compliance procedures or lack of adequate oversight measures. They believed that the required minimum capital as an investment counsel portfolio manager was $25,000 and that they have maintained at least this level of working capital on an ongoing basis for many years. The noted capital deficiency arose as a result of the inclusion of the insurance deductible of $100,000. Vengrowth acknowledges that the requirement to reflect the amount of insurance deductible in the minimum capital requirement is clearly set out in the regulation under the Securities Act (Regulation) and on the OSC website. Despite no written evidence to support this position, Vengrowth believed that OSC staff exercised its discretion to relieve them of the insurance aspect of the minimum capital calculation.

Decision and reasons
My decision is to impose 1(a) and 1(b) outlined in Schedule A of the recommended terms and conditions on the registration of Vengrowth for a minimum of six months. These terms and conditions are as follows:
Vengrowth shall file on a monthly basis with the Compliance team of the Ontario Securities Commission, attention Financial Analyst, starting with the month ending January 31, 2009 the following information:

(1) year-to-date unaudited financial statements including a balance sheet and an income statement, both prepared in accordance with generally accepted accounting principles; and
(2) month end calculation of minimum required capital; and

no later than three weeks after each month end.
The facts, however, do not indicate a breakdown in internal controls and I am not requiring that Vengrowth submit a compliance report as originally indicated in the letter dated November 24, 2008 recommending the imposition of terms and conditions on Vengrowth’s registration.

I concur with staff’s argument that the rare and unusual circumstances that would result in terms and conditions not being imposed following a capital deficiency do not exist in this case. Vengrowth acknowledges in its written submissions that the requirement to reflect the insurance deductible in the minimum capital calculation is clearly set out not only in the Regulation but also on the OSC website. The Director had exercised discretion to relieve Vengrowth from the insurance requirement when Vengrowth was initially registered as an investment counsel. Vengrowth, however, changed its category of registration to investment counsel portfolio manager in 2007. The director’s resolution that was submitted by Vengrowth on the renewal of their registration contained incorrect information. The resolution states that insurance under subsection 108(3) of the Regulation is not required because Vengrowth is applying for renewal of its registration as an investment counsel. The OSC had exercised its discretion to relieve Vengrowth from the insurance requirement when it was registered only as an investment counsel. It is Vengrowth’s obligation to ensure that it is in compliance with any additional requirements as a result of changing its category of registration from investment counsel to investment counsel portfolio manager.

December 30, 2008
“Felicia Tedesco”