In the Matter of Staff’s Recommendation
For Terms and Conditions on the Registration
of Takota Asset Management, Inc.
Opportunity to be Heard by the Director under
Section 31 of the Securities Act (Ontario)
1. For the reasons outlined below, my decision is to impose modified terms and conditions on Takota Asset Management, Inc. (Takota) as provided in paragraph 9.
2. Takota is registered under the Securities Act (Ontario) (Act) in the categories of portfolio manager, investment fund manager and exempt market dealer.
3. Under subsection 12.1(1) of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), “[i]f at any time, the excess working capital of a registered firm, as calculated in accordance with Form 31-103FI Calculation of Excess Working Capital, is less than zero, the registered firm must notify the regulator … as soon as possible.” In April 2012 and May 2012, Takota was capital deficient and failed to notify the Ontario Securities Commission (OSC).
4. By letter dated May 1, 2013, Staff of the OSC advised Takota that it was recommending to the Director that terms and conditions be imposed on Takota’s registration due to the firm’s failure to meet the excess working capital requirements of NI 31-103. The recommend Terms and Conditions are as follows:
• “1. The Firm shall deliver on a monthly basis …
a. year-to-date unaudited financial statements including a balance sheet and income statement or statement of financial position and statement of comprehensive income, both prepared in accordance with accounting principles required by NI 52-107; and
b. month end calculation of excess working capital; no later than three weeks after each month end.
• 2. The Firm will review its procedures for compliance with Ontario securities law and, no later than May 31, 2012 will deliver … a report setting out:
a. the reasons for its failure to meet the minimum capital requirements as at April 30, 2012 and May 31, 2012 as required under Ontario securities law (the Capital Requirements);
b. a certification from its Chief Compliance Officer to the effect that the Firm has reviewed its system for on-going compliance with Ontario securities law and rectified the problem(s) that led to its failure to satisfy the Capital Requirement; and
c. details of the specific measures that will be taken to ensure that the Capital Requirement will be satisfied at all times in the future.”
Process for requesting an opportunity to be heard
5. Under section 31 of the Act, if a registrant wants to oppose Staff’s recommendation for terms and conditions, the registrant may request an opportunity to be heard (OTBH). By email dated May 10, 2013, and by letter dated May 13, 2013, Scott Leckie, Principal of Takota, requested an in-person OTBH. Subsection 6(a) of the Procedures For Opportunities To Be Heard Before Director’s Decisions on Registration Matters states that an OTBH will normally be conducted as an exchange of written submissions, but that either the registrant or Staff may request that it take the form of an in-person appearance before the Director. Generally, an in-person appearance is held in matters where credibility or integrity are at issue. Since neither appears to be at issue in this matter, the Director determined that a departure from the normal process of an exchange of written submissions was not warranted. Written submissions were received during the month of June, 2013. My decision is based on the written submissions of Mark Skuce (Legal Counsel, Compliance and Registrant Regulation Branch) and Scott Leckie and Dianne Leckie (Compliance Manager) on behalf of Takota.
6. Staff submits that a failure to meet the minimum capital required in subsection 12.1(1) of NI 31-103 is a failure to comply with Ontario securities law and may give rise to concerns regarding a registrant’s solvency. The working capital requirement is a fundamental feature of the registrant regulation regime as solvency is one of the three pillars of suitability for registration. For these reasons, Staff regularly recommends the imposition of terms and conditions on the registration of registrants that fail to meet the minimum capital requirements. Only in rare and extenuating circumstances would Staff not recommend imposing terms and conditions on a registrant that failed to maintain the appropriate minimum capital.
7. Takota explained that the working capital deficiency occurred within the first two months of operations and was the result of a classification of a debt obligation as a long term liability when in fact it should have been classified as a current liability. The error occurred as a result of relying on the professional advice of a professional accounting firm with whom Mr. Leckie had a relationship with for over 20 years.
8. There were two other accounting errors relating to a shareholder loan and the treatment of a credit card limit. Takota stated that these errors were the result of the initial set up of the accounting system which was advised on and reviewed by the professional accounting firm.
Decision and reasons
9. My decision is to impose modified Terms and Conditions on the registration of Takota (as set out in the letter from Staff dated May 1, 2013). The following modifications are:
• the date of the first Term and Condition is July 31, 2013 instead of May 31, 2013;
• the term of the first Term and Condition is a minimum of three months as opposed to the recommendation of a minimum of six months;
• the date in the second Term and Condition is August 31, 2013 instead of May 29, 2013; and
• items 2(a) and (b) have been sufficiently provided by Takota in its submissions so no additional information is required; however, 2(c) has not been addressed.
10. It is the responsibility of the registrant to ensure compliance with Ontario securities law. The failure to meet the minimum capital requirements occurred as a result of errors created by a professional accounting firm when it established the accounting system for Takota and completed its financial statements. Mr. Leckie contends that if he knew that there was a working capital deficiency, it would have been corrected. Even though the registrant retained a professional accounting firm to establish their accounting system, the obligation to establish appropriate internal controls and systems remains with the registrant. Additionally, there is insufficient information to determine what steps Takota has taken to ensure that further undetected errors are not present in their accounting system. Thus Takota failed to comply with the requirements of section 12.1 of NI 31-103 and, in accordance with decided cases, including Re Trafalgar Associates Limited (2013) 36 O.S.C.B. 1462, Re Pente Investment Management Ltd (2006) 29 O.S.C.B. 6795, and Re GMP Investment Management L.P. (2008) 31 O.S.C.B. 10029, the modified Terms and Conditions (as modified in paragraph 9) will be applied to the registration of Takota.
11. Staff submitted, and I agree, that the explanation provided by Takota does not constitute rare and extenuating circumstances such that the modified Terms and Conditions should not be imposed.
“Debra Foubert” J.D.
Compliance and Registrant Regulation Branch
Ontario Securities Commission
July 29, 2013